** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

** **

| **x**                                                                                                                                                 | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                            | ** **                                                                                               |
| **For  the fiscal year ended December 29, 2007**                                                                                                 |
| ** **                                                                                                                                            |
| **OR**                                                                                                                                                |
| ** **                                                                                                                                            |
| **o**                                                                                                                                                 | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **                                                                                                                                            | ** **                                                                                               |
| **For  the transition period from                      to** |
| ** **                                                                                                                                            |
| **Commission  File Number:  1-14725**                                                                                                            |

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**MONACO COACH CORPORATION**

(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.) |

 

**91320Industrial WayCoburg, Oregon 97408**

(Address of principalexecutive offices)

 

Registrant’s telephonenumber, including area code: **(541) 686-8011**

 

Securities registeredpursuant 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 registeredpursuant to Section 12(g) of the Act:

**None**

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.YES o NO x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.YES o NO x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x  NO o

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer o               Accelerated filer x               Non-accelerated filer o               Smaller reporting company o

(Do not check if smaller reportingcompany)

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o  NO x

Theaggregate market value of the Common Stock held by non-affiliates of theregistrant on December 29, 2007, based upon the closing sale price of theCommon Stock on June 30, 2007 as reported on the New York Stock Exchange, wasapproximately $391.5 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. This determination of affiliate status is notnecessarily conclusive for other purposes.

Asof March 3, 2008 the registrant had 30,055,293 shares of Common Stockoutstanding.

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**DOCUMENTS INCORPORATED BY REFERENCE**

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Theregistrant’s definitive Proxy Statement for its Annual Meeting of Stockholdersto be held on May 14, 2008 (the “Proxy Statement”) is incorporated byreference in Part III of this Form 10-K to the extent stated therein.

Thisdocument consists of 79 pages. The Exhibit Index appears at pages 77-79.

 

** **

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** **

 

 

** **

**MONACOCOACH CORPORATION AND SUBSIDIARIES**

***ANNUAL REPORT ON FORM 10-K***

***FOR THE FISCAL YEAR ENDED DECEMBER 29, 2007***

*** ***

**INDEX**

*** ***
| PART I    |
|----------------|
|           |
| ITEM 1.        | BUSINESS | 3 |
| ITEM 1A.       | RISK FACTORS | 11 |
| ITEM 1B.       | UNRESOLVED STAFF COMMENTS | 14 |
| ITEM 2.        | PROPERTIES | 15 |
| ITEM 3.        | LEGAL PROCEEDINGS | 15 |
| ITEM 4.        | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 15 |
|           |   |   |
| PART II   |
|           |
| ITEM 5.        | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES | 16 |
| ITEM  6.       | SELECTED  FINANCIAL DATA | 17 |
| ITEM 7.        | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS | 19 |
| ITEM 7A.       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK | 36 |
| ITEM 8.        | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 37 |
| ITEM 9.        | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE | 68 |
| ITEM 9A.       | CONTROLS AND PROCEDURES | 68 |
| ITEM  9B.      | OTHER  INFORMATION | 69 |
|           |   |   |
| PART III  |
|           |
| ITEM 10.       | DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT, AND  CORPORATE GOVERNANCE | 69 |
| ITEM 11.       | EXECUTIVE COMPENSATION | 70 |
| ITEM 12.       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 70 |
| ITEM 13.       | CERTAIN RELATIONSHIPS AND TRANSACTIONS, AND DIRECTOR  INDEPENDENCE | 71 |
| ITEM 14.       | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 71 |
|           |   |   |
| PART IV   |
|           |
| ITEM 15.       | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 72 |
| SIGNATURES     | 75 |
| CERTIFICATIONS |   |

 

2

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** **

** **

**PART I**

** **

This report containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”, and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Thesestatements include without limitation those below marked with an asterisk (*).In addition, Monaco Coach Corporation (the “Company,” “we,” “us,” “our,” or “Monaco”)may from time to time make oral forward-looking statements through statementsthat include the words “believes,” “expects,” “anticipates,” or similarexpressions. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause actual results, performance orachievements of the Company to differ materially from those expressed orimplied by such forward-looking statements, including those set forth belowunder Part I, Item 1A, Risk Factors. We undertake no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datethis occurrence of unanticipated events. These forward-looking statements are made in reliance upon the safeharbor provision of The Private Securities Litigation Reform Act of 1995.

