** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 
| **ý**                                                                                                                                                                                                                                                                                                          | **Annual Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **For the fiscal year ended  January 3, 2004**                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                |                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                               | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
| **For the transition period  from                          to                        ** |
|                                                                                                                                                                                                                                                                                                                |                                                                                          |
| **Commission File  Number:  1-14725**                                                                                                                                                                                                                                                                          |

 

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**MONACO COACH CORPORATION**

(ExactName of Registrant as specified in its charter)

 
| **Delaware**                                                                  |   | **35-1880244**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation  or organization)              |   | (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** |

 

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Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class:**                                     |   | **Name of each exchange on which registered:** |
|--------------------------------------------------------------|--------|------------------------------------------------|
| Common  Stock, par value $.01 per share                      |   | New  York Stock Exchange                       |
|                                                         |   |                                           |
| Securities  registered pursuant to Section 12(g) of the Act: |
| **None**                                                     |

 

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Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past ninety days.             YES  ý  NO  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the Registrant’s knowledge, in definite proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.

 

Theaggregate market value of the Common Stock held by non-affiliates of theRegistrant on January 3, 2004, based upon the closing sale price of the CommonStock on June 30, 2003 as reported on the New York Stock Exchange, wasapproximately $343.2 million.  Shares ofCommon Stock held by officers and directors and their affiliated entities havebeen excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status isnot necessarily conclusive for other purposes.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Securities Exchange Act of 1934).  Yes  ý  No  o

 

Asof March 1, 2004, the Registrant had 29,309,994 shares of Common Stockoutstanding.

 

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DOCUMENTSINCORPORATED BY REFERENCE

TheRegistrant’s definitive Proxy Statement for its Annual Meeting of Stockholdersto be held on May 18, 2004 (the “Proxy Statement”) is incorporated by referencein Part III of this Form 10-K to the extent stated therein.

 

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This document consists of 64 pages.  The Exhibit Index appears at page 55 and 56.

 

 

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**INDEX**

 
| PART I         |
|----------------|
|           |   |   |
| ITEM 1.        | BUSINESS |   |
| ITEM 2.        | PROPERTIES |   |
| ITEM 3.        | LEGAL PROCEEDINGS |   |
| ITEM 4.        | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS |   |
|           |   |   |
| PART II        |
|           |   |   |
| ITEM 5.        | MARKET FOR THE REGISTRANT’S COMMON STOCK  AND RELATED STOCKHOLDER MATTERS |   |
| ITEM 6.        | SELECTED FINANCIAL DATA |   |
| ITEM 7.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| ITEM 7A.       | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK |   |
| ITEM 8.        | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |   |
| ITEM 9.        | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |   |
| ITEM 9A.       | CONTROLS AND PROCEDURES |   |
|           |   |   |
| PART  III      |
|           |   |   |
| ITEM 10.       | DIRECTORS AND EXECUTIVE OFFICERS OF  REGISTRANT |   |
| ITEM 11.       | EXECUTIVE COMPENSATION |   |
| ITEM 12.       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |   |
|           |   |   |
| ITEM 13.       | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS |   |
|           |   |   |
| PART IV        |
|           |   |   |
| ITEM 14.       | PRINCIPAL ACCOUNTANT FEES AND SERVICES |   |
|           |   |   |
| ITEM 15.       | EXHIBITS, FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON FORM 8-K |   |
|           |   |   |
| SIGNATURES     |   |
|           |   |
| CERTIFICATIONS |   |

 

2

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PART I

 

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include without limitation those below marked with an asterisk(*).  In addition, the Company may fromtime to time make oral forward-looking statements through statements thatinclude the words “believes,” “expects,” “anticipates,” or similarexpressions.  Such forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause actual results, performance or achievements of the Company todiffer materially from those expressed or implied by such forward-lookingstatements, including those set forth below under “Factors That May Affect FutureOperating Results” within Management’s Discussion and Analysis of FinancialCondition and Results of Operations. The Company cautions the reader, however, that these factors may not beexhaustive.

 

**ITEM 1****.  BUSINESS**

 

Monaco CoachCorporation (the “Company”) is a leading manufacturer of premium recreationalvehicles including Class A motor coaches, Class C motor coaches and towablerecreational vehicles.  The Company’sproduct line consists of 29 models of motor coaches and 13 models of towables(fifth wheel trailers and travel trailers) under the “Monaco,” “HolidayRambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  The Company’s products, which are typicallypriced at the high end of their respective product categories, range in suggestedretail price from $70,000 to $1.4 million for motor coaches and from $25,000 to$60,000 for towables.  Based upon retailregistrations in 2003, the Company believes it had a 30.3% share of the marketfor diesel Class A motor coaches, a 17.5% share of the market for all Class Amotor coaches, a 2.8% share of the market for fifth wheel towables and a 0.5%share of the market for travel trailers. At January 3, 2004, the Company’s products were sold through anextensive network of 332 dealer lots located primarily in the United States andCanada.

 

The Company isthe successor to a company formed in 1968 (the “Predecessor”) and commencedoperations on March 5, 1993 by acquiring all the assets and liabilities of itspredecessor company (the “Predecessor Acquisition”).  Prior to March 1996, the Company’s product line consistedexclusively of High-Line Class A motor coaches.  In March 1996, the Company acquired the Holiday Rambler Divisionof Harley-Davidson, Inc. (“Holiday Rambler”), a manufacturer of a full line ofClass A motor coaches and towables (the “Holiday Acquisition”).  Additionally, on August 2, 2001, the Companyacquired SMC Corporation (“SMC”), a manufacturer of a full line of Class Adiesel motor coaches (the “SMC Acquisition”). The Company believes that developing relationships with a broad base offirst-time buyers, coupled with the Company’s strong emphasis on quality,customer service and design innovation, will foster brand loyalty and increasethe likelihood that, over time, more customers will trade-up through theCompany’s line of products.  Attractinglarger numbers of first-time buyers is important to the Company because of theCompany’s belief that many recreational vehicle customers purchase multiplerecreational vehicles during their lifetime.

 

On November27, 2002, the Company acquired from Outdoor Resorts of America, Inc. (“ORA”)three luxury motor coach resort properties being developed by ORA in Las Vegas,Nevada; Indio, California; and Naples, Florida.  The resorts offer individual lots to owners, with undividedinterests in the resort amenities. Amenities at the resorts include such features as tennis courts,swimming pools, par three golf courses, and club houses. These motor coach resortsprovide a destination location for many of the high-line motor coaches that theCompany produces.  By providing upscalemotor coach resorts, the Company believes that it’s products will appeal to anincreasing number of new customers, further solidifying the Company’s positionin the marketplace.

 

The Las Vegas,Nevada and Indio, California resorts have been designed to be built in multiplephases.  In both locations, the firstphase of construction is complete.  TheCompany anticipates completing future phases as market conditions continue toimprove.*  The Naples, Florida propertywas sold by the Company in September 2003, for cash proceeds in the amount of$6.7 million.

 

The Company’swebsite is located at www.monaco-online.com. The Company provides free of charge through a link on its website accessto its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K, as well as amendments to those reports, as soon asreasonably practicable after the reports are electronically filed with, orfurnished to, the Securities and Exchange Commission.

 

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PRODUCTS

 

The Companycurrently manufactures 29 motor coaches and 13 towable models, each of whichhas distinct features and attributes designed to target the model to aparticular suggested retail price range. The Company’s product offerings currently target four product typeswithin the recreational vehicle market: Class A motor coaches, Class C motorcoaches, fifth wheel trailers, and travel trailers.  The Company does not currently compete in any other productcategories of the recreational vehicle industry.

 

The followingtable highlights the Company’s product offerings as of January 3, 2004:

 
| COMPANY MOTOR COACH PRODUCTS |
|------------------------------|
|                         |
| **MODEL**                    |   | **CURRENT SUGGESTED  RETAIL PRICE RANGE** |   | **BRAND** |
| Class  A                     |   |   |   |   |
| Royale Coach                 |   | $950,000-$1.4 million |   | Monaco |
| Marquis                      |   | $485,000-$555,000 |   | Beaver |
| Signature Series             |   | $495,000-$550,000 |   | Monaco |
| Navigator                    |   | $380,000-$510,000 |   | Holiday Rambler |
| Executive                    |   | $370,000-$420,000 |   | Monaco |
| Patriot                      |   | $310,000-$360,000 |   | Beaver |
| Dynasty                      |   | $305,000-$360,000 |   | Monaco |
| Imperial                     |   | $265,000-$330,000 |   | Holiday Rambler |
| Windsor                      |   | $250,000-$295,000 |   | Monaco |
| Scepter                      |   | $225,000-$250,000 |   | Holiday Rambler |
| Monterey                     |   | $220,000-$250,000 |   | Beaver |
| Camelot                      |   | $215,000-$250,000 |   | Monaco |
| Sahara                       |   | $210,000-$240,000 |   | Safari |
| Diplomat                     |   | $180,000-$225,000 |   | Monaco |
| Endeavor                     |   | $175,000-$225,000 |   | Holiday Rambler |
| Santiam                      |   | $175,000-$220,000 |   | Beaver |
| Cheetah                      |   | $160,000-$185,000 |   | Safari |
| Knight                       |   | $155,000-$175,000 |   | Monaco |
| Ambassador                   |   | $155,000-$175,000 |   | Holiday Rambler |
|                         |   |   |   |   |
| Cayman                       |   | $125,000-$155,000 |   | Monaco |
| Neptune                      |   | $125,000-$155,000 |   | Holiday Rambler |
| LaPalma                      |   | $105,000-$150,000 |   | Monaco |
| Vacationer                   |   | $100,000-$140,000 |   | Holiday Rambler |
| Trek                         |   | $100,000-$120,000 |   | Safari |
| Simba                        |   | $95,000-$120,000 |   | Safari |
| Monarch                      |   | $90,000-$120,000 |   | Monaco |
| Admiral                      |   | $90,000-$120,000 |   | Holiday Rambler |
|                         |   |   |   |   |
| Class C                      |   |   |   |   |
| Atlantis                     |   | $70,000-$80,000 |   | Holiday Rambler |
| Rogue                        |   | $70,000-$80,000 |   | Monaco |
|                         |   |   |   |   |
| COMPANY TOWABLE PRODUCTS     |
|                         |
| **MODEL**                    |   | **CURRENT SUGGESTED  RETAIL PRICE RANGE** |   | **BRAND** |
| Medallion Fifth Wheel        |   | $40,000-$60,000 |   | McKenzie |
| Presidential Fifth Wheel     |   | $45,000-$55,000 |   | Holiday Rambler |
| Presidential Travel  Trailer |   | $35,000-$40,000 |   | Holiday Rambler |
| Lakota Fifth Wheel           |   | $30,000-$45,000 |   | McKenzie |
| Alumascape Fifth Wheel       |   | $30,000-$40,000 |   | Holiday Rambler |
| Next Level Fifth Wheel       |   | $30,000-$35,000 |   | Holiday Rambler |
| Next Level Travel Trailer    |   | $30,000-$35,000 |   | Holiday Rambler |
| Dune Chaser Fifth Wheel      |   | $30,000-$35,000 |   | McKenzie |
| Dune Chaser Travel Trailer   |   | $30,000-$35,000 |   | McKenzie |
| Alumascape Travel Trailer    |   | $25,000-$35,000 |   | Holiday Rambler |
| Lakota Travel Trailer        |   | $25,000-$35,000 |   | McKenzie |
| Savoy Fifth Wheel            |   | $25,000-$30,000 |   | Holiday Rambler |
| Starwood Fifth Wheel         |   | $25,000-$30,000 |   | McKenzie |

 

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In 2003, theaverage unit wholesale selling prices of the Company’s motor coaches, fifthwheel trailers and travel trailers, were approximately $152,000, $37,700, and$26,400, respectively.  The Company’smotor coach products generated 90.3%, 91.9%, and 92.2% of total revenues forthe fiscal years 2001, 2002, and 2003, respectively.

 

The Company’srecreational vehicles are designed to offer all the comforts of home within a215 to 415 square foot area. Accordingly, the interior of the recreational vehicle is designed tomaximize use of available space.  TheCompany’s products are designed with five general areas, all of which aresmoothly integrated to form comfortable and practical mobile accommodations.  The five areas are the living room, kitchen,dining room, bathroom, and bedroom.  Foreach model, the Company offers a variety of interior layouts.

 

Each of theCompany’s recreational vehicles comes fully equipped with a wide range ofkitchen and bathroom appliances, audio and visual electronics, communicationdevices, and other amenities, including couches, dining tables, closets, andstorage spaces.  All of the Company’srecreational vehicles incorporate products from well-recognized suppliers,including: stereos, CD and cassette players, VCR’s, DVD’s, and televisions fromQuasar, Bose, Panasonic, and Sony; microwave ovens from Sharp, Magic Chef, andGeneral Electric; stoves and ranges from KitchenAid and Modern Maid; enginesfrom Cummins and Caterpillar; transmissions from Allison; and chassis from Fordand Workhorse.  The Company’s high endproducts offer top-of-the-line amenities, including 42” Sony plasma and LCDtelevisions, GPS systems from Carin, fully automatic DSS (satellite) systems,Corian and Wilsonart solid surface kitchen and bath countertops, importedceramic tile, leather furniture, and Ralph Lauren fabrics.

 

PRODUCTDESIGN

 

To addresschanging consumer preferences, the Company modifies and improves its productseach model year and typically redesigns each model every three or fouryears.  The Company’s designers workwith the Company’s marketing, manufacturing, and service departments to designa product that is appealing to consumers, practical to manufacture, and easy toservice.  The designers try to maximizethe quality and value of each model at the strategic retail price point forthat model.  The marketing and salesstaff suggest features or characteristics that they believe could be integratedinto the various models to differentiate the Company’s products from those ofits competitors.  By working withmanufacturing personnel, the Company’s product designers engineer therecreational vehicles so that they can be built efficiently and with highquality.  Service personnel suggestideas to improve the serviceability and reliability of the Company’s productsand give the designers feedback on the Company’s past designs.

 

The exteriorsof the Company’s recreational vehicles are designed to be aestheticallyappealing to consumers, aerodynamic in shape for fuel efficiency, and practicalto manufacture.  The Company has anexperienced team of computer-aided design personnel to complete the productdesign and produce prints from which the products will be manufactured.

 

The Companyexpensed $975,000, $1.2 million, and $1.2 million for research and developmentin the fiscal years 2001, 2002, and 2003, respectively.

 

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SALESAND MARKETING

 

DEALERS

 

The Companyexpanded its dealer network over the past year to 332 dealership lots primarilylocated in the United States and Canada at January 3, 2004.  Revenues generated from shipments todealerships located outside the United States were approximately  3.2%, 3.0%, and 3.6% of total sales for thefiscal years  2001, 2002, and 2003,respectively.  The Company intends tocontinue to expand its dealer network, primarily by adding additional Safariand Beaver dealers to increase dealer representation for these twobrands.*  The Company maintains aninternal sales organization consisting of 39 account executives who service theCompany’s dealer network.

 

The Companyanalyzes and selects new dealers on the basis of such criteria as location,marketing ability, sales history, financial strength, and the capability of thedealer’s repair services.  The Companyprovides its dealers with a wide variety of support services, includingadvertising subsidies and technical training, and offers certain model pricingdiscounts to dealers who exceed wholesale purchase volume milestones.  The Company’s sales staff is also availableto educate dealers about the characteristics and advantages of the Company’srecreational vehicles compared with competing products.  The Company offers dealers geographicexclusivity to carry a particular model. While the Company’s dealership contracts have renewable one or two-yearterms, historically the Company’s dealer turnover rate has been low.

 

Dealerstypically finance their inventory through revolving credit facilitiesestablished with asset-based lending institutions, including specializedfinance companies and banks.  It isindustry practice that such “floor plan” lenders require recreational vehiclemanufacturers to agree to repurchase (for a period of 12 to 18 months from thedate of the dealer’s purchase) motor coaches and towables previously sold tothe dealer in the event the dealer defaults on its financing agreements.  The Company’s contingent obligations underthese repurchase agreements are reduced by the proceeds received upon the saleof any repurchased units. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and CapitalResources,” and Note 16 of Notes to the Company’s Consolidated FinancialStatements.

 

ADVERTISING AND PROMOTION

 

The Companyadvertises regularly in trade journals and magazines, participates incooperative advertising programs with its dealers, and produces color brochuresdepicting its models’ performance features and amenities.  The Company also promotes its products withdirect incentive programs to dealer sales personnel linked to sales ofparticular models.

 

An importantmarketing activity for the Company is its participation with its dealers in themore than 250 recreational vehicle trade shows and rallies each year.  National trade shows and rallies, which canattract as many as 40,000 attendees, are an integral part of the Company’smarketing process because they enable potential retail customers to compare andcontrast all the products offered by the major recreational vehiclemanufacturers.  Setting up attractivedisplay areas at major trade shows to highlight the newest design innovationsand features of its products is critical to the Company’s success in attractingand maintaining its dealer network and in generating enthusiasm at the retailcustomer level.  The Company alsoprovides complimentary service for minor repairs to its customers at severalrallies and trade shows.

 

The Companyattempts to encourage and reinforce customer loyalty through clubs for theowners of its products so that they may share experiences and communicate witheach other.  The Company’s clubscurrently have more than 40,000 members. The Company publishes magazines to enhance its relations with theseclubs and holds rallies for clubs to meet periodically to view the Company’snew models and obtain maintenance and service guidance.  Attendance at Company-sponsored rallies canbe as high as 2,100 recreational vehicles per year.  The Company receives support from its dealers and suppliers tohost these rallies.

 

The Company’sweb 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 forcustomers the closest dealers to their location for the model(s) they areinterested in purchasing.  The Company’sweb site also provides information for upcoming rallies and club functions aswell as links to other R.V. lifestyle web sites of interest to existing orpotential customers.

 

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CUSTOMERSERVICE

 

The Companybelieves that customer satisfaction is vitally important in the recreationalvehicle market because of the large number of repeat customers and the rapidcommunication of business reputations among recreational vehicle enthusiasts.  The Company also believes that service is anintegral part of the total product the Company delivers and that responsive andprofessional customer service is consistent with the premium image the Companystrives to convey in the marketplace.

 

The Companyoffers a limited warranty to all new vehicle purchasers.  The Company’s current limited warrantycovers its products for up to one year (or 24,000 miles, whichever occursfirst) from the date of retail sale (a limited structural warranty has a durationof five years for the front and sidewall frame structure, and a limited threeyear warranty for the Roadmaster chassis). In addition, customers are protected by the limited warranties of majorcomponent suppliers such as those of Cummins Engine Company, Inc. (“Cummins”)(diesel engines), Caterpillar Inc. (“Caterpillar”) (diesel engines), SpicerHeavy Axle & Brake Division of Dana Corporation (“Dana”) (axles), MeritorWABCO V.C.S. (“Meritor”) (axles), Allison Transmission Division of General MotorsCorporation (“Allison”) (transmissions), Workhorse (chassis), and Ford MotorCompany (“Ford”) (chassis). The Company’s limited warranty covers allmanufacturing-related problems and parts and system failures, regardless ofwhether the repair is made at a Company facility or by one of the Company’sdealers or authorized service centers. As of January 3, 2004, the Company had332 dealerships providing service to owners of the Company’s products. Inaddition, owners of the Company’s diesel products have access to the entireCummins and Caterpillar dealer networks, which include over 2,000 repaircenters.

