**UNITED STATES**

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**SECURITIES 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 December 28, 2002**                                                                                                                                                                           |
|                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                      | **Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |
| **For  the transition period  from               to               ** |

 

**CommissionFile Number:  1-14725**

** **

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** **

**MONACOCOACH CORPORATION**

(Exact Name ofRegistrant 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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| Securities  registered 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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Indicate  by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past ninetydays.    YES ý   NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definite proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

The aggregate marketvalue of the Common Stock held by non-affiliates of the Registrant, based uponthe closing sale price of the Common Stock on January 31, 2003 as reported onthe New York Stock Exchange, was approximately $321 million.  Shares of Common Stock held by officers anddirectors and their affiliated entities have been excluded in that such personsmay be deemed to be affiliates.  Thisdetermination of affiliate status is not necessarily conclusive for otherpurposes.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).  Yes ý  No o

 

The aggregate marketvalue of the Common Stock held by non-affiliates (which for this purpose doesnot include directors or officers) of the Registrant, based upon the closingsale price of the Common Stock on June 29, 2002 as reported on the New YorkStock Exchange, was approximately $546 million.

 

As of January 31, 2003,the Registrant had 28,948,376 shares of Common Stock outstanding.

 

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DOCUMENTSINCORPORATED BY REFERENCE

 

The Registrant’sdefinitive Proxy Statement for its Annual Meeting of Stockholders to be held onMay 13, 2003 (the “Proxy Statement”) is incorporated by reference in Part IIIof this Form 10-K to the extent stated therein.

 

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This document consists of58 pages.  The Exhibit Index appears atpage 57.

 

 

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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 |
|                                                                  |   |
| 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.                                                              | CONTROLS AND  PROCEDURES |
| ITEM  15.                                                             | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
|                                                                  |   |
| SIGNATURES                                                            |
|                                                                  |   |
| CERTIFICATION  UNDER SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 |

 

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PART I

 

This report containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended.  These statementsinclude without limitation those below marked with an asterisk (*).  In addition, the Company may from time totime make oral forward-looking statements through statements that include thewords “believes,” “expects,” “anticipates,” or similar expressions.  Such forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of the Company to differ materially fromthose expressed or implied by such forward-looking statements, including thoseset forth below under “Factors That May Affect Future Operating Results” withinManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.  The Company cautions thereader, however, that these factors may not be exhaustive.

 

**ITEM1.  BUSINESS**

 

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium Class A motor coaches, ClassC motor coaches and towable recreational vehicles.  The Company’s product line consists of thirty-three models ofmotor coaches and seven models of towables (fifth wheel trailers and traveltrailers) under the “Monaco,”  “HolidayRambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie Towables” brandnames.  The Company’s products, whichare typically priced at the high end of their respective product categories,range in suggested retail price from $70,000 to $1.1 million for motor coachesand from $25,000 to $65,000 for towables. Based upon retail registrations in 2002, the Company believes it had a32.8% share of the market for diesel Class A motor coaches, a 17.8% share ofthe market for all Class A  motorcoaches, a 12.0% share of the market for mid-to-high end fifth wheel trailers(units with retail prices above $20,000) and a 20.3% share of the market formid-to-high end travel trailers (units with retail prices above $17,000).  At December 28, 2002, the Company’s productswere sold through an extensive network of 420 dealerships located primarily inthe United States and Canada.

 

The Company is thesuccessor 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 Companyacquired the Holiday Rambler Division of Harley-Davidson, Inc. (“HolidayRambler”), a manufacturer of a full line of Class A motor coaches and towables(the “Holiday Acquisition”). Additionally, on August 2, 2001, the Company acquired SMC Corporation(“SMC”), a manufacturer of a full line of Class A motor coaches (the “SMCAcquisition”).  The Company believesthat developing relationships with a broad base of first-time buyers, coupledwith the Company’s strong emphasis on quality, customer service and designinnovation, will foster brand loyalty and increase the likelihood that, overtime, more customers will trade-up through the Company’s line of products.  Attracting larger numbers of first-timebuyers is important to the Company because of the Company’s belief that manyrecreational vehicle customers purchase multiple recreational vehicles duringtheir lifetime.

 

On November 27, 2002, theCompany acquired from Outdoor Resorts of America, Inc. (“ORA”) three luxurymotor coach resort properties being developed by ORA in Las Vegas, Nevada;Indio, California; and Naples, Florida. The resorts offer individual lots to owners, with undivided interests inthe resort amenities.  Amenities at theresorts include such features as tennis courts, swimming pools, par three golfcourses, and club houses. These motor coach resorts provide a destinationlocation for many of the high-line motor coaches that the Companyproduces.  By providing upscale motorcoach resorts, the Company believes that it’s products will appeal to anincreasing number of new customers, further solidifying the Company’s positionin the marketplace.

 

Of the three resortlocations acquired, the Las Vegas, Nevada and Indio, California locations arecompleted for the first phase of construction. The Company anticipates selling through the first phase, and will evaluatethe market conditions for completion of subsequent phases at that time.*  The Naples, Florida property is undeveloped,and the Company has entered into an agreement to sell the property, in anundeveloped state, in the second quarter of 2003.

 

The Company’s website islocated 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

 

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Current Reports on Form 8-K, as well as amendments tothose reports, as soon as reasonably practicable after the reports areelectronically filed with, or furnished to, the Securities and ExchangeCommission.

 

PRODUCTS

 

The Company currentlymanufactures thirty-three motor coaches and seven 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.  During the  second quarterof 2002, the Company introduced three new products, the Traveler, a newmid-priced edition of the Holiday Rambler brand gasoline motor coach, theBaron, a new low priced edition of the Beaver brand diesel motor coach,and  the Panther, a new high-end editionof the Safari brand diesel motor coach. These products were designed to fill retail price points previously without a product offering from theCompany.

 

The following tablehighlights the Company’s product offerings as of December 28, 2002:

 

COMPANY MOTORCOACH PRODUCTS

 
| **MODEL**         |   | **CURRENT  SUGGESTED  RETAIL PRICE RANGE** |   | **BRAND**       |   |
|-------------------|--------|--------------------------------------------|--------|-----------------|--------|
| Class A           |   |                                       |   |            |   |
| Royale  Coach     |   | $600,000-$1.1 million                      |   | Monaco          |   |
| Marquis           |   | $445,000-$535,000                          |   | Beaver          |   |
| Signature  Series |   | $470,000-$520,000                          |   | Monaco          |   |
| Executive         |   | $370,000-$420,000                          |   | Monaco          |   |
| Navigator         |   | $370,000-$420,000                          |   | Holiday Rambler |   |
| Panther           |   | $335,000-$390,000                          |   | Safari          |   |
| Patriot           |   | $310,000-$360,000                          |   | Beaver          |   |
| Dynasty           |   | $295,000-$330,000                          |   | Monaco          |   |
| Imperial          |   | $265,000-$295,000                          |   | Holiday Rambler |   |
| Contessa          |   | $255,000-$270,000                          |   | Beaver          |   |
| Windsor           |   | $225,000-$270,000                          |   | Monaco          |   |
| Camelot           |   | $220,000-$240,000                          |   | Monaco          |   |
| Scepter           |   | $220,000-$240,000                          |   | Holiday Rambler |   |
| Zanzibar          |   | $215,000-$245,000                          |   | Safari          |   |
| Monterey          |   | $210,000-$230,000                          |   | Beaver          |   |
| Sahara            |   | $185,000-$210,000                          |   | Safari          |   |
| Endeavor          |   | $160,000-$195,000                          |   | Holiday Rambler |   |
| Diplomat          |   | $160,000-$195,000                          |   | Monaco          |   |
| Santiam           |   | $155,000-$180,000                          |   | Beaver          |   |
| Cheetah           |   | $140,000-$160,000                          |   | Safari          |   |
| Knight            |   | $135,000-$170,000                          |   | Monaco          |   |
| Ambassador        |   | $135,000-$170,000                          |   | Holiday Rambler |   |
| Baron             |   | $135,000-$160,000                          |   | Beaver          |   |
| Cayman            |   | $115,000-$130,000                          |   | Monaco          |   |
| Neptune           |   | $115,000-$130,000                          |   | Holiday Rambler |   |
| LaPalma           |   | $  95,000-$120,000               |   | Monaco          |   |
| Vacationer        |   | $  95,000-$115,000               |   | Holiday Rambler |   |
| Trek              |   | $  90,000-$110,000               |   | Safari          |   |
| Traveler          |   | $  85,000-$110,000               |   | Holiday Rambler |   |
| Monarch           |   | $  75,000-$105,000               |   | Monaco          |   |
| Admiral           |   | $  75,000-$105,000               |   | Holiday Rambler |   |
|              |   |                                       |   |            |   |
| Class C           |   |                                       |   |            |   |
| Atlantis          |   | $  65,000-$  75,000    |   | Holiday Rambler |   |
| Rogue             |   | $  65,000-$  75,000    |   | Monaco          |   |

 

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COMPANY TOWABLEPRODUCTS

 
| **MODEL**                    |   | **CURRENT  SUGGESTED  RETAIL PRICE RANGE** |   | **BRAND**       |   |
|------------------------------|--------|--------------------------------------------|--------|-----------------|--------|
| Medallion  Fifth Wheel       |   | $  40,000-$  65,000    |   | McKenzie        |   |
| Presidential  Fifth Wheel    |   | $  40,000-$  45,000    |   | Holiday Rambler |   |
| Presidential  Travel Trailer |   | $  40,000-$  45,000    |   | Holiday Rambler |   |
| Lakota  Fifth Wheel          |   | $  30,000-$  50,000    |   | McKenzie        |   |
| Alumascape  Fifth Wheel      |   | $  30,000-$  40,000    |   | Holiday Rambler |   |
| Alumascape  Travel Trailer   |   | $  25,000-$  35,000    |   | Holiday Rambler |   |
| Lakota  Travel Trailer       |   | $  25,000-$  35,000    |   | McKenzie        |   |

 

In 2002, the average unitwholesale selling prices of the Company’s motor coaches, fifth wheel trailersand travel trailers, were approximately $141,800, $33,400, and $24,000,respectively.  The Company’s motor coachproducts generated 89.6%, 90.3%, and 91.9% of total revenues for the fiscalyears 2000, 2001, and 2002, 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 mobileaccommodations.  The five areas are theliving room, kitchen, dining room, bathroom, and bedroom.  For each model, the Company offers a varietyof interior layouts.

 

Each of the Company’srecreational vehicles comes fully equipped with a wide range of kitchen andbathroom appliances, audio and visual electronics, communication devices, andother amenities, including couches, dining tables, closets, and storagespaces.  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 25” Sony stereotelevisions, 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.

 

PRODUCT DESIGN

 

To address changingconsumer preferences, the Company modifies and improves its products each modelyear and typically redesigns each model every three or four years.  The Company’s designers work with theCompany’s marketing, manufacturing, and service departments to design a productthat 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 exteriors of theCompany’s recreational vehicles are designed to be aesthetically appealing toconsumers, aerodynamic in shape for fuel efficiency, and practical tomanufacture.  The Company has anexperienced team of computer-aided design personnel to complete the productdesign and produce prints from which the products will be manufactured.

 

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The Company expensed$783,000, $975,000, and $1.2 million for research and development in the fiscalyears 2000, 2001, and 2002, respectively.

 

SALES AND MARKETING

 

DEALERS

 

The Company expanded itsdealer network over the past year from 385 dealerships at the beginning of 2002to 420 dealerships primarily located in the United States and Canada atDecember 28, 2002.  Revenue generatedfrom shipments to dealerships located outside the United States were approximately  4.3%, 3.2%, and 3.0% of total sales for thefiscal years  2000, 2001, and 2002,respectively.  The Company intends tocontinue to expand its dealer network, primarily by adding additional Safariand Beaver dealers to increase dealer representation for these twobrands.*  In addition, the Companyintends to increase dealer representation for its towable products to supportthe expansion of the towable production facility in Elkhart, Indiana which isplanned to be completed by June of 2003.* The Company maintains an internal sales organization consisting of 36account executives who service the Company’s dealer network.

 

The Company analyzes andselects new dealers on the basis of such criteria as location, marketingability, sales history, financial strength, and the capability of the dealer’srepair services.  The Company providesits dealers with a wide variety of support services, including advertisingsubsidies and technical training, and offers certain model pricing discounts todealers 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.

 

Dealers typically financetheir inventory through revolving credit facilities established withasset-based lending institutions, including specialized finance companies andbanks.  It is industry practice thatsuch “floor plan” lenders require recreational vehicle manufacturers to agreeto repurchase (for a period of 12 to 18 months from the date of the dealer’spurchase) motor coaches and towables previously sold to the dealer in the eventthe dealer defaults on its financing agreements.  The Company’s contingent obligations under these repurchaseagreements are reduced by the proceeds received upon the sale of anyrepurchased units. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Liquidity and Capital Resources,” andNote 16 of Notes to the Company’s Consolidated Financial Statements.

 

ADVERTISING AND PROMOTION

 

The Company advertisesregularly in trade journals and magazines, participates in cooperativeadvertising programs with its dealers, and produces color brochures depictingits models’ performance features and amenities.  The Company also promotes its products with direct incentiveprograms to dealer sales personnel linked to sales of particular models.

 

A critical marketingactivity for the Company is its participation in the more than 155 recreationalvehicle trade shows and rallies each year. National trade shows and rallies, which can attract as many as 40,000attendees, are an integral part of the Company’s marketing process because theyenable dealers and potential retail customers to compare and contrast all theproducts offered by the major recreational vehicle manufacturers.  Setting up attractive display areas at majortrade shows to highlight the newest design innovations and product features ofits products is critical to the Company’s success in attracting and maintainingits dealer network and in generating enthusiasm at the retail customerlevel.  The Company also providescomplimentary service for minor repairs to its customers at several rallies andtrade shows.

 

The Company attempts toencourage and reinforce customer loyalty through clubs for the owners of itsproducts so that they may share experiences and communicate with eachother.  The Company’s clubs currentlyhave more than 40,000 members.  TheCompany publishes magazines to enhance its relations with these clubs and holds

 

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rallies for clubs to meet periodically to view theCompany’s new models and obtain maintenance and service guidance.  Attendance at Company-sponsored rallies canbe as high as 2,100 recreational vehicles per year.  The Company frequently receives support from its dealers andsuppliers to host these rallies.

 

The Company’s web sitealso offers an extensive listing of the Company’s models, floor plans, andfeatures, including “virtual tours” of some models.  A dealer locator feature identifies for customers the closestdealers to their location for the model(s) they are interested inpurchasing.  The Company’s web site alsoprovides information for upcoming rallies and club functions as well as linksto other R.V. Lifestyle web sites of interest to existing or potentialcustomers.

 

CUSTOMER SERVICE

 

The Company believes thatcustomer satisfaction is vitally important in the recreational vehicle marketbecause of the large number of repeat customers and the rapid communication ofbusiness 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.

 

TheCompany offers a limited warranty to all new vehicle purchases.  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 aduration of five years for the front and sidewall frame structure, and alimited three year Warranty for the Roadmaster chassis). In addition, customersare protected by the limited warranties of major component suppliers such asthose of Cummins Engine Company, Inc. (“Cummins”) (diesel engines), CaterpillarInc. (“Caterpillar”) (diesel engines), Spicer Heavy Axle & Brake Divisionof Dana Corporation (“Dana”) (axles), Meritor WABCO V.C.S. (“Meritor”) (axles),Allison Transmission Division of General Motors Corporation (“Allison”)(transmissions), Workhorse (chassis), and Ford Motor Company (“Ford”)(chassis). The Company’s limited warranty covers all manufacturing-relatedproblems and parts and system failures, regardless of whether the repair ismade at a Company facility or by one of the Company’s dealers or authorizedservice centers. As of December 28, 2002, the Company had 420 dealershipsproviding service to owners of the Company’s products. In addition, owners ofthe Company’s diesel products have access to the entire Cummins, andCaterpillar dealer networks, which include over 2,000 repair centers.