 

**ITEM1.**                    BUSINESS

** **

**CORPORATEINFORMATION**

 

The present Company wasincorporated under the laws of the State of Delaware in 1992.  We acquired substantially all of the assetsand liabilities of a predecessor company that had been formed in 1968.  Our principal executive offices are locatedat 91320 Coburg Industrial Way, Coburg, Oregon 97408.  Our telephone number at that address is (541)686-8011.  The Company’s website iswww.monaco-online.com.  The contents ofour website are not incorporated by reference in to this Form 10-K.  We provide free of charge through a link onour website access to our Annual Reports on Form 10-K.  Quarterly Reports on Form 10-Q andCurrent Reports on Form 8-K, as well as amendments to those reports, assoon as reasonably practical after the reports are electronically filed with,or furnished to, the SEC.

 

**OVERVIEW**

** **

MonacoCoach Corporation is a leading manufacturer of premium recreational vehicles includingClass A, B, and C motor coaches, as well as towable recreational vehicles.The Company also develops and sells luxury motorcoach resort facilities. Thesethree operations, while closely tied into the recreational lifestyle, aresegmented for reporting purposes as the Motorized Recreational Vehicle (MRV)segment, the Towable Recreational Vehicle (TRV) segment, and the MotorhomeResort (MR) segment. The following table represents the net sales by segmentfor the fiscal years 2005, 2006, and 2007. All numbers are in thousands:

 

| ** **                             | ** ** | ** ** | ** ** | **% of**  | ** ** | ** ** | ** ** | **% of**  | ** ** | ** ** | ** ** | **% of**  | ** ** |
|----------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|
| ** **                             | ** ** | **2005**   | ** ** | **Sales** | ** ** | **2006**   | ** ** | **Sales** | ** ** | **2007**   | ** ** | **Sales** | ** ** |
| Motorized recreational vehicle segment |       | $          | 1,017,766  |      | 82.3       | %          | $          | 941,657   |       | 72.5       | %          | $         | 998,448    |   | 78.5 | % |
| Towable recreational vehicle segment   |       | 185,433    |       | 15.0      | %          | 324,342    |       | 25.0      | %          | 261,391    |       | 20.5      | %          |
| Motorhome resort segment               |       | 33,039     |       | 2.7       | %          | 31,987     |       | 2.5       | %          | 12,291     |       | 1.0       | %          |
|                                   |       |       |       |      |       |       |       |      |       |       |       |      |       |
| Total net sales                        |       | $          | 1,236,238  |      | 100.0      | %          | $          | 1,297,986 |       | 100.0      | %          | $         | 1,272,130  |   | 100.0 | % |

** **

**RECENT BUSINESS CHANGES**

** **

During the first quarterof 2007, the Company completed the formation of a joint venture withInternational Truck and Engine Corporation (ITEC) for the purpose ofmanufacturing diesel chassis.  This jointventure, known as Custom Chassis Products LLC (CCP), will enable us to takeadvantage of purchasing synergies, access engineering and design expertise fromITEC, and improve the utilization of our Roadmaster chassis manufacturingfacility in Elkhart, Indiana.  Ourownership interest is 49%, and we are accounting for the activity of thisoperation using the equity method of accounting.

 

On November 18,2005 the Company acquired R-Vision, Inc., R-Vision Motorized, LLC, BisonManufacturing, LLC, and Roadmaster, LLC (collectively “R-Vision”), whichmanufactures entry level towable and motorized products. 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-time buyers is important to the Companybecause of our belief that many recreational vehicle customers purchasemultiple recreational vehicles during their lifetime.

 

3

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During the third quarterof 2005, the Company announced that it was closing its Royale Coach operationsin Elkhart, Indiana. Royale Coach produced Prevost bus conversion motor coacheswith price points in excess of $1.4 million. Royale Coach sold approximately 20coaches per year and was not a significant portion of the Company’s overallbusiness. As of the end of 2005, all closure costs were accrued for in theCompany’s financial statements.

 

**MOTORIZED RECREATIONALVEHICLE SEGMENT**

** **

The Company is a leadingmanufacturer of motorized recreational vehicles. The Company’s motorized productline consists of 39 models under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,”and “R-Vision” brand names. The Company’s motorized products, which aretypically priced at the high end of their respective product categories, rangein suggested retail price from $50,000 to $650,000. Based upon retailregistrations in 2007, the Company believes it had a 25.9% share of the marketfor diesel class A motor coaches, a 6.0% share of the market for gas class Amotor coaches, a 16.3% share of the market for all class A motor coaches,and a 3.1% share for all class C motor coaches. At December 29, 2007,the Company’s products were sold through an extensive network of approximately364 dealer lots located primarily in the United States and Canada.