 

The Companyoperates service centers in Harrisburg, Oregon; Bend, Oregon; Elkhart, Indiana;and in Wildwood, Florida.  The Companyhad approximately 700 employees in customer service at January 3, 2004.  The Company maintains individualizedproduction records and a computerized warranty tracking system which enable theCompany’s service personnel to identify problems quickly and to provideindividualized customer service.  Whilemany problems can be resolved on the telephone, the customer may be referred toa nearby dealer or service center.  TheCompany believes that dedicated customer service phone lines are an ideal wayto interact directly with the Company’s customers and to quickly address theirtechnical problems.

 

The Companyhas expanded its on-line dealer support network to assist its service personneland dealers in providing better service to the Company’s customers.  Service personnel and dealerships are ableto access information relating to specific models and sales orders, filewarranty claims and track their status, and view the status of existing partsorders.  The Company’s on-line dealersupport network gives service personnel at dealerships the ability to orderparts through an electronic parts catalog.

 

MANUFACTURING

 

The Companycurrently operates motorized manufacturing facilities in Coburg, Oregon; Bend,Oregon; and in Wakarusa, Indiana.  TheCompany’s towable manufacturing facilities are in Elkhart, Indiana.  The Company also operates its Royale Coachbus conversion facility in Elkhart, Indiana.

 

The Company’smotor coach production capacity at the end of 2003 based on a single shiftfive-day work week, was 27 units per day at its Coburg facility, 3 units perday at its Bend Facility, and 30 units per day at its Wakarusa facility. TheCompany’s current towables production capacity is 32 units per day at itsElkhart facility. The Company is currently utilizing approximately 56% of totalcapacity and therefore believes it is positioned to take advantage of futuregrowth potential of the Company’s products within the RV market.*

 

The Companybelieves that its manufacturing process is one of the most verticallyintegrated in the recreational vehicle industry.  By manufacturing a variety of items, including the Roadmastersemi-monocoque diesel chassis, plastic components, some of its cabinetry andfiberglass parts, as well as many subcomponents, the Company maintainsincreased control over scheduling, component production, and overall productquality.  In addition, verticalintegration enables the Company to be more responsive to market dynamics.

 

Each facilityhas several stations for manufacturing, organized into four broad categories:chassis manufacturing, body manufacturing, painting, and finishing.  It takes from two weeks to two months tobuild each unit, depending on the product. The Company keeps a detailed log book during the manufacture of eachproduct and inputs key information into its computerized service trackingsystem.

 

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Each unit isgiven an inspection during which its appliances and plumbing systems arethoroughly tested.  As a final qualitycontrol check, each motor coach is given a road test.  To further ensure both dealer and end-user satisfaction, theCompany pays a unit fee per recreational vehicle to its dealers so that theywill thoroughly inspect each product upon delivery and return a detailed reportform.

 

The Companypurchases raw materials, parts, subcomponents, electronic systems, andappliances from approximately 1,000 vendors. These items are either directly mounted in the vehicle or are utilizedin subassemblies which the Company assembles before installation in the vehicle.  The Company attempts to minimize its levelof inventory by ordering most parts as it needs them.  Certain key components that require longer purchasing lead timesare ordered based on planned needs. Examples of these components are diesel engines, axles, transmissions,chassis, and interior designer fabrics. The Company has a variety of major suppliers, including Allison,Workhorse, Cummins, Caterpillar, Dana, Meritor, and Ford.   The Company does not have any long-termsupply contracts with these suppliers or their distributors, but believes ithas good relationships with them.  Tominimize the risks associated with reliance on a single-source supplier, theCompany typically keeps a 60-day supply of axles, engines, chassis, andtransmissions in stock or available at the suppliers’ facilities and believesthat, in an emergency, other suppliers could fill the Company’s needs on aninterim basis.*  The Company presentlybelieves that its allocation by suppliers of all components is sufficient tomeet planned production volumes, and the Company does not foresee any operatingdifficulties as a result of vendor supply issues.*  Nevertheless, there can be no assurance that Allison, Ford, orany of the Company’s other suppliers will be able to meet the Company’s futurerequirements for transmissions, chassis, or other key components.  An extended delay or interruption in thesupply of any components obtained from a single or limited source suppliercould have a material adverse effect on the Company’s business, results ofoperations, and financial condition.

 

BACKLOG

 

The Company’sproducts are generally manufactured against orders from the Company’s dealers.As of January 3, 2004, the Company’s backlog of orders was $410.2 million,compared to $220.4 million at December 28, 2002.  The Company includes in its backlog all accepted purchase ordersfrom dealers shippable within the next six months.  Orders in backlog can be canceled at the option of the purchaserat any time without penalty and, therefore, backlog should not be used as ameasure of future sales.

 

COMPETITION

 

The market forrecreational vehicles is highly competitive. The Company currently encounters significant competition at each pricepoint for its recreational vehicle products. The Company believes that the principal competitive factors that affectthe market for the Company’s products include product quality, productfeatures, reliability, performance, quality of support and customer service,loyalty of customers, brand recognition, and price.  The Company believes that it competes favorably against itscompetitors with respect to each of these factors.  The Company’s competitors include, among others: Coachmen Industries,Inc., Fleetwood Enterprises, Inc., National R.V. Holdings, Inc., ThorIndustries, Inc., and Winnebago Industries, Inc.  Many of the Company’s competitors have significant financialresources and extensive marketing capabilities.  There can be no assurance that either existing or new competitorswill not develop products that are superior to or that achieve better consumeracceptance than the Company’s products, or that the Company will continue toremain competitive.

 

GOVERNMENTREGULATION

 

Themanufacture and operation of recreational vehicles are subject to a variety offederal, state, and local regulations, including the National Traffic and MotorVehicle Safety Act and safety standards for recreational vehicles and theircomponents that have been promulgated by the Department of Transportation.  These standards permit the National HighwayTraffic Safety Administration to require a manufacturer to repair or recallvehicles with safety defects or vehicles that fail to conform to applicablesafety standards. Because of its sales in Canada, the Company is also governedby similar laws and regulations promulgated by the Canadian government.  The Company has on occasion voluntarilyrecalled certain products.  TheCompany’s operating results could be adversely affected by a major productrecall or if warranty claims in any period exceed warranty reserves.

 

8

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The Company isa member of the Recreation Vehicle Industry Association (the “RVIA”), avoluntary association of recreational vehicle manufacturers and suppliers,which promulgates recreational vehicle safety standards.  Each of the products manufactured by theCompany has an RVIA seal affixed to it to certify that such standards have beenmet.

 

Many statesregulate the sale, transportation, and marketing of recreational vehicles.  The Company is also subject to stateconsumer protection laws and regulations, which in many cases requiremanufacturers to repurchase or replace chronically malfunctioning recreationalvehicles. Some states also legislate additional safety and constructionstandards for recreational vehicles.

 

The Company issubject to regulations promulgated by the Occupational Safety and HealthAdministration (“OSHA”). The Company’s plants are periodically inspected byfederal or state agencies, such as OSHA, concerned with workplace health andsafety.

 

The Companybelieves that its products and facilities comply in all material respects withthe applicable vehicle safety, consumer protection, RVIA, and OSHA regulationsand standards.  Amendments to any of theforegoing regulations and the implementation of new regulations couldsignificantly increase the cost of manufacturing, purchasing, operating, orselling the Company’s products and could materially and adversely affect theCompany’s net sales and operating results. The failure of the Company to comply with present or future regulationscould result in fines being imposed on the Company, potential civil andcriminal liability, suspension of production or cessation of operations.

 

The Company issubject to product liability and warranty claims arising in the ordinary courseof business.  To date, the Company hasbeen successful in obtaining product liability insurance on terms the Companyconsiders acceptable.  The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  There can be no assurance that the Company will be able to obtaininsurance coverage in the future at acceptable levels or that the costs ofinsurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, operating results, and financial condition.

 

In 2002, theNational Highway Traffic Safety Administration (NHTSA), enacted new vehiclesafety legislation referred to as the TREAD Act that imposes significant earlywarning reporting (“EWR”) requirements on vehicle manufacturers, including theCompany.  The Company believes that ithas met the EWR requirements of the TREAD Act that became effective during2003.

 

Certain U.S.tax laws currently afford favorable tax treatment for the purchase and sale ofrecreational vehicles.  These laws andregulations have historically been amended frequently, and it is likely thatfurther amendments and additional laws and regulations will be applicable tothe Company and its products in the future. Furthermore, no assurance can be given that any increase in personalincome tax rates will not have a material adverse effect on the Company’sbusiness, operating results, and financial condition by reducing demand for theCompany’s products.

 

ENVIRONMENTALREGULATION AND REMEDIATION

 

REGULATION TheCompany’s recreational vehicle manufacturing operations are subject to avariety 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 morestringent, and it is likely that future amendments to these laws will impactthe Company’s operations.

 

The Companyhas submitted applications for “Title V” air permits for all of its existingand new operations.  The air permitshave either been issued or are in the process of being issued by the relevantstate agency.

 

The Companycurrently anticipates that additional painting capacities will be needed at itsproduction facilities in Coburg and Bend, Oregon.  As a condition of these expansions, air pollution controlequipment will probably be required for the Coburg operations but not for theBend facility.  The Company does notanticipate air pollution control equipment will be required as a condition ofany existing air permits, although new regulations and

 

9

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their interpretation may changeover time, and there can be no assurance that additional expenditures will notbe required.*

 

During 2003 the new federal Maximum Achievable Control Technology(“MACT”) regulations were adopted.  TheCompany does not currently anticipate that compliance with the MACT regulationsby the Company will require any material capital expenditures at its facilitiesbeyond those which have already been incurred.*  However, the ongoing interpretation of these regulations isuncertain and there can be no assurance that additional capital expenditureswill not be required.

 

The Company isaware of no unresolved violations of any of its existing air permits at any ofits owned or leased facilities at this time. However, the failure of the Company to comply with present or futureregulations could subject the Company to: (i) fines; (ii) potential civil andcriminal liability; (iii) suspension of production or cessation of operations;(iv) alterations to the manufacturing process; or (v) costly cleanup or capitalexpenditures, any of which could have a material adverse effect on theCompany’s business, results of operations, and financial condition.

 

REMEDIATION  The Company is currently involved in avoluntary remediation activity at one of its facilities acquired in the SMCacquisition.  The remediation project isassociated with old abandoned fuel storage tanks.  Preliminary site evaluations delineated the extent of contaminationto be confined to a relatively minor area. Total project costs are expected to be under $40,000.  The Company is currently unaware of anyother sites owned or facilities operated by the Company that requireenvironmental remediation.  However, thefailure of the Company to comply with present or future regulations could subjectthe Company to: (i) fines; (ii) potential civil and criminal liability; (iii)suspension of production or cessation of operations; (iv) alterations to themanufacturing process; or (v) costly cleanup or capital expenditures, any ofwhich could have a material adverse effect on the Company’s business, resultsof operations, and financial condition.

 

EMPLOYEES

 

As of January3, 2004, the Company had 5,604 full-time employees, including 4,347 inproduction, 84 in sales, 689 in service, and 484 in management andadministration.  The Company’s employeesare not represented by any collective bargaining organization, and the Companyhas never experienced a work stoppage resulting from labor issues.  The Company believes its relations with itsemployees are good.

 

The Company’sfuture prospects depend upon its key management personnel, including Kay L.Toolson, the Company’s Chief Executive Officer and John W. Nepute, theCompany’s President.  The loss of one ormore of these key management personnel could adversely affect the Company’sbusiness.  The prospects of the Companyalso depend in part on its ability to attract and retain qualified technical,manufacturing, managerial, and marketing personnel.  Competition for such personnel is intense, and there can be noassurance that the Company will be successful in attracting and retaining suchpersonnel.

 

EXECUTIVE OFFICERS OF THECOMPANY

 

The followingsets forth certain information with respect to the executive officers of theCompany as of March 10, 2004:

 
| **Name**            |   | **Age** |   | **Position with the Company**                                       |
|---------------------|--------|---------|--------|---------------------------------------------------------------------|
| Kay L. Toolson      |   | 60      |   | Chairman and Chief  Executive Officer                               |
| John W. Nepute      |   | 52      |   | President                                                           |
| Richard E. Bond     |   | 50      |   | Senior Vice President,  Secretary, and Chief Administrative Officer |
| Martin W. Garriott  |   | 48      |   | Vice President and  Director of Oregon Manufacturing                |
| Irvin M. Yoder      |   | 56      |   | Vice President and  Director of Indiana Manufacturing               |
| Patrick F. Carroll  |   | 46      |   | Vice President of Product  Development                              |
| P. Martin Daley     |   | 39      |   | Vice President and Chief  Financial Officer                         |
| Michael P. Snell    |   | 35      |   | Vice President of Sales                                             |
| John B. Healey, Jr. |   | 38      |   | Vice President of  Corporate Purchasing                             |

 

10

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Mr. Toolsonhas served as Chief Executive Officer of the Company and the Predecessor since1986 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 toSeptember 1999.  From 1973 to 1986, Mr.Toolson held executive positions with two motor coach manufacturers.

 

Mr. Nepute hasserved the Company as President since October 2000.  He served as Executive Vice President, Treasurer and ChiefFinancial Officer from September 1999 to October 2000.  Prior to that and from 1991, he served theCompany and the Predecessor in the capacity of Vice President of Finance,Treasurer and Chief Financial Officer. From January 1988 until January 1991, he served the Predecessor asController.

 

Mr. Bond hasserved as Senior Vice President, Secretary, and Chief Administrative Officer ofthe Company since September 1999 and as Vice President, Secretary, and ChiefAdministrative Officer beginning in August of 1998.  Prior to that and from February 1997, he served the Company asVice President, Secretary, and General Counsel, having joined the Company inJanuary 1997.  From 1987 to December1996, he held the position of Vice President, Secretary, and General Counsel ofHoliday Rambler, which was acquired by the Company in 1996, and originallyjoined Holiday Rambler as Vice President and Assistant General Counsel in 1984.

 

Mr. Garriotthas served the Company as Vice President and Director of Oregon Manufacturingsince January 1997.  He has beencontinuously employed by the Company or the Predecessor since November 1975 invarious capacities, including Vice President of Corporate Purchasing fromOctober 1994 until December 1996.

 

Mr. Yoder hasserved the Company as Vice President and Director of Indiana Manufacturingsince August 1998.  Joining the Companyupon the acquisition of Holiday Rambler in March 1996 as Director of IndianaMotorized Manufacturing, he served in that capacity through July 1998.  Mr. Yoder began his employment with HolidayRambler in 1969 and held a variety of production-related positions, serving asArea Manager of Motorized Production from 1980 until March 1996.

 

Mr. Carrollhas served as Vice President of Product Development since August 1998 and priorto that as Director of Product Development since joining the Company in October1995.  He has held a variety ofmarketing and product development positions with various recreational vehiclemanufacturers since 1979.

 

Mr. Daley hasserved as Vice President and Chief Financial Officer since October 2000.  He served as Corporate Controller from March1996 to October 2000.  Prior to that, heserved as the Oregon Controller since joining the Company in November 1994.

 

Mr. Snell hasserved as Vice President of Sales since October of 2000, and as Vice Presidentof Monaco Motorized Sales beginning in August 1998.  Prior to that and since joining the Company in October of1994,  he held different positions inthe sales department, including National Sales Manager of Monaco MotorizedSales.

 

Mr. Healey hasserved as Vice President of Corporate Purchasing since October of 2000 and asDirector of Purchasing for Indiana Operations beginning in August of 1998.  Prior to that and since joining the Companyin March of 1991, he held a variety of positions in the purchasing department.

 

**ITEM 2****.  PROPERTIES**

 

The Company isheadquartered in Coburg, Oregon, approximately 100 miles from Portland, Oregon.The following table summarizes the Company’s current and planned facilities:

 
| **FACILITY**        |   | **OWNED/  LEASED** |   | **APPROXIMATE  SQ FOOTAGE** |   | **ACTIVITY**                                     |
|---------------------|--------|--------------------|--------|-----------------------------|--------|--------------------------------------------------|
|                |   |               |   |                        |   |                                             |
| Coburg, Oregon      |   | Owned              |   | 816,000                     |   | Motor Coaches/Chassis production                 |
| Burns, Oregon       |   | Owned              |   | 176,000                     |   | Fiberglass components production                 |
| Springfield, Oregon |   | Leased             |   | 100,000                     |   | Fiberglass components production                 |
| Bend, Oregon        |   | Leased             |   | 152,800                     |   | Service and Motor Coaches  production            |
| Harrisburg, Oregon  |   | Owned              |   | 274,500                     |   | Service, Chassis, and Wood  component production |
| Elkhart, Indiana    |   | Leased             |   | 30,000                      |   | Bus Conversions production                       |
| Wakarusa, Indiana   |   | Owned              |   | 1,154,000                   |   | Motor Coaches production                         |
| Nappanee, Indiana   |   | Owned              |   | 130,000                     |   | Wood Components production                       |
| Elkhart, Indiana    |   | Owned              |   | 382,000                     |   | Service and Towables/Chassis  production         |
| Tampa, Florida      |   | Owned              |   | 35,000                      |   | Vacant                                           |
| Wildwood, Florida   |   | Owned              |   | 75,000                      |   | Service                                          |

 

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The Companybelieves that its existing facilities will be sufficient to meet its productionrequirements for the foreseeable future.* Should the Company require increased production capacity in the future,the Company believes that additional or alternative space adequate to serve theCompany’s foreseeable needs would be available on commercially reasonableterms.*

 

In addition tothe properties noted above related to building and servicing recreationalvehicles, the Company owns two luxury motor coach resorts under development asfollows:

 
| **RESORT LOCATION** |   | **DEVELOPED  ACREAGE** |   | **NUMBER OF  DEVELOPED LOTS** |   | **NUMBER OF  LOTS SOLD** |   | **UNDEVELOPED  ACREAGE** |   | **NUMBER OF  POTENTIAL LOTS** |   |
|---------------------|--------|------------------------|--------|-------------------------------|--------|--------------------------|--------|--------------------------|--------|-------------------------------|--------|
|                |   |                   |   |                          |   |                     |   |                     |   |                          |   |
| Las Vegas, Nevada   |   | 21                     |   | 202                           |   | 107                      |   | 21                       |   | 199                           |   |
| Indio, California   |   | 27                     |   | 136                           |   | 22                       |   | 53                       |   | 264                           |   |

 

**ITEM 3****.  LEGAL PROCEEDINGS**

 

The Company isinvolved in legal proceedings arising in the ordinary course of its business,including a variety of product liability and warranty claims typical in therecreational vehicle industry.  TheCompany does not believe that the outcome of its pending legal proceedings, netof insurance coverage, will have a material adverse effect on the business,financial condition, or results of operations of the Company.*

 

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**ITEM 4****.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

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**PARTII**

 

**ITEM 5****.  MARKET FORTHE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

The Company’sCommon Stock is traded on the New York Stock Exchange under the symbol“MNC.”  The following table sets forthfor the periods indicated the high and low closing sale prices for the CommonStock (rounded to the nearest $.01 per share).