 

The Company operatesservice centers in Harrisburg, Oregon; Bend, Oregon; Elkhart, Indiana;Leesburg, Florida; and Tampa, Florida, with plans to add a facility inWildwood, Florida, which will replace the Leesburg and Tampa facilities.  The Company had approximately 700 employeesin customer service at December 28, 2002. The Company maintains individualized production records and acomputerized warranty tracking system which enable the Company’s servicepersonnel to identify problems quickly and to provide individualized customerservice.  While many problems can beresolved on the telephone, the customer may be referred to a nearby dealer orservice center.  The Company believesthat dedicated customer service phone lines are an ideal way to interactdirectly with the Company’s customers and to quickly address their technicalproblems.

 

The Company  has expanded its on-line dealer supportnetwork to assist its service personnel and 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 personnelat dealerships the ability to order parts through an electronic parts catalog.

 

MANUFACTURING

 

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

 

The Company’s motor coachproduction capacity at the end of 2002 based on a single shift five-day workweek, was 25 units per day at its Coburg facility, 3 units per day at its BendFacility, and 25 units per day at its

 

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Wakarusa facility. The Company’s current towables production capacity is 13 units per dayat its Elkhart facility. The Company is currently utilizing approximately 73%of total capacity and therefore believes it is positioned to take advantage offuture growth potential of the Company’s products within the RV market.*

 

The Company believes thatits manufacturing process is one of the most vertically integrated in therecreational vehicle industry.  Bymanufacturing a variety of items, including the Roadmaster semi-monocoquediesel chassis, plastic components, some of its cabinetry and fiberglass parts,as well as many subcomponents, the Company maintains increased control overscheduling, component production, and overall product quality.  In addition, vertical integration enablesthe Company to be more responsive to market dynamics.

 

Each facility has severalstations for manufacturing, organized into four broad categories: chassismanufacturing, 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.

 

Each unit is given aninspection during which its appliances and plumbing systems are thoroughlytested.  As a final quality controlcheck, each motor coach is given a road test. To further ensure both dealer and end-user satisfaction, the Companypays a unit fee per recreational vehicle to its dealers so that they willthoroughly inspect each product upon delivery and return a detailed reportform.

 

The Company purchases rawmaterials, parts, subcomponents, electronic systems, and appliances fromapproximately 1,000 vendors.  Theseitems are either directly mounted in the vehicle or are utilized insubassemblies 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’s productsare generally manufactured against orders from the Company’s dealers. As ofDecember 28, 2002, the Company’s backlog of orders was $220.4 million, comparedto $201.6 million at December 29, 2001. The Company includes in its backlog all accepted purchase orders fromdealers shippable within the next six months. Orders in backlog can be canceled at the option of the purchaser at anytime without penalty and, therefore, backlog should not be used as a measure offuture 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: CoachmenIndustries, Inc., Fleetwood Enterprises, Inc., National

 

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R.V. Holdings, Inc., Thor Industries, Inc., andWinnebago Industries, Inc.  Many of theCompany’s competitors have significant financial resources and extensivemarketing capabilities.  There can be noassurance that either existing or new competitors will not develop productsthat are superior to or that achieve better consumer acceptance than theCompany’s products, or that the Company will continue to remain competitive.

 

GOVERNMENT REGULATION

 

The manufacture andoperation of recreational vehicles are subject to a variety of federal, state,and local regulations, including the National Traffic and Motor Vehicle SafetyAct and safety standards for recreational vehicles and their components thathave 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.

 

The Company is a memberof the Recreation Vehicle Industry Association (the “RVIA”), a voluntaryassociation of recreational vehicle manufacturers and suppliers, whichpromulgates recreational vehicle safety standards.  Each of the products manufactured by the Company has an RVIA sealaffixed to it to certify that such standards have been met.

 

Many states regulate thesale, 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 is subject toregulations promulgated by the Occupational Safety and Health Administration(“OSHA”). The Company’s plants are periodically inspected by federal or stateagencies, such as OSHA, concerned with workplace health and safety.

 

The Company believes thatits products and facilities comply in all material respects with the applicablevehicle safety, consumer protection, RVIA, and OSHA regulations andstandards.  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 is subject toproduct liability and warranty claims arising in the ordinary course ofbusiness.  To date, the Company has beensuccessful 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, the NationalHighway Traffic Safety Administration (NHTSA), enacted a new reportingrequirement referred to as the Tread Act. This act requires certain transportation manufacturers, including theCompany, to provide detailed reporting of various repairs performed on productsproduced by transportation manufacturers. The Company expects to meet the new requirements during the 2003 fiscalyear.*

 

Certain U.S. tax lawscurrently afford favorable tax treatment for the purchase and sale ofrecreational vehicles.  These laws andregulations have historically been amended frequently, and it is likely thatfurther

 

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amendments and additional laws and regulations will beapplicable to the Company and its products in the future.  Furthermore, no assurance can be given thatany increase in personal income tax rates will not have a material adverseeffect on the Company’s business, operating results, and financial condition byreducing demand for the Company’s products.

 

ENVIRONMENTAL REGULATION AND REMEDIATION

 

REGULATION  The Company’s recreational vehiclemanufacturing operations are subject to a variety of federal and stateenvironmental regulations relating to the use, generation, storage, treatment,and disposal of hazardous materials. These laws are often revised and made more stringent, and it is likelythat future amendments to these laws will impact the Company’s operations.

 

The Company has submittedapplications for “Title V” air permits for all of its existing and newoperations.  The air permits have eitherbeen issued or are in the process of being issued by the relevant state agency.

 

The Company does notcurrently anticipate that any additional air pollution control equipment willbe required as a condition of receiving new air permits, although newregulations and their interpretation may change over time, and there can be noassurance that additional expenditures will not be required.*

 

The Company is aware ofthe forthcoming adoption and implementation of new federal Maximum AchievableControl Technology (“MACT”) regulations. The Company does not currently anticipate that compliance with the MACTregulations by the Company will require any material capital expenditures atits facilities beyond those which have already been incurred.*  However, the specific content andinterpretation of these regulations is uncertain and there can be no assurancethat additional capital expenditures will not be required.

 

The Company has twocurrently unresolved air permit violation notices issued by a permittingagency.  The Company believes theseviolations have been cured and the Company is working with the permittingagency to close the matter.  The Companyis aware of no other 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 ofcontamination to be confined to a relatively minor area.  Total project costs are expected to be under$40,000.  However, the failure of theCompany to comply with present or future regulations could subject the Companyto: (i) fines; (ii) potential civil and criminal liability; (iii) suspension ofproduction or cessation of operations; (iv) alterations to the manufacturingprocess; or (v) costly cleanup or capital expenditures, any of which could havea material adverse effect on the Company’s business, results of operations, andfinancial condition.

 

EMPLOYEES

 

As of December 28, 2002,the Company had 5,790 full-time employees, including 4,500 in production, 91 insales, 679 in service, and 520 in management and administration.  The Company’s employees are not representedby any collective bargaining organization, and the Company has never experienceda work stoppage resulting from labor issues. The Company believes its relations with its employees are good.

 

The Company’s futureprospects depend upon its key management personnel, including Kay L. Toolson,the Company’s Chief Executive Officer and John W. Nepute, the Company’sPresident.  The loss of one or more ofthese 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 no assurancethat the Company will be successful in attracting and retaining such personnel.

 

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EXECUTIVE OFFICERS OF THE COMPANY

 

The following sets forthcertain information with respect to the executive officers of the Company as ofMarch 13, 2003:

 
| **Name**            |   | **Age** |   | **Position with the Company**                                       |
|---------------------|--------|---------|--------|---------------------------------------------------------------------|
| Kay L. Toolson      |   | 59      |   | Chairman and Chief Executive Officer                                |
| John W. Nepute      |   | 51      |   | President                                                           |
| Richard E. Bond     |   | 49      |   | Senior Vice President, Secretary, and Chief  Administrative Officer |
| Martin W. Garriott  |   | 47      |   | Vice President and Director of Oregon Manufacturing                 |
| Irvin M. Yoder      |   | 55      |   | Vice President and Director of Indiana Manufacturing                |
| Patrick F. Carroll  |   | 45      |   | Vice President of Product Development                               |
| P. Martin Daley     |   | 38      |   | Vice President and Chief Financial Officer                          |
| Michael P. Snell    |   | 34      |   | Vice President of Sales                                             |
| John B. Healey, Jr. |   | 37      |   | Vice President of Corporate Purchasing                              |

 

Mr. Toolson has served asChief Executive Officer of the Company and the Predecessor since 1986 and asChairman of the Company since July 1993. He served as President of the Company from 1986 to October 2000, exceptfor the periods from October 1995 to January 1997 and August 1998 to September1999.  From 1973 to 1986, Mr. Toolsonheld executive positions with two motor coach manufacturers.

 

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

 

Mr. Bond has served asSenior Vice President, Secretary, and Chief Administrative Officer of theCompany 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, and originally joined Holiday Rambler as Vice President andAssistant General Counsel in 1984.

 

Mr. Garriott has servedthe Company as Vice President and Director of Oregon Manufacturing sinceJanuary 1997.  He has been continuouslyemployed by the Company or the Predecessor since November 1975 in variouscapacities, including Vice President of Corporate Purchasing from October 1994until December 1996.

 

Mr. Yoder has served theCompany as Vice President and Director of Indiana Manufacturing since August1998.  Joining the Company upon theacquisition of Holiday Rambler in March 1996 as Director of Indiana MotorizedManufacturing, 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. Carroll has served asVice President of Product Development since August 1998 and prior to that asDirector of Product Development since joining the Company in October 1995.  He has held a variety of marketing andproduct development positions with various recreational vehicle manufacturerssince 1979.

 

Mr. Daley has served asVice 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 has served asVice President of Sales since October of 2000, and as Vice President of MonacoMotorized Sales beginning in August 1998. Prior to that and since joining the Company in October of 1994,  he held different positions in the salesdepartment, including National Sales Manager of Monaco Motorized Sales.

 

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Mr. Healey has served asVice President of Corporate Purchasing since October of 2000 and as Director ofPurchasing 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.

 

**ITEM2.  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 and Chassis 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 |
| Leesburg, Florida   |   | Owned              |   | 22,000                       |   | Service                                 |
| Tampa, Florida      |   | Owned              |   | 35,000                       |   | Service                                 |
| Wildwood, Florida   |   | Planned            |   | 75,000                       |   | Service                                 |

 

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

 

In addition to theproperties noted above related to building and servicing recreational vehicles,the Company owns three luxury motor coach resorts under development as follows:

 
| **RESORT LOCATION** |   | **DEVELOPED  ACREAGE** |   | **NUMBER OF  DEVELOPED  LOTS** |   | **UNDEVELOPED  ACREAGE** |   | **NUMBER OF  POTENTIAL  LOTS** |   |
|---------------------|--------|------------------------|--------|--------------------------------|--------|--------------------------|--------|--------------------------------|--------|
|                |   |                   |   |                           |   |                     |   |                           |   |
| Las  Vegas, Nevada  |   | 21                     |   | 202                            |   | 21                       |   | 199                            |   |
| Indio,  California  |   | 27                     |   | 136                            |   | 53                       |   | 264                            |   |
| Naples,  Florida    |   | 0                      |   | 0                              |   | 93                       |   | 0                              |   |

 

**ITEM3.  LEGAL PROCEEDINGS**

 

The Company is involvedin legal proceedings arising in the ordinary course of its business, includinga variety of product liability and warranty claims typical in the recreationalvehicle industry.  The Company does notbelieve that the outcome of its pending legal proceedings, net of insurancecoverage, will have a material adverse effect on the business, financialcondition, or results of operations of the Company.*

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

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**PARTII**

 

**ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERMATTERS**

 

The Company’s CommonStock is traded on the New York Stock Exchange under the symbol “MNC.” Thefollowing table sets forth for the periods indicated the high and low closingsale prices for the Common Stock (rounded to the nearest $.01 per share).

 

|            |   | **High** |   | **Low** |   |
|-----------------|--------|----------|--------|---------|--------|
| **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 |   |
|            |   |     |   |    |   |
| **2001**        |   |     |   |    |   |
| First  Quarter  |   | $        | 14.49  |    | $      | 10.89 |   |
| Second  Quarter |   | $        | 22.13  |    | $      | 10.77 |   |
| Third  Quarter  |   | $        | 20.73  |    | $      | 12.10 |   |
| Fourth  Quarter |   | $        | 22.65  |    | $      | 13.91 |   |

 

As of January 31, 2003,there were approximately 763 holders of record of the Company’s CommonStock.  The high and low closing salesprices listed above have been adjusted to reflect the stock splits approved bythe Board on August  6, 2001, May 19,1999, November 2, 1998, and March 16, 1998.

 

The Company has neverpaid dividends on its Common Stock and currently has no plans to pay dividendson its Common Stock.  The Company’sexisting loan agreements limit the payment of dividends on the Common Stock.

 

The market price of theCompany’s Common Stock is subject to wide fluctuations in response toquarter-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.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table setsforth information with respect to the Company’s equity compensation plans as ofthe 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     |   | 1,341,523                                                                                                |   | $                                                                                         | 10.15  |                                                                                                                                                   | 1,545,138 |   |
| Equity  compensation plans not approved by security holders |   | —                                                                                                   |   | —                                                                                    |   | —                                                                                                                                                 |      |
|                                                        |   |                                                                                                     |   |                                                                                      |   |                                                                                                                                                   |      |
| Total                                                       |   | 1,341,523                                                                                                |   | $                                                                                         | 10.15  |                                                                                                                                                   | 1,545,138 |   |

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The ConsolidatedStatements of Income Data set forth below with respect to fiscal years 2000,2001, and 2002, and the Consolidated Balance Sheet Data at December 29, 2001and December 28, 2002, are derived from, and should be read in conjunctionwith, the audited Consolidated Financial Statements and Notes thereto of theCompany included in this Annual Report on Form 10-K.  The Consolidated Statements of Income Data set forth below withrespect to fiscal years 1998 and 1999 and the Consolidated Balance Sheet Dataat January 2, 1999, January 1, 2000, and December 30, 2000 are derived fromaudited consolidated financial statements of the Company which are not includedin this Annual Report on Form 10-K.

 

The data set forth in thefollowing table should be read in conjunction with, and are qualified in theirentirety by, Management’s Discussion and Analysis of Financial Condition andResults of Operations, the Company’s Consolidated Financial Statements and theNotes thereto appearing elsewhere in this Annual Report on Form 10-K.