 

**TOWABLE RECREATIONALVEHICLE SEGMENT**

** **

TheCompany manufactures 28 models of towable recreational vehicles under the “HolidayRambler,” “McKenzie,” and “R-Vision” brand names. The Company’s towableproducts range in suggested retail price from $14,000 to $70,000. Based uponretail registrations in 2007, the Company believes it had a 3.6% share of themarket for fifth wheel towables and a 4.5% share of the market for traveltrailers. At December 29, 2007, the Company’s products were sold throughan extensive network of approximately 619 dealer lots located primarily in theUnited States and Canada.

 

**MOTORHOMERESORTS SEGMENT**

** **

TheCompany’s motorhome resorts are located in Indio, California, and Las Vegas,Nevada. The resorts provide high-end luxury destination locations for owners ofClass A motorhomes that include amenities such as golf courses, swimmingpools, tennis courts, and full recreational vehicle hookups for utilities. TheCompany sells individual lots through independent real estate agents, and theowner shares a common interest in the resort amenities. As of December 29,2007, the Company had sold 745 of the 807 available lots. Both the Las Vegasand Indio resorts are fully developed, and will continue to provide resort lotsales activity at least through the second quarter of 2008. In addition tothese two resorts, the Company has property in La Quinta, California and inNaples, Florida currently being developed into upscale motorhome resortfacilities.  The Company is exploring thepotential purchases of additional properties in other sections of the countrythat would help to reduce the seasonality of lots sales we experience.

 

Theresort development business is regulated by various governmental authoritiesfor site planning, environmental impact studies, and land usage. To comply withthe requirements imposed by these various authorities, the Company employstechnical staff and utilizes outside legal counsel and other advisors.

 

Themotorhome resort industry is highly fragmented, with no single developmentcompany occupying a dominant position. While there are no single largecompetitors in the motorhome resort development segment, the Companynonetheless competes with state, county, and national parks and campgrounds,privately owned campgrounds such as KOA, and independent developers. Thegeographic markets that the Company has targeted are located in the southeast(Florida), and the southwest (California and Nevada). These areas providedestination locations that have major cities or resort destinations thatprovide attractions outside of the motorhome resorts themselves.

 

**MOTORIZEDAND TOWABLE RECREATIONAL VEHICLE PRODUCTS**

** **

The Company’srecreational vehicles (comprised of both motorized and towable vehicles) aredesigned to offer all the comforts of home within a 130 to 466 square footarea. Accordingly, the interior of the recreational vehicle is designed tomaximize use of available space. The Company’s products are designed with fivegeneral areas, all of which are smoothly integrated to form comfortable andpractical mobile accommodations. The five areas are the living room, kitchen,dining room, bathroom, and bedroom. For each model, the Company offers avariety of interior layouts.

 

4

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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 storage spaces.All of the Company’s recreational vehicles incorporate products fromwell-recognized suppliers, including: audio and video electronics from Sharp,RCA, and Sony; microwave ovens from Sharp, Magic Chef, and General Electric;stoves and ranges from KitchenAid and Modern Maid; engines from Cummins andCaterpillar; transmissions from Allison; and chassis from Ford, Workhorse, andthe Company’s own Roadmaster brand (from the newly formed joint venture, CCP).The Company’s high end products offer top-of-the-line amenities, including LCDtelevisions, GPS systems from Kenwood and Pioneer, fully automatic DSS(satellite) systems, Corian solid surface kitchen and bath countertops,imported ceramic tile, granite, marble, leather furniture, and Ralph Lauren fabrics.

 

The following tableillustrates our motorized and towable recreational vehicle segment offerings asof December 29, 2007 (revenues in thousands):

 

**CompanyProducts**

 

| ** **          | ** ** | **Retail**        | ** ** | **Gross Revenues** | ** ** |
|---------------------|------------|-------------------|------------|--------------------|------------|
| **Type**            | ** ** | **Price Range**   | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Class A Diesel |       | $135,000-$600,000 |       | $                  | 884,988    |   | $ | 842,275 |   | $ | 881,218 |   |
| Class A Gas    |       | $80,000-$130,000  |       | $                  | 125,696    |   | $ | 77,480 |   | $ | 74,238 |   |
| Class C        |       | $45,000-$86,000   |       | $                  | 15,458     |   | $ | 27,979 |   | $ | 34,331 |   |
| Towables            |       | $11,000-$80,000   |       | $                  | 191,003    |   | $ | 342,811 |   | $ | 286,011 |   |

 

To address changing consumerpreferences, the Company modifies and improves its products each model year andtypically redesigns each model every three or four years. The Company’sdesigners work with the Company’s marketing, manufacturing, and servicedepartments to design a product that is appealing to consumers, practical tomanufacture, and easy to service. The designers try to maximize the quality andvalue of each model at the strategic retail price point for that model. Themarketing and sales staff suggests features or characteristics that theybelieve could be integrated into the various models to differentiate theCompany’s products from those of its competitors. By working with manufacturingpersonnel, the Company’s engineers design the recreational vehicles so that theycan be built efficiently and with high quality. Service personnel suggest ideasto improve the serviceability and reliability of the Company’s products andgive the designers feedback on the Company’s past designs.