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| **2003**       |   |     |   |    |   |
| First Quarter  |   | $        | 17.39  |    | $      | 9.06 |   |
| Second Quarter |   | $        | 16.73  |    | $      | 10.00 |   |
| Third Quarter  |   | $        | 20.41  |    | $      | 13.97 |   |
| Fourth Quarter |   | $        | 24.96  |    | $      | 16.55 |   |
|           |   |     |   |    |   |
| **2002**       |   |     |   |    |   |
| First Quarter  |   | $        | 29.60  |    | $      | 21.77 |   |
| Second Quarter |   | $        | 29.50  |    | $      | 21.30 |   |
| Third Quarter  |   | $        | 23.00  |    | $      | 15.57 |   |
| Fourth Quarter |   | $        | 20.03  |    | $      | 15.00 |   |

 

As of March 9,2004, there were approximately 909 holders of record of the Company’s CommonStock.

 

On February19, 2004, the Company declared a $.05 per share dividend on all common stockowned by holders of record as of March 4, 2004.  This is the first dividend declared by the Company.  The Company currently expects thatcomparable cash dividends will be paid on a quarterly basis going forward,however, the Company reserves the right to alter or discontinue this practiceat any time depending on its economic performance and financial condition.

 

The marketprice of the Company’s Common Stock is subject to wide fluctuations in responseto quarter-to-quarter variations in operating results, changes in earningsestimates by analysts, announcements of new products by the Company or itscompetitors, general conditions in the recreational vehicle market, and otherevents or factors.  In addition, thestocks of many recreational vehicle companies have experienced price and volumefluctuations which have not necessarily been directly related to the companies’operating performance, and the market price of the Company’s Common Stock couldexperience similar fluctuations.

 

Theinformation required by this item regarding equity compensation plans isincorporated by reference in the information set forth in Item 12 of the AnnualReport on Form 10-K.

 

**ITEM 6****.  SELECTEDFINANCIAL DATA**

 

SELECTED HISTORICALCONSOLIDATED FINANCIAL DATA

 

TheConsolidated Statements of Income Data set forth below with respect to fiscalyears 2001, 2002, and 2003, and the Consolidated Balance Sheet Data at December28, 2002 and January 3, 2004, are derived from, and should be read inconjunction with, the audited Consolidated Financial Statements and Notesthereto of the Company included in this Annual Report on Form 10-K.  The Consolidated Statements of Income Dataset forth below with respect to fiscal years 1999 and 2000 and the ConsolidatedBalance Sheet Data at January 1, 2000, December 30, 2000, and December 29, 2001are derived from audited consolidated financial statements of the Company whichare not included in this Annual Report on Form 10-K.

 

The data setforth in the following table should be read in conjunction with, and arequalified in their entirety by, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, the Company’s ConsolidatedFinancial Statements and the Notes thereto appearing elsewhere in this AnnualReport on Form 10-K.

 

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**Five-YearSelected Financial Data**

** **

The following table sets forthfinancial data of Monaco Coach Corporation for the years indicated (inthousands of dollars, except share and per share data and consolidatedoperating data).

 
|                                          |   | **Fiscal Year** |    |
|-----------------------------------------------|--------|-----------------|---------|
|                                          |   | **1999**        |    | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
| **Consolidated Statements of Income Data:**   |   |            |    |   |   |   |   |   |   |   |   |
| Net sales                                     |   | $               | 780,815 |   | $ | 901,890 |   | $ | 937,073 |   | $ | 1,222,689 |   | $ | 1,168,311 |   |
| Cost of sales                                 |   | 658,536         |    | 772,240 |   | 823,083 |   | 1,059,560 |   | 1,028,377 |   |
| Gross profit                                  |   | 122,279         |    | 129,650 |   | 113,990 |   | 163,129 |   | 139,934 |   |
| Selling, general, and administrative expenses |   | 48,791          |    | 59,175 |   | 70,687 |   | 87,202 |   | 101,700 |   |
| Amortization of goodwill                      |   | 645             |    | 645 |   | 645 |   | 0 |   | 0 |   |
| Operating income                              |   | 72,843          |    | 69,830 |   | 42,658 |   | 75,927 |   | 38,234 |   |
| Other income, net                             |   | (142            | )       | (182 | ) | (334 | ) | (105 | ) | (260 | ) |
| Interest expense                              |   | 1,143           |    | 632 |   | 2,357 |   | 2,752 |   | 2,968 |   |
| Income before provision for income taxes      |   | 71,842          |    | 69,380 |   | 40,635 |   | 73,280 |   | 35,526 |   |
| Provision for income taxes                    |   | 28,081          |    | 26,859 |   | 15,716 |   | 28,765 |   | 13,326 |   |
| Net income                                    |   | $               | 43,761  |   | $ | 42,521 |   | $ | 24,919 |   | $ | 44,515 |   | $ | 22,200 |   |
|                                          |   |            |    |   |   |   |   |   |   |   |   |
| Earnings per common share:                    |   |            |    |   |   |   |   |   |   |   |   |
| Basic                                         |   | $               | 1.55    |   | $ | 1.50 |   | $ | 0.87 |   | $ | 1.55 |   | $ | 0.76 |   |
| Diluted                                       |   | $               | 1.51    |   | $ | 1.47 |   | $ | 0.85 |   | $ | 1.51 |   | $ | 0.75 |   |
| Weighted average shares outstanding:          |   |            |    |   |   |   |   |   |   |   |   |
| Basic                                         |   | 28,213,444      |    | 28,377,123 |   | 28,531,593 |   | 28,812,473 |   | 29,062,649 |   |
| Diluted                                       |   | 29,050,453      |    | 28,978,264 |   | 29,288,688 |   | 29,573,420 |   | 29,567,012 |   |
|                                          |   |            |    |   |   |   |   |   |   |   |   |
| **Consolidated Operating Data:**              |   |            |    |   |   |   |   |   |   |   |   |
| Units sold:                                   |   |            |    |   |   |   |   |   |   |   |   |
| Motor coaches                                 |   | 6,233           |    | 6,632 |   | 6,228 |   | 8,005 |   | 7,051 |   |
| Towables                                      |   | 3,269           |    | 3,377 |   | 3,261 |   | 3,206 |   | 2,593 |   |
|                                          |   |            |    |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**          |   |            |    |   |   |   |   |   |   |   |   |
| Working capital                               |   | $               | 38,888  |   | $ | 69,299 |   | $ | 63,694 |   | $ | 114,241 |   | $ | 121,231 |   |
| Total assets                                  |   | 246,727         |    | 321,610 |   | 427,098 |   | 547,417 |   | 478,669 |   |
| Long-term borrowings, less current portion    |   | ––    |    | –– |   | 30,000 |   | 30,333 |   | 15,000 |   |
| Total stockholders’ equity               |   | 143,339         |    | 186,625 |   | 213,130 |   | 260,627 |   | 286,248 |   |

 

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| **ITEM 7****.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS** |
|-----------------|-------------------------------------------------------------------------------------------------|

 

OVERVIEW

 

*Background*

 

We are aleading manufacturer of premium Class A motor coaches, Class C motor coachesand towable recreation vehicles.  Ourproduct line consists of 29 models of motor coaches and 13 models of towables(fifth wheel trailers and travel trailers) under the “Monaco,” “HolidayRambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  Our products, which are typically priced atthe high end of their respective product categories, range in suggested retailprice from $70,000 to $1.4 million for motor coaches and from $25,000 to$60,000 for towables.  Based upon retailregistrations in 2003, we believe we had a 30.1% share of the market for dieselClass A motor coaches, an 18.1% share of the market for all Class A motorcoaches, a 2.8% share of the market for fifth wheel towables and a 0.7% shareof the market for travel trailers.

 

We haveconducted a series of acquisitions during our history, beginning in March 1993when we commenced operations by acquiring substantially all of the assets andliabilities of a predecessor company that had been formed in 1968.  In March 1996, we acquired the HolidayRambler Division of Harley-Davidson, Inc., a manufacturer of a full line ofClass A motor coaches and towables.  InAugust 2001, we acquired SMC Corporation, manufacturer of the Beaver and Safaribrand Class A motorhomes.  In November2002, we acquired from Outdoor Resorts of America (“ORA”) three luxurymotorcoach resort properties being developed by ORA in Las Vegas, Nevada,Indio, California, and Naples, Florida. In September 2003, we sold the property in Naples, Florida.

 

Each of theseacquisitions was accounted for using the purchase method of accounting.  As a result, the consolidated financialstatements for fiscal years 2001 and 2002 contain various acquisition-relatedexpenses including, in 2001, amortization of goodwill related to theacquisition of the Company’s predecessor and interest expense and amortizationof debt issuance costs and goodwill relating to the acquisition of HolidayRambler.  Additionally, the consolidatedfinancial statements for fiscal years 2001, 2002 and 2003 contain interestexpense and amortization of debt issuance costs related to the acquisition ofSMC Corporation and, for fiscal years 2002 and 2003, interest expense andamortization of debt issuance costs associated with the resort acquisition.

 

For years priorto 2002, we amortized the goodwill resulting from the acquisitions of thepredecessor and Holiday Rambler using the straight-line method over a 40-yearperiod.  However, in accordance withStatements of Financial Accounting Standards No. 142, “Accounting for Goodwilland Other Intangible Assets” (“SFAS 142”), no goodwill amortization wasrecorded for the acquisition of SMC Corporation for the fiscal year endedDecember 29, 2001, and no goodwill amortization was recorded for any of theacquisitions for the fiscal years ended December 28, 2002 and January 3,2004.  We completed our annual testingof goodwill during 2003 as required by SFAS 142 and determined that there hasbeen no impairment requiring a write down.

 

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RESULTS OF OPERATIONS

 

The followingtable illustrates the results of operations for the years ended December 28,2002, and January 3, 2004.  All dollarsrepresented are in thousands.

 
|                                         |   | **2002**  |      | **%****of  Sales** |   | **2003**  |   | **%****of  Sales** |   | **$**   | **Change** |   | **%****Change** |   |
|----------------------------------------------|--------|-----------|-----------|--------------------|--------|-----------|--------|--------------------|--------|---------|------------|--------|-----------------|--------|
| Net sales                                    |   | $         | 1,222,689 |               | 100.0  | %         | $      | 1,168,311          |   | 100.0   | %          | $      | -54,378         |   | -4.5 | % |
| Cost of Sales                                |   | 1,059,560 |      | 86.7               |   | 1,028,377 |   | 88.0               |   | -31,183 |       | -2.9   | %               |
| Gross Profit                                 |   | 163,129   |      | 13.3               |   | 139,934   |   | 12.0               |   | -23,195 |       | -14.2  | %               |
| Selling, general and administrative expenses |   | 87,202    |      | 7.1                |   | 101,700   |   | 8.7                |   | 14,498  |       | 16.6   | %               |
|                                         |   |      |      |               |   |      |   |               |   |    |       |   |            |
| Operating income                             |   | $         | 75,927    |               | 6.2    | %         | $      | 38,234             |   | 3.3     | %          | $      | -37,693         |   | -49.6 | % |

 

*Performancein 2003*

 

In 2003, weexperienced several challenges within our industry.  The war in Iraq, a sluggish economy, and slower retail turns atdealer lots, created a surplus of finished goods inventory in the first half of2003.  As our finished goods numbersgrew, we reduced production output at our facilities, and reduced our workforce by approximately 20%.  Inconnection with the reduction in output, we also offered sales incentives toour dealer network.  This decision,while healthy for our balance sheet, resulted in lower revenues for the year,as well as reduced gross profit margins.

 

To stimulateretail turns on our dealer’s lots, we instituted an aggressive retailpromotions program, offering incentives to retail buyers to purchase inventoryon dealer lots.  As a result, ourselling, general, and administrative expenses rose significantly between 2002 and2003.  However, as a result of theseaggressive retail promotions program, dealer inventories fell in the third andfourth quarters of 2003.  This enabledus to successfully increase our production output, and, by the end of 2003,rehire most of our workforce.

 

As retailinterest grew in the third and fourth quarter, the Company was successful inreducing its retail promotions to more normal levels.  Accordingly, selling, general, and administrative expenses, whilestill higher in 2003 compared to 2002, began to decline in the second half of2003.

 

*2003 Compared With 2002*

 

Net salesdecreased 4.5% from $1.223 billion in 2002 to $1.168 billion in 2003.  Gross diesel motorized revenues were down5.6%, while gas motorized were up 0.6%, and towables were down 8.6%.  For 2003, gross diesel motorized salesaccounted for 78.8% of sales, gas motorized sales accounted for 13.4% of sales,and towables accounted for 7.8% of sales. For 2002, gross diesel motorized sales accounted for 78.5% of sales, gasmotorized accounted for 13.4% of sales, and towables accounted for 8.1% ofsales.  The increase in diesel motorizedsales as a percentage of sales reflects the continued strong diesel market,while the decrease in towables as a percentage of sales was due primarily to asmall decrease in market share from increased towable competition.  Accordingly, as diesel motorized productgrew as a percentage of sales, the Company’s overall average unit selling priceincreased from  $110,000 in  2002, to $121,000 in 2003.

 

Gross profitdecreased by $23.2 million from $163.1 million in 2002 to $139.9 million in2003 and gross margin decreased from 13.3% in 2002 to 12.0% in 2003.  The decrease in gross margin in 2003 wasdue, in part, to higher than normal sales discounts that were offered in thefirst half of 2003 as the economy slowed due to uncertainties surroundingmiddle east conflicts.  These discounts,which were .70% higher as a percentage of sales in 2003 versus 2002, wereoffset by better material costs of 1.79% of sales.  However, higher delivery expenses of 1.29% as a percentage ofsales, and higher indirect costs of sales of 1.32% of sales, resulted inoverall gross margin reductions.  Theremaining decrease in gross margins were related to other direct costs of salessuch as slightly higher labor and warranty costs.  Material margins were improved due to the continued utilizationof the Company’s component facilities, and the efficiencies gained throughvertical integration of the related component facility

 

17

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products.  Indirect cost of sales increases reflect thereduced run rates in the Company’s plants that resulted in lower utilizationand higher overhead plant costs.

 

Selling,general, and administrative expenses increased by $14.5 million from $87.2million in 2002 to $101.7 million in 2003 and increased as a percentage ofsales from 7.1% in 2002 to 8.7% in 2003. Increases in spending over the prior year were due mostly to increasesin dealer promotions spending of 1.39% of sales.  These dealer promotions were offered as retail incentives tocustomers in the forms of manufacturer assistance rebates, and were successfulin substantially reducing the Company’s finished goods to appropriate levels bythe third and fourth quarters of 2003. An additional increase in selling, general, and administrative costs wasdue to increased costs associated with product liability expenses related toactual and estimated claims.  Theincrease occurred predominantly in the first quarter of 2003 and returned tomore normal levels throughout the remainder of 2003.  This increase was more than offset by a decrease in the Company’smanagement bonus expense.

 

Operatingincome decreased $37.7 million from $75.9 million in 2002 to $38.2 million in2003.  The Company’s higher level ofselling, general, and administrative expense as a percentage of sales combinedwith the decrease in the Company’s gross margin, resulted in a decrease inoperating margin from 6.2% in 2002 to 3.3% in 2003.

 

Net interestexpense increased from $2.8 million in 2002 to $3.0 million in 2003.  This increase was related to increased debtlevels during 2003 due to higher levels of inventory compared to the prioryear, combined with increased capital requirements after the purchase of theOutdoor Resorts of America properties in November of 2002.  Capitalized interest was zero in 2002 and$285,000 in 2003.  The Company’sinterest expense included $314,000 in 2002 and $426,000 in 2003 related to theamortization of debt issuance costs recorded in conjunction with the Company’scredit facilities.  The Company isexpecting decreased interest expense for 2004 based on anticipated lower debtlevels.*

 

The Companyreported a provision for income taxes of $13.3 million, or an effective taxrate of 37.5%, for 2003, compared to $28.8 million, or an effective tax rate of39.3% for 2002.  The change in effectivetax rate was due mainly to benefits from sales to customers in foreigncountries, and certain state tax benefits the Company received.

 

Net incomedecreased by $22.3 million from $44.5 million in 2002 to $22.2 million in 2003,due to the combination of a decrease in net sales and a decrease in operatingmargin.  The Company does not currentlyexpense stock options granted, however, if option expensing were required, theimpact on net income for 2003 for all previously granted options would havebeen a decrease of $1.4 million.  SeeNote 13 of the Company’s consolidated financial statements for informationregarding the calculation of the impact of expensing stock options.

 

*2002 Compared With 2001*

 

Net salesincreased 30.5% from $937.1 million in 2001 to $1.2 billion in 2002.  The Company’s overall unit sales were up18.1% from 9,489 in 2001 to 11,211 units in 2002.  The Company’s units sales were up 28.5% on the motorized sidewith 16.5% of that increase due to the addition of the Safari and Beaver lineof products starting in the second half of 2001.  Gross diesel motorized sales revenues were up 30.6%, while gasmotorized were up 45.7%, and towables were up 8.2%.  This reflects a stronger mix of higher priced units in eachcategory in 2002 as the Company’s overall average unit selling price increasedfrom $99,900 in 2001 to $110,000 in 2002. The Company’s diesel products accounted for 78.5% of total 2002 revenueswhile gas products were 13.4% and towables were 8.1% of total revenues.

 

Gross profitincreased by $49.1 million from $114.0 million in 2001 to $163.1 million in2002 and gross margin increased from 12.2% in 2001 to 13.3% in 2002.  The increase in gross margin in 2002 was dueto lower sales discounts and reductions in material costs as a percentage ofsales.  Through the first half of 2001,the Company found it necessary to offer above normal discounts to maintainsales to dealers.  The discountingreturned to normal levels in the second half of 2001 and throughout 2002.  Reductions in material costs were attainedby leveraging the Company’s subassembly fiberglass and cabinet shop operationswith higher production levels than in 2001.

 

Selling,general, and administrative expenses increased by $16.5 million from $70.7million in 2001 to $87.2 million in 2002 and decreased as a percentage of salesfrom 7.5% in 2001 to 7.1% in 2002. Increases in spending over the prior year were due to those items thatfluctuate with the increase in sales such as sales commissions,

 

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product liability expenses,advertising, promotions, general insurance, and printed brochure costs.  The reduction as a percentage of sales wasmostly due to the large increase in sales compared to overall spending.

 

Amortizationof goodwill declined from $645,000 in 2001 to zero in 2002 due to theapplication of SFAS 142 discussed above and management’s determination thatthere had been no impairment of goodwill as of December 28, 2002.