 

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**Five-YearSelected Financial Data**

 

The following table sets forth financial data ofMonaco Coach Corporation for the years indicated (in thousands of dollars,except share and per share data and consolidated operating data).

 
|                                           |   | **Fiscal  Year** |    |
|------------------------------------------------|--------|------------------|---------|
|                                           |   | **1998**         |    | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| **Consolidated  Statements of Income Data:**   |   |             |    |   |   |   |   |   |   |   |   |
| Net  sales                                     |   | $                | 594,802 |   | $ | 780,815 |   | $ | 901,890 |   | $ | 937,073 |   | $ | 1,222,689 |   |
| Cost  of sales                                 |   | 512,570          |    | 658,536 |   | 772,240 |   | 823,083 |   | 1,059,560 |   |
| Gross  profit                                  |   | 82,232           |    | 122,279 |   | 129,650 |   | 113,990 |   | 163,129 |   |
| Selling,  general, and administrative expenses |   | 41,571           |    | 48,791 |   | 59,175 |   | 70,687 |   | 87,202 |   |
| Amortization  of goodwill                      |   | 645              |    | 645 |   | 645 |   | 645 |   | 0 |   |
| Operating  income                              |   | 40,016           |    | 72,843 |   | 69,830 |   | 42,658 |   | 75,927 |   |
| Other  income, net                             |   | (607             | )       | (142 | ) | (182 | ) | (334 | ) | (105 | ) |
| Interest  expense                              |   | 1,861            |    | 1,143 |   | 632 |   | 2,357 |   | 2,752 |   |
| Income  before provision for income taxes      |   | 38,762           |    | 71,842 |   | 69,380 |   | 40,635 |   | 73,280 |   |
| Provision  for income taxes                    |   | 16,093           |    | 28,081 |   | 26,859 |   | 15,716 |   | 28,765 |   |
| Net  income                                    |   | $                | 22,669  |   | $ | 43,761 |   | $ | 42,521 |   | $ | 24,919 |   | $ | 44,515 |   |
|                                           |   |             |    |   |   |   |   |   |   |   |   |
| Earnings  per common share:                    |   |             |    |   |   |   |   |   |   |   |   |
| Basic                                          |   | $                | 0.81    |   | $ | 1.55 |   | $ | 1.50 |   | $ | 0.87 |   | $ | 1.55 |   |
| Diluted                                        |   | $                | 0.79    |   | $ | 1.51 |   | $ | 1.47 |   | $ | 0.85 |   | $ | 1.51 |   |
| Weighted  average shares outstanding:          |   |             |    |   |   |   |   |   |   |   |   |
| Basic                                          |   | 27,987,004       |    | 28,213,444 |   | 28,377,123 |   | 28,531,593 |   | 28,812,473 |   |
| Diluted                                        |   | 28,622,976       |    | 29,050,453 |   | 28,978,264 |   | 29,288,688 |   | 29,573,420 |   |
|                                           |   |             |    |   |   |   |   |   |   |   |   |
| **Consolidated  Operating Data:**              |   |             |    |   |   |   |   |   |   |   |   |
| Units  sold:                                   |   |             |    |   |   |   |   |   |   |   |   |
| Motor  coaches                                 |   | 4,768            |    | 6,233 |   | 6,632 |   | 6,228 |   | 8,005 |   |
| Towables                                       |   | 2,217            |    | 3,269 |   | 3,377 |   | 3,261 |   | 3,206 |   |
| Dealerships  at end of period                  |   | 263              |    | 294 |   | 338 |   | 385 |   | 420 |   |
|                                           |   |             |    |   |   |   |   |   |   |   |   |
| **Consolidated  Balance Sheet Data:**          |   |             |    |   |   |   |   |   |   |   |   |
| Working  capital                               |   | $                | 23,676  |   | $ | 38,888 |   | $ | 69,299 |   | $ | 63,694 |   | $ | 114,241 |   |
| Total  assets                                  |   | 190,127          |    | 246,727 |   | 321,610 |   | 427,098 |   | 547,417 |   |
| Long-term  borrowings, less current portion    |   | 5,400            |    | — |   | — |   | 30,000 |   | 30,333 |   |
| Total  stockholders’ equity               |   | 98,193           |    | 143,339 |   | 186,625 |   | 213,130 |   | 260,627 |   |

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

OVERVIEW

 

The Company has conducteda series of acquisitions during its history, beginning in March 1993 when theCompany commenced operations by acquiring substantially all of the assets andliabilities of a predecessor company that had been formed in 1968.  In March 1996, the Company acquired fromHarley-Davidson certain assets and assumed certain liabilities of its HolidayRambler Division and acquired certain related dealerships.  In August 2001, the Company acquired SMCCorporation, manufacturer of the Beaver and Safari brand motorhomes.  In November 2002, the Company acquired fromOutdoor Resorts of America (“ORA”) three luxury motor coach resort propertiesbeing developed by ORA in Las Vegas, Nevada; Indio, California; and Naples,Florida.

 

Each of theseacquisitions was accounted for using the purchase method of accounting, and theacquired operations have in each case been incorporated into the Company’sconsolidated financial statements.  As aresult, the consolidated financial statements for fiscal years 2000, 2001, and2002 contain various acquisition-related expenses including, in 2000 and 2001,amortization of goodwill related to the acquisition of the Company’spredecessor and interest expense and amortization of debt issuance costs andgoodwill relating to the acquisition of Holiday Rambler.  Additionally, the consolidated financialstatements for fiscal years 2001 and 2002 contain interest expense andamortization of debt issuance costs related to the acquisition of SMCCorporation and, for fiscal year 2002, interest expense and amortization ofdebt issuance costs associated with the resort acquisition.

 

For years prior to 2002,the Company 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 year ended December 28, 2002.  Management has completed its annual testingof goodwill during 2002 as required by SFAS 142 and determined that there hasbeen no impairment requiring a write down.

 

RESULTS OF OPERATIONS

 

2002 COMPARED WITH 2001

 

Net sales increased 30.5%from $937.1 million in 2001 to $1.2 billion in 2002.  The Company’s overall unit sales were up 18.1% from 9,489 in 2001to 11,211 units in 2002.  The Company’sunits sales were up 28.5% on the motorized side with 16.5% of that increase dueto the addition of the Safari and Beaver line of products starting in thesecond half of 2001.  Gross dieselmotorized sales revenues were up 30.6%, while gas motorized were up 45.7%, andtowables were up 8.2%.  This reflects astronger mix of higher priced units in each category in 2002 as the Company’soverall average unit selling price increased from $99,900 in 2001 to $110,000in 2002.  The Company’s diesel productsaccounted for 78.5% of total 2002 revenues while gas products were 13.4% andtowables were 8.1% of total revenues.

 

Gross profit increased by$49.1 million from $114.0 million in 2001 to $163.1 million in 2002 and grossmargin increased from 12.2% in 2001 to 13.3% in 2002.  The increase in gross margin in 2002 was due to lower salesdiscounts and reductions in material costs as a percentage of sales.  Through the first half of 2001, the Companyfound it necessary to offer above normal discounts to maintain sales todealers.  The discounting returned tonormal 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. The Company’s overall gross margin may fluctuate in future periods ifthe mix of products shifts from higher to lower gross margin units or if theCompany encounters unexpected manufacturing difficulties or competitivepressures.

 

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Selling, general, andadministrative expenses increased by $16.5 million from $70.7 million in 2001to $87.2 million in 2002 and decreased as a percentage of sales from 7.5% in2001 to 7.1% in 2002.  Increases inspending over the prior year were due to those items that fluctuate with theincrease in sales such as sales commissions, product liability expenses,advertising, promotions, general insurance, and printed brochure costs.  The reduction  as a percentage of sales was mostly due to the large increase insales compared to overall spending.

 

Amortization of goodwilldeclined from $645,000 in 2001 to zero in 2002 due to the application of SFAS142 discussed above and management’s determination that there had been noimpairment of goodwill as of December 28, 2002.

 

Operating incomeincreased $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 interest expenseincreased 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 creditfacilities.  The Company also increasedits long-term credit facility by $22 million in the fourth quarter of 2002 forthe resort acquisition.  See “Liquidityand Capital Resources.”  The Company isexpecting increased interest expense for 2003 based on anticipated higher debtlevels.

 

The Company reported aprovision for income taxes of $28.8 million, or an effective tax rate of 39.3%,for 2002, compared to $15.7 million, or an effective tax rate of 38.7% for2001.  The change in effective tax ratewas due mainly to a decreased benefit in 2002 from foreign sales.

 

Net income increased by$19.6 million from $24.9 million in 2001 to $44.5 million in 2002, due to thecombination 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 option expense.

 

2001 COMPARED WITH 2000

 

Net sales increased 3.9%from $901.9 million in 2000 to $937.1 million in 2001.  The Company’s overall unit sales were down5.2% from 10,009 in 2000 to 9,489 units in 2001.  The Company’s units sales were down 6.1% on the motorized sidereflecting lower sales during the first half of 2001 which were nearly offsetby increases in the latter part of 2001, mostly from the addition of the Safariand Beaver line of products.  Motorizedgross sales were up 2.7% reflecting the higher mix of diesel unit sales in2001.  The Company’s unit sales oftowable products in 2001 were down only 3.4% while gross sales were up 8.2% assales from the towable operations had a shift in the mix from the prior year offewer travel trailers and more higher priced fifth wheel units.  The Company’s overall average unit sellingprice increased from $91,800 in 2000 to $99,900 in 2001 reflecting thecontinuing increases in sales of diesel motor coaches.

 

Gross profit decreased by$15.7 million from $129.7 million in 2000 to $114.0 million in 2001 and grossmargin decreased from 14.4% in 2000 to 12.2% in 2001.  The decrease in gross margin in 2001 was due to a combination offactors resulting from competitive pressures in the market.  Through the first half of 2001, the Companyfound it necessary to offer above normal discounts to maintain sales todealers.  In addition, throughout 2001,the Company’s efforts to match production with the models that were sellingwell in the market resulted in production inefficiencies caused by shiftingvolume among production lines and changing the mix of models produced on thoselines, as well as integrating the Safari production into the Coburg facility.

 

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Selling, general, andadministrative expenses increased by $11.5 million from $59.2 million in 2000to $70.7 million in 2001 and increased as a percentage of sales from 6.6% in2000 to 7.5% in 2001.  Approximately 42%of the increase was due to retail sales and dealer promotions, as well as showand rally expenses.  The remainder ofthe increase was from administrative and sales wages and commissions, mostlydue to the combining of SMC operations which have historically run higherselling, general, and administrative costs as a percentage of sales than theCompany.

 

Operating incomedecreased $27.1 million from $69.8 million in 2000 to $42.7 million in2001.  The Company’s higher level ofselling, general, and administrative expense as a percentage of sales combinedwith the reduction in the Company’s gross margin, resulted in a decrease in operatingmargin from 7.7% in 2000 to 4.6% in 2001.

 

Net interest expenseincreased $1.7 million from $632 thousand in 2000 to $2.4 million in 2001.  This increase was related to increased debtdue to higher levels of inventory during the first half of 2001, combined withcash requirements to complete the SMC Acquisition in the third quarter of2001.  The Company capitalized $192,000of interest expense in 2000 relating to the construction in Indiana andFlorida, and no interest was capitalized in 2001.  The Company’s interest expense included $61,300 in 2000 and$14,000 in 2001 related to the amortization of debt issuance costs recorded inconjunction with the Company’s credit facilities.  Additionally, interest expense in 2000 included $52,700, fromaccelerated amortization of debt issuance costs related to the creditfacilities.  The Company also paid offits revolving credit facility in the third quarter of 2001 and obtainedfinancing from a consortium of lenders.

 

The Company reported aprovision for income taxes of $15.7 million, or an effective tax rate of 38.7%,for 2001, compared to $26.9 million, or an effective tax rate of 38.7% for2000.

 

Net income decreased by$17.6 million from $42.5 million in 2000 to $24.9 million in 2001, due to theincrease in net sales being more than offset by a lower operating margin.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During 2002, the Company generated cash of $1.3 million fromoperating activities.  The Companygenerated $53.1 million from net income and non-cash expenses such asdepreciation and amortization. This amount was mostly offset by net changes inworking capital accounts.  Sources ofcash included an increase in trade payables of $10.3 million, an increase inaccrued liabilities and reserves of $14.0 million and an increase in incometaxes payable of $9.6 million.  The usesof cash included an increase of $33.9 million in trade receivables and anincrease of $48.5 million in inventories. The increase in trade receivables reflects increased shipments near theend of the fourth quarter compared to the prior year end of 2001.  Increased inventory levels reflect anincrease in raw materials due to higher production run rates and an increase inwork in process as the Company implemented a new quality improvement processthat added an additional stage to the final completion of the product.  The finished goods component of inventoryincreased by $14 million over the prior year. Increased payables and liabilities are reflective of increased purchasesfor higher production run rates over the prior year, model change, accruals forcurrent income taxes payable, and various other accrued liabilities.

 

The Company has credit facilitiesconsisting of a revolving line of credit of up to $70.0 million of which $51.4million was outstanding at December 28, 2002 (the “Revolving Loan”) and termloans with balances of $52.0 million at December 28, 2002 (the “Term Loans”).  At the election of the Company, theRevolving Loan and Term Loans bear interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’sleverage ratio.  The Company also pays interestmonthly on the unused available portion of the Revolving Loan at varying rates,determined by the Company’s leverage ratio. The Revolving loan is due and payable in full on September 30, 2004, andrequires monthly interest payments. Additional prepayments for portions of the term notes are required inthe event the Company sells substantially all of any motor coach resortlocation.  The Term Loans requiremonthly interest payments and quarterly principal payments that total $4.3million.  The Revolving Loan and TermLoans are collateralized 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

 

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the line of credit is automatically made for checksclearing each day.  Since the balance ofthe disbursement account at the bank returns to zero at the end of each day,the outstanding checks of the Company are reflected as a liability.  The outstanding check liability is combinedwith the Company’s positive cash balance accounts to reflect a net bookoverdraft or a net cash balance for financial reporting.

 

The Company’s principalworking capital requirements are for purchases of inventory and financing oftrade receivables.  Many of theCompany’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below.  At December 28, 2002, the Company had working capital ofapproximately $114.2 million, an increase of $50.5 million from working capitalof $63.7 million at December 29, 2001. The Company has been using short-term credit facilities and cash flow tofinance its capital expenditures.

 

The Company believes thatcash flow from operations and funds available under its anticipated creditfacilities will be sufficient to meet the Company’s liquidity requirements forthe next 12 months.*  The Company’scapital expenditures were $18.7 million in 2002, which included costs forroutine capital expenditures, completing renovations in the Oregon servicecenter and Indiana cabinet shop, as well as incurring costs for a paint shopaddition in Indiana.  The Company alsoincurred a significant portion of the costs required to build a new Florida servicecenter, which will replace it’s two existing service facilities inFlorida.  The Company anticipates thatcapital expenditures for all of 2003 will be approximately $21 to $22 million,which includes expenditures to complete the Florida service center and Indianatowable plant expansion, an expansion of the Oregon chassis plant, and routinecapital expenditures for computer system upgrades and additions, smaller scaleplant remodeling projects, and normal replacement of outdated or worn-outequipment.*  The Company may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if the Company significantly increases the levelof working capital assets such as inventory and accounts receivable.  The Company may also from time to time seekto acquire businesses that would complement the Company’s current business, andany such acquisition could require additional financing.  There can be no assurance that additionalfinancing will be available if required or on terms deemed favorable by theCompany.

 

As is typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale 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 certain conditions.  The Company has agreements with severalinstitutional lenders under which the Company currently has repurchaseobligations.  The Company’s contingentobligations under these repurchase agreements are reduced by the proceedsreceived upon the sale of any repurchased units.  The Company’s obligations under these repurchase agreements varyfrom period to period.  At December 28,2002, approximately $490.2 million of products sold by the Company toindependent dealers were subject to potential repurchase under existing floorplan financing agreements with approximately 8.4% concentrated with onedealer.  Historically, the Company hasbeen successful in mitigating losses associated with repurchase obligations.  During 2002, the losses associated with theexercise of repurchase agreements were approximately $300,000.  If the Company were obligated to repurchasea significant number of units under any repurchase agreement, its business,operating results, and financial condition could be adversely affected.