 

Theexteriors of the Company’s recreational vehicles are designed to beaesthetically appealing to consumers, aerodynamic in shape for fuel efficiency,and practical to manufacture. The Company has an experienced team ofcomputer-aided design personnel to complete the product design and produceprints from which the products will be manufactured.

 

**SALESAND MARKETING FOR MOTORIZED AND TOWABLE RECREATIONAL VEHICLES**

** **

**DEALERS**

** **

TheCompany expanded its dealer network over the past year to approximately 364dealership lots for its motorized products, and 619 dealership lots for itstowable products. As of December 29, 2007, these lots are primarilylocated in the United States and Canada with considerable overlap of motorizedand towable dealership lots. Revenues generated from shipments to dealershipslocated outside the United States were approximately 5.6%, 8.0%, and 7.2% oftotal sales for the fiscal years 2005, 2006, and 2007, respectively. Sales tothe Company’s dealerships are subject to concentrations. Sales to the topdealer (Lazydays RV Center) in the recreational vehicle segments accounted for10.9%, 8.5%, and 9.1% of total sales for the years ended 2005, 2006, and 2007,respectively. The Company intends to continue to expand its dealer network,primarily by targeting key geographic regions where the Company’s products arenot well represented.* The Company maintains an internal sales organizationconsisting of approximately 42 account executives who service the Company’sdealer network.

 

TheCompany analyzes and selects new dealers on the basis of such criteria aslocation, marketing ability, sales history, financial strength, and thecapability of the dealer’s repair services. The Company provides its dealerswith a wide variety of support services, including advertising assistance andtechnical training, as well as dealer incentives for retail sales of itsproducts through the Franchise For The Future program. The Company’s salesstaff is also available to educate dealers about the characteristics andadvantages of the Company’s recreational vehicles compared with competingproducts. The Company offers dealers geographic exclusivity to display aparticular model. While the Company’s dealership contracts have renewable oneto three year terms, historically the Company’s dealer turnover rate hasbeen low.

 

5

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Dealerstypically finance their inventory through revolving credit facilitiesestablished with asset-based third-party lending institutions, includingspecialized finance companies and banks. It is industry practice that such “floorplan” lenders require recreational vehicle manufacturers to agree to repurchase(for a period of 12 to 15 months from the date of the dealer’s purchase) motorcoaches and towables previously sold to the dealer in the event the dealerdefaults on its financing agreements. The Company’s contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources,”and Note 20 of Notes to the Company’s Consolidated Financial Statements.

 

**ADVERTISING ANDPROMOTIONS**

** **

TheCompany advertises regularly in trade journals and magazines, participates incooperative advertising programs with its dealers, and produces color brochuresdepicting its models’ performance features and amenities. The Company alsopromotes its products, in some cases, with direct incentive programs to dealersales personnel linked to sales of particular models.

 

Additionally,the Company attempts to encourage and reinforce customer loyalty throughsupport of owners’ clubs so that they may share experiences and communicatewith each other. The clubs of the Company’s products currently have more than26,000 members. The Company publishes magazines to enhance its relations withthese clubs and holds rallies for clubs to meet periodically to view theCompany’s new models and obtain maintenance and service guidance. Attendance atCompany-sponsored rallies can be as high as 3,200 recreational vehicles peryear with support from its dealers and suppliers.

 

The Company’s websitesalso offer an extensive listing of the Company’s models, floor plans, andfeatures, including “virtual tours” of some models. A dealer locator featureidentifies for customers the closest dealers to their location for the model(s) theyare interested in purchasing. The Company’s website also provides informationfor upcoming rallies and club functions as well as links to other RV lifestylewebsites of interest to existing or potential customers.

 

**CUSTOMERSERVICE**

** **

TheCompany believes that customer satisfaction is vitally important in therecreational vehicle market because of the large number of repeat customers andthe rapid communication of business reputations among recreational vehicleenthusiasts. The Company also believes that service is an integral part of thetotal product the Company delivers and that responsive and professionalcustomer service is consistent with the premium image the Company strives toconvey in the marketplace.