 

Operatingincome increased $33.3 million from $42.7 million in 2001 to $75.9 million in2002.  The Company’s lower level ofselling, general, and administrative expense as a percentage of sales combinedwith the increase in the Company’s gross margin, resulted in an increase inoperating margin from 4.6% in 2001 to 6.2% in 2002.

 

Net interestexpense increased from $2.4 million in 2001 to $2.8 million in 2002.  This increase was related to increased debtlevels during 2002 due to higher levels of inventory compared to the prioryear, combined with increased capital requirements after the SMC acquisition inAugust of 2001 and the resort acquisition in November of 2002.  No interest was capitalized in 2001 or2002.  The Company’s interest expenseincluded $14,000 in 2001 and $314,000 in 2002 related to the amortization ofdebt issuance costs recorded in conjunction with the Company’s credit facilities.  The Company also increased its long-termcredit facility by $22 million in the fourth quarter of 2002 for the resortacquisition.  See “Liquidity and CapitalResources.”

 

The Companyreported a provision for income taxes of $28.8 million, or an effective taxrate of 39.3%, for 2002, compared to $15.7 million, or an effective tax rate of38.7% for 2001.  The change in effectivetax rate was due mainly to a decreased benefit in 2002 from foreign sales.

 

Net incomeincreased by $19.6 million from $24.9 million in 2001 to $44.5 million in 2002,due to the combination of an increase in net sales and an increase in operatingmargin.  The Company does not currentlyexpense stock options granted, however, if option expensing were required, theimpact on net income for 2002 for all previously granted options would havebeen a decrease of $1.3 million.  SeeNote 13 of the Company’s consolidated financial statements for informationregarding the calculation of the impact of expensing stock options.

 

LIQUIDITYAND CAPITAL RESOURCES

 

The Company’sprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During 2003, the Company generated cash of $97.9 million fromoperating activities and had a net cash balance of $13.4 million at January 3,2004.  The Company generated $32.0million from net income and non-cash expenses such as depreciation andamortization.  Other sources of cashincluded a decrease in trade receivables of $27.9 million, a decrease ininventories of $47.9 million and a decrease in resort lot inventory of $5.9million.  The uses of cash included adecrease of $13.3 million in accounts payable, a decrease of $5.7 million inaccrued liabilities and reserves, and a decrease of $1.1 million in income taxpayable.  The decrease in tradereceivables reflects a shift in the shipment patterns of the Company’sproducts, whereby fewer shipments occurred near the end of the quarter,affording the Company an opportunity to collect receivables prior to the end ofthe year.  Decreased inventory levelsreflect a decrease in finished goods and raw materials in accordance with theCompany’s desire to reduce working capital needs. The finished goods componentof inventory decreased by $37.4 million over the prior year.  Decreased payables and liabilities arereflective of decreased purchases for lower production run rates over the prioryear, model change, accruals for current income taxes payable, and variousother accrued liabilities.  In additionto cash flows from operations, the Company also received $6.7 million from thesale of investment property in Naples, Florida, as well as $1.1 million fromthe sale of property in Leesburg, Florida. Proceeds from the sale of properties served to pay down long-term debtin the amount of $4.7 million, and to reduce the Company’s outstandingborrowings under it’s operating line of credit.

 

The Companyhas credit facilities consisting of a revolving line of credit of up to $95.0million of which no borrowings were outstanding at January 3, 2004 (the “RevolvingLoan”) and term loans with balances of $30.0 million at January 3, 2004 (the“Term Loans”).  At the election of theCompany, the Revolving Loan and Term Loans 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 June 30, 2005, and requires monthly interest payments.  Additional prepayments for portions of

 

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the term notes are required inthe event the Company sells substantially all, or any, motor coach resort location.  The Term Loans require monthly interestpayments and principal payments that total $3.75 million per quarter.  The Revolving Loan and Term Loans arecollateralized by all the assets of the Company and include variousrestrictions and financial covenants. The Company utilizes “zero balance” bank disbursement accounts in whichan advance on the line of credit is automatically made for checks clearing eachday.  Since the balance of thedisbursement account at the bank returns to zero at the end of each day, theoutstanding checks of the Company are reflected as a liability.  The outstanding check liability is combinedwith the Company’s positive cash balance accounts to reflect a net bookoverdraft or a net cash balance for financial reporting.

 

The Company’sprincipal working capital requirements are for purchases of inventory andfinancing of trade receivables.  Many ofthe Company’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below.  At January 3, 2004, the Company had working capital ofapproximately $121.2 million, an increase of $7.0 million from working capitalof $114.2 million at December 28, 2002. The Company has been using short-term credit facilities and cash flow tofinance its capital expenditures.

 

The Companybelieves that cash flow from operations and funds available under itsanticipated credit facilities will be sufficient to meet the Company’sliquidity requirements for the next 12 months.*  The Company’s capital expenditures were $19.5 million in 2003,which included costs related to the expansion of an existing paint facility atthe Company’s Indiana location, an expansion of the Indiana towable plant, anew service facility in Florida, as well as various other routine capitalexpenditures.  The Company anticipatesthat capital expenditures for all of 2004 will be approximately $12 to $15million, which includes expenditures to purchase additional machinery andequipment in both the Company’s Coburg, Oregon and Wakarusa, Indianafacilities, as well as upgrades to existing information systemsinfrastructures.*  The Company mayrequire additional equity or debt financing to address working capital andfacilities expansion needs, particularly if the Company significantly increasesthe level of working capital assets such as inventory and accountsreceivable.  The Company may also fromtime to time seek to acquire businesses that would complement the Company’scurrent business, and any such acquisition could require additionalfinancing.  There can be no assurancethat additional financing will be available if required or on terms deemedfavorable by the Company.

 

As is typicalin the recreational vehicle industry, many of the Company’s retail dealersutilize wholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  The Company has agreementswith several institutional lenders under which the Company currently hasrepurchase obligations.  The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units.  The Company’s obligations under theserepurchase agreements vary from period to period up to 18 months.  At January 3, 2004, approximately $513.6million of products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 7.2% concentrated with one dealer.  Historically, the Company has been successful in mitigatinglosses associated with repurchase obligations. During 2003, the losses associated with the exercise of repurchaseagreements were approximately $897,000. If the Company were obligated to repurchase a significant number ofunits under any repurchase agreement, its business, operating results, andfinancial condition could be adversely affected.

 

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

 

PAYMENTSDUE BY PERIOD

 
| **Contractual Obligations (in thousands)** |   | **1 year or less** |   | **1 to 3 years** |   | **4 to 5 years** |   | **Thereafter** |   | **Total** |   |
|--------------------------------------------|--------|--------------------|--------|------------------|--------|------------------|--------|----------------|--------|-----------|--------|
| Long-term debt (1)                         |   | $                  | 15,000 |             | $      | 15,000           |   | $              | 0      |      | $      | 0 |   | $ | 30,000 |   |
| Operating Leases (2)                       |   | 2,937              |   | 2,479            |   | 1,957            |   | 3,599          |   | 10,972    |   |
| Total  Contractual Cash Obligations        |   | $                  | 17,937 |             | $      | 17,479           |   | $              | 1,957  |      | $      | 3,599 |   | $ | 40,972 |   |

 

AMOUNTOF COMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in thousands)** |   | **1 year or less** |   | **1 to 3 years** |   | **4 to 5 years** |   | **Thereafter** |   | **Total** |   |
|--------------------------------------|--------|--------------------|--------|------------------|--------|------------------|--------|----------------|--------|-----------|--------|
| Lines of Credit (3)                  |   | $                  | 0      |             | $      | 95,000           |   | $              | 0      |      | $      | 0 |   | $ | 95,000 |   |
| Guarantees                           |   | 0                  |   | 16,000           | (2)    | 0                |   | 0              |   | 16,000    |   |
| Repurchase Obligations (4)           |   | 0                  |   | 513,600          |   | 0                |   | 0              |   | 513,600   |   |
| Total  Commitments                   |   | $                  | 0      |             | $      | 624,600          |   | $              | 0      |      | $      | 0 |   | $ | 624,600 |   |

 

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(1)  See Note 7 to the financials.

(2)  See Note 11 to the financials.

(3)  See Note 6 to the financials. The amount listed represents available borrowings on the line of creditat January 3, 2004.

(4)  Reflects obligations under manufacturer repurchasecommitments.  See Note 16 to thefinancials.

 

INFLATION

 

The Companydoes not believe that inflation has had a material impact on its results of operationsfor the periods presented.

 

CRITICAL ACCOUNTING POLICIES

 

The discussionand analysis of our financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including thoserelated to warranty costs, product liability, and impairment of goodwill.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.  We believe the following critical accountingpolicies and related judgments and estimates affect the preparation of ourconsolidated financial statements.

 

WARRANTY COSTSEstimated warranty costs are provided for at the time of sale of products withwarranties covering the products for up to one year from the date of retailsale (five years for the front and sidewall frame structure, and three years onthe Roadmaster chassis).  Theseestimates are based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate 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.

 

IMPAIRMENT OFGOODWILL  The Company assesses thepotential impairment of goodwill in accordance with Financial AccountingStandards Board (FASB) Statement No. 142. This initial test involves management comparing the marketcapitalization of the Company, to the carrying amount, including goodwill, ofthe net book value of the Company, to determine if goodwill has been impaired.

 

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INVENTORYRESERVES  The Company writes down itsinventory for obsolescence, and the difference between the cost of inventoryand its estimated market value. These write-downs are based on assumptionsabout future sales demand and market conditions. If actual sales demand ormarket conditions change from those projected by management, additionalinventory write-downs may be required.

 

INCOMETAXES  In conjunction with preparing itsconsolidated financial statements, the Company must estimate its income taxesin each of the jurisdictions in which it operates. This process involvesestimating actual current tax expense together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included in the consolidated balance sheets. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income, and to the extent management believes that recovery isnot likely, a valuation allowance must be established. Significant managementjudgment is required in determining the Company’s provision for income taxes,deferred tax assets and liabilities, and any valuation allowance recordedagainst net deferred tax assets.  Adiscussion of the income tax provision and the components of the deferred taxassets and liabilities can be found in Note 9 to the Company’s consolidatedfinancial statements.

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

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

 

•                  The marginsassociated with the mix of products we sell in any particular period.

 

•                  Our ability toutilize and expand our manufacturing resources efficiently.

 

•                  Shortages ofmaterials used in our products.

 

•                  A determinationby us that goodwill or other intangible assets are impaired and have to bewritten down to their fair values, resulting in a charge to our results ofoperations.

 

•                  Our ability tointroduce new models that achieve consumer acceptance.

 

•                  Theintroduction, marketing and sale of competing products by others, includingsignificant discounting offered by our competitors.

 

•                  The addition orloss of our dealers.

 

•                  The timing oftrade shows and rallies, which we use to market and sell our products.

 

•                  Factorsaffecting the recreational vehicle industry as a whole, including economic andseasonal factors.

 

Our overallgross margin may decline in future periods to the extent that we increase thepercentage of sales of lower gross margin towable products or if the mix ofmotor 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.

 

Demand in therecreational 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 nowoffer, seasonal factors could have a significant impact on our operatingresults in the future.  Additionally,unusually severe weather conditions in certain markets could delay the timingof shipments from one quarter to another.

 

We attempt toforecast orders for our products accurately and commence purchasing andmanufacturing prior to receipt of such orders. However, it is highly unlikely that we will consistently accuratelyforecast 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 forany given quarter.

 

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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 2001 to 257,000 units.  In 2003, the industry rebounded up toapproximately 321,000 units.  Ourbusiness is subject to the cyclical nature of this industry.  Some of the factors that contribute to thiscyclicality include fuel availability and costs, interest rate levels, thelevel of discretionary spending, and availability of credit and overallconsumer confidence.  The recent declinein consumer confidence and slowing of the overall economy has adverselyaffected the recreational vehicle market. An extended continuation of these conditions would materially affect ourbusiness, results of operations, and financial condition.

 

WE RELY ON ARELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OURSALES  Although our products wereoffered by 332 dealerships located primarily in the United States and Canada asof January 3, 2004, a significant percentage of our sales are concentratedamong a relatively small number of independent dealers.  For the year ended January 3, 2004, sales toone dealer, Lazy Days RV Center, accounted for 12.6% of total sales compared to12.3% of sales in the same period ended last year.  For fiscal years 2002 and 2003, sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 39.0% and 40.0% oftotal sales, respectively.  The loss ofa significant dealer or a substantial decrease in sales by any of these dealerscould have a material impact on our business, results of operations, andfinancial condition.

 

WE MAY HAVE TOREPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALERDOES NOT REPAY ITS LENDER  As is commonin the recreational vehicle industry, we enter into repurchase agreements withthe financing institutions used by our dealers to finance their purchases ofour products.  These agreements requireus to repurchase the dealer’s inventory in the event that the dealer does notrepay its lender.  Obligations underthese agreements vary from period to period, but totaled approximately $513.6million as of January 3, 2004, with approximately 7.2% concentrated with onedealer.  If we were obligated torepurchase a significant number of units under any repurchase agreement, ourbusiness, operating results, and financial condition could be adverselyaffected.

 

OURACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK  We sell our product to dealers who arepredominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.  As of January 3,2004, total trade receivables were $89.1 million, with approximately $55.3million, or 62.0% of the outstanding accounts receivable balance concentratedamong floor plan lenders. The remaining $33.8 million of trade receivables wereconcentrated substantially all with one dealer.

 

WE MAYEXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICEOR A DECREASE IN THE SUPPLY OF FUEL  Aninterruption in the supply, or a significant increase in the price or tax onthe sale, of diesel fuel or gasoline on a regional or national basis couldsignificantly affect our business. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain.

 

WE DEPEND ONSINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THATWE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components for certain of our products arepurchased from single or a limited number of sources. These include turbodiesel engines (Cummins and Caterpillar), substantially all of our transmissions(Allison), axles (Dana and Meritor) for all diesel motor coaches and chassis(Workhorse and Ford) for gas motor coaches. We have no long-term supply contracts with these suppliers or theirdistributors, and we cannot be certain that these suppliers will be able tomeet our future requirements. Consequently, the Company has periodically been placed on allocation ofthese and other key components.  Thelast significant allocation occurred in 1997 from Allison, and in 1999 fromFord.  An extended delay or interruptionin the 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.

 

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OUR INDUSTRYIS VERY COMPETITIVE.  WE MUST CONTINUETO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for our products is verycompetitive.  We currently compete witha number of manufacturers of motor coaches, fifth wheel trailers, and traveltrailers.  Some of these companies havegreater financial resources than we have and extensive distributionnetworks.  These companies, or newcompetitors in the industry, may develop products that customers in theindustry prefer over our products.

 

Webelieve that the introduction of new products and new features is critical toour success.  Delays in the introductionof new models or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely.  For example,unexpected costs associated with model changes have affected our gross marginin the past.  Further, new productintroductions can divert revenues from existing models and result in fewer salesof existing products.

 

OUR PRODUCTSCOULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE,CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTINGIN LOSS OF SALES  Our customers requiredemanding specifications for product performance and reliability.  Because our products are complex and oftenuse advanced components, processes and techniques, undetected errors and designflaws may occur.  Product defects resultin higher product service and warranty and replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich will negatively affect our sales and business.

 

OUR BUSINESSIS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY ANDWARRANTY 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 notbelieve that the outcome of any pending litigation, net of insurance coverage,will materially adversely affect our business, results of operations, orfinancial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

Todate, we have been successful in obtaining product liability insurance on termsthat we consider acceptable.  The termsof the policy contain a self-insured retention amount of $500,000 peroccurrence, with a maximum annual aggregate self-insured retention of $3.0million.  Overall product liabilityinsurance, including umbrella coverage, is available to a maximum amount of$100.0 million for each occurrence, as well as in the aggregate.  We cannot be certain we will be able toobtain insurance coverage in the future at acceptable levels or that the costsof such insurance will be reasonable. Further, successful assertion against us of one or a series of largeuninsured claims, or of a series of claims exceeding our insurance coverage,could have a material adverse effect on our business, results of operations,and financial condition.

 

WE MAY BEUNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT ANDMANUFACTURING  Our success depends inpart upon attracting and retaining highly skilled professionals.  A number of our employees are highly skilledengineers and other technical professionals, and our failure to continue toattract and retain such individuals could adversely affect our ability tocompete in the industry.

 

OUR RECENTGROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, ANDMANAGEMENT INFORMATION SYSTEMS  In thepast 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.

 

WE MAYEXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR MANUFACTURINGEQUIPMENT AUTOMATION PLAN  As wecontinue to work towards involving automated machinery and equipment to improveefficiencies and quality, we will be subject to certain risks involvingimplementing new technologies into our facilities.

 

The expansioninto new machinery and equipment technologies involves risks, including thefollowing:

 

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

 

•                  The developmentof new processes involves costs associated with new machinery, training ofemployees, and compliance with environmental, health, and other governmentregulations.

 

•                  The newlydeveloped products may not be successful in the marketplace.

 

•                  We may be unableto complete a planned machinery and equipment implementation in a timelymanner, which could result in lower production levels and an inability tosatisfy customer demand for our products.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

SFAS 150

 

In May of2003, the Financial Accounting Standards Board (the Board), issued SFAS 150Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity (SFAS 150).  ThisStatement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances).  Many of those instruments would previouslyhave been classified as an equity.

 

This Statementis effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003, except for mandatorily redeemable financialinstruments of nonpublic entities.

 

The Companyhas reviewed the provisions of SFAS 150, and believes that it does not have anyfinancial instruments requiring reclassifications under SFAS 150.

 

FIN 45

 

In November2002, the Board issued FASB Interpretation No. 45 (FIN 45), Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, and Interpretation of SFAS 5, 57, and 107and Rescission of FIN 34.  TheInterpretation requires certain disclosures to be made by a guarantor about itsobligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.

 

The initialrecognition and measurement provisions are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The disclosure requirements are effectivefor financial statements of interim or annual periods ending after December 15,2002.  The Company has included thedisclosure requirements in its financial statements and has determined that therecognition provisions of FIN 45 apply to certain guarantees routinely made bythe Company including repurchase obligations to third party lenders forinventory financing of dealer inventories. The Company has recorded a liability of approximately $750,000 forpotential losses resulting from guarantees on products shipped to dealers. Thisestimated liability is based on the Company’s experience of losses associatedwith the repurchase and resale of units in prior years.

 

FIN 46

 

In January2003, the Board issued FASB Interpretation No. 46 (FIN 46), Consolidation ofVariable Interest Entities - an Interpretation of ARB No. 51, ConsolidatedFinancial Statements.  TheInterpretation addresses how variable interest entities are to be identifiedand how an enterprise assesses its interests in a variable interest entity todecide whether to consolidate that entity. The Interpretation also requires existing unconsolidated variableinterest entities to be consolidated by their primary beneficiaries if the entitiesdo not effectively disperse risks among the parties involved.

 

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FIN 46 iseffective in the first fiscal year or interim period beginning after June 15,2003, to variable interest entities in which a company holds a variableinterest that is acquired before February 1, 2003.

 

The provisionsof FIN 46 have been reviewed, and the Company does not believe that it has anyentities requiring consolidation.