 

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

** **

PAYMENTS DUE BYPERIOD

 
| **Contractual Obligations (in  thousands)** |   | **1 year or  less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|---------------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Long-term  debt(1)                          |   | $                   | 21,667 |              | $      | 30,333            |   | $              | 0      |      | $      | 0 |   | $ | 52,000 |   |
| Operating  Leases(2)                        |   | 2,598               |   | 2,216             |   | 2,003             |   | 4,477          |   | 11,294    |   |
| Total  Contractual Cash Obligations         |   | $                   | 24,265 |              | $      | 32,549            |   | $              | 2,003  |      | $      | 4,477 |   | $ | 63,294 |   |

 

AMOUNT OFCOMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in thousands)** |   | **1 year or  less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|--------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Lines  of Credit(3)                  |   | $                   | 0      |              | $      | 51,413            |   | 0              |   | 0         |   | $ | 51,413 |   |
| Guarantees                           |   | 0                   |   | 16,000            | (2)    | 0                 |   | 0              |   | 16,000    |   |
| Repurchase  Obligations(4)           |   | 0                   |   | 490,200           |   | 0                 |   | 0              |   | 490,200   |   |
| Total  Commitments                   |   | $                   | 0      |              | $      | 557,613           |   | 0              |   | 0         |   | $ | 557,613 |   |

 

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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 availableborrowings on the line of credit at December 28, 2002.

(4)               Reflects obligations under manufacturerrepurchase commitments.  See Note 16 tothe financials.

 

INFLATION

 

The Company does notbelieve that inflation has had a material impact on its results of operationsfor the periods presented.

 

CRITICAL ACCOUNTING POLICIES

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  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 COSTS  The Company provides an estimate for accruedwarranty costs at the time a product is sold. This estimate is based on historical average repair costs, as well asother reasonable assumptions as have been deemed appropriate by management.

 

PRODUCT LIABILITY  The Company provides an estimate for accruedproduct liability based on current pending cases, as well as for those caseswhich are incurred but not reported. This estimate is developed by legal counsel based on professionaljudgment, 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 analysis involves management comparing the market capitalization ofthe Company, to the carrying amount, including goodwill, of the net book valueof the Company, to determine if goodwill has been impaired.

 

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INVENTORY RESERVES  The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated market value. These write-downs are based on assumptions about futuresales demand and market conditions. If actual sales demand or market conditionschange from those projected by management, additional inventory write-downs maybe required.

 

INCOME TAXES  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 temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in the consolidated balance sheets. The Company must then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent management believes that recovery is not likely, avaluation allowance must be established. Significant management judgment isrequired in determining the Company’s provision for income taxes, deferred taxassets and liabilities, and any valuation allowance recorded against netdeferred tax assets.  A discussion ofthe income tax provision and the components of the deferred tax assets andliabilities can be found in Note 9 to the Company’s consolidated financialstatements.

 

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

 

WE MAY EXPERIENCEUNANTICIPATED 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:

 

•                       Themargins associated with the mix of products we sell in any particular period.

 

•                       Ourability to utilize and expand our manufacturing resources efficiently.

 

•                       Shortagesof materials used in our products.

 

•                       Adetermination by us that goodwill or other intangible assets are impaired andhave to be written down to their fair values, resultingin a charge toour results of operations.

 

•                       Ourability to introduce new models that achieve consumer acceptance.

 

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

 

•                       Theaddition or loss of our dealers.

 

•                       Thetiming of trade shows and rallies, which we use to market and sell ourproducts.

 

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

 

Our overall gross marginmay decline in future periods to the extent that we increase the percentage ofsales of lower gross margin towable products or if the mix of motor coaches wesell shifts to lower gross margin units. In addition, a relatively small variation in the number of recreationalvehicles we sell in any quarter can have a significant impact on total salesand 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 to forecastorders for our products accurately and commence purchasing and manufacturingprior to receipt of such orders. However, it is highly unlikely that we will consistently accuratelyforecast the timing, rate,

 

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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.

 

THE RECREATIONAL VEHICLEINDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY  The recreational vehicle industry has beencharacterized by cycles of growth and contraction in consumer demand, reflectingprevailing economic, demographic, and political conditions that affectdisposable income for leisure-time activities. For example, unit sales of recreational vehicles (excluding conversionvehicles) peaked at approximately 259,000 units in 1994 and declined toapproximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units anddeclined in 2001 to 257,000 units.  In2002, the industry rebounded up to approximately 307,000 units.  Our business is subject to the cyclicalnature of this industry.  Some of thefactors that contribute to this cyclicality include fuel availability andcosts, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidenceand slowing of the overall economy  hasadversely affected the recreational vehicle market.  An extended continuation of these conditions would materiallyaffect our business, results of operations, and financial condition.

 

OUR RECENT GROWTH HAS PUTPRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENTINFORMATION SYSTEMS  In the past fewyears, we have significantly expanded the size and scope of our business, whichhas required us to hire additional employees. Some of these new employees include new management personnel.  In addition, our current managementpersonnel have assumed additional responsibilities.   The increase in our size over a relatively short period of timehas put pressure on our operating, financial, and management informationsystems.  If we continue to expand, suchgrowth would put additional pressure on these systems and may cause suchsystems to malfunction or to experience significant delays.

 

WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH THE EXPANSION OF OURMANUFACTURING CAPACITY  In the past fewyears, we have significantly increased our manufacturing capacity.   In connection with this expansion, we havealso integrated some of our manufacturing facilities.   We may experience unexpected building and production problemsassociated with this expansion.  In thepast, we have had difficulties with the manufacturing of new models andincreasing the rates of production of our plants.   Our expenses have increased as a result of the expansion and wewill be materially and adversely affected if the expansion does not result inan increase in revenue from new or additional products.

 

This expansion involvesrisks, including the following:

 

•                       Wemust rely on timely performance by contractors, subcontractors, and governmentagencies, whose performance we may be unable to control.

 

•                       Thedevelopment of new products involves costs associated with new machinery,training of employees, and compliance with environmental, health, and othergovernment regulations.

 

•                       Thenewly developed products may not be successful in the marketplace.

 

•                       Wemay be unable to complete a planned expansion in a timely manner, which couldresult in lower production levels and an inability to satisfy customer demandfor our products.

 

WE RELY ON A RELATIVELYSMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although our products were offered by 420dealerships located primarily in the United States and Canada as of December28, 2002, a significant percentage of our sales are concentrated among arelatively small number of independent dealers.  For the year ended December 28, 2002, sales to one dealer, LazyDays RV Center, accounted for 12.3% of total sales compared to 11.7% of salesin the same period ended last year. For fiscal years 2001 and 2002, sales toour 10 largest dealers, including Lazy Days RV Center, accounted for a total of39.0%.  The loss of a significant dealeror a substantial decrease in sales by any of these dealers could have amaterial impact on our business, results of operations, and financialcondition.

 

WE MAY HAVE TO REPURCHASEA DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOTREPAY ITS LENDER  As is common in therecreational vehicle industry, we

 

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enter into repurchase agreements with the financinginstitutions used by our dealers to finance their purchases of ourproducts.  These agreements require usto 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 $490.2million as of December 28, 2002, with approximately 8.4% 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.

 

OUR ACCOUNTS RECEIVABLEBALANCE IS SUBJECT TO CONCENTRATION RISK We sell our product to dealers who are predominantly located in theUnited States and Canada.  The terms andconditions of payment are a combination of open trade receivables, andcommitments from dealer floor plan lending institutions.  As of December 28, 2002, total tradereceivables were $116.6 million, with approximately $83.6 million, or 71.7% ofthe outstanding accounts receivable balance concentrated among floor planlenders. The remaining $33.0 million of trade receivables were concentratedsubstantially all with one dealer.

 

WE MAY EXPERIENCE ADECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASEIN THE SUPPLY OF FUEL  An interruptionin the supply, or a significant increase in the price or tax on the sale, ofdiesel fuel or gasoline on a regional or national basis could significantlyaffect our business.  Diesel fuel andgasoline have, at various times in the past, been either expensive or difficultto obtain.

 

WE DEPEND ON SINGLE ORLIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE INTHE PRODUCTION OF OUR PRODUCTS  A numberof important components for certain of our products are purchased from singleor a limited number of sources. These include turbo diesel engines (Cummins andCaterpillar), substantially all of our transmissions (Allison), axles (Dana andMeritor) for all diesel motor coaches and chassis (Workhorse and Ford) for gasmotor coaches.  We have no long-termsupply contracts with these suppliers or their distributors, and we cannot becertain that these suppliers will be able to meet our future requirements.  For example, in 1997, Allison placed allchassis manufacturers on allocation with respect to one of the transmissionsthat we use, and again in 1999 Ford placed one of its gasoline powered chassison allocation.  An extended delay orinterruption in the supply of any components that we obtain from a singlesupplier or from a limited number of suppliers could adversely affect ourbusiness, results of operations, and financial condition.

 

OUR INDUSTRY IS VERYCOMPETITIVE.  WE MUST CONTINUE TOINTRODUCE 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.

 

We believe that theintroduction of new products and new features is critical to our success.  Delays in the introduction of new models orproduct features, quality problems associated with these introductions, or alack of market acceptance of new models or features could affect us adversely.  For example, unexpected costs associatedwith model changes have affected our gross margin in the past.  Further, new product introductions candivert revenues from existing models and result in fewer sales of existingproducts.

 

OUR PRODUCTS COULD FAILTO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSINGDAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSSOF 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 BUSINESS IS SUBJECTTO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTYCLAIMS  We are subject to litigationarising in the ordinary course of our business, typically for product liabilityand warranty claims that are common in the recreational vehicle industry.  While we do not believe that the outcome ofany pending litigation, net of insurance coverage, will materially

 

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adversely affect our business, results of operations,or financial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

To date, we have beensuccessful in obtaining product liability insurance on terms that we consideracceptable.  The terms of the policycontain a self-insured retention amount of $500,000 per occurrence, with amaximum 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.  We cannot be certain we will be able to obtain insurance coveragein the future at acceptable levels or that the costs of such insurance will bereasonable.  Further, successfulassertion against us of one or a series of large uninsured claims, or of aseries of claims exceeding our insurance coverage, could have a materialadverse effect on our business, results of operations, and financial condition.

 

WE MAY BE UNABLE TOATTRACT 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.

 

NEWLY ISSUEDFINANCIAL REPORTING PRONOUNCEMENTS

 

SFAS 148

 

In December 2002, theBoard issued SFAS 148, Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of SFAS 123. This statement provides transition guidance for entities that elect tovoluntarily adopt the accounting provisions of SFAS 123.  The statement does not change the provisionsof SFAS 123 that permit entities to continue to apply the intrinsic valuemethod of APB 25, Accounting for Stock Issued to Employees.  The statement also requires certain newdisclosures that are incremental to those required by SFAS 123.  The transition and disclosure provisions areeffective for fiscal years ending after December 15, 2002.  The Company applies the intrinsic valuemethod of APB 25 in accordance with SFAS 123 and has elected the disclosureprovisions of the fair value method of SFAS 123.  Therefore the transitional rules for adopting SFAS 123 do notapply, however, the Company has included the new disclosure requirements ofSFAS 148 in its financial statements.

 

FIN 45

 

In November 2002, theBoard issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, and Interpretation of SFAS 5, 57, and 107 and Rescissionof FIN 34.  The Interpretation requirescertain disclosures to be made by a guarantor about its obligations undercertain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee.

 

The initial recognitionand measurement provisions are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002. The disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The Company has included the disclosurerequirements 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 anticipates recording a liability of approximately $500,000for potential losses resulting from guarantees on products shipped to dealersstarting in 2003.  This estimatedliability, which will be recorded primarily in the first half of 2003, is basedon the Company’s experience of losses associated with the repurchase and resaleof units in prior years.

 

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FIN 46

 

In January 2003, theBoard issued FASB Interpretation No. 46 (FIN 46), Consolidation of VariableInterest Entities - an Interpretation of ARB No. 51, Consolidated FinancialStatements.  The Interpretationaddresses how variable interest entities are to be identified and how anenterprise assesses its interests in a variable interest entity to decidewhether to consolidate that entity.  TheInterpretation also requires existing unconsolidated variable interest entitiesto be consolidated by their primary beneficiaries if the entities do noteffectively disperse risks among the parties involved.

 

FIN 46 is effective inthe first fiscal year or interim period beginning after June 15, 2003 tovariable interest entities in which a company holds a variable interest that isacquired before February 1, 2003.

 

The provisions of FIN 46may apply to certain operating leases of the Company that have residual valueguarantees.

 

AUDIT COMMITTEE APPROVAL OF NON-AUDIT SERVICES

 

In accordance withSection 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing thenon-audit services approved in the three months ended December 28, 2002 by ourAudit Committee to be performed by our external auditor. Non-audit services aredefined in the law as services other than those provided in connection with anaudit or a review of our financial statements. The non-audit services approvedby the Audit Committee in the three months ended December 28, 2002 are eachconsidered by the Company to be audit-related services, which are closelyrelated to the financial audit process. During the three months ended December 28, 2002, the Audit Committeeapproved the engagement of PricewaterhouseCoopers LLP, our external auditor,for the following non-audit services: (1) tax review and consulting servicesduring the three months ended December 28, 2002 not to exceed $10,000; and (2)tax review and consulting services during fiscal year 2003 not to exceed$35,000.

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisks related to fluctuations in interest rates on our borrowings.  We do not currently use rate swaps, futurescontracts or options on futures, or other types of derivative financialinstruments.  Our line of credit andterm debt permit a combination of fixed and variable interest rate optionswhich allows us to minimize the effect of rising interest rates by locking infixed rates for periods of up to 6 months. We believe these features of our credit facilities help us reduce therisk associated with interest rate fluctuations.

 

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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

INDEX TO FINANCIALSTATEMENTS

 
| Monaco Coach Corporation-Consolidated  Financial Statements:                                                                                     |   | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| Report of Independent  Accountants                                                                                                               |   |
| Consolidated Balance Sheets  as of December 29, 2001 and December 28, 2002                                                                       |   |
| Consolidated  Statements of Income for the Years Ended December 30, 2000, December 29,  2001, and December 28, 2002                              |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 30, 2000,  December 29, 2001, and December 28, 2002 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 30, 2000, December 29,  2001, and December 28, 2002                          |   |
| Notes to  Consolidated Financial Statements                                                                                                      |   |
|                                                                                                                                             |   |
| Schedule Included in Item 14(a):                                                                                                                 |   |
| II Valuation and  Qualifying Accounts                                                                                                            |   |

 

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**Reportof Independent Accountants**

 

To the Stockholders and Board of Directors of MonacoCoach Corporation

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, of stockholders’ equity, and of cash flows listed in theaccompanying index present fairly, in all material respects, the financialposition of Monaco Coach Corporation and its Subsidiaries (the Company) atDecember 29, 2001 and December 28, 2002, and the results of their operationsand their cash flows for each of the three years in the period ended December28, 2002, in conformity with accounting principles generally accepted in theUnited States of America. In addition, in our opinion, the financial statementschedule listed in the accompanying index presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements and thefinancial statement schedule are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financialstatements, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets.