 

**The Company offers a limited warranty to all new vehiclepurchasers. The Company’s current limited warranty covers its products for upto one year (or 24,000 miles, whichever occurs first) from the date of retailsale (a limited structural warranty has a duration of five years for the frontand sidewall frame structure, and a limited three year warranty for theRoadmaster chassis). In addition, customers are protected by the limitedwarranties of major component suppliers such as those of Cummins Engine Company, Inc.(“Cummins”) (diesel engines), Caterpillar Inc. (“Caterpillar”) (dieselengines), Spicer Heavy Axle & Brake Division of Dana Corporation (“Dana”)(axles), Allison Transmission Division of General Motors Corporation (“Allison”)(transmissions), Workhorse (chassis), Onan (generators), and Ford Motor Company(“Ford”) (chassis). The Company’s limited warranty covers all manufacturing-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 29, 2007, the Company had over 700dealerships providing service to owners of the Company’s products. In addition,owners of the Company’s diesel products have access to the entire Cummins andCaterpillar dealer networks, which include over 2,000 repair centers.**

** **

TheCompany operates service centers in Harrisburg, Oregon; Elkhart, Indiana; andWildwood, Florida. The Company had approximately 668 employees in customerservice on December 29, 2007. The Company maintains individualizedproduction records and a computerized warranty tracking system which enablesthe Company’s service personnel to identify problems quickly and to provideindividualized customer service. While many problems can be resolved on thetelephone, the customer may be referred to a nearby dealer or service center.The Company believes that dedicated customer service phone lines are an ideal wayto interact directly with the Company’s customers and to quickly address theirtechnical problems.

 

6

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TheCompany has expanded its on-line dealer support network to assist its servicepersonnel and dealers in providing better service to the Company’s customers.Service personnel and dealerships are able to access information relating tospecific models and sales orders, file warranty claims and track their status,and view the status of existing parts orders. The Company’s on-line dealersupport network gives service personnel at dealerships the ability to orderparts through an electronic parts catalog.

 

**MANUFACTURING**

** **

TheCompany currently operates motorized manufacturing facilities in Coburg,Oregon; Wakarusa, Indiana; and Warsaw, Indiana. The Company’s towablemanufacturing facilities are in Wakarusa, Indiana; Milford, Indiana; Warsaw,Indiana; Goshen, Indiana; and Coburg, Oregon.

 

TheCompany’s motor coach production capacity at the end of 2007 based on a singleshift five-day work week, was 40 motorized products per day, and 139 towableunits per day. The Company is currently utilizing approximately 55% of totalcapacity and therefore believes it is positioned to take advantage of futuregrowth potential of the Company’s products within the RV market.*

 

The Company believesthat its manufacturing process is one of the most vertically integrated in therecreational vehicle industry. By manufacturing a variety of items, includingthe Roadmaster semi-monocoque diesel chassis, plastic components, some of itscabinetry and fiberglass parts, as well as many subcomponents, the Companymaintains increased control over scheduling, component production, and overallproduct quality. In addition, vertical integration enables the Company to bemore responsive to market dynamics.

 

Eachfacility has several stations for manufacturing, organized into four broadcategories: chassis manufacturing, body manufacturing, painting, and finishing.It takes from one week to four weeks to build each unit, depending on theproduct. 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 an inspection during which its appliances andplumbing systems are thoroughly tested. As a final quality control check, eachmotor coach is given a road test.

 

The Company purchasesraw materials, parts, subcomponents, electronic systems, and appliances from approximately1,000 vendors. These items are either directly mounted in the vehicle or areutilized in subassemblies which the Company assembles before installation inthe vehicle. The Company attempts to minimize its level of inventory byordering most parts as it needs them. Certain key components that requirelonger purchasing lead times are ordered based on planned needs. Examples ofthese components are diesel engines, axles, transmissions, chassis, andinterior designer fabrics. The Company has a variety of major suppliers,including Allison, Workhorse, Cummins, Caterpillar, Dana, Onan, and Ford. TheCompany does not have any long-term supply contracts with these suppliers ortheir distributors, but believes it has 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 presently believes that its allocation by suppliersof all components is sufficient to meet planned production volumes, and theCompany does not foresee any operating difficulties as a result of vendorsupply 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 extendeddelay or interruption in the supply of any components obtained from a single orlimited source supplier could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

**BACKLOG**

** **

TheCompany’s products are generally manufactured against orders from the Company’sdealers. As of December 29, 2007, the Company’s backlog of orders was$118.9 million, compared to $180.9 million at December 30, 2006. TheCompany includes in its backlog all accepted purchase orders from dealersshippable within the next six months. Orders in backlog can be canceled at theoption of the purchaser at any time without penalty and, therefore, backlogshould not be used as a measure of future sales.