 

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**ITEM 7A****.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposedto market risks related to fluctuations in interest rates on ourborrowings.  We do not currently userate swaps, futures contracts or options on futures, or other types ofderivative financial instruments.  Ourline of credit and term debt permit a combination of fixed and variableinterest rate options which allows us to minimize the effect of rising interestrates by locking in fixed rates for periods of up to 6 months.  We believe these features of our creditfacilities help us reduce the risk associated with interest rate fluctuations.

 

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**ITEM 8****.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

INDEXTO FINANCIAL STATEMENTS

 

 
| Monaco Coach  Corporation–Consolidated Financial Statements:                                                                    |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent  Accountants                                                                                                   |   |
| Consolidated Balance Sheets  as of December 28, 2002 and January 3, 2004                                                             |   |
| Consolidated  Statements of Income for the Years Ended December 29, 2001,  December 28, 2002, and January 3, 2004                    |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended  December 29, 2001, December 28, 2002, and January 3, 2004 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 29, 2001,  December 28, 2002, and January 3, 2004                |   |
| Notes to  Consolidated Financial Statements                                                                                          |   |

 

28

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# **Report ofIndependent Accountants**

 

To the Stockholders andBoard of Directors of Monaco Coach Corporation

 

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Monaco Coach Corporationand its Subsidiaries (the Company) at December 28, 2002 and January 3, 2004,and the results of their operations and their cash flows for each of the threeyears in the period ended January 3, 2004, in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

As discussed in Note 1 to theconsolidated financial statements, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets.

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
|                            |
| Portland, Oregon                |
| February 2, 2004                |

 

29

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**MONACO COACH CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

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

 

 
|                                                                                                                        |   | **December 28,  2002** |    | **January 3,  2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|----------------------|--------|
| **ASSETS**                                                                                                                  |   |                   |    |                 |   |
| Current assets:                                                                                                             |   |                   |    |                 |   |
| Cash                                                                                                                        |   | $                      | 0       |                 | $      | 13,398 |   |
| Trade receivables, net of $799 and $626, respectively                                                                       |   | 116,647                |    | 89,170               |   |
| Inventories                                                                                                                 |   | 175,609                |    | 127,746              |   |
| Resort lot inventory                                                                                                        |   | 26,883                 |    | 13,978               |   |
| Prepaid expenses                                                                                                            |   | 3,612                  |    | 3,029                |   |
| Deferred income taxes                                                                                                       |   | 33,379                 |    | 33,836               |   |
| Total current assets                                                                                                        |   | 356,130                |    | 281,157              |   |
|                                                                                                                        |   |                   |    |                 |   |
| Property, plant, and equipment, net                                                                                         |   | 135,350                |    | 141,662              |   |
| Debt issuance costs, net of accumulated amortization of  $389 and $815, respectively                                        |   | 683                    |    | 596                  |   |
| Goodwill, net of accumulated amortization of $5,320 and  $5,320, respectively                                               |   | 55,254                 |    | 55,254               |   |
|                                                                                                                        |   |                   |    |                 |   |
| Total  assets                                                                                                               |   | $                      | 547,417 |                 | $      | 478,669 |   |
|                                                                                                                        |   |                   |    |                 |   |
| **LIABILITIES**                                                                                                             |   |                   |    |                 |   |
| Current liabilities:                                                                                                        |   |                   |    |                 |   |
| Book overdraft                                                                                                              |   | $                      | 3,518   |                 | $      | 0 |   |
| Line of credit                                                                                                              |   | 51,413                 |    | 0                    |   |
| Current portion of long-term note payable                                                                                   |   | 21,667                 |    | 15,000               |   |
| Accounts payable                                                                                                            |   | 78,055                 |    | 64,792               |   |
| Product liability reserve                                                                                                   |   | 21,322                 |    | 20,723               |   |
| Product warranty reserve                                                                                                    |   | 31,745                 |    | 29,643               |   |
| Income taxes payable                                                                                                        |   | 4,536                  |    | 3,395                |   |
| Accrued expenses and other liabilities                                                                                      |   | 29,633                 |    | 26,373               |   |
| Total current liabilities                                                                                                   |   | 241,889                |    | 159,926              |   |
|                                                                                                                        |   |                   |    |                 |   |
| Long-term note payable                                                                                                      |   | 30,333                 |    | 15,000               |   |
| Deferred income taxes                                                                                                       |   | 14,568                 |    | 17,495               |   |
| Total liabilities                                                                                                           |   | 286,790                |    | 192,421              |   |
|                                                                                                                        |   |                   |    |                 |   |
| Commitments and contingencies (Note 16)                                                                                     |   |                   |    |                 |   |
|                                                                                                                        |   |                   |    |                 |   |
| **STOCKHOLDERS’ EQUITY**                                                                                               |   |                   |    |                 |   |
| Common stock, $.01 par value; 50,000,000 shares authorized,  28,871,144 and 29,246,143 issued and outstanding, respectively |   | 289                    |    | 292                  |   |
| Additional paid-in capital                                                                                                  |   | 51,501                 |    | 54,919               |   |
| Retained earnings                                                                                                           |   | 208,837                |    | 231,037              |   |
| Total stockholders’ equity                                                                                             |   | 260,627                |    | 286,248              |   |
| Total  liabilities and stockholders’ equity                                                                            |   | $                      | 547,417 |                 | $      | 478,669 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

30

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**for the years ended December 29, 2001, December 28, 2002, andJanuary 3, 2004**

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

 

* *
|                                          |   | **2001**   |    | **2002**   |   | **2003**   |   |
|-----------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
|                                          |   |       |    |       |   |       |   |
| Net sales                                     |   | $          | 937,073 |       | $      | 1,222,689  |   | $ | 1,168,311 |   |
| Cost of sales                                 |   | 823,083    |    | 1,059,560  |   | 1,028,377  |   |
| Gross profit                                  |   | 113,990    |    | 163,129    |   | 139,934    |   |
|                                          |   |       |    |       |   |       |   |
| Selling, general, and administrative expenses |   | 70,687     |    | 87,202     |   | 101,700    |   |
| Amortization of goodwill                      |   | 645        |    | 0          |   | 0          |   |
| Operating income                              |   | 42,658     |    | 75,927     |   | 38,234     |   |
|                                          |   |       |    |       |   |       |   |
| Other income, net                             |   | 334        |    | 105        |   | 260        |   |
| Interest expense                              |   | (2,357     | )       | (2,752     | )      | (2,968     | )      |
| Income before income taxes                    |   | 40,635     |    | 73,280     |   | 35,526     |   |
|                                          |   |       |    |       |   |       |   |
| Provision for income taxes                    |   | 15,716     |    | 28,765     |   | 13,326     |   |
|                                          |   |       |    |       |   |       |   |
| Net  income                                   |   | $          | 24,919  |       | $      | 44,515     |   | $ | 22,200 |   |
|                                          |   |       |    |       |   |       |   |
| Earnings per common share:                    |   |       |    |       |   |       |   |
| Basic                                         |   | $          | .87     |       | $      | 1.55       |   | $ | .76 |   |
| Diluted                                       |   | $          | .85     |       | $      | 1.51       |   | $ | .75 |   |
|                                          |   |       |    |       |   |       |   |
| Weighted average common shares outstanding:   |   |       |    |       |   |       |   |
| Basic                                         |   | 28,531,593 |    | 28,812,473 |   | 29,062,649 |   |
| Diluted                                       |   | 29,288,688 |    | 29,573,420 |   | 29,567,012 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

31

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**for the years ended December 29, 2001, December 28, 2002, andJanuary 3, 2004**

*(in thousands of dollars, except share data)*

 

* *
|                                   |   |             |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Total** |   |
|----------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------|--------|-----------|--------|
|                                   |   | **Common Stock** |
| **Shares**                             |   | **Amount**       |
|                                   |   |             |   |                             |   |                   |   |      |   |   |   |
| Balances, December 30, 2000            |   | 18,952,107       |   | $                                | 190    |                   | $      | 47,032    |   | $ | 139,403 |   | $ | 186,625 |   |
| Issuance of common stock               |   | 161,848          |   | 1                                |   | 1,115                  |   |      |   | 1,116 |   |
| Tax benefit of stock options exercised |   |             |   |                             |   | 470                    |   |      |   | 470 |   |
| Stock splits                           |   | 9,518,819        |   | 95                               |   | (95                    | )      |      |   |   |   |
| Net income                             |   |             |   |                             |   |                   |   | 24,919    |   | 24,919 |   |
| Balances, December 29, 2001            |   | 28,632,774       |   | 286                              |   | 48,522                 |   | 164,322   |   | 213,130 |   |
| Issuance of common stock               |   | 238,370          |   | 3                                |   | 1,654                  |   |      |   | 1,657 |   |
| Tax benefit of stock options exercised |   |             |   |                             |   | 1,325                  |   |      |   | 1,325 |   |
| Net income                             |   |             |   |                             |   |                   |   | 44,515    |   | 44,515 |   |
| Balances, December 28, 2002            |   | 28,871,144       |   | 289                              |   | 51,501                 |   | 208,837   |   | 260,627 |   |
| Issuance of common stock               |   | 374,999          |   | 3                                |   | 2,406                  |   |      |   | 2,409 |   |
| Tax benefit of stock options exercised |   |             |   |                             |   | 1,012                  |   |      |   | 1,012 |   |
| Net income                             |   |             |   |                             |   |                   |   | 22,200    |   | 22,200 |   |
| Balances,  January 3, 2004             |   | 29,246,143       |   | $                                | 292    |                   | $      | 54,919    |   | $ | 231,037 |   | $ | 286,248 |   |

 

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

32

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**for the years ended December 29, 2001, December 28, 2002, andJanuary 3, 2004**

*(in thousands of dollars)*

 

* *
|                                                                               |   | **2001** |   | **2002** |   | **2003** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                               |   |     |   |     |   |     |   |
| **Increase (Decrease) in Cash**:                                                   |   |     |   |     |   |     |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash flows from operating activities:                                              |   |     |   |     |   |     |   |
| Net income                                                                         |   | $        | 24,919 |     | $      | 44,515   |   | $ | 22,200 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation and amortization                                                      |   | 7,543    |   | 8,585    |   | 9,768    |   |
| (Gain) loss on disposal of assets                                                  |   | (74      | )      | 178      |   | 43       |   |
| Deferred income taxes                                                              |   | 6,005    |   | (1,574   | )      | 3,852    |   |
| Change in assets and liabilities:                                                  |   |     |   |     |   |     |   |
| Trade receivables, net                                                             |   | (13,154  | )      | (33,932  | )      | 27,854   |   |
| Inventories                                                                        |   | 12,682   |   | (48,534  | )      | 47,863   |   |
| Resort lot inventory                                                               |   | 0        |   | (98      | )      | 5,869    |   |
| Prepaid expenses                                                                   |   | (903     | )      | (1,650   | )      | 573      |   |
| Accounts payable                                                                   |   | (10,318  | )      | 10,301   |   | (13,263  | )      |
| Product liability reserve                                                          |   | (1,639   | )      | 1,237    |   | (599     | )      |
| Product warranty reserve                                                           |   | (1,958   | )      | 3,835    |   | (2,102   | )      |
| Income taxes payable                                                               |   | 0        |   | 9,597    |   | (1,141   | )      |
| Accrued expenses and other liabilities                                             |   | (2,123   | )      | 8,888    |   | (3,007   | )      |
| Net cash provided by operating activities                                          |   | 20,980   |   | 1,348    |   | 97,910   |   |
| Cash flows from investing activities:                                              |   |     |   |     |   |     |   |
| Additions to property, plant, and equipment                                        |   | (10,210  | )      | (18,735  | )      | (19,510  | )      |
| Proceeds from sale of assets                                                       |   | 106      |   | 387      |   | 2,197    |   |
| Proceeds from the sale of Naples property                                          |   | 0        |   | 0        |   | 6,650    |   |
| Collections on notes receivable                                                    |   | 0        |   | 500      |   | 0        |   |
| Payment for business acquisition, net of cash acquired                             |   | (24,320  | )      | (21,085  | )      | 0        |   |
| Issuance of notes receivable                                                       |   | (5,357   | )      | (385     | )      | 0        |   |
| Net cash used in investing activities                                              |   | (39,781  | )      | (39,318  | )      | (10,663  | )      |
| Cash flows from financing activities:                                              |   |     |   |     |   |     |   |
| Book overdraft                                                                     |   | (10,840  | )      | (2,371   | )      | (3,518   | )      |
| Borrowings (payments) on line of credit, net                                       |   | (10,930  | )      | 25,414   |   | (51,413  | )      |
| Borrowings on long-term notes payable                                              |   | 40,000   |   | 22,000   |   | 0        |   |
| Payments on long-term notes payable                                                |   | 0        |   | (10,000  | )      | (22,000  | )      |
| Issuance of common stock                                                           |   | 1,586    |   | 2,982    |   | 3,421    |   |
| Debt issuance costs                                                                |   | (1,015   | )      | (55      | )      | (339     | )      |
| Net cash provided by (used in) financing activities                                |   | 18,801   |   | 37,970   |   | (73,849  | )      |
| Net change in cash                                                                 |   | 0        |   | 0        |   | 13,398   |   |
| Cash at beginning of period                                                        |   | 0        |   | 0        |   | 0        |   |
| Cash  at end of period                                                             |   | $        | 0      |     | $      | 0        |   | $ | 13,398 |   |

 

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

33

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**MONACO COACH CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.****                  ****BUSINESS AND SIGNIFICANTACCOUNTING POLICIES:**

 

**Business**

 

Monaco Coach Corporation and its subsidiaries (the“Company”) manufacture premium motor coaches, bus conversions, and towablerecreational vehicles at manufacturing facilities in Oregon and Indiana.  These products are sold to independentdealers primarily throughout the United States and Canada.  In addition, the Company also owns two motorcoach resort properties, the developed lots, of which, are sold to retailcustomers.

 

Pursuant to Statement of Financial AccountingStandards (SFAS) No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” the Company has determined that it’s core businessactivities are comprised of two distinct operations. The first is the design,manufacture, and sale of recreational vehicles. The second is the developmentand sale of motor coach recreation resort lots.  While the nature of the Company’s business is segregated into twodistinct operations, the Company has elected to report its operations as asingle entity, based on the relative immateriality of the motor coach resortoperations when compared to the Company’s operations in its entirety.

 

**Consolidation Policy**

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries.  All material intercompany transactions andbalances have been eliminated.

 

**Fiscal Period**

 

The Company follows a 52/53 week fiscal year periodending on the Saturday closest to December 31. Interim periods also end on the Saturday closest to the calendar quarterend.  The fiscal periods were 52 weekslong for 2001 and 2002, and 53 weeks for 2003. All references to years in the consolidated financial statements relateto fiscal years rather than calendar years.

 

**Stock Splits**

 

On August 6, 2001, the Board of Directors declared athree-for-two stock split in the form of a 50% stock dividend on the Company’sCommon Stock.  Accordingly, allhistorical weighted average share and per share amounts have been restated toreflect the stock split.  Share amountspresented in the Consolidated Statements of Stockholders’ Equity reflect theactual share amounts outstanding for each period presented.

 

**Estimates and Industry Factors**

 

Estimates - The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  The Company basesestimates on various assumptions that are believed to be reasonable under thecircumstances.  Management iscontinually evaluating and updating these estimates, and it is possible thatthese estimates will change in the near future.

 

34

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Concentration of Credit Risk - TheCompany distributes its products through an independent dealer network forrecreational vehicles.  Sales to onecustomer were approximately 12% of net revenues for fiscal years 2001, and2002, and 2003.  No other individualdealers represented over 10% of net revenues in 2001, 2002, or 2003.  The loss of a significant dealer or asubstantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations, and financialcondition.  The terms and conditions ofpayment are a combination of open trade receivables, and commitments fromdealer floor plan lending institutions. As of January 3, 2004, total trade receivables were $89.1 million, withapproximately $55.3 million, or 62.0% of the outstanding accounts receivablebalance, concentrated among floor plan lenders. The remaining open $33.8million of secured trade receivables, were concentrated substantially all withone dealer.

 

Concentrations of credit risk exist for accountsreceivable and repurchase agreements (see Note 16), primarily for the Company’slargest dealers.  As of January 3, 2004,the Company had one dealer that comprised 37.9% of the outstanding tradereceivables.  The Company generallysells to dealers throughout the United States and there is no geographicconcentration of credit risk.

 

Reliance on Key Suppliers - TheCompany’s production strategy relies on certain key suppliers’ ability todeliver subassemblies and component parts in time to meet manufacturingschedules.  The Company has a variety ofkey suppliers, including Allison, Workhorse, Cummins, Caterpillar, Dana,Meritor, and Ford.  The Company does nothave any long-term contracts with these suppliers or their distributors.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocation occurred in1997 from Allison, and in 1999 from Ford. In light of these dependencies, it is possible that failure of Allison,Ford or any of the other suppliers to meet the Company’s future requirementsfor transmissions, chassis or other key components could have a materialnear-term impact on the Company’s business, results of operations, andfinancial condition.

 

Product Warranty Reserve - Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis).  These estimatesare based on historical average repair costs, as well as other reasonableassumptions as have been deemed appropriate by management.  The following table discloses significantchanges in the product warranty reserve:

 
|                           |   | **2001**            |   | **2002** |   | **2003** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                           |   | **(in  thousands)** |   |
| Beginning balance              |   | $                   | 13,750 |     | $      | 27,799   |   | $ | 31,745 |   |
| Expense                        |   | 21,800              |   | 34,237   |   | 35,188   |   |
| Payments/adjustments           |   | (21,788             | )      | (30,402  | )      | (37,290  | )      |
| Adjustment for SMC Acquisition |   | 14,037              |   | 111      |   | 0        |   |
| Ending  balance                |   | $                   | 27,799 |     | $      | 31,745   |   | $ | 29,643 |   |

 

35

----

 

Product Liability Reserve -Estimated litigation costs are provided for at the time of sale of products, orat the time a determination is made that an estimable loss has occurred.  These estimates are developed by legalcounsel based on professional judgment, as well as historical experience.  The following table discloses significantchanges in the product liability reserve:

 
|                           |   | **2001**            |   | **2002** |   | **2003** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                           |   | **(in  thousands)** |   |
| Beginning balance              |   | $                   | 8,120  |     | $      | 19,856   |   | $ | 21,322 |   |
| Expense                        |   | 6,108               |   | 8,020    |   | 12,678   |   |
| Payments/adjustments           |   | (4,246              | )      | (6,783   | )      | (13,277  | )      |
| Adjustment for SMC Acquisition |   | 9,874               |   | 229      |   |     |   |
| Ending  balance                |   | $                   | 19,856 |     | $      | 21,322   |   | $ | 20,723 |   |

 

**Inventories**

 

Inventories consist of raw materials, work-in-process,and finished recreational vehicles and are stated at the lower of cost(first-in, first-out) or market.  Costof work-in-process and finished recreational vehicles includes material, labor,and manufacturing overhead costs.