 
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
|                           |
| Portland, Oregon               |
| January 28, 2003               |

 

27

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**MONACOCOACH CORPORATIONCONSOLIDATED BALANCE SHEETS*(in thousands of dollars, except share and per share data)***

** **
|                                                                                                                        |   | **December  29,  2001** |    | **December  28,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                  |   |                    |    |                    |   |
| Current  assets:                                                                                                            |   |                    |    |                    |   |
| Trade  receivables, net of $541 and $799, respectively                                                                      |   | $                       | 82,885  |                    | $      | 116,647 |   |
| Inventories                                                                                                                 |   | 127,075                 |    | 175,609                 |   |
| Resort  lot inventory                                                                                                       |   | 0                       |    | 26,883                  |   |
| Prepaid  expenses                                                                                                           |   | 2,063                   |    | 3,612                   |   |
| Deferred  income taxes                                                                                                      |   | 27,327                  |    | 33,379                  |   |
| Total  current assets                                                                                                       |   | 239,350                 |    | 356,130                 |   |
|                                                                                                                        |   |                    |    |                    |   |
| Notes  receivable                                                                                                           |   | 8,157                   |    | 0                       |   |
| Property,  plant, and equipment, net                                                                                        |   | 122,795                 |    | 135,350                 |   |
| Debt  issuance costs, net of accumulated amortization of $75 and $389, respectively                                         |   | 940                     |    | 683                     |   |
| Goodwill,  net of accumulated amortization of $5,320 and $5,320, respectively                                               |   | 55,856                  |    | 55,254                  |   |
|                                                                                                                        |   |                    |    |                    |   |
| Total  assets                                                                                                               |   | $                       | 427,098 |                    | $      | 547,417 |   |
|                                                                                                                        |   |                    |    |                    |   |
| **LIABILITIES**                                                                                                             |   |                    |    |                    |   |
| Current  liabilities:                                                                                                       |   |                    |    |                    |   |
| Book  overdraft                                                                                                             |   | $                       | 5,889   |                    | $      | 3,518 |   |
| Line  of credit                                                                                                             |   | 26,004                  |    | 51,413                  |   |
| Current  portion of long-term note payable                                                                                  |   | 10,000                  |    | 21,667                  |   |
| Accounts  payable                                                                                                           |   | 66,859                  |    | 78,055                  |   |
| Product  liability reserve                                                                                                  |   | 19,856                  |    | 21,322                  |   |
| Product  warranty reserve                                                                                                   |   | 27,799                  |    | 31,745                  |   |
| Income  taxes payable                                                                                                       |   | 0                       |    | 4,536                   |   |
| Accrued  expenses and other liabilities                                                                                     |   | 19,249                  |    | 29,633                  |   |
| Total  current liabilities                                                                                                  |   | 175,656                 |    | 241,889                 |   |
|                                                                                                                        |   |                    |    |                    |   |
| Long-term  note payable                                                                                                     |   | 30,000                  |    | 30,333                  |   |
| Deferred  income taxes                                                                                                      |   | 8,312                   |    | 14,568                  |   |
|                                                                                                                        |   | 213,968                 |    | 286,790                 |   |
|                                                                                                                        |   |                    |    |                    |   |
| Commitments  and contingencies (Note 16)                                                                                    |   |                    |    |                    |   |
|                                                                                                                        |   |                    |    |                    |   |
| **STOCKHOLDERS’  EQUITY**                                                                                              |   |                    |    |                    |   |
| Common  stock, $.01 par value; 50,000,000 shares authorized 28,632,774 and 28,871,144  issued and outstanding, respectively |   | 286                     |    | 289                     |   |
| Additional  paid-in capital                                                                                                 |   | 48,522                  |    | 51,501                  |   |
| Retained earnings                                                                                                           |   | 164,322                 |    | 208,837                 |   |
| Total  stockholders’ equity                                                                                            |   | 213,130                 |    | 260,627                 |   |
| Total  liabilities and stockholders’ equity                                                                            |   | $                       | 427,098 |                    | $      | 547,417 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**MONACOCOACH CORPORATIONCONSOLIDATED STATEMENTS OF INCOMEfor the years ended December 30, 2000, December 29, 2001, and December 28, 2002*(in thousands of dollars, except share and per share data)***

 
|                                           |   | **2000**   |    | **2001**   |   | **2002**   |   |
|------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
|                                           |   |       |    |       |   |       |   |
| Net  sales                                     |   | $          | 901,890 |       | $      | 937,073    |   | $ | 1,222,689 |   |
| Cost  of sales                                 |   | 772,240    |    | 823,083    |   | 1,059,560  |   |
| Gross  profit                                  |   | 129,650    |    | 113,990    |   | 163,129    |   |
|                                           |   |       |    |       |   |       |   |
| Selling,  general, and administrative expenses |   | 59,175     |    | 70,687     |   | 87,202     |   |
| Amortization  of goodwill                      |   | 645        |    | 645        |   | 0          |   |
| Operating  income                              |   | 69,830     |    | 42,658     |   | 75,927     |   |
|                                           |   |       |    |       |   |       |   |
| Other  income, net                             |   | 182        |    | 334        |   | 105        |   |
| Interest  expense                              |   | (632       | )       | (2,357     | )      | (2,752     | )      |
| Income  before income taxes                    |   | 69,380     |    | 40,635     |   | 73,280     |   |
|                                           |   |       |    |       |   |       |   |
| Provision  for income taxes                    |   | 26,859     |    | 15,716     |   | 28,765     |   |
|                                           |   |       |    |       |   |       |   |
| Net  income                                    |   | $          | 42,521  |       | $      | 24,919     |   | $ | 44,515 |   |
|                                           |   |       |    |       |   |       |   |
| Earnings  per common share:                    |   |       |    |       |   |       |   |
| Basic                                          |   | $          | 1.50    |       | $      | .87        |   | $ | 1.55 |   |
| Diluted                                        |   | $          | 1.47    |       | $      | .85        |   | $ | 1.51 |   |
|                                           |   |       |    |       |   |       |   |
| Weighted  average common shares outstanding:   |   |       |    |       |   |       |   |
| Basic                                          |   | 28,377,123 |    | 28,531,593 |   | 28,812,473 |   |
| Diluted                                        |   | 28,978,265 |    | 29,288,688 |   | 29,573,420 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

29

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**MONACOCOACH CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITYfor the years ended December 30, 2000, December 29, 2001, and December 28, 2002*(in thousands of dollars, except share data)***

 
|                                    |   | **Common Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Total** |   |
|-----------------------------------------|--------|------------------|--------|----------------------------------|--------|------------------------|--------|-----------|--------|
| **Shares**                              |   | **Amount**       |
|                                    |   |             |   |                             |   |                   |   |      |   |   |   |
| Balances,  January 1, 2000              |   | 18,871,084       |   | $                                | 189    |                   | $      | 46,268    |   | $ | 96,882 |   | $ | 143,339 |   |
| Issuance  of common stock               |   | 81,023           |   | 1                                |   | 727                    |   |      |   | 728 |   |
| Tax  benefit of stock options exercised |   |             |   |                             |   | 37                     |   |      |   | 37 |   |
| Net  income                             |   |             |   |                             |   |                   |   | 42,521    |   | 42,521 |   |
| 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                    | )      |      |   | 0 |   |
| 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 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**MONACOCOACH CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSfor the years ended December 30, 2000, December 29, 2001, and December 28, 2002*(in thousands of dollars)***

 
|                                                                               |   | **2000** |   | **2001** |   | **2002** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                               |   |     |   |     |   |     |   |
| **Increase  (Decrease) in Cash**:                                                  |   |     |   |     |   |     |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash  flows from operating activities:                                             |   |     |   |     |   |     |   |
| Net  income                                                                        |   | $        | 42,521 |     | $      | 24,919   |   | $ | 44,515 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation  and amortization                                                     |   | 6,359    |   | 7,543    |   | 8,585    |   |
| Gain  on disposal of equipment                                                     |   |     |   | (74      | )      | 178      |   |
| Deferred  income taxes                                                             |   | 3,609    |   | 6,005    |   | (1,574   | )      |
| Change  in assets and liabilities:                                                 |   |     |   |     |   |     |   |
| Trade  receivables, net                                                            |   | (31,460  | )      | (13,154  | )      | (33,932  | )      |
| Inventories                                                                        |   | (26,801  | )      | 12,682   |   | (48,534  | )      |
| Resort  lot inventory                                                              |   |     |   |     |   | (98      | )      |
| Prepaid  expenses                                                                  |   | (724     | )      | (903     | )      | (1,650   | )      |
| Accounts  payable                                                                  |   | 16,186   |   | (10,318  | )      | 10,301   |   |
| Product  liability reserve                                                         |   | (1,288   | )      | (1,639   | )      | 1,237    |   |
| Product  warranty reserve                                                          |   | 314      |   | (1,958   | )      | 3,835    |   |
| Income  taxes payable                                                              |   | (1,406   | )      | 0        |   | 9,597    |   |
| Accrued  expenses and other liabilities                                            |   | (957     | )      | (2,123   | )      | 8,888    |   |
| Net  cash provided by operating activities                                         |   | 6,353    |   | 20,980   |   | 1,348    |   |
| Cash  flows from investing activities:                                             |   |     |   |     |   |     |   |
| Additions  to property, plant, and equipment                                       |   | (19,750  | )      | (10,210  | )      | (18,735  | )      |
| Proceeds  from sale of assets                                                      |   |     |   | 106      |   | 387      |   |
| Collections  on notes receivable                                                   |   |     |   |     |   | 500      |   |
| Payment  for business acquisition, net of cash acquired                            |   |     |   | (24,320  | )      | (21,085  | )      |
| Issuance  of  notes receivable                                                |   | (2,800   | )      | (5,357   | )      | (385     | )      |
| Net  cash used in investing activities                                             |   | (22,550  | )      | (39,781  | )      | (39,318  | )      |
| Cash  flows from financing activities:                                             |   |     |   |     |   |     |   |
| Book  overdraft                                                                    |   | 2,700    |   | (10,840  | )      | (2,371   | )      |
| Borrowings  (payments) on line of credit, net                                      |   | 12,732   |   | (10,930  | )      | 25,414   |   |
| Borrowings  on long-term notes payable                                             |   |     |   | 40,000   |   | 22,000   |   |
| Payments  on long-term notes payable                                               |   |     |   |     |   | (10,000  | )      |
| Issuance  of common stock                                                          |   | 765      |   | 1,586    |   | 2,982    |   |
| Debt  issuance costs                                                               |   |     |   | (1,015   | )      | (55      | )      |
| Net  cash provided by financing activities                                         |   | 16,197   |   | 18,801   |   | 37,970   |   |
| Net  change in cash                                                                |   | 0        |   | 0        |   | 0        |   |
| Cash  at beginning of period                                                       |   | 0        |   | 0        |   | 0        |   |
| Cash  at end of period                                                             |   | $        | 0      |     | $      | 0        |   | $ | 0 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

** **

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**MONACOCOACH CORPORATIONNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****                                      BUSINESSAND SIGNIFICANT ACCOUNTING POLICIES:**

 

**Business**

 

Monaco Coach Corporationand its subsidiaries (the “Company”) manufacture premium motor coaches, busconversions, and towable recreational vehicles at manufacturing facilities inOregon and Indiana.  These products aresold to independent dealers primarily throughout the United States andCanada.  In addition, the Company alsoowns three motor coach resort properties, the developed lots of which, are soldto retail customers.

 

Pursuant to  Statement of Financial Accounting Standards(SFAS) No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” the Company has determined that it’s core business activities arecomprised of two distinct operations. The first is the design, manufacture, andsale of recreational vehicles. The second is the development and sale of motorcoach recreation resort lots.  While thenature of the Company’s business is segregated into two distinct operations,the Company has elected to report its operations as a single entity, based onthe relative immateriality of the motor coach resort operations when comparedto the Company’s operations in its entirety.

 

**Consolidation Policy**

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries.  All materialintercompany transactions and balances have been eliminated.

 

**Fiscal Period**

 

The Company follows a52/53 week fiscal year period ending on the Saturday closest to December31.  Interim periods also end on theSaturday closest to the calendar quarter end. For 2000, 2001, and 2002, all fiscal periods were 52 weeks long.  All references to years in the consolidatedfinancial statements relate to fiscal years rather than calendar years.

 

**Stock Splits**

 

On August 6, 2001, theBoard of Directors declared a three-for-two stock split in the form of a 50%stock dividend on the Company’s Common stock. Accordingly, all historical weighted average share and per share amountshave been restated to reflect the stock split. Share amounts presented in the Consolidated Statements of Stockholders’Equity reflect the actual share amounts outstanding for each period presented.

 

**Estimates and Industry Factors**

 

Estimates- The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America, requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. The Company bases estimates on various assumptions that are believed tobe reasonable under the circumstances. Management is continually evaluating and updating these estimates, andit is possible that these estimates will change in the near future.

 

32

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Concentration of CreditRisk - The Company distributes its products through anindependent dealer network for recreational vehicles.  Sales to one customer were approximately 12% of net revenues forfiscal years 2000,  2001, and  2002. No other individual dealers represented over 10% of net revenues in2000, 2001, or 2002.  The loss of asignificant dealer or a substantial decrease in sales by such a dealer couldhave a material adverse effect on the Company’s business, results ofoperations, and financial condition. The terms and conditions of payment are a combination of open tradereceivables, and commitments from dealer floor plan lending institutions.  As of December 28, 2002, total tradereceivables were $116.6 million, with approximately $83.6 million, or 71.7% ofthe outstanding accounts receivable balance, concentrated among floor planlenders. The remaining open $33.0 million of trade receivables, wereconcentrated substantially all with one dealer.

 

Concentrations of creditrisk exist for accounts receivable and repurchase agreements (see Note 16),primarily for the Company’s largest dealers. As of December 28, 2002, the Company had one dealer that comprised 28.1%of the outstanding trade receivables. The Company generally sells to dealers throughout the United States andthere is no geographic concentration of credit risk.

 

Reliance on Key Suppliers- The Company’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.  In 1997, Allison put all chassis manufacturerson allocation with respect to one of the transmissions the Company uses, and in1999 Ford put one of its gasoline powered chassis on allocation.  In light of these dependencies, it ispossible that failure of Allison, Ford or any of the other suppliers to meetthe Company’s future requirements for transmissions, chassis or other keycomponents could have a material near-term impact on the Company’s business,results of operations, and financial condition.

 

Product Warranty Reserve- Estimated warranty costs are provided for at the time of sale of productswith warranties covering the products for up to one year from the date ofretail sale (five years for the front and sidewall frame structure, and threeyears on the Roadmaster chassis).  Theseestimates are based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate by management. Thefollowing table discloses significant changes in the product warranty reserve:

 
|                           |   | **2000** |   | **2001**         |   | **2002** |   |
|--------------------------------|--------|----------|--------|------------------|--------|----------|--------|
|                           |   |     |   | *(in thousands)* |   |     |   |
| Beginning balance              |   | $        | 13,436 |             | $      | 13,750   |   | $ | 27,799 |   |
| Expense                        |   | 17,474   |   | 21,800           |   | 34,237   |   |
| Payments/adjustments           |   | 17,160   |   | 21,788           |   | 30,402   |   |
| Adjustment for SMC  Acquistion |   | —   |   | 14,037           |   | 111      |   |
| Ending balance                 |   | $        | 13,750 |             | $      | 27,799   |   | $ | 31,745 |   |

** **

 

 

Product Liability Reserve- Estimated litigation costs are provided for at the time of sale of products,or at the time a determination is made that an estimable loss hasoccurred.  These estimates are developedby legal counsel based on professional judgment, as well as historicalexperience. The following table discloses significant changes in the productliability reserve:

 
|                           |   | **2000** |   | **2001**         |   | **2002** |   |
|--------------------------------|--------|----------|--------|------------------|--------|----------|--------|
|                           |   |     |   | *(in thousands)* |   |     |   |
| Beginning balance              |   | $        | 9,407  |             | $      | 8,120    |   | $ | 19,856 |   |
| Expense                        |   | 5,489    |   | 6,108            |   | 8,020    |   |
| Payments/adjustments           |   | 6,776    |   | 4,246            |   | 6,783    |   |
| Adjustment for SMC  Acquistion |   | —   |   | 9,874            |   | 229      |   |
| Ending balance                 |   | $        | 8,120  |             | $      | 19,856   |   | $ | 21,322 |   |

 

 

**Inventories**

 

Inventories consist ofraw materials, work-in-process, and finished recreational vehicles and arestated at the lower of cost (first-in, first-out) or market.  Cost of work-in-process and finishedrecreational vehicles includes material, labor, and manufacturing overheadcosts.