 

7

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**COMPETITION**

** **

The market forrecreational vehicles is highly competitive. The Company currently encounterssignificant competition at each price point for its recreational vehicleproducts. The Company believes that the principal competitive factors thataffect the 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 thatit competes favorably against its competitors with respect to each of thesefactors. The Company’s competitors in the motorized recreational vehiclesegment include, among others: Coachmen Industries, Inc., FleetwoodEnterprises, Inc., Thor Industries, Inc., Forest River, and WinnebagoIndustries, Inc. The Company’s competitors in the towable recreationalvehicle segment include, among others: Fleetwood Enterprises, Inc. andThor Industries, Inc. Many of the Company’s competitors have significantfinancial resources and extensive marketing 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.

 

**GOVERNMENTREGULATION**

** **

Themanufacture and operation of recreational vehicles are subject to a variety offederal, state, and local regulations, including the National Traffic and MotorVehicle Safety Act and safety standards for recreational vehicles and theircomponents that have been promulgated by the Department of Transportation.These standards permit the National Highway Traffic Safety Administration torequire a manufacturer to repair or recall vehicles with safety defects orvehicles that fail to conform to applicable safety standards. We are alsosubject to various state consumer protection laws and regulations relating tothe operation of motor vehicles, including so called “Lemon-Laws”.  Because of its sales in Canada, the Companyis also governed by similar laws and regulations promulgated by the Canadiangovernment. The Company has on occasion voluntarily recalled certain products.The Company’s operating results could be adversely affected by a major productrecall or if warranty claims in any period exceed warranty reserves.

 

TheCompany is a member of the Recreation Vehicle Industry Association (the “RVIA”),a voluntary association of recreational vehicle manufacturers and suppliers,which promulgates recreational vehicle safety standards. Each of the productsmanufactured by the Company has an RVIA seal affixed to it to certify that suchstandards have been met.

 

Many states regulate thesale, transportation, and marketing of recreational vehicles. The Company isalso subject to state consumer protection laws and regulations, which in manycases require manufacturers to repurchase or replace chronically malfunctioningrecreational vehicles. Some states also legislate additional safety and constructionstandards for recreational vehicles.

 

TheCompany is subject to regulations promulgated by the Occupational Safety andHealth Administration (“OSHA”). The Company’s plants are periodically inspectedby federal or state agencies, such as OSHA, concerned with workplace health andsafety.

 

The Company believes thatits products and facilities comply in all material respects with the applicablevehicle safety, consumer protection, RVIA, and OSHA regulations and standards.Amendments to any of the foregoing regulations and the implementation of newregulations could significantly increase the cost of manufacturing, purchasing,operating, or selling the Company’s products and could materially and adverselyaffect the Company’s net sales and operating results. The failure of theCompany to comply with present or future regulations could result in finesbeing imposed on the Company, potential civil and criminal liability,suspension of production or cessation of operations.

 

TheCompany is subject to product liability and warranty claims arising in theordinary course of business. To date, the Company has been successful inobtaining product liability insurance on terms the Company considersacceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $3.0 million. Overall product liability insurance, including umbrellacoverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. There can be no assurance that theCompany will be able to obtain insurance coverage in the future at acceptablelevels or that the costs of insurance will be reasonable. Furthermore,successful assertion against the Company of one or a series of large uninsuredclaims, or of one or a series of claims exceeding any insurance coverage, couldhave a material adverse effect on the Company’s business, operating results,and financial condition.

 

8

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In2002, the National Highway Traffic Safety Administration (NHTSA), enacted newvehicle safety legislation referred to as the TREAD Act that imposessignificant early warning reporting (“EWR”) requirements on vehiclemanufacturers, including the Company. The Company believes that it has met theEWR requirements of the TREAD Act that became effective during 2003.

 

CertainU.S. tax laws currently afford favorable tax treatment for the purchase andsale of recreational vehicles. These laws and regulations have historicallybeen amended frequently, and it is likely that further amendments andadditional laws and regulations will be applicable to the Company and itsproducts in the future. Furthermore, no assurance can be given that anyincrease in personal income tax rates will not have a material adverse effecton the Company’s business, operating results, and financial condition byreducing demand for the Company’s products.

 

**ENVIRONMENTALREGULATION AND REMEDIATION**

** **

**REGULATION**The Company’srecreational vehicle manufacturing operations are subject to a variety of federaland state environmental regulations relating to the use, generation, storage,treatment, and disposal of hazardous materials. These laws are often revisedand made more stringent, and it is likely that future amendments to these lawswill impact the Company’s operations.