 

**Resort Lot Inventory**

 

Resort lot inventories consist ofconstruction-in-progress on motor coach properties, as well as fully developedmotor coach properties.  Theseproperties are stated at the lower of cost (specific identification) ormarket.  Cost of construction in progress,as well as fully developed motor coach properties include costs associated withland, construction, and interest capitalization.

 

**Property, Plant, and Equipment**

 

Property, plant, and equipment, including significantimprovements thereto, are stated at cost less accumulated depreciation andamortization.  Cost includes expendituresfor major improvements, replacements and renewals and the net amount ofinterest cost associated with significant capital additions during periods ofconstruction.  Capitalized interest waszero in 2001 and 2002, and $285,000 in 2003. Maintenance and repairs are charged to expense as incurred.  Replacements and renewals arecapitalized.  When assets are sold,retired or otherwise disposed of, the cost and accumulated depreciation areremoved from the accounts and any resulting gain or loss is reflected inincome.

 

The cost of plant and equipment is depreciated usingthe straight-line method over the estimated useful lives of the relatedassets.  Buildings are generallydepreciated over 39 years and equipment is depreciated over 3 to 10 years.  Leasehold improvements are amortized underthe straight-line method based on the shorter of the lease periods or theestimated useful lives.

 

At each balance sheet date, management assesseswhether there has been permanent impairment in the value of property, plant,and equipment assets.  The amount of anysuch impairment is determined by comparing anticipated undiscounted future cashflows from operating activities with the associated carrying value.  The factors considered by management inperforming this assessment include current operating results, trends andprospects, as well as the effects of obsolescence, demand, competition, andother economic factors.

 

36

----

 

**Goodwill**

 

Goodwill represents the excess of the cost ofacquisition over the fair value of net assets acquired.  The Company is the successor to a companyformed in 1968 (the “Predecessor”) and commenced operations on March 5, 1993 byacquiring substantially all of the assets and liabilities of the Predecessor.  As of January 3, 2004, the goodwill arisingfrom the acquisition of the assets and operations of the Company’s Predecessorin March 1993 was $16.1 million.  InMarch 1996, the Company acquired the Holiday Rambler Division ofHarley-Davidson, Inc. (“Holiday Rambler”). As of January 3, 2004, the goodwill arising from the acquisition ofHoliday Rambler was $1.8 million.  TheCompany also recorded $37.3 million of goodwill associated with the August 2,2001 acquisition of SMC Corporation (SMC). For years ending December 29, 2001 and prior, the Company amortizedgoodwill using the straight-line method over a 40 year period for theacquisition of the Company’s Predecessor, as well as for the Holiday Rambleracquisition.  In accordance withStatements of Financial Accounting Standards No. 142 (SFAS 142) “Accounting forGoodwill and Other Intangible Assets,” no amortization was recorded for the SMCacquisition for 2001, and no amortization was recorded for any of theacquisitions for fiscal years 2002 and 2003.

 

SFAS 142 requires that management assess annuallywhether there has been permanent impairment in the value of goodwill.  The test for any such impairment isdetermined by comparing the fair value of the Company’s reporting entity withits carrying value, including goodwill. The factors considered by management in performing this assessment caninclude current operating results, trends and prospects, as well as the effectsof obsolescence, demand, competition, and other economic factors.  As required by SFAS 142, management hascompleted its annual testing during 2002 and 2003, and has determined thatthere has been no impairment of goodwill requiring a write down.

 

**Debt Issuance Costs**

 

Unamortized debt issuance costs of $683,000, and$596,000 (at December 28, 2002 and January 3, 2004, respectively), are beingamortized over the terms of the related loans.

 

**Stock-Based Employee CompensationPlans**

 

At January 3, 2004, the Company has three stock-basedemployee compensation plans (see Note 13). The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

 

**Income Taxes**

 

Deferred taxes are recognized based on the differencebetween the financial statement and tax basis of assets and liabilities atenacted tax rates in effect in the years in which the differences are expectedto reverse.  Deferred tax expense orbenefit represents the change in deferred tax asset/liability balances.  A valuation allowance is established fordeferred tax assets when it is more likely than not that the deferred tax assetwill not be realized.

 

37

----

 

**Revenue Recognition**

 

The Company recognizes revenue from the sale ofrecreational vehicles upon shipment and recognizes revenue from resort lotsales upon closing.

 

In December 1999, the Securities and ExchangeCommission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognitionin Financial Statements.  SAB No. 101provides guidance for revenue recognition under certain circumstances.  The Company has complied with the guidanceprovided by SAB No. 101 for the fiscal years 2001, 2002, and 2003.

 

**Advertising and Promotion Costs**

 

The Company expenses advertising and promotion costsas incurred, except for prepaid show costs which are expensed when the eventtakes place.  During 2003, approximately$12.6 million ($10.1 million in 2001 and $14.6 million in 2002) of advertisingand promotion costs were expensed.

 

**Research and Development Costs**

 

Research and development costs are charged to expenseas incurred and were $1.2 million in 2003 ($975,000 in 2001 and $1.2 million in2002).

 

**New Accounting Pronouncements**

 

SFAS 150

 

In May of 2003, the Financial Accounting StandardsBoard (the Board), issued SFAS 150 Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity (SFAS 150).  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Many ofthose instruments would previously have been classified as an equity.

 

This Statement is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after June 15, 2003, except formandatorily redeemable financial instruments of nonpublic entities.

 

The Company has reviewed the provisions of SFAS 150,and believes that it does not have any financial instruments requiringreclassifications under SFAS 150.

 

FIN 45

 

In November 2002, the Board issued FASB InterpretationNo. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others, andInterpretation of SFAS 5, 57, and 107 and Rescission of FIN 34.  The Interpretation requires certain disclosuresto be made by a guarantor about its obligations under certain guarantees thatit has issued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.

 

38

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The initial recognition and measurement provisions areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  The disclosurerequirements are effective for financial statements of interim or annualperiods ending after December 15, 2002. The Company has included the disclosure requirements in its financialstatements and has determined that the recognition provisions of FIN 45 applyto certain guarantees routinely made by the Company including repurchaseobligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $750,000 for potential losses resulting fromguarantees on products shipped to dealers. This estimated liability is based onthe Company’s experience of losses associated with the repurchase and resale ofunits in prior years.

 

FIN 46

 

In January 2003, the Board issued FASB InterpretationNo. 46 (FIN 46), Consolidation of Variable Interest Entities - anInterpretation of ARB No. 51, Consolidated Financial Statements.  The Interpretation addresses how variableinterest entities are to be identified and how an enterprise assesses itsinterests in a variable interest entity to decide whether to consolidate thatentity.  The Interpretation alsorequires existing unconsolidated variable interest entities to be consolidatedby their primary beneficiaries if the entities do not effectively disperserisks among the parties involved.

 

FIN 46 is effective in the first fiscal year orinterim period beginning after June 15, 2003, to variable interest entities inwhich a company holds a variable interest that is acquired before February 1,2003.

 

The provisions of FIN 46 have beenreviewed, and the Company does not believe that it has any entities requiringconsolidation.

 

**Supplemental Cash Flow Disclosures:**

 
|                                                                             |   | **2001**            |   | **2002** |   | **2003** |   |
|----------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                                             |   | **(in  thousands)** |   |
| Cash paid during the period for:                                                 |   |                |   |     |   |     |   |
| Interest, net of amount capitalized of $0 in 2001, $0 in  2002, and $285 in 2003 |   | $                   | 2,206  |     | $      | 2,464    |   | $ | 2,552 |   |
| Income taxes                                                                     |   | 16,231              |   | 18,753   |   | 9,604    |   |
|                                                                                  |        |                     |        |          |        |          |        |  |  |  |

 

**2.**                   ACQUISITIONS:

** **

**SMC Corporation**

** **

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

 

39

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

 
|                                           |   | **(in  thousands)** |   |
|------------------------------------------------|--------|---------------------|--------|
|                                           |   |                |   |
| Receivables                                    |   | $                   | 6,678  |   |
| Inventories                                    |   | 25,360              |   |
| Deferred tax asset                             |   | 17,418              |   |
| Property and equipment                         |   | 14,776              |   |
| Prepaids and other assets                      |   | 21                  |   |
| Goodwill                                       |   | 37,317              |   |
| Total assets acquired                          |   | 101,570             |   |
|                                           |   |                |   |
| Book overdraft                                 |   | (1,551              | )      |
| Notes payable                                  |   | (16,345             | )      |
| Accounts payable                               |   | (23,824             | )      |
| Accrued liabilities                            |   | (35,530             | )      |
| Total liabilities assumed                      |   | (77,250             | )      |
|                                           |   |                |   |
| Total  assets acquired and liabilities assumed |   | $                   | 24,320 |   |

 

During 2002 the allocation of the purchase price andthe related goodwill was adjusted for resolution of pre-acquisitioncontingencies of $602,000.  The effectsof resolution of pre-acquisition contingencies occurring: (i) within one yearof the acquisition date were reflected as an adjustment of the allocation ofthe purchase price and goodwill, and (ii) after one year were recognized in thedetermination of net income.

 

The following unaudited pro forma information presentsthe consolidated results as if the acquisition had occurred at the beginning ofthe 2001 fiscal period and giving effect to the adjustments for the relatedinterest on financing the purchase price, goodwill, and depreciation.  The pro forma information does notnecessarily reflect results that would have occurred or is it necessarilyindicative of future operating results.

 
|                              |   | **(In thousands,  except per share  data)  2001** |      |
|-----------------------------------|--------|---------------------------------------------------|-----------|
|                              |   |                                              |      |
| Net sales                         |   | $                                                 | 1,015,000 |   |
| Net income                        |   | 14,000                                            |      |
|                              |   |                                              |      |
| Diluted earnings per common share |   | $                                                 | 0.48      |   |

 

**Outdoor Resorts**

 

On November 27, 2002, the Company completed theacquisition of all of the outstanding stock of Outdoor Resorts of Las Vegas,Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), and Outdoor ResortsMotorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed andundeveloped luxury motor coach resorts.

 

40

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Previous to the acquisition, the Company had providedOutdoor Resorts of America (ORA) with loans in the amount of $8.0 million, aswell as co-guaranteeing $10 million in bank debt secured by ORA.  In the third quarter of 2003, the Companysold the undeveloped land associated with ORN and received proceeds of $6.7million.

 

As consideration for the acquisition, Monaco assumedthe current debt and liabilities of the projects of approximately $30.8million, including the $8.0 million note payable to the Company, and the $10million co-guaranteed debt. This acquisition relieved ORA of certain debtpressures associated with resort construction and allowed ORA to continue tofocus on development and lot sales, as well as providing management servicesfor the Company on the Projects.

 

The cash paid for the Projects, including transactioncosts of $522,000 totaled $21,113,000. The total assets acquired and liabilities assumed of the Projects, basedon estimated fair values at November 27, 2002, is as follows:

 
|                                           |   | **(In  thousands)** |   |
|------------------------------------------------|--------|---------------------|--------|
|                                           |   |                |   |
| Cash                                           |   | $                   | 28     |   |
| Resort lot inventory                           |   | 26,098              |   |
| Deferred tax asset                             |   | 1,654               |   |
| Property and equipment                         |   | 2,974               |   |
| Total assets acquired                          |   | 30,754              |   |
|                                           |   |                |   |
| Notes payable                                  |   | (8,027              | )      |
| Accounts payable                               |   | (1,165              | )      |
| Accrued liabilities                            |   | (449                | )      |
| Total liabilities assumed                      |   | (9,641              | )      |
|                                           |   |                |   |
| Total  assets acquired and liabilities assumed |   | $                   | 21,113 |   |

 

During 2003, the allocation of the purchase price wasadjusted for the resolution of pre-ORA Acquisition contingencies of $1.4million.  The effects of resolution ofpre-ORA Acquisition contingencies occurring: (1) within one year of the acquisition date have been reflected as anadjustment of the allocation of the purchase price, and (ii) after one yearwill be recognized in the determination of net income.

 

The following unaudited pro forma information presentsthe consolidated results as if the acquisition had occurred at the beginning ofthe 2001 fiscal period and giving effect to the adjustments for the relatedinterest on financing the purchase price and depreciation.  The pro forma information does notnecessarily reflect results that would have occurred or is it necessarilyindicative of future operating results.

 
|                              |   | **(In thousands,  except per share  data)  2001** |    | **(In thousands,  except per share  data)  2002** |   |
|-----------------------------------|--------|---------------------------------------------------|---------|---------------------------------------------------|--------|
|                              |   |                                              |    |                                              |   |
| Net sales                         |   | $                                                 | 939,195 |                                              | $      | 1,223,776 |   |
| Net income                        |   | 24,478                                            |    | 44,127                                            |   |
|                              |   |                                              |    |                                              |   |
| Diluted earnings per common share |   | $                                                 | 0.84    |                                              | $      | 1.49 |   |

 

41

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**3.****                  ****INVENTORIES:**

 

Inventories consist of the following:

 
|            |   | **December 28,  2002** |    | **January 3,  2004** |   |
|-----------------|--------|------------------------|---------|----------------------|--------|
|            |   | **(In  thousands)**    |    |
| Raw materials   |   | $                      | 70,021  |                 | $      | 60,946 |   |
| Work-in-process |   | 62,022                 |    | 60,604               |   |
| Finished units  |   | 43,566                 |    | 6,196                |   |
|            |   | $                      | 175,609 |                 | $      | 127,746 |   |

 

**4.****                  ****PROPERTY, PLANT, ANDEQUIPMENT:**

 

Property, plant, and equipment consist of thefollowing:

* *
|                                           |   | **December 28,  2002** |    | **January 3,  2004** |   |
|------------------------------------------------|--------|------------------------|---------|----------------------|--------|
|                                           |   | **(In  thousands)**    |    |
|                                           |   |                   |    |                 |   |
| Land                                           |   | $                      | 15,638  |                 | $      | 15,508 |   |
| Buildings                                      |   | 104,043                |    | 115,963              |   |
| Equipment                                      |   | 26,503                 |    | 33,875               |   |
| Furniture and fixtures                         |   | 11,436                 |    | 12,534               |   |
| Vehicles                                       |   | 1,763                  |    | 2,681                |   |
| Leasehold improvements                         |   | 2,152                  |    | 2,151                |   |
| Construction in progress                       |   | 7,236                  |    | 1,282                |   |
|                                           |   | 168,771                |    | 183,994              |   |
| Less accumulated depreciation and amortization |   | 33,421                 |    | 42,332               |   |
|                                           |   | $                      | 135,350 |                 | $      | 141,662 |   |

 

**5.****                  ****ACCRUED EXPENSES AND OTHERLIABILITIES:**

** **
|                                           |   | **December 28,  2002** |   | **January 3,  2004** |   |
|------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                           |   | **(In  thousands)**    |   |
|                                           |   |                   |   |                 |   |
| Payroll, vacation, and related accruals        |   | $                      | 17,317 |                 | $      | 12,842 |   |
| Payroll and property taxes                     |   | 1,517                  |   | 1,110                |   |
| Promotional and advertising                    |   | 3,473                  |   | 3,897                |   |
| Health insurance reserves and premiums payable |   | 3,540                  |   | 4,369                |   |
| Other                                          |   | 3,786                  |   | 4,155                |   |
|                                           |   | $                      | 29,633 |                 | $      | 26,373 |   |

 

42

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**6.****                  ****LINE OF CREDIT:**

 

The Company’s line of credit facilityconsists of a revolving line of credit of up to $95.0 million (the “RevolvingLoan”).  At the election of the Company,the Revolving Loan bears interest at variable rates based on the Prime Rate orLIBOR.  At January 3, 2004, the interestrate was 3.6%.  The Revolving Loan isdue and payable in full on June 30, 2005, and requires monthly interestpayments.  The balance outstanding underthe Revolving Loan at January 3, 2004 was zero.  The Revolving Loan is collateralized by all of the assets of theCompany, and include various restrictions and financial covenants.

 

The weighted average interest rate onthe outstanding borrowings under the revolving line of credit was 4.3% and 4.2%for 2002 and 2003, respectively. Interest expense on the unused available portion of the line was$141,000 or 0.7% and $219,000 or 0.5% of weighted average outstandingborrowings for 2002 and 2003, respectively. The revolving line of credit is collateralized by all the assets of theCompany.  The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. As of January 3, 2004, the Company was in compliance with thesecovenants.

 

**7.**                   LONG-TERM NOTE PAYABLE:

** **

In November 2002, the Companyobtained an amendment to the long-term note payable for an additional borrowingof $22 million in association with the purchase of Outdoor Resorts (see Note2).  The Company has long-term notespayable of $30 million outstanding at January 3, 2004.  The term notes bear interest at varyingrates that fluctuate based on the Prime rate or LIBOR, and are determined basedon the Company’s leverage ratio.  Theterm notes require monthly interest payments and quarterly principalpayments.  Additional prepayments forportions of the term notes are required in the event the Company sellssubstantially all of any motor coach resort location. The term notes arecollateralized by all the assets of the Company.  The term notes are due and payable in full on October 3, 2005.  As of January 3, 2004, the interest rate onthe term debt was 3.14%.

 

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

 

| **Year** |   | **Amount of  payment due**

**(in  thousands)** |   |
|----------|--------|-------------------------------------------------|--------|
| 2004     |   | $                                               | 15,000 |   |
| 2005     |   | $                                               | 15,000 |   |
|     |   | $                                               | 30,000 |   |

** **

**8.****                  ****PREFERRED STOCK:**

 

The Company has authorized “blank check” preferredstock (1,934,783 shares authorized, $.01 par value) (“Preferred Stock”), whichmay be issued from time to time in one or more series upon authorization by theCompany’s Board of Directors.  The Boardof Directors, without further approval of the stockholders, is authorized tofix the dividend rights and terms, conversion rights, voting rights, redemptionrights and terms, liquidation preferences, and any other rights, preferences,privileges, and restrictions applicable to each series of the PreferredStock.  There were no shares ofPreferred Stock outstanding as of December 28, 2002 or January 3, 2004.