 

**Resort Lot Inventory**

 

Resort lot inventoriesconsist of construction-in-progress on motor coach properties, as well as fullydeveloped motor coach properties.  Theseproperties are stated at the lower of cost (specific identification) ormarket.  Cost of construction inprogress, as well as fully developed motor coach properties include costsassociated with land, construction, and interest capitalization.

 

33

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**Property, Plant, and Equipment**

 

Property, plant, andequipment, including significant improvements thereto, are stated at cost lessaccumulated depreciation and amortization. Cost includes expenditures for major improvements, replacements andrenewals and the net amount of interest cost associated with significantcapital additions during periods of construction.  Capitalized interest was $192,000 in 2000, and zero in 2001 and2002.  Maintenance and repairs arecharged to expense as incurred. Replacements and renewals are capitalized.  When assets are sold, retired or otherwise disposed of, the costand accumulated depreciation are removed from the accounts and any resultinggain or loss is reflected in income.

 

The cost of plant and equipmentis depreciated using the straight-line method over the estimated useful livesof the related assets.  Buildings aregenerally depreciated over 39 years and equipment is depreciated over 3 to 10years.  Leasehold improvements areamortized under the straight-line method based on the shorter of the leaseperiods or the estimated useful lives.

 

At each balance sheetdate, management assesses whether there has been permanent impairment in thevalue of property, plant, and equipment assets.  The amount of any such impairment is determined by comparinganticipated undiscounted future cash flows from operating activities with theassociated carrying value.  The factorsconsidered by management in performing this assessment include currentoperating results, trends and prospects, as well as the effects ofobsolescence, demand, competition, and other economic factors.

 

**Goodwill**

 

Goodwill represents theexcess of the cost of acquisition over the fair value of net assetsacquired.  The Company is the successorto a company formed in 1968 (the “Predecessor”) and commenced operations onMarch 5, 1993 by acquiring substantially all of the assets and liabilities ofthe Predecessor.  As of December 28,2002, the goodwill arising from the acquisition of the assets and operations ofthe Company’s Predecessor in March 1993 was $16.1 million.  In March 1996, the Company acquired theHoliday Rambler Division of Harley-Davidson, Inc. (“Holiday Rambler”).  As of December 28, 2002, the goodwillarising from the acquisition of Holiday Rambler was $1.8 million.  The Company also recorded $37.3 million ofgoodwill associated with the August 2, 2001 acquisition of SMC Corporation(SMC).  For years ending December 29,2001 and prior, the Company amortized goodwill using the straight-line methodover a 40 year period for the acquisition of the Company’s Predecessor, as wellas for the Holiday Rambler acquisition. In accordance with Statements of Financial Accounting Standards No. 142(SFAS 142) “Accounting for Goodwill and Other Intangible Assets,” noamortization was recorded for the SMC acquisition for  2001, and no amortization was recorded for any of theacquisitions for fiscal year 2002.

 

SFAS 142 requires thatmanagement assesses annually whether there has been permanent impairment in thevalue of goodwill.  The test for anysuch impairment is determined by comparing the fair value of the Company’sreporting entity with its carrying value, including goodwill.  The factors considered by management inperforming this assessment can include current operating results, trends andprospects, as well as the effects of obsolescence, demand, competition, andother economic factors.  As required bySFAS 142, management has completed its annual testing during 2002 anddetermined that there has been no impairment of goodwill requiring a writedown.

 

**Debt Issuance Costs**

 

Unamortized debt issuancecosts of $940,000, and $683,000 (at December 29, 2001 and December 28, 2002,respectively), are being amortized over the terms of the related loans.

 

34

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**Stock-Based Employee Compensation Plans**

 

At December 28, 2002, theCompany has three stock-based employee compensation plans (see Note 13).  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.

 

**Income Taxes**

 

Deferred taxes arerecognized based on the difference between the financial statement and taxbasis of assets and liabilities at enacted tax rates in effect in the years inwhich the differences are expected to reverse. Deferred tax expense or benefit represents the change in deferred taxasset/liability balances.  A valuationallowance is established for deferred tax assets when it is more likely thannot that the deferred tax asset will not be realized.

 

**Revenue Recognition**

 

The Company recognizesrevenue from the sale of recreational vehicles upon shipment and recognizes revenue from resortlot sales upon closing.

 

In December 1999, the Securities and Exchange Commission issued StaffAccounting Bulletin (SAB) No. 101, Revenue Recognition in FinancialStatements.  SAB No. 101 providesguidance for revenue recognition under certain circumstances.  The Company has complied with the guidanceprovided by SAB No. 101 for the fiscal years 2000, 2001, and 2002.

 

**Advertising and Promotion Costs**

 

The Company expensesadvertising costs as incurred, except for prepaid show costs which are expensedwhen the event takes place.  During2002, approximately $14.6 million ($7.8 million in 2000 and $10.1 million in2001) of advertising costs were expensed.

 

**Research and Development Costs**

 

Research and developmentcosts are charged to expense as incurred and were $1.2 million in 2002($783,000 in 2000 and $975,000 in 2001).

 

35

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**New Accounting Pronouncements**

 

SFAS 148

 

In December 2002, theBoard issued SFAS 148, Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of SFAS 123. This statement provides transition guidance for entities that elect tovoluntarily adopt the accounting provisions of SFAS 123.  The statement does not change the provisionsof SFAS 123 that permit entities to continue to apply the intrinsic valuemethod of APB 25, Accounting for Stock Issued to Employees.  The statement also requires certain newdisclosures that are incremental to those required by SFAS 123.  The transition and disclosure provisions areeffective for fiscal years ending after December 15, 2002.  The Company applies the intrinsic valuemethod of APB 25 in accordance with SFAS 123 and has elected the disclosureprovisions of the fair value method of SFAS 123.  Therefore, the transitional rules for adopting SFAS 123 do notapply, however, the Company has included the new disclosure requirements ofSFAS 148 in its financial statements.

 

FIN 45

 

In November 2002, theBoard issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, and Interpretation of SFAS 5, 57, and 107 andRescission 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 initial recognitionand measurement provisions are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002. The disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The Company has included the disclosurerequirements 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 anticipates recording a liability of approximately $500,000for potential losses resulting from guarantees on products shipped to dealersstarting in 2003.  This estimatedliability, which will be recorded primarily in the first half of 2003, is basedon the Company’s experience of losses associated with the repurchase and resaleof units in prior years.

 

FIN 46

 

In January 2003, theBoard issued FASB Interpretation No. 46 (FIN 46), Consolidation of VariableInterest Entities - an Interpretation 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 inthe first fiscal year or interim period beginning after June 15, 2003, tovariable interest entities in which a company holds a variable interest that isacquired before February 1, 2003.

 

36

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The provisions of FIN 46may apply to certain operating leases of the Company that have residual valueguarantees.

 

**Supplemental Cash Flow Disclosures:**

 
|                                                                             |   | **2000**             |   | **2001** |   | **2002** |   |
|----------------------------------------------------------------------------------|--------|----------------------|--------|----------|--------|----------|--------|
|                                                                             |   | ***(in thousands)*** |   |
| Cash  paid during the period for:                                                |   |                 |   |     |   |     |   |
| Interest,  net of amount capitalized of $192 in 2000, $0 in 2001, and $0 in 2002 |   | $                    | 632    |     | $      | 2,206    |   | $ | 2,464 |   |
| Income  taxes                                                                    |   | 28,226               |   | 16,231   |   | 18,753   |   |
|                                                                                  |        |                      |        |          |        |          |        |  |  |  |

 

**2.****                                      ACQUISITIONS:**

 

**SMCCorporation**

 

The Company announced onJune 25, 2001 that it had reached an agreement with Oregon based motor homemanufacturer SMC Corporation (“SMC”) to acquire all of the outstanding sharesof SMC pursuant 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.

 

The cash paid for SMC,including transaction costs of $3,062,000, totaled $24,320,000.  The total assets acquired and liabilitiesassumed of SMC, based on estimated fair values at August 6, 2001, is asfollows:

 
|                                           |   | ***(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 |   |

 

The allocation of thepurchase price and the related goodwill has been adjusted for resolution ofpre-acquisition contingencies of $602,000. The effects of resolution of pre-acquisition contingencies occurring:(i) within one year of the acquisition date were reflected as an adjustment ofthe allocation of the purchase price and goodwill, and (ii) after one year wererecognized in the determination of net income.

 

37

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The following unauditedpro forma information presents the consolidated results as if the acquisitionhad occurred at the beginning of the period and giving effect to theadjustments for the related interest on financing the purchase price, goodwill,and depreciation.  The pro formainformation does not necessarily reflect results that would have occurred or isit necessarily indicative of future operating results.

 
|                               |   | ***(In thousands,   except per share   data)*** |      | ***(In thousands,   except per share   data)*** |   |
|------------------------------------|--------|-------------------------------------------------|-----------|-------------------------------------------------|--------|
|                               |   | **2000**                                        |      | **2001**                                        |   |
|                               |   |                                            |      |                                            |   |
| Net  sales                         |   | $                                               | 1,093,000 |                                            | $      | 1,015,000 |   |
| Net  income                        |   | 36,000                                          |      | 14,000                                          |   |
|                               |   |                                            |      |                                            |   |
| Diluted  earnings per common share |   | $                                               | 1.25      |                                            | $      | 0.48 |   |

 

**Outdoor Resorts**

 

During the quarter endedSeptember 28, 2002, the Company reached an agreement in principle with OutdoorResorts of America (ORA) to acquire all of the outstanding stock of OutdoorResorts of Las Vegas, Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), andOutdoor Resorts Motorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed andundeveloped luxury motor coach resorts.

 

On November 27, 2002, theCompany completed the acquisition of all of the outstanding stock of ORLV, ORN,and ORMCC.  Previous to the acquisition,the Company had provided ORA with loans in the amount of $8.0 million, as wellas co-guaranteeing $10 million in bank debt secured by ORA.

 

As consideration for theacquisition, Monaco assumed the current debt and liabilities of the projects ofapproximately $30.8 million, including the $8.0 million note payable to theCompany, and the $10 million co-guaranteed debt. This acquisition relieves ORAof certain debt pressures associated with resort construction, and will allowORA to continue to focus on development and lot sales, as well as providingmanagement services for the Company on the Projects.

 

The cash paid for theProjects, including transaction costs of $522,000 totaled $21,113,000.  The total assets acquired and liabilitiesassumed of the Projects, based on estimated fair values at November 27, 2002,is as follows:

 
|                                           |   | ***(In thousands)*** |   |
|------------------------------------------------|--------|----------------------|--------|
|                                           |   |                 |   |
| Cash                                           |   | $                    | 28     |   |
| Resort  lot inventory                          |   | 26,784               |   |
| Deferred  tax asset                            |   | 272                  |   |
| Property  and equipment                        |   | 3,670                |   |
| 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 |   |

 

38

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The allocation of thepurchase price will be subject to adjustment upon resolution of pre-ORAAcquisition contingencies.  The effectsof resolution of pre-ORA Acquisition contingencies occurring: (i) within oneyear of the acquisition date will be reflected as an adjustment of theallocation of the purchase price and goodwill, and (ii) after one year will berecognized in the determination of net income.

 

The following unauditedpro forma information presents the consolidated results as if the acquisitionhad occurred at the beginning of the period and giving effect to theadjustments for the related interest on financing the purchase price anddepreciation.  The pro forma informationdoes not necessarily reflect results that would have occurred or is it necessarilyindicative of future operating results.

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

 

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

 

Inventories consist ofthe following:

 
|            |   | **December  29,  2001** |    | **December  28,  2002** |   |
|-----------------|--------|-------------------------|---------|-------------------------|--------|
|            |   | ***(In thousands)***    |    |
| Raw  materials  |   | $                       | 53,160  |                    | $      | 70,021 |   |
| Work-in-process |   | 44,436                  |    | 62,022                  |   |
| Finished  units |   | 29,479                  |    | 43,566                  |   |
|            |   | $                       | 127,075 |                    | $      | 175,609 |   |

 

**4.****                                      PROPERTY,PLANT, AND EQUIPMENT:**

 

Property, plant, andequipment consist of the following:

 
|                                            |   | **December  29,  2001** |       | **December  28,  2002** |       |
|-------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
|                                            |   | ***(In thousands)***    |       |
|                                            |   |                    | ** ** |                    | ** ** |
| Land                                            |   | $                       | 11,999     |                    | $          | 15,638 |   |
| Buildings                                       |   | 99,333                  |       | 104,043                 |       |
| Equipment                                       |   | 22,838                  |       | 26,503                  |       |
| Furniture  and fixtures                         |   | 9,479                   |       | 11,436                  |       |
| Vehicles                                        |   | 1,571                   |       | 1,763                   |       |
| Leasehold  improvements                         |   | 1,472                   |       | 2,152                   |       |
| Construction  in progress                       |   | 2,376                   |       | 7,236                   |       |
|                                            |   | 149,068                 |       | 168,771                 | ** ** |
| Less  accumulated depreciation and amortization |   | 26,273                  |       | 33,421                  |       |
|                                            |   | $                       | 122,795    |                    | $          | 135,350 | ** ** |

 

39

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**5.****                                      ACCRUEDEXPENSES AND OTHER LIABILITIES:**

 
|                                     |   | **December  29,  2001** |   | **December  28,  2002** |   |
|------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                     |   | **(in thousands)**      |   |
|                                     |   |                    |   |                    |   |
| Payroll,  vacation, and related accruals |   | $                       | 12,580 |                    | $      | 17,317 |   |
| Payroll  and property taxes              |   | 1,172                   |   | 1,517                   |   |
| Promotional  and advertising             |   | 1,345                   |   | 3,473                   |   |
| Other                                    |   | 4,152                   |   | 7,326                   |   |
|                                     |   | $                       | 19,249 |                    | $      | 29,633 |   |

 

**6.****                                      LINEOF CREDIT:**

 

The Company’s line ofcredit facility consists of a revolving line of credit of up to $70.0 million(the “Revolving Loan”).  At the electionof the Company, the Revolving Loan bears interest at variable rates based onthe Prime Rate or LIBOR.  At December28, 2002, the interest rate was 4.3%. The Revolving Loan is due and payable in full on September 30, 2004, andrequires monthly interest payments.  Thebalance outstanding under the Revolving Loan at December 28, 2002 was $51.4million.  The Revolving Loan iscollateralized by all of the assets of the Company, and include variousrestrictions and financial covenants.