 

Newregulations regarding emissions of hazardous air pollutants (HAPs) came intoeffect in 2007.  The Company is incompliance with these new regulations. Also during 2007, Elkhart County, Indiana was redesignated as inattainment status under the Clean Air Standards for Ozone.  The Company expects that this redesignation willreduce the number of requisites required for permitting and facility expansionsin Elkhart County, although new regulations and their interpretation may changeover time, and there can be no assurance that additional expenditures will notbe required.*

 

TheCompany is aware of no unresolved violations of any of its existing air permitsat any of its owned or leased facilities at this time. However, the failure ofthe Company to comply with present or future regulations could subject theCompany to: (i) fines; (ii) potential civil and criminal liability; (iii) suspensionof production or cessation of operations; (iv) alterations to themanufacturing process; or (v) costly cleanup or capital expenditures, anyof which could have a material adverse effect on the Company’s business,results of operations, and financial condition.

 

**REMEDIATION**The Companyis currently engaged in a remediation project involving soil contamination atits Goshen, Indiana facility acquired in connection with the R-Visionacquisition.  We do not expect theproject to have a material adverse effect on the Company’s business, results ofoperations, or financial condition.  TheCompany is currently unaware of any other sites owned or facilities operated bythe Company that require future environmental remediation. Monitoringrequirements are in place for Company-owned sites in Hines, Oregon and Warsaw,Indiana.  All off-site clean-up projectswhere the Company has been identified as a Potentially Responsible Party (PRP)are either closed, the Company has been released as a de minimus party, or areinactive.  Failure of the Company tocomply with past, present or future regulations could subject the Company to: (i) fines;(ii) potential civil and criminal liability; (iii) suspension of productionor cessation of operations; (iv) alterations to the manufacturing process;or (v) costly cleanup or capital expenditures, any of which could have amaterial adverse effect on the Company’s business, results of operations, andfinancial condition.

 

**EMPLOYEES**

** **

As of December 29,2007, the Company had 5,348 full-time employees, including 4,010 in production,98 in sales, 668 in service, and 572 in management and administration. TheCompany’s employees are not represented by any collective bargainingorganization, and the Company has never experienced a work stoppage resultingfrom labor issues. The Company believes its relations with its employees aregood.

 

**RESEARCHAND DEVELOPMENT**

 

TheCompany expensed $1.5 million, $1.9 million, and $1.7 million for research anddevelopment in fiscal years 2005, 2006, and 2007, respectively.

 

9

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**SEASONALITY**

 

The Company has experienced,and expects to continue to experience, significant variability in sales,production, and net income as a result of seasonality in our industry.  Demand for recreational vehicles usuallydeclines during the winter season, while sales and profits are usually highestduring the spring and summer seasons.  Inaddition, unusually severe weather conditions in some markets may delay thetiming of purchases and shipments from one quarter to another.

 

**GEOGRAPHICINFORMATION**

 

During the last threefiscal years, substantially all of our revenue was generated within NorthAmerica, and all of our long-lived assets are located within the United States.

 

**EXECUTIVE OFFICERS OFTHE COMPANY**

** **

***The following sets forth certaininformation with respect to the executive officers of the Company as ofDecember 29, 2007:***

*** ***

| **Name**            | ** ** | **Age** | ** ** | **Position with the Company**                                             |
|---------------------|------------|---------|------------|---------------------------------------------------------------------------|
| Kay  L. Toolson     |       | 63      |       | Chairman  and Chief Executive Officer                                     |
| John  W. Nepute     |       | 55      |       | President                                                                 |
| Richard  E. Bond    |       | 54      |       | Senior  Vice President, Secretary, and Chief Administrative Officer       |
| P.  Martin Daley    |       | 42      |       | Vice  President and Chief Financial Officer                               |
| Michael  P. Snell   |       | 39      |       | Vice  President of Sales and Marketing                                    |
| Charles  J. Kimball |       | 41      |       | Vice  President of Planning/Business Development and Corporate Controller |

*** ***

Mr. Toolson has served as ChiefExecutive Officer of the Company and its predecessor since 1986 and as Chairmanof the Company since July 1993. He served as President of the Company from1986 to October 2000, except for the periods from October 1995 to January 1997and August 1998 to September 1999. From 1973 to 1986, Mr. Toolsonheld executive positions with two motor coach manufacturers.

 

Mr. Nepute has served the Company asPresident since October 2000. He served as Executive Vice President,Treasurer and Chief Financial Officer from September 1999 to October 2000.Prior to that and from 1991, he served the Company and its predecessor in thecapacity of Vice President of Finance, Treasurer and Chief Financial Officer.From January 1988 until January 1991, he served as Controller of theCompany’s predecessor.