 

43

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**9.****                  ****INCOME TAXES:**

 

The provision for income taxes is as follows:

 
|                        |   | **2001**            |   | **2002** |   | **2003** |   |
|-----------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                        |   | **(in  thousands)** |   |
| Current:                    |   |                |   |     |   |     |   |
| Federal                     |   | $                   | 8,262  |     | $      | 25,303   |   | $ | 8,713 |   |
| State                       |   | 1,606               |   | 5,278    |   | 1,899    |   |
|                        |   | 9,868               |   | 30,581   |   | 10,612   |   |
| Deferred:                   |   |                |   |     |   |     |   |
| Federal                     |   | 4,880               |   | (1,556   | )      | 2,191    |   |
| State                       |   | 968                 |   | (260     | )      | 523      |   |
| Provision  for income taxes |   | $                   | 15,716 |     | $      | 28,765   |   | $ | 13,326 |   |

 

The reconciliation of the provision for income taxesat the U.S. federal statutory rate to the Company’s effective income tax rateis as follows:

 
|                                                  |   | **2001**            |   | **2002** |   | **2003** |   |
|-------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                  |   | **(in  thousands)** |   |
| Expected U.S. federal income taxes at statutory rates |   | $                   | 14,222 |     | $      | 25,648   |   | $ | 12,434 |   |
| State and local income taxes, net of federal benefit  |   | 1,673               |   | 3,262    |   | 1,574    |   |
| Change in valuation allowance                         |   |                |   |     |   | (280     | )      |
| Other                                                 |   | (179                | )      | (145     | )      | (402     | )      |
| Provision  for income taxes                           |   | $                   | 15,716 |     | $      | 28,765   |   | $ | 13,326 |   |

 

The components of the current net deferred tax assetand long-term net deferred tax liability are:

 
|                                       |   | **December 28,  2002** |       | **January 3,  2004** |   |
|--------------------------------------------|--------|------------------------|------------|----------------------|--------|
|                                       |   | **(in thousands)**     | ** ** |
| Current deferred income tax assets:        |   |                   |       |                 |   |
| Warranty liability                         |   | $                      | 13,768     |                 | $      | 12,855 |   |
| Product liability                          |   | 7,211                  |       | 7,517                |   |
| Inventory reserves                         |   | 3,922                  |       | 4,543                |   |
| Payroll and related accruals               |   | 2,057                  |       | 2,007                |   |
| Insurance reserves                         |   | 1,318                  |       | 1,965                |   |
| Resort lot inventory                       |   | 921                    |       | 1,522                |   |
| Other accruals                             |   | 4,182                  |       | 3,427                |   |
|                                       |   | $                      | 33,379     |                 | $      | 33,836 |   |
| Long-term deferred income tax liabilities: |   |                   |       |                 |   |
| Depreciation                               |   | $                      | 11,509     |                 | $      | 13,601 |   |
| Amortization                               |   | 3,530                  |       | 4,246                |   |
| Net operating loss (NOL) carryforward      |   | (1,272                 | )          | (873                 | )      |
| Valuation allowance on NOL carryforward    |   | 801                    |       | 521                  |   |
|                                       |   | $                      | 14,568     |                 | $      | 17,495 |   |

 

44

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Management believes that the temporary differenceswhich gave rise to the deferred income tax assets will be realized in theforeseeable future, except for benefits arising from the NOL carryforward associatedwith the SMC Acquisition.  Accordingly,management has provided a valuation allowance for the portion of the NOLcarryforward that may not be fully recognized. During 2002, certain tax law changes were enacted which resulted in theCompany’s immediate recognition of certain operating losses relating to prioryear results of operations.  As aresult, management has properly reflected a reduction in the valuationallowance.  At January 3, 2004, thevaluation allowance of $521,000 relates to uncertainties on the netrealizability of the deferred tax asset for state income tax benefitsassociated with net operating loss carryforwards.

 

**10.****           ****EARNINGS PER SHARE:**

 

Basic earnings per common share is based on theweighted average number of shares outstanding during the period using netincome attributable to common stock as the numerator.  Diluted earnings per common share is based on the weightedaverage number of shares outstanding during the period, after consideration ofthe dilutive effect of stock options and convertible preferred stock, using netincome as the numerator.  The weightedaverage number of common shares used in the computation of earnings per commonshare for the years ended December 29, 2001, December 28, 2002, and January 3,2004 are as follows:

 
|                                             |   | **2001**   |   | **2002**   |   | **2003**   |   |
|--------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| **Basic**                                        |   |       |   |       |   |       |   |
| Issued and outstanding shares (weighted average) |   | 28,531,593 |   | 28,812,473 |   | 29,062,649 |   |
|                                             |   |       |   |       |   |       |   |
| **Effect of Dilutive Securities**                |   |       |   |       |   |       |   |
| Stock options                                    |   | 757,095    |   | 760,947    |   | 504,363    |   |
|                                             |   |       |   |       |   |       |   |
| **Diluted**                                      |   | 29,288,688 |   | 29,573,420 |   | 29,567,012 |   |

 

**11.****           ****LEASES:**

 

The Company has commitments under certainnoncancelable operating leases.   Totalrental expense for the fiscal years ended December 29, 2001, December 28, 2002,and January 3, 2004 related to operating leases amounting to approximately $2.8million, $3.8 million, and $3.8 million, respectively.  The Company’s most significant lease is atwo-year operating lease for an aircraft with annual renewals for up to threeadditional years.  The future minimum rentalcommitments under the one year renewal term of this lease is $1.5 million in2004 and $244,000 in 2005.  In addition,if the Company chooses the return option at the end of the initial lease termin February of 2004, the Company has guaranteed up to $16 million of anydeficiency in the event that the Lessor’s net sales proceeds of the aircraftare less than $18.5 million.

 

Approximate future minimum rental commitments underthese leases at January 3, 2004 are summarized as follows:

 

| **Fiscal Year**      |   | **(In thousands)** |   |
|----------------------|--------|--------------------|--------|
| 2004                 |   | 2,937              |   |
| 2005                 |   | 1,442              |   |
| 2006                 |   | 1,037              |   |
| 2007                 |   | 994                |   |
| 2008                 |   | 963                |   |
| 2009 and  thereafter |   | 3,599              |   |

 

45

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**12.****           ****BONUS PLAN:**

 

The Company has a discretionary bonus plan for certainkey employees.  Bonus expense includedin selling, general, and administrative expenses for the years ended December29, 2001, December 28, 2002, and January 3, 2004 was $6.1 million, $11.5million, and $5.2 million, respectively.

 

**13.****           ****STOCK OPTION PLANS:**

 

The Company has an Employee Stock Purchase Plan (the“Purchase Plan”) - 1993, a Non-employee Director Stock Plan (the “DirectorPlan”) - 1993, and an Incentive Stock Option Plan (the “Option Plan”) - 1993:

 

**Stock Purchase Plan**

 

The Company’s Purchase Plan qualifies under Section423 of the Internal Revenue Code.  TheCompany has reserved 683,438 shares of Common Stock for issuance under thePurchase Plan.  During the years endedDecember 28, 2002 and January 3, 2004, 45,875 shares and 67,163 shares,respectively, were purchased under the Purchase Plan.  The weighted-average fair value of purchase rights granted in2002 and 2003 was $17.88 and $15.45, respectively.  Under the Purchase Plan, an eligible employee may purchase sharesof common stock from the Company through payroll deductions of up to 10% ofbase compensation, at a price per share equal to 85% of the lesser of the fairmarket value of the Company’s Common Stock as of the first day (grant date) orthe last day (purchase date) of each six-month offering period under thePurchase Plan.

 

The Purchase Plan is administered by a committeeappointed by the Board.  Any employeewho is customarily employed for at least 20 hours per week and more than fivemonths in a calendar year by the Company, or by any majority-owned subsidiarydesignated from time to time by the Board, and who does not own 5% or more ofthe total combined voting power or value of all classes of the Company’soutstanding capital stock, is eligible to participate in the Purchase Plan.

 

**Directors’ Option Plan**

 

Each non-employee director of the Company is entitledto participate in the Company’s “Director Plan.”  The Board of Directors and the stockholders have authorized atotal of 352,500 shares of Common Stock for issuance pursuant to the DirectorPlan.  Under the terms of the DirectorPlan, each eligible non-employee director is automatically granted an option topurchase 8,000 shares of Common Stock (the “Initial Option”) on which theoptionee first becomes a director of the Company.  Thereafter, each optionee is automatically granted an additionaloption to purchase 3,500 shares of Common Stock (a “Subsequent Option”) onSeptember 30 of each year if, on such date, the optionee has served as adirector of the Company for at least six months.  Each Initial Option vests over five years at the rate of 20% ofthe shares subject to the Initial Option at the end of each anniversaryfollowing the date of grant.  EachSubsequent Option vests in full on the fifth anniversary of its date ofgrant.  The exercise price of eachoption is the fair market value of the Common Stock as determined by theclosing price reported by the New York Stock Exchange on the date ofgrant.  The maximum term of theseoptions are 10 years.  As of January 3,2004, 89,100 options had been exercised, and options to purchase 123,700 sharesof common stock were outstanding.  Underthe Director Plan, the directors of the Company may elect to receive up to 50%of the value of their retainer in the form of common stock or an option topurchase shares of common stock.  As ofJanuary 3, 2004, 1,484 shares of common stock had been issued in lieu of cashretainer under the plan.

 

46

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**Option Plan**

 

The Option Plan provides for the grant to employees ofincentive stock options within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended (the “Code”), and for the grant to employeesand consultants of the Company of nonstatutory stock options.  A total of 3,257,813 shares of Common Stockhave been reserved for issuance under the Option Plan.  As of January 3, 2004, 1,281,582 options hadbeen exercised, and options to purchase 1,113,471 shares of Common Stock wereoutstanding.  These options vest ratablyover five years commencing with the date of grant.

 

The exercise price of all incentive stock optionsgranted under the Option Plan must be at least equal to the fair market valueof a share of the Company’s Common Stock on the date of grant.  With respect to any participant possessingmore than 10% of the voting power of the Company’s outstanding capital stock,the exercise price of any option granted must equal at least 110% of the fairmarket value on the grant date, and the maximum term of the option must notexceed five years.  The terms of allother options granted under the Option Plan may not exceed ten years.

 

Transactions involving the Director Plan and theOption Plan are summarized with corresponding weighted-average exercise pricesas follows:

 

|                             |   | **Shares** |   | **Price** |   |
|----------------------------------|--------|------------|--------|-----------|--------|
| Outstanding at December 30, 2000 |   | 1,337,568  |   | $         | 6.48   |   |
| Granted                          |   | 218,401    |   | 12.42     |   |
| Exercised                        |   | (140,163   | )      | 3.95      |   |
| Forfeited                        |   | (45,033    | )      | 8.21      |   |
| Outstanding at December 29, 2001 |   | 1,370,773  |   | 7.62      |   |
| Granted                          |   | 178,650    |   | 23.88     |   |
| Exercised                        |   | (192,495   | )      | 4.62      |   |
| Forfeited                        |   | (15,405    | )      | 13.77     |   |
| Outstanding at December 28, 2002 |   | 1,341,523  |   | 10.15     |   |
| Granted                          |   | 207,200    |   | 11.48     |   |
| Exercised                        |   | (306,352   | )      | 4.92      |   |
| Forfeited                        |   | (5,200     | )      | 19.61     |   |
| Outstanding at January 3, 2004   |   | 1,237,171  |   | $         | 11.63  |   |

 

For various price ranges, weighted average characteristicsof all outstanding stock options at January 3, 2004 were as follows:

 

|                          |   | **Options Outstanding** |   | **Options Exercisable**          |    |
|-------------------------------|--------|-------------------------|--------|----------------------------------|---------|
| **Range of  Exercise Prices** |   | **Shares**              |   | **Remaining  Life  (years****)** |    | **Weighted-  Average  Price** |   | **Shares** |   | **Weighted-  Average  Price** |   |
| $  2.44                  | -      | 4.86                    |   |                             | 195,572 |   | 2.4 |   | $ | 3.20 |   | 195,572 |   | $ | 3.20 |   |
| $  4.87                  | -      | 9.72                    |   |                             | 140,277 |   | 4.3 |   | $ | 7.73 |   | 140,277 |   | $ | 7.73 |   |
| $  9.73                  | -      | 12.15                   |   |                             | 514,195 |   | 7.3 |   | $ | 10.91 |   | 173,554 |   | $ | 10.85 |   |
| $12.16                        | -      | 14.58                   |   |                             | 158,027 |   | 6.3 |   | $ | 12.77 |   | 80,057 |   | $ | 12.66 |   |
| $14.59                        | -      | 17.01                   |   |                             | 55,750  |   | 8.9 |   | $ | 16.36 |   | 6,400 |   | $ | 16.18 |   |
| $17.02                        | -      | 21.87                   |   |                             | 17,500  |   | 8.7 |   | $ | 20.03 |   | –– |   | –– |   |
| $21.88                        | -      | 24.30                   |   |                             | 155,850 |   | 8.2 |   | $ | 24.30 |   | 31,170 |   | –– |   |
|                          |   | 1,237,171               |   |                             |    |   |   | 627,030 |   |   |   |

 

47

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At January 3, 2004, the Company has three stock-basedemployee compensation plans.  TheCompany accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated Interpretations.  No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS 123, Accounting for Stock-based Compensation, to stock-based employeecompensation.

 
|                                                                                                                                          |   | **2001**                                  |   | **2002** |   | **2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                          |   | **(In thousands, except per share data)** |   |
|                                                                                                                                          |   |                                      |   |     |   |     |   |
| Net income - as reported                                                                                                                      |   | $                                         | 24,919 |     | $      | 44,515   |   | $ | 22,200 |   |
| Deduct: Total stock-based employee  compensation expense Determined under fair value based method for all awards,  net of related tax effects |   | (1,039                                    | )      | (1,328   | )      | (1,357   | )      |
| Net  income - pro forma                                                                                                                       |   | $                                         | 23,880 |     | $      | 43,187   |   | $ | 20,843 |   |
|                                                                                                                                          |   |                                      |   |     |   |     |   |
| Earnings per share:                                                                                                                           |   |                                      |   |     |   |     |   |
| Basic - as reported                                                                                                                           |   | $                                         | 0.87   |     | $      | 1.55     |   | $ | 0.76 |   |
| Basic - pro forma                                                                                                                             |   | 0.84                                      |   | 1.50     |   | 0.72     |   |
|                                                                                                                                          |   |                                      |   |     |   |     |   |
| Diluted - as reported                                                                                                                         |   | $                                         | 0.85   |     | $      | 1.51     |   | $ | 0.75 |   |
| Diluted - pro forma                                                                                                                           |   | 0.82                                      |   | 1.46     |   | 0.71     |   |

 

For purposes of the above pro forma information, thefair value of each option grant was estimated at the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions:

 
|                     |   | **2001** |   | **2002** |   | **2003** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
|                     |   |     |   |     |   |     |   |
| Risk-free interest rate  |   | 4.42     | %      | 4.22     | %      | 3.89     | %      |
| Expected life (in years) |   | 6.23     |   | 5.97     |   | 5.81     |   |
| Expected volatility      |   | 55.02    | %      | 56.92    | %      | 54.70    | %      |
| Expected dividend yield  |   | 0.00     | %      | 0.00     | %      | 0.00     | %      |

 

**14.****           ****FAIR VALUE OF FINANCIALINSTRUMENTS:**

 

The fair value of the Company’s financial instrumentsare presented below.  The estimatesrequire subjective judgments and are approximate.  Changes in methodologies and assumptions could significantlyaffect estimates.

 

Line of Credit - The carrying amountoutstanding on the revolving line of credit is $51.4 million and zero atDecember 28, 2002 and January 3, 2004, respectively, which approximates theestimated fair value as this instrument requires interest payments at a marketrate of interest plus a margin.

 

Long-term Note Payable - Thecarrying amount outstanding on the long-term note payable is $30 million(including $15 million of current payable) at January 3, 2004, whichapproximates the estimated fair value as this instrument requires interestpayments at a market rate of interest plus a margin.

 

48

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**15.****           ****401(K) DEFINED CONTRIBUTIONPLAN:**

 

The Company sponsors a 401(k) defined contributionplan covering substantially all full-time employees.  Company contributions to the plan totaled $629,000 in 2001,$748,000 in 2002, and $678,000 in 2003.

 

**16.****           ****COMMITMENTS ANDCONTINGENCIES:**

 

**Repurchase Agreements**

 

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

 

The Company’s liability under repurchase agreements islimited to the unpaid balance owed to the lending institution by reason of itsextending credit to the dealer to purchase its vehicles, reduced by the resalevalue of vehicles which may be repurchased. The risk of loss is spread over numerous dealers and financialinstitutions.

 

No significant net losses were incurred during theyears ended December 29, 2001 or December 28, 2002.  Losses of approximately $897,000 wereincurred in 2003.  The approximateamount subject to contingent repurchase obligations arising from theseagreements at January 3, 2004 is $513.6 million, with approximately 7.2%concentrated with one dealer.  TheCompany has recorded a liability of approximately $750,000 for potential lossesresulting from guarantees on repurchase obligations for products shipped todealers. If the Company were obligated to repurchase a significant number ofunits under any repurchase agreement, its business, operating results, andfinancial condition could be adversely affected.  

 

**Product Liability**

 

The Company is subject to regulations which mayrequire the Company to recall products with design or safety defects, and suchrecall could have a material adverse effect on the Company’s business, resultsof operations, and financial condition.

 

The Company has from time to time been subject toproduct liability claims.  To date, theCompany has been successful in obtaining product liability insurance on termsthe Company considers acceptable.  Theterms of the policy contain a self-insured retention amount of $500,000 peroccurrence, with a maximum annual aggregate self-insured retention of $3.0million.  Overall product liabilityinsurance, including umbrella coverage, is available to a maximum amount of$100.0 million for each occurrence, as well as in the aggregate.  There can be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the cost of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

**Litigation**

 

The Company is involved in various legal proceedingswhich are incidental to the industry and for which certain matters are coveredin whole or in part by insurance or, otherwise, the Company has recordedaccruals for estimated settlements. Management believes that any liability which may result from theseproceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

 

49

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**17.****           ****QUARTERLY RESULTS(UNAUDITED):**

 

**Year endedDecember 29, 2001**

 
| **(In  thousands, except per share data)** |   | **1st  Quarter** |    | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |    |
|--------------------------------------------|--------|------------------|---------|------------------|--------|------------------|--------|------------------|---------|
|                                       |   |             |    |             |   |             |   |             |    |
| Net sales                                  |   | $                | 211,228 |             | $      | 223,424          |   | $                | 240,831 |   | $ | 261,590 |   |
| Gross profit                               |   | 25,488           |    | 25,804           |   | 30,548           |   | 32,150           |    |
| Operating income                           |   | 9,088            |    | 9,153            |   | 11,438           |   | 12,979           |    |
| Net income                                 |   | 5,197            |    | 5,480            |   | 6,623            |   | 7,619            |    |
| Earnings per common share:                 |   |             |    |             |   |             |   |             |    |
| Basic                                      |   | $                | 0.18    |             | $      | 0.19             |   | $                | 0.23    |   | $ | 0.27 |   |
| Diluted                                    |   | $                | 0.18    |             | $      | 0.19             |   | $                | 0.23    |   | $ | 0.26 |   |

 

**Year endedDecember 28, 2002**

 
| **(In thousands, except per share data)** |   | **1st  Quarter** |    | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** | ** ** |
|-------------------------------------------|--------|------------------|---------|------------------|--------|------------------|--------|------------------|------------|
|                                      |   |             |    |             |   |             |   |             |       |
| Net sales                                 |   | $                | 293,600 |             | $      | 313,742          |   | $                | 314,680    |   | $ | 300,667 |   |
| Gross profit                              |   | 37,745           |    | 41,229           |   | 42,817           |   | 41,338           |       |
| Operating income                          |   | 16,579           |    | 18,724           |   | 20,034           |   | 20,590           |       |
| Net income                                |   | 9,673            |    | 10,970           |   | 11,788           |   | 12,084           |       |
| Earnings per common share:                |   |             |    |             |   |             |   |             |       |
| Basic                                     |   | $                | 0.34    |             | $      | 0.38             |   | $                | 0.41       |   | $ | 0.42 |   |
| Diluted                                   |   | $                | 0.33    |             | $      | 0.37             |   | $                | 0.40       |   | $ | 0.41 |   |

 

**Year endedJanuary 3, 2004**

 
| **(In  thousands, except per share data)** |   | **1st  Quarter (1****)** |    | **2nd  Quarter (1****)** |   | **3rd  Quarter (1****)** |   | **4th  Quarter** |    |
|--------------------------------------------|--------|--------------------------|---------|--------------------------|--------|--------------------------|--------|------------------|---------|
|                                       |   |                     |    |                     |   |                     |   |             |    |
| Net sales                                  |   | $                        | 273,761 |                     | $      | 268,456                  |   | $                | 303,231 |   | $ | 322,863 |   |
| Gross profit                               |   | 33,793                   |    | 27,348                   |   | 36,773                   |   | 42,020           |    |
| Operating income                           |   | 8,144                    |    | 1,604                    |   | 11,106                   |   | 17,380           |    |
| Net income                                 |   | 4,326                    |    | 582                      |   | 6,262                    |   | 11,030           |    |
| Earnings per common share:                 |   |                     |    |                     |   |                     |   |             |    |
| Basic                                      |   | $                        | 0.15    |                     | $      | 0.02                     |   | $                | 0.22    |   | $ | 0.38 |   |
| Diluted                                    |   | $                        | 0.15    |                     | $      | 0.02                     |   | $                | 0.21    |   | $ | 0.37 |   |

 

----

(1) The 2003 quarterlyamounts have been revised for a reclassification of revenue from othernon-operating income to net sales of $187,000, $95,000, and $53,000,respectively.