 

The weighted averageinterest rate on the outstanding borrowings under the revolving line of creditwas 5.8% and 4.3% for 2001 and 2002, respectively.  Interest expense on the unused available portion of the line was$85,000 or 0.2% and $141,000 or 0.7% of weighted average outstanding borrowingsfor 2001 and 2002, respectively.  Therevolving line of credit is collateralized by all the assets of theCompany.  The agreement contains restrictivecovenants as to the Company’s leverage ratio, current ratio, fixed chargecoverage ratio, and tangible net worth. As of December 28, 2002, the Company was in compliance with thesecovenants.

 

**7.****                                      LONG-TERMNOTE PAYABLE:**

 

In November 2002, theCompany obtained an amendment to the long-term note payable for an additionalborrowing of $22 million in association with the purchase of Outdoor Resorts(see Note 2). The Company has long-term notes payable of $52 millionoutstanding at December 28, 2002.  Theterm notes bear interest at varying rates that fluctuate based on the Prime rateor LIBOR, and are determined based on the Company’s leverage ratio.  The term notes require monthly interestpayments and quarterly principal payments.  Additional prepayments for portions of the term notes are required inthe event the Company sells substantially all of any motor coach resortlocation. The term notes  arecollateralized by all the assets of the Company.  The term notes are due and payable in full on September 28,2005.  As of December 28, 2002, theinterest rate on the term debt was 3.55%.

 

The following tabledisplays the scheduled principal payments by year that will be due on the termloan.

** **

| **Year** |   |   | **Amount of  payment due** |   |
|----------|--------|--------|----------------------------|--------|
| 2003     |   | $      | 21,667                     |   |
| 2004     |   | $      | 17,333                     |   |
| 2005     |   | $      | 13,000                     |   |
|     |   | $      | 52,000                     |   |

 

40

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**8.****                                      PREFERREDSTOCK:**

 

The Company hasauthorized “blank check” preferred stock (1,934,783 shares authorized, $.01 parvalue) (“Preferred Stock”), which may be issued from time to time in one ormore series upon authorization by the Company’s Board of Directors.  The Board of Directors, without furtherapproval of the stockholders, is authorized to fix the dividend rights andterms, conversion rights, voting rights, redemption rights and terms,liquidation preferences, and any other rights, preferences, privileges, andrestrictions applicable to each series of the Preferred Stock.  There were no shares of Preferred Stockoutstanding as of December 29, 2001 or December 28, 2002.

 

**9.****                                      INCOMETAXES:**

 

The provision for incometaxes is as follows:

 
|                        |   | **2000**             |   | **2001** |   | **2002** |   |
|-----------------------------|--------|----------------------|--------|----------|--------|----------|--------|
|                        |   | ***(in thousands)*** |   |
| Current:                    |   |                 |   |     |   |     |   |
| Federal                     |   | $                    | 19,120 |     | $      | 8,262    |   | $ | 25,303 |   |
| State                       |   | 4,130                |   | 1,606    |   | 5,278    |   |
|                        |   | 23,250               |   | 9,868    |   | 30,581   |   |
| Deferred:                   |   |                 |   |     |   |     |   |
| Federal                     |   | 2,945                |   | 4,880    |   | (1,556   | )      |
| State                       |   | 664                  |   | 968      |   | (260     | )      |
| Provision  for income taxes |   | $                    | 26,859 |     | $      | 15,716   |   | $ | 28,765 |   |

 

The reconciliation of theprovision for income taxes at the U.S. federal statutory rate to the Company’seffective income tax rate is as follows:

 
|                                                   |   | **2000**             |   | **2001** |   | **2002** |   |
|--------------------------------------------------------|--------|----------------------|--------|----------|--------|----------|--------|
|                                                   |   | ***(in thousands)*** |
| Expected  U.S. federal income taxes at statutory rates |   | $                    | 24,283 |     | $      | 14,222   |   | $ | 25,648 |   |
| State  and local income taxes, net of federal benefit  |   | 3,116                |   | 1,673    |   | 3,262    |   |
| Other                                                  |   | (540                 | )      | (179     | )      | (145     | )      |
|                                                   |   | $                    | 26,859 |     | $      | 15,716   |   | $ | 28,765 |   |

 

41

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The components of thecurrent net deferred tax asset and long-term net deferred tax liability are:

 
|                                        |   | **December  29,  2001** |   | **December  28,  2002** |   |
|---------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                        |   |                    |   |                    |   |
| Current  deferred income tax assets:        |   |                    |   |                    |   |
| Warranty  liability                         |   | $                       | 11,909 |                    | $      | 13,768 |   |
| Product  liability                          |   | 6,376                   |   | 7,211                   |   |
| Inventory  reserves                         |   | 3,144                   |   | 3,922                   |   |
| Payroll  and related accruals               |   | 1,911                   |   | 2,057                   |   |
| Insurance  reserves                         |   | 467                     |   | 1,318                   |   |
| Resort  lot inventory                       |   | 0                       |   | 921                     |   |
| Other  accruals                             |   | 3,520                   |   | 4,182                   |   |
|                                        |   | $                       | 27,327 |                    | $      | 33,379 |   |
| Long-term  deferred income tax liabilities: |   |                    |   |                    |   |
| Depreciation                                |   | $                       | 8,741  |                    | $      | 11,509 |   |
| Amortization                                |   | 2,846                   |   | 3,530                   |   |
| Net  operating loss (NOL) carryforward      |   | (6,070                  | )      | (1,272                  | )      |
| Valuation  allowance on NOL carryforward    |   | 2,795                   |   | 801                     |   |
|                                        |   | $                       | 8,312  |                    | $      | 14,568 |   |

 

Management believes thatthe temporary differences which gave rise to the deferred income tax assetswill be realized in the foreseeable future, except for benefits arising fromthe NOL carryforward associated with the SMC Acquisition.  Accordingly, management has provided avaluation allowance for the portion of the NOL carryforward that may not befully recognized.  During 2002, certaintax law changes were enacted which resulted in the Company’s immediaterecognition of certain operating losses relating to prior year results of operations.  As a result, management has properlyreflected a reduction in the valuation allowance.  At December 28, 2002, the valuation allowance relates to thedeferred tax asset for the state income tax benefit of the net operating losscarryforward.

 

**10.****                               EARNINGSPER SHARE:**

 

Basic earnings per commonshare is based on the weighted average number of shares outstanding during theperiod using net income attributable to common stock as the numerator.  Diluted earnings per common share is basedon the weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options and convertible preferredstock, using net income as the numerator. The weighted average number of common shares used in the computation ofearnings per common share for the years ended December 30, 2000, December 29,2001, and December 28, 2002 are as follows:

 
|                                              |   | **2000**   |   | **2001**   |   | **2002**   |   |
|---------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| **Basic**                                         |   |       |   |       |   |       |   |
| Issued  and outstanding shares (weighted average) |   | 28,377,123 |   | 28,531,593 |   | 28,812,473 |   |
|                                              |   |       |   |       |   |       |   |
| **Effect  of Dilutive Securities**                |   |       |   |       |   |       |   |
| Stock  options                                    |   | 601,142    |   | 757,095    |   | 760,947    |   |
|                                              |   |       |   |       |   |       |   |
| **Diluted**                                       |   | 28,978,265 |   | 29,288,688 |   | 29,573,420 |   |

 

42

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

 

The Company hascommitments under certain noncancelable operating leases.   Total rental expense for the fiscal yearsended December 30, 2000, December 29, 2001, and December 28, 2002 related tooperating leases amounted to approximately $2.4 million, $2.8 million, and $3.8million, respectively.  The Company’smost significant lease is a two-year operating lease for an aircraft withannual renewals for up to three additional years.  The future minimum rental commitments under the initial term ofthis lease is $1.4 million in 2003.  Inaddition, if the Company chooses the return option at the end of the initiallease term in February of 2004, the Company has guaranteed up to $16 million ofany deficiency in the event that the Lessor’s net sales proceeds of theaircraft are less than $18.5 million.

 

Approximate futureminimum rental commitments under these leases at December 28, 2002 aresummarized as follows:

 

| **Fiscal  Year**     |   |   | ***(In thousands)*** |   |
|----------------------|--------|--------|----------------------|--------|
| 2003                 |   | 2,598  |                 |
| 2004                 |   | 1,117  |                 |
| 2005                 |   | 1,099  |                 |
| 2006                 |   | 1,023  |                 |
| 2007                 |   | 980    |                 |
| 2008  and thereafter |   | 4,477  |                 |

 

**12.****                               BONUSPLAN:**

 

The Company has adiscretionary bonus plan for certain key employees.  Bonus expense included in selling, general, and administrativeexpenses for the years ended December 30, 2000, December 29, 2001, and December28, 2002 was $9.0 million, $6.1 million, and $11.5 million, respectively.

 

**13.****                               STOCKOPTION PLANS:**

 

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

 

**Stock Purchase Plan**

 

The Company’s PurchasePlan qualifies under Section 423 of the Internal Revenue Code.  The Company has reserved 683,438 shares ofCommon Stock for issuance under the Purchase Plan.  During the years ended December 29, 2001 and December 28, 2002,64,643 shares and 45,875 shares, respectively, were purchased under thePurchase Plan.  The weighted-averagefair value of purchase rights granted in 2001 and 2002 was $8.74 and $17.88,respectively.  Under the Purchase Plan,an eligible employee may purchase shares of common stock from the Companythrough payroll deductions of up to 10% of base compensation, at a price pershare equal to 85% of the lesser of the fair market value of the Company’sCommon Stock as of the first day (grant date) or the last day (purchase date)of each six-month offering period under the Purchase Plan.

 

The Purchase Plan isadministered by a committee appointed by the Board.  Any employee who is customarily employed for at least 20 hoursper week and more than five months in a calendar year by the Company, or by anymajority-owned subsidiary designated from time to time by the Board, and whodoes not own 5% or more of the total combined voting power or value of allclasses of the Company’s outstanding capital stock, is eligible to participatein the Purchase Plan.

 

43

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**Directors’ Option Plan**

 

Each non-employeedirector of the Company is entitled to participate in the Company’s “DirectorPlan.”  The Board of Directors and thestockholders have authorized a total of 352,500 shares of Common Stock forissuance pursuant to the Director Plan. 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 the later ofthe effective date of the Company’s initial public offering or the date onwhich the optionee first becomes a director of the Company.  Thereafter, each optionee is automaticallygranted an additional option to purchase 3,500 shares of Common Stock (a“Subsequent Option”) on September 30 of each year if, on such date, theoptionee has served as a director of the Company for at least six months.  Each Initial Option vests over five years atthe rate of 20% of the shares subject to the Initial Option at the end of eachanniversary following the date of grant. Each Subsequent Option vests in full on the fifth anniversary of its dateof grant.  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.  As of December 28, 2002, 89,100options had been exercised, and options to purchase 79,700 shares of commonstock were outstanding.

 

**Option Plan**

 

The Option Plan providesfor the grant to employees of incentive stock options within the meaning ofSection 422 of the Internal Revenue Code of 1986, as amended (the “Code”), andfor the grant to employees and consultants of the Company of nonstatutory stockoptions.  A total of 3,257,813 shares ofCommon Stock have been reserved for issuance under the Option Plan.  As of December 28, 2002, 975,230 options hadbeen exercised, and options to purchase 1,261,823 shares of Common Stock wereoutstanding.  These options vest ratablyover five years commencing with the date of grant.

 

The exercise price of allincentive stock options granted under the Option Plan must be at least equal tothe fair market value of a share of the Company’s Common Stock on the date ofgrant.  With respect to any participantpossessing more than 10% of the voting power of the Company’s outstandingcapital stock, the exercise price of any option granted must equal at least110% of the fair market value on the grant date, and the maximum term of theoption must not exceed five years.  Theterms of all other options granted under the Option Plan may not exceed tenyears.

 

Transactions involvingthe Director Plan and the Option Plan are summarized with correspondingweighted-average exercise prices as follows:

 

|                              |   | **Shares** |   | **Price** |   |
|-----------------------------------|--------|------------|--------|-----------|--------|
| Outstanding  at January 1, 2000   |   | 1,214,188  |   | $         | 5.99   |   |
| Granted                           |   | 206,851    |   | 12.43     |   |
| Exercised                         |   | (68,810    | )      | 3.25      |   |
| Forfeited                         |   | (14,661    | )      | 7.93      |   |
| 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  |   |

 

44

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For various price ranges,weighted average characteristics of all outstanding stock options at December28, 2002 were as follows:

 

|                                                                  |   | **Options  Outstanding** |   | **Options  Exercisable**     |   |
|-----------------------------------------------------------------------|--------|--------------------------|--------|------------------------------|--------|
| **Range of Exercise Prices**                                          |   | **Shares**               |   | **Remaining  Life  (years)** |   | **Weighted-  Average  Price** |   | **Shares** |   | **Weighted-   Average  Price** |   |
| $       0  -   2.43 |   | 75,700                   |   | .2                           |   | $ | 0.65 |   | 75,700 |   | $ | 0.65 |   |
| $  2.44  -   4.86                            |   | 306,753                  |   | 3.3                          |   | $ | 3.18 |   | 306,753 |   | $ | 3.18 |   |
| $  7.29  -   9.72                            |   | 205,356                  |   | 5.3                          |   | $ | 7.73 |   | 148,034 |   | $ | 7.74 |   |
| $  9.73  - 12.15                                            |   | 386,138                  |   | 7.3                          |   | $ | 11.10 |   | 135,307 |   | $ | 10.68 |   |
| $12.16  - 14.58                                                       |   | 171,226                  |   | 7.3                          |   | $ | 12.76 |   | 58,621 |   | $ | 12.66 |   |
| $14.59  - 17.01                                                       |   | 19,750                   |   | 8.4                          |   | $ | 16.19 |   | 3,200 |   | $ | 16.18 |   |
| $19.44  - 21.87                                                       |   | 17,500                   |   | 9.8                          |   | $ | 20.03 |   | — |   | — |   |
| $21.88  - 24.30                                                       |   | 159,100                  |   | 9.3                          |   | $ | 24.30 |   | — |   | — |   |
|                                                                  |   | 1,341,523                |   |                         |   |   |   | 727,615 |   |   |   |

 

At December 28, 2002, theCompany has three stock-based employee compensation plans.  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123, Accounting forStock-based Compensation, to stock-based employee compensation.

 
|                                                                                                                                                |   | **2000**                                     |   | **2001** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                                |   | ***(In thousands, except per share  data)*** |   |
|                                                                                                                                                |   |                                         |   |     |   |     |   |
| Net  income - as reported                                                                                                                           |   | $                                            | 42,521 |     | $      | 24,919   |   | $ | 44,515 |   |
| Deduct:  Total stock-based employee compensation  expense Determined under fair value based method for all awards, net of  related tax effects |   | (778                                         | )      | (1,039   | )      | (1,328   | )      |
| Net  income - pro forma                                                                                                                             |   | $                                            | 41,743 |     | $      | 23,880   |   | $ | 43,187 |   |
|                                                                                                                                                |   |                                         |   |     |   |     |   |
| Earnings  per share:                                                                                                                                |   |                                         |   |     |   |     |   |
| Basic  - as reported                                                                                                                                |   | $                                            | 1.50   |     | $      | 0.87     |   | $ | 1.55 |   |
| Basic  - pro forma                                                                                                                                  |   | 1.47                                         |   | 0.84     |   | 1.50     |   |
|                                                                                                                                                |   |                                         |   |     |   |     |   |
| Diluted  - as reported                                                                                                                         |   | $                                            | 1.47   |     | $      | 0.85     |   | $ | 1.51 |   |
| Diluted  - pro forma                                                                                                                           |   | 1.44                                         |   | 0.82     |   | 1.46     |   |

 

For purposes of the abovepro forma information, the fair value of each option grant was estimated at thedate of grant using the Black-Scholes option pricing model with the followingweighted average assumptions:

 
|                      |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Risk-free  interest rate  |   | 6.27     | %      | 4.42     | %      | 4.22     | %      |
| Expected  life (in years) |   | 5.68     |   | 6.23     |   | 5.97     |   |
| Expected  volatility      |   | 54.63    | %      | 55.02    | %      | 56.92    | %      |
| Expected  dividend yield  |   | 0.00     | %      | 0.00     | %      | 0.00     | %      |

 

45

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**14.****                               FAIRVALUE OF FINANCIAL INSTRUMENTS:**

 

The fair value of theCompany’s financial instruments are presented below.  The estimates require subjective judgments and areapproximate.  Changes in methodologiesand assumptions could significantly affect estimates.