 

Mr. Bond has served as Senior VicePresident, Secretary, and Chief Administrative Officer of the Company since September 1999and as Vice President, Secretary, and Chief Administrative Officer beginning inAugust of 1998. Prior to, and from February 1997, he served theCompany as Vice President, Secretary, and General Counsel, having joined theCompany in January 1997. From 1987 to December 1996, he held theposition of Vice President, Secretary, and General Counsel of Holiday Rambler,which was acquired by the Company in 1996, and originally joined HolidayRambler as Vice President and Assistant General Counsel in 1984.

 

Mr. Daley has served as VicePresident and Chief Financial Officer since October 2000. He served as CorporateController from March 1996 to October 2000. Prior to that, he servedas the Oregon Controller since joining the Company in November 1994.

 

Mr. Snell has served as VicePresident of Sales and Marketing since November 2004. Prior to that andsince joining the Company in October 1994, he held various positionsincluding Vice President of Sales and National Sales Manager of MonacoMotorized Sales.

 

Mr. Kimball has served as VicePresident of Planning/Business Development since September 2007 and asCorporate Controller since October 2000. Prior to that and since joiningthe Company in October 1997 he served as the Oregon Division Controller.Before joining the Company, Mr. Kimball worked in the public accountingsector.

 

10

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** **

**ITEM 1A.**           RISK FACTORS

** **

Wehave listed below various risks and uncertainties relating to our businesses.This list is not inclusive of all the risks and uncertainties we face, but anyof these could cause our actual results to differ materially from the resultscontemplated by the forward-looking statements contained in this report or thatwe may issue from time to time in the future.

 

**THE EXPECTED BENEFITS OF OURRECENT FORMATION OF THE JOINT VENTURE, CCP, MAY NOT BE REALIZED **During the first quarter of 2007, wecompleted the formation of a joint venture (CCP) with International Truck andEngine Corporation (ITEC) for the purpose of manufacturing diesel chassis.  The process of establishing the operations ofthe joint venture may result in unforeseen operating difficulties and mayrequire a significant amount of management’s attention that would otherwise befocused on the ongoing development of our business.  The anticipated advantages of the jointventure, which are purchasing synergies, access to engineering and designexpertise from ITEC, and improvement of the utilization of our Roadmasterchassis manufacturing facility in Elkhart, Indiana, may not be realized.

 

**THE EXPECTED BENEFITS OF OUR ACQUISITION OFR-VISION AND AFFILIATES MAY NOT BE REALIZED** On November 18,2005 we acquired Indiana-based towable and motorhome manufacturer R-Vision, Inc.,R-Vision Motorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC(collectively “R-Vision”). The process of integrating R-Vision into our companyoperations may result in unforeseen operating difficulties and expenditures andmay absorb significant management attention that would otherwise be availablefor the ongoing development of our business. This may cause an interruption ora loss of momentum in our operating activities, which in turn, could have amaterial adverse affect on our operating results and financial condition.Moreover, the acquisition involves a number of additional risks, such as theloss of key employees of R-Vision as a result of the acquisition, theincorporation of acquired products into our existing product line, and thedifficulty of integrating disparate corporate cultures. Accordingly, theanticipated benefits may not be realized or the acquisition may have a materialadverse affect on our operating results and financial condition.

 

**WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS **Our net sales, gross margin, andoperating results may fluctuate significantly from period to period due to anumber of factors, many of which are not readily predictable. These factorsinclude the following:

 

·       The varying margins associated with themix of products we sell in any particular period.

 

·       The fact that we typically ship a largeamount of products near quarter end.

 

·       Our ability to utilize and expand ourmanufacturing resources efficiently.

 

·       Shortages of materials used in ourproducts.

 

·       The effects of inflation on the costs ofmaterials used in our products.

 

·       A determination by us that goodwill orother intangible assets are impaired and have to be written down to their fairvalues, resulting in a charge to our results of operations.

 

·       Our ability to introduce new models thatachieve consumer acceptance.

 

·       The introduction, marketing and sale ofcompeting products by others, including significant discounting offered by ourcompetitors.

 

·       The addition or loss of our dealers.

 

·       The timing of trade shows and rallies,which we use to market and sell our products.

 

·       Factors affecting the recreationalvehicle industry as a whole, including economic and seasonal factors.

 

·       Our inability to acquire and develop keypieces of property for on-going resort activity.

 

·       Fluctuations in demand for our resortlots due to changing economic and other conditions.

 

Our overall gross marginmay decline in future periods to the extent that we increase the percent 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 smallvariation in the number of recreational vehicles we sell in any quarter canhave a significant impact on total sales and operating results for thatquarter.

 

11

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Demand in