 

50

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**ITEM9****.****                             CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not Applicable.

 

**ITEM9A****.****                    CONTROLS ANDPROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

Our management, including ourchief executive officer and chief financial officer, does not expect that our disclosurecontrols and procedures will prevent all error and all fraud. Because ofinherent limitations in any system of disclosure controls and procedures, noevaluation of controls can provide absolute assurance that all instances oferror or fraud, if any, within the Company may be detected.  However, our management, including our chiefexecutive officer and our chief financial officer, have designed our disclosurecontrols and procedures to provide reasonable assurance of achieving theirobjectives and have, pursuant to the evaluation discussed above, concluded thatour disclosure controls and procedures are, in fact, effective at thisreasonable assurance level.

 

**Changesin Internal Controls**

 

Subsequent to the “EvaluationDate,” there were no significant changes in our internal controls or in otherfactors that could significantly affect our disclosure controls and procedures,nor were there any significant deficiencies or material weaknesses identifiedin our internal controls.  As a result, no corrective actions wererequired or undertaken.

 

51

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**PART III**

 

**ITEM10****.       DIRECTORS AND EXECUTIVE OFFICERS OFREGISTRANT**

 

Informationrequired by this Item regarding directors and compliance with Section 16(a) ofthe Exchange Act set forth under the captions “Proposal 1 - Election ofDirectors” and “Compliance with Section 16(a) of the Securities Exchange Act”in the Company’s definitive Proxy Statement is incorporated herein byreference.

 

**AuditCommittee Financial Expert**

 

The Company’sBoard of Directors has determined that Mr. Dennis Oklak is the Company’sdesignated audit committee financial expert. Mr. Oklak is considered “independent” as the term is used in Item7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

**CorporateGovernance, Code of Ethics, and Code of Business Conduct**

 

The Companyhas certain corporate governance guidelines, a code of ethics that applies toits senior financial officers, as well as a code of business conduct.  The code of ethics, code of conduct, as wellas other corporate governance information is posted on our Internet website.The Internet address for our website is http://www.monaco-online.com, and thecode of ethics, code of conduct, and other corporate governance information maybe found as follows:

 

*1. From our main Web page, first click on“Company – Monaco Coach Corporation”*

 

*2. Next, click on “Investor Relations”*

 

*3. Next, click on “Corporate Governance”*

 

*4. Next, click on “Code of Ethics forExecutive Officers” (or “Code of Business Conduct”, or any other “CorporateGovernance”* related topic).

 

We intend tosatisfy the disclosure requirement under Item 10 of Form 8-K regarding anamendment to, or waiver from, a provision of this Code of Ethics for SeniorFinancial Officers by posting such information on our website, at the addressand location specified above.

 

**ITEM11****.       EXECUTIVE COMPENSATION**

 

Theinformation required by this item concerning the executive officers is setforth in Part I, Item 1 - “Business” of this Annual Report on Form 10-K.

 

Informationrequired by this Item regarding compensation of the Company’s directors andexecutive officers set forth under the captions “Corporate Governance -Director Compensation” and “Executive Compensation” in the Proxy Statement is incorporatedherein by reference.

 

52

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**ITEM12****.       SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Informationrequired by this Item regarding beneficial ownership of the Company’s CommonStock by certain beneficial owners and management set forth under the caption“Security Ownership of Certain Beneficial Owners and Management” in the ProxyStatement is incorporated herein by reference.

 

EQUITY COMPENSATION PLANINFORMATION

 

The followingtable sets forth information with respect to the Company’s equity compensationplans as of the end of the most recently completed fiscal year.

 
| **Plan Category**                                          |   | **(a)  Number of securities to be  issued upon exercise of  outstanding options,  warrants, and rights** |   | **(b)  Weighted-average exercise price of  outstanding options, warrants, and  rights** |   | **(c)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities  reflected in column (a))** |      |
|------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Equity compensation plans approved by security holders     |   | 1,237,171                                                                                                |   | $                                                                                       | 11.63  |                                                                                                                                                      | 1,280,705 |   |
| Equity compensation plans not approved by security holders |   | —                                                                                                   |   | —                                                                                  |   | —                                                                                                                                                    |      |
|                                                       |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                      |      |
| Total                                                      |   | 1,237,171                                                                                                |   | $                                                                                       | 11.63  |                                                                                                                                                      | 1,280,705 |   |

 

**ITEM13****.       CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Information requiredby this Item regarding certain relationships and related transactions withmanagement set forth under the caption “Compensation Committee Interlocks andInsider Participation” in the Proxy Statement is incorporated herein byreference.

 

53

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**PART IV**

 

**ITEM14****.       PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Theinformation required by this item is included under the caption “Ratificationof Appointment of Independent Accountants” in the Proxy Statement and is incorporatedherein by reference.

 

**ITEM15****.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES,AND REPORTS ON FORM 8-K**

 
|   | (a)   The following documents are filed as part  of this Report on Form 10-K:                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 1.                                                                                                                                                                                                                             | Financial  Statements.   The Consolidated Financial Statements of Monaco Coach Corporation and  the Report of Independent Accountants are filed in Item 8 within this  Annual Report on Form 10-K. |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 2.                                                                                                                                                                                                                             | Financial  Statement Schedule.   None |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | Schedules  not listed above have been omitted because they are not applicable or are not  required or the information required to be set forth therein is included in  the consolidated financial statements or notes thereto. |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 3.                                                                                                                                                                                                                             | Exhibits.  The following Exhibits are filed as part  of, or incorporated by reference into, this Report on Form 10-K. |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 2.1                                                                                                                                                                                                                            | Stock  Purchase Agreement by and among Monaco Coach Corporation, MCC Acquisition  Corporation, Outdoor Resorts of America, Inc., and Outdoor Resorts of Naples,  Inc., dated November 27, 2002.   (Incorporated herein by reference to Exhibit (2.1) to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 2.2                                                                                                                                                                                                                            | Stock  Purchase Agreement by and among Monaco Coach Corporation, MCC Acquisition  Corporation, Outdoor Resorts of America, Inc., and Outdoor Resorts Motorcoach  Country Club, Inc., dated November 27, 2002.   (Incorporated herein by reference to Exhibit (2.2) to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 2.3                                                                                                                                                                                                                            | Stock  Purchase Agreement by and among Monaco Coach Corporation, MCC Acquisition  Corporation, Outdoor Resorts of America, Inc., and Outdoor Resorts of Las  Vegas, Inc., dated November 27, 2002.   (Incorporated herein by reference to Exhibit (2.3) to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 3.1                                                                                                                                                                                                                            | Amended and  Restated Certificate of Incorporation of the Registrant (Incorporated herein  by reference to Exhibit (3.1) to the Registrant’s Annual Report on Form 10-K  for the year ended January 1, 1994). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 3.2                                                                                                                                                                                                                            | Certificate of Amendment  of Amended and Restated Certificate of Incorporation dated June 30, 1999  (Incorporated herein by reference to Exhibit (3.2) to the Registrant’s Annual  Report on Form 10-K for the year ended January 1, 2000). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 3.3                                                                                                                                                                                                                            | Bylaws of Registrant, as  amended to date (Incorporated herein by reference to Exhibit (3.1) to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29,  2002). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 10.1                                                                                                                                                                                                                           | Form of Indemnification  Agreement for directors and executive officers (Incorporated herein by  reference to Exhibit (10.2) to the Registrant’s Registration Statement on  Form S-1 (Reg. No. 33-67374) declared effective on September 23, 1993). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 10.2                                                                                                                                                                                                                           | 1993 Director Option Plan  as Amended Through May 13, 2003.   (Incorporated herein by reference to Exhibit (10.2) to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28,  2003). |
|   |                                                                                                                                                                                                                           |   |   |   |   |   |
|   | 10.2+                                                                                                                                                                                                                          | 1993 Incentive Stock  Option Plan as amended through October 23, 2002 (Incorporated herein by  reference to Exhibit (10.1) to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 28, 2002). |

 

54

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|   | 10.3+  | 1993 Director Option Plan  as amended through May 16, 2002.   (Incorporated herein by reference to Exhibit (10.2) to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29,  2002.                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.4+  | 1993 Employee Stock  Purchase Plan and form of subscription agreement thereunder (Incorporated  herein by reference to Exhibit (10.5) to the Registrant’s Registration  Statement on Form S-1 (Reg. No. 33-67374) declared effective on September 23,  1993).                  |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.5+  | Executive Variable  Compensation Plan (Incorporated herein by reference to Exhibit A to the  Registrant’s definitive Proxy Statement filed with the Securities and  Exchange Commission on April 19, 1999).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.6   | Amended and Restated  Credit Agreement dated September 28, 2001 with U.S. Bank National  Association.  (Incorporated herein by  reference to Exhibit (10.1) to the Registrant’s quarterly report on Form 10-Q  filed November 13, 2001).                                  |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.7   | First Amendment to the  Amended and Restated Credit Agreement dated April 30, 2002 with U.S. Bank  National Association.  (Incorporated  herein by reference to Exhibit (10.7) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).     |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.8   | Second Amendment to the  Amended and Restated Credit Agreement dated November 27, 2002 with U.S. Bank  National Association.  (Incorporated  herein by reference to Exhibit (10.8) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002). |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 10.12  | Third Amendment to the Amended and Restated Credit  Agreement dated May 29, 2003 with U.S. Bank National Association.  (Incorporated herein by reference to Exhibit (10.12) to the Registrant’s  quarterly report on Form 10-Q for the quarter ended June 28, 2003).           |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 11.1   | Computation of earnings  per share (see Note 10 of Notes to Consolidated Financial Statements included  in Item 8 hereto).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 21.1   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 23.1   | Consent of Independent  Accountants.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 24.1   | Power of Attorney  (included on the signature pages hereof).                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 31.1   | Certification of CFO under  the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 31.2   | Certification of CEO under  the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                |   |   |   |   |
|   | 32     | Certification of CEO and  CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                            |

 

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| +      |   | The item  listed is a compensatory plan.                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                   |
|   | (b)    | REPORTS ON  FORM 8-K.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                   |
|   | i.     | On October 27, 2003, the Company filed a Form 8-K which  furnished a copy of a press release announcing the Company’s results of  operations for the three months, and year to date ended September 27, 2003.     |
|   |   |                                                                                                                                                                                                                   |
|   | ii.    | On February 3, 2004, the Company filed a Form 8-K which  furnished a copy of a press release announcing the Company’s results of  operations for the three months ended, and year to date ended January 3,  2004. |

 

55

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report on Form 10-K to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| March 16, 2004 | MONACO COACH  CORPORATION |
|----------------|---------------------------|
|           |                      |
|           | By:                       | /s/ Kay L.  Toolson |   |
|           |                      |   | Kay L.  Toolson |
|           |                      |   | Chief  Executive Officer |
|                |                           |  |  |  |

 

 

**POWER OF ATTORNEY**

 

KNOW ALLPERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Kay L. Toolson and P. Martin Daley, and each ofthem, jointly and severally, his attorneys-in-fact, each with the power ofsubstitution, for him in any and all capacities, to sign any and all amendmentsto this Report on Form 10-K and to file the same, with exhibits theretoand other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his substitute or substitutes, may do or cause to be doneby virtue hereof.

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this Report on 10-Khas been signed by the following persons in the capacities and on the datesindicated:

 
| **Signature**              |   | **Title**                                     |                                        | **Date** |
|----------------------------|--------|-----------------------------------------------|---------------------------------------------|----------|
|                       |   |                                          |                                        |     |
| /s/ Kay L. Toolson         |   |                                          | Chairman of the Board and  Chief Executive  |     | March 16, 2004 |
| (Kay L. Toolson)           |   | Officer (Principal  Executive Officer)        |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ P. Martin Daley        |   |                                          | Vice President and Chief  Financial Officer |     | March 16, 2004 |
| (P. Martin Daley)          |   | (Principal Financial and  Accounting Officer) |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ Robert P. Hanafee, Jr. |   |                                          | Director                                    |     | March 16, 2004 |
| (Robert P. Hanafee, Jr.)   |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ L. Ben Lytle           |   |                                          | Director                                    |     | March 16, 2004 |
| (L. Ben Lytle)             |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/  Dennis D. Oklak  |   |                                          | Director                                    |     | March 16, 2004 |
| (Dennis D. Oklak)          |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ Carl E. Ring, Jr.      |   |                                          | Director                                    |     | March 16, 2004 |
| (Carl E. Ring, Jr.)        |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ Richard A. Rouse       |   |                                          | Director                                    |     | March 16, 2004 |
| (Richard A. Rouse)         |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ Daniel  C. Ustian      |   |                                          | Director                                    |     | March 16, 2004 |
| (Daniel C.  Ustian)        |   |                                          |                                        |     |
|                       |   |                                          |                                        |     |
| /s/ Roger A. Vandenberg    |   |                                          | Director                                    |     | March 16, 2004 |
| (Roger A. Vandenberg)      |   |                                          |                                        |     |

 

56

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EXHIBIT INDEX

 
| **Exhibit  No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                         |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                |
| 2.1              |   | Stock  Purchase Agreement by and among Monaco Coach Corporation, MCC Acquisition  Corporation, Outdoor Resorts of America, Inc., and Outdoor Resorts of Naples,  Inc., dated November 27, 2002.   (Incorporated herein by reference to Exhibit (2.1) to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002).               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 2.2              |   | Stock Purchase Agreement  by and among Monaco Coach Corporation, MCC Acquisition Corporation, Outdoor  Resorts of America, Inc., and Outdoor Resorts Motorcoach Country Club, Inc.,  dated November 27, 2002.  (Incorporated  herein by reference to Exhibit (2.2) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002). |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 2.3              |   | Stock Purchase Agreement  by and among Monaco Coach Corporation, MCC Acquisition Corporation, Outdoor  Resorts of America, Inc., and Outdoor Resorts of Las Vegas, Inc., dated  November 27, 2002.  (Incorporated  herein by reference to Exhibit (2.3) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 3.1              |   | Amended and  Restated Certificate of Incorporation of the Registrant (Incorporated herein  by reference to Exhibit (3.1) to the Registrant’s Annual Report on Form 10-K  for the year ended January 1, 1994).                                                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 3.2              |   | Certificate of Amendment  of Amended and Restated Certificate of Incorporation dated June 30, 1999  (Incorporated herein by reference to Exhibit (3.2) to the Registrant’s Annual  Report on Form 10-K for the year ended January 1, 2000).                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 3.3              |   | Bylaws of  Registrant, as amended to date (Incorporated herein by reference to Exhibit  (3.1) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 29, 2002).                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.1             |   | Form of  Indemnification Agreement for directors and executive officers (Incorporated  herein by reference to Exhibit (10.2) to the Registrant’s Registration  Statement on Form S-1 (Reg. No. 33-67374) declared effective on September 23,  1993).                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.2             |   | 1993 Director Option Plan  as Amended Through May 13, 2003 (Incorporated herein by reference to Exhibit  (10.2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended June 28, 2003).                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.2+            |   | 1993  Incentive Stock Option Plan as amended through October 23, 2002.  (Incorporated herein by reference to Exhibit (10.1) to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended September 28, 2002).                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.3+            |   | 1993  Director Option Plan as amended through May 16, 2002. (Incorporated herein by  reference to Exhibit (10.2) to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 29, 2002.                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.4+            |   | 1993  Employee Stock Purchase Plan and form of subscription agreement thereunder  (Incorporated herein by reference to Exhibit (10.5) to the Registrant’s  Registration Statement on Form S-1 (Reg. No. 33-67374) declared effective on  September 23, 1993).                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.5+            |   | Executive  Variable Compensation Plan (Incorporated herein by reference to Exhibit A to  the Registrant’s definitive Proxy Statement filed with the Securities and  Exchange Commission on April 19, 1999).                                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.6             |   | Amended and  Restated Credit Agreement dated September 28, 2001 with U.S. Bank National  Association.  (Incorporated herein by  reference to Exhibit (10.1) to the Registrant’s quarterly report on Form 10-Q  filed November 13, 2001).                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.7             |   | First Amendment to the  Amended and Restated Credit Agreement dated April 30, 2002 with U.S. Bank  National Association.  (Incorporated  herein by reference to Exhibit (10.7) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| 10.8             |   | Second Amendment to the  Amended and Restated Credit Agreement dated November 27, 2002 with U.S. Bank  National Association.  (Incorporated  herein by reference to Exhibit (10.8) to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).                                                                                 |

 

57

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| 10.12  |   | Third Amendment to the Amended and Restated Credit  Agreement dated May 29, 2003 with U.S. Bank National Association.  (Incorporated herein by reference to Exhibit (10.12) to the Registrant’s  quarterly report on Form 10-Q for the quarter ended June 28, 2003). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 11.1   |   | Computation of earnings  per share (see Note 10 of Notes to Consolidated Financial Statements included  in Item 8 hereto).                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 21.1   |   | Subsidiaries  of Registrant.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 23.1   |   | Consent of  Independent Accountants.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 24.1   |   | Power of  Attorney (included on the signature pages hereof).                                                                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 31.1   |   | Certification of CFO under  the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 31.2   |   | Certification of CEO under  the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                      |   |   |   |   |
| 32     |   | Certification of CEO and  CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                  |

 

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+                                                                                         Theitem listed is a compensatory plan.

 

58

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