 

Line of Credit- The carrying amount outstanding on the revolving line of credit is $26.0 millionand $51.4 million at December 29, 2001 and December 28, 2002, respectively,which approximates the estimated fair value as this instrument requiresinterest payments at a market rate of interest plus a margin.

 

Long-term Note Payable- The carrying amount outstanding on the long-term note payable is $52 million(including $21.7 million of current payable) at December 28, 2002, whichapproximates the estimated fair value as this instrument requires interestpayments at a market rate of interest plus a margin.

 

**15.****                               401(K)DEFINED CONTRIBUTION PLAN:**

 

The Company sponsors a401(k) defined contribution plan covering substantially all full-timeemployees.  Company contributions to theplan totaled $593,000 in 2000, $629,000 in 2001, and $748,000 in 2002.

 

**16.****                               COMMITMENTSAND CONTINGENCIES:**

 

**Repurchase Agreements**

 

Many of the Company’ssales to independent dealers are made on a “floor plan” basis by a bank orfinance company which lends the dealer all or substantially all of thewholesale purchase price and retains a security interest in the vehicles.  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.  Theseagreements provide that, for up to 18 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event of a default by adealer to its lender.

 

The Company’s liabilityunder repurchase agreements is limited to the unpaid balance owed to thelending institution by reason of its extending credit to the dealer to purchaseits vehicles, reduced by the resale value of vehicles which may berepurchased.  The risk of loss is spreadover numerous dealers and financial institutions.

 

No significant net losseswere incurred during the years ended December 30, 2000, December 29, 2001,or December 28, 2002.  The approximateamount subject to contingent repurchase obligations arising from theseagreements at December 28, 2002 is $490.2 million, with approximately 8.4%concentrated with one dealer.  If theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, its business, operating results, and financial conditioncould be adversely affected.

 

**Product Liability**

 

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

 

46

----

 

The Company has from timeto time been subject to product liability claims.  To date, the Company has been successful in obtaining productliability insurance on terms the Company considers acceptable.  The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million.  Overall product liability insurance, including umbrella coverage,is available to a maximum amount of $100.0 million for each occurrence, as wellas in the aggregate.  There can be noassurance that the Company will be able to obtain insurance coverage in thefuture at acceptable levels or that the cost of insurance will be reasonable.  Furthermore, successful assertion againstthe Company of one or a series of large uninsured claims, or of one or a seriesof claims exceeding any insurance coverage, could have a material adverseeffect on the Company’s business, results of operations, and financialcondition.

 

**Litigation**

 

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

 

47

----

 

**17.****                               QUARTERLYRESULTS (UNAUDITED):**

 
| **Year ended December 30, 2000**            |   | **1st  Quarter** |    | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |    |
|---------------------------------------------|--------|------------------|---------|------------------|--------|------------------|--------|------------------|---------|
| ***(In thousands, except per share data)*** |   |             |    |             |   |             |   |             |    |
| Net  sales                                  |   | $                | 237,983 |             | $      | 226,091          |   | $                | 226,393 |   | $ | 211,423 |   |
| Gross  profit                               |   | 37,314           |    | 32,117           |   | 30,908           |   | 29,311           |    |
| Operating  income                           |   | 21,375           |    | 18,217           |   | 16,143           |   | 14,095           |    |
| Net  income                                 |   | 12,918           |    | 11,148           |   | 9,807            |   | 8,648            |    |
| Earnings  per common share:                 |   |             |    |             |   |             |   |             |    |
| Basic                                       |   | $                | 0.46    |             | $      | 0.39             |   | $                | 0.35    |   | $ | 0.30 |   |
| Diluted                                     |   | $                | 0.44    |             | $      | 0.39             |   | $                | 0.34    |   | $ | 0.30 |   |

 
| **Year ended December 29, 2001**            |   | **1st  Quarter** |       | **2nd  Quarter** |       | **3rd  Quarter** |       | **4th  Quarter** | ** ** |
|---------------------------------------------|--------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***(In thousands, except per share data)*** |   |             | ** ** |             | ** ** |             | ** ** |             | ** ** |
| 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 ended December 28, 2002**            |   | **1st  Quarter** |       | **2nd  Quarter** |       | **3rd  Quarter** |       | **4th  Quarter** | ** ** |
|---------------------------------------------|--------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ***(In thousands, except per share data)*** |   |             | ** ** |             | ** ** |             | ** ** |             | ** ** |
| 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 |   |

 

48

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| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

 

Not Applicable.

 

49

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**PARTIII**

 

**ITEM 10.****                 DIRECTORSAND EXECUTIVE OFFICERS OF REGISTRANT**

 

Information required bythis Item regarding directors and executive officers set forth under thecaptions “Proposal 1 - Election of Directors” and “Compliance with Section16(a) of the Securities Exchange Act” in the Registrant’s definitive ProxyStatement is incorporated herein by reference.

 

**ITEM 11.****                 EXECUTIVECOMPENSATION**

 

Information required bythis Item regarding compensation of the Registrant’s directors and executiveofficers set forth under the captions “Proposal 1 - Election of Directors -Compensation of Directors” and “Additional Information - ExecutiveCompensation” in the Proxy Statement is incorporated herein by reference.

 

**ITEM 12.****                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Information required bythis Item regarding beneficial ownership of the Registrant’s Common Stock bycertain beneficial owners and management of the Registrant set forth under thecaption “Security Ownership of Certain Beneficial Owners and Management” in theProxy Statement is incorporated herein by reference.

 

**ITEM 13.****                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required bythis Item regarding certain relationships and related transactions withmanagement set forth under the caption “Additional Information - CompensationCommittee Interlocks and Insider Participation” in the Proxy Statement isincorporated herein by reference.

 

50

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**PARTIV**

 

**ITEM 14.****                 CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Our chief executive officer and our chief financialofficer, after evaluating our “disclosure controls and procedures” (as definedin Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and15-d-14(c)) have concluded that as of a date within 90 days of the filing dateof this report (the “Evaluation Date”) our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

Our management, including our chief executive officerand chief financial officer, does not expect that our disclosure controls andprocedures will prevent all error and all fraud. Because of inherentlimitations in any system of disclosure controls and procedures, no evaluationof controls can provide absolute assurance that all instances of error orfraud, if any, within the company may be detected.

 

**Changes in Internal Controls**

 

Subsequent to the “Evaluation Date,” there were nosignificant changes in our internal controls or in other factors that couldsignificantly affect our disclosure controls and procedures, nor were there anysignificant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

 

**ITEM 15.****                 EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)                                  Thefollowing documents are filed as part of this Report on Form 10-K:

 

1.                                       FinancialStatements.  The ConsolidatedFinancial Statements of Monaco Coach Corporation  and the Report of Independent Accountants are filed inItem 8 within this Annual Report on Form 10-K.

 

2.                                       FinancialStatement Schedule.  The followingfinancial statement schedule of Monaco Coach Corporation for the fiscal yearsended December 30, 2000, December 29, 2001, and December 28, 2002 is filed aspart of this Annual Report on Form 10-K and should be read in conjunction with the ConsolidatedFinancial Statements, and related notes thereto, of Monaco Coach Corporation.

 

| **Schedule** |   |                              | **Page** |   |
|--------------|--------|-----------------------------------|----------|--------|
| II           |   | Valuation and Qualifying Accounts | 56       |   |

 

Schedules not listedabove have been omitted because they are not applicable or are not required orthe information required to be set forth therein is included in theconsolidated 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.               |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                         |
| 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. |
|   |                                                                                                                                                                                                         |
| 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.            |

 

51

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| 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 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.                                                                                                                                           |
|   |                                                                                                                                                                                                                                                              |
| 10.8   | Second Amendment to the Amended and Restated Credit  Agreement dated November 27, 2002 with U.S. Bank National Association.                                                                                                                                       |
|   |                                                                                                                                                                                                                                                              |
| 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).                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                              |
| 99.1   | Certification by CEO and CFO of Financial  Statements.                                                                                                                                                                                                            |

 

----

| +      | The item listed is a compensatory plan.                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                  |
|   |                                                                                                                  |
| (b)    | REPORTS ON FORM 8-K.  No reports on Form 8-K were filed by the Company during the  year ended December 28, 2002. |

 

52

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**SIGNATURES**

 

Pursuant to therequirements 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 12, 2003 | MONACO COACH CORPORATION |
|----------------|--------------------------|
|           |                     |
|           | By:                      | /s/ Kay L. Toolson |
|           |                     |  Kay L. Toolson |
|           |                     |  Chief Executive Officer |

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Kay L. Toolson and P. Martin Daley, and each of them, jointly andseverally, his attorneys-in-fact, each with the power of substitution, for himin any and all capacities, to sign any and all amendments to this Report onForm 10-K and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each of said attorneys-in-fact, or hissubstitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report on 10-K hasbeen 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 12, 2003 |
| (Kay L. Toolson)           |   | Officer (Principal Executive Officer)                  |   |           |
|                       |   |                                                   |   |           |
| /s/ P. Martin Daley        |   | Vice President and Chief Financial Officer  (Principal |   | March 12, 2003 |
| (P. Martin Daley)          |   | Financial and Accounting Officer)                      |   |           |
|                       |   |                                                   |   |           |
| /s/ Robert P. Hanafee, Jr. |   | Director                                               |   | March 13, 2003 |
| (Robert P. Hanafee, Jr.)   |   |                                                   |   |           |
|                       |   |                                                   |   |           |
| /s/ L. Ben Lytle           |   | Director                                               |   | March 11, 2003 |
| (L. Ben Lytle)             |   |                                                   |   |           |
|                       |   |                                                   |   |           |
| /s/  Dennis  D. Oklak |   | Director                                               |   | March 11, 2003 |
| (Dennis D. Oklak)          |   |                                                   |   |           |
|                       |   |                                                   |   |           |
| /s/ Carl E. Ring, Jr.      |   | Director                                               |   | March 10, 2003 |
| (Carl E. Ring, Jr.)        |   |                                                   |   |           |
|                       |   |                                                   |   |           |
| /s/ Richard A. Rouse       |   | Director                                               |   | March 13, 2003 |
| (Richard A. Rouse)         |   |                                                   |   |           |
|                       |   |                                                   |   |           |
| /s/ Roger A. Vandenberg    |   | Director                                               |   | March 10, 2003 |
| (Roger A. Vandenberg)      |   |                                                   |   |           |

 

53

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**Sarbanes-OxleySection 302(a) Certification**

 

I, P. Martin Daley, certify that:

 
| 1.     | I have reviewed this annual report on Form 10-K of  Monaco Coach Corporation;                                                                                                                                                                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.     | Based on my knowledge, this annual report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this annual report;                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this annual report, fairly present in  all material respects the financial condition, results of operations, and  cash flows of the registrant as of, and for, the periods presented in this  annual report;                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant  and we have:                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                               | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this annual report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                               | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                               | presented in this annual report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                               | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize, and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                               | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this annual report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 
| Dated: | March 14, 2003 |   | /s/:  P.  Martin Daley                |
|--------|----------------|--------|--------------------------------------------|
|   |           |   | P. Martin Daley                            |
|   |           |   | Vice President and Chief Financial Officer |

** **

54

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** **

**Sarbanes-OxleySection 302(a) Certification**

 

I, Kay L. Toolson, certify that:

 
| 1.     | I have reviewed this annual report on Form 10-K of  Monaco Coach Corporation;                                                                                                                                                                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.     | Based on my knowledge, this annual report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this annual report;                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this annual report, fairly present in  all material respects the financial condition, results of operations, and  cash flows of the registrant as of, and for, the periods presented in this  annual report;                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                               | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                               | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                               | presented in this annual report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                               | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize, and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                               | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this annual report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |
|        |                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |

 
| Dated: | March 14, 2003 |                    | /s/:  Kay L.  Toolson |
|--------|----------------|-------------------------|----------------------------|
|   |           |                    |
|   |           | Kay L. Toolson          |
|   |           | Chief Executive Officer |

 

55

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**MONACO COACH CORPORATION**

 

**SCHEDULE II****-VALUATIONAND QUALIFYING ACCOUNTS**

 

***(in thousands)***

 
| **Description**                       |   | **Balance at  Beginning of  Period** |   | **Adjustment  for SMC  Acquisition *** |   | **Charge  to  Expense** |   | **Claims  Paid** |   | **Balance  at  End of  Period** |   |
|---------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|-------------------------|--------|------------------|--------|---------------------------------|--------|
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Fiscal  year ended December 30, 2000: |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for warranty claims          |   | $                                    | 13,436 |                                   |   |                    | $      | 17,474           |   | $                               | 17,160 |   | $ | 13,750 |   |
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for product liability        |   | $                                    | 9,407  |                                   |   |                    | $      | 5,489            |   | $                               | 6,776  |   | $ | 8,120 |   |
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Fiscal  year ended December 29, 2001: |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for warranty claims          |   | $                                    | 13,750 |                                   | $      | 14,037                  |   | $                | 21,800 |                            | $      | 21,788 |   | $ | 27,799 |   |
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for product liability        |   | $                                    | 8,120  |                                   | $      | 9,874                   |   | $                | 6,108  |                            | $      | 4,246 |   | $ | 19,856 |   |
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Fiscal  year ended December 28, 2002: |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for warranty claims          |   | $                                    | 27,799 |                                   | $      | 111                     |   | $                | 34,237 |                            | $      | 30,402 |   | $ | 31,745 |   |
|                                  |   |                                 |   |                                   |   |                    |   |             |   |                            |   |
| Reserve  for product liability        |   | $                                    | 19,856 |                                   | $      | 229                     |   | $                | 8,020  |                            | $      | 6,783 |   | $ | 21,322 |   |

 

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*  Openingbalance sheet entries for SMC Acquisition, see Note 2 to the financialstatements.

 

56

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**EXHIBITINDEX**

 
| **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.                                                                    |
|            |   |                                                                                                                                                                                                                                                              |
| 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.                                                      |
|            |   |                                                                                                                                                                                                                                                              |
| 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.                                                                 |
|            |   |                                                                                                                                                                                                                                                              |
| 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 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.                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                              |
| 10.8            |   | Second Amendment to the Amended and Restated Credit  Agreement dated November 27, 2002 with U.S. Bank National Association.                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                              |
| 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.                                                                                                                                                                                                                                       |

 

57

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| 23.1   |   | Consent of Independent Accountants.                          |
|--------|--------|--------------------------------------------------------------|
|   |   |                                                         |
| 24.1   |   | Power of Attorney (included on the signature pages  hereof). |
|   |   |                                                         |
| 99.1   |   | Certification by CEO and CFO of Financial  Statements.       |

 

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| + |   | The item listed is a compensatory plan. |
|---|--------|-----------------------------------------|

 

58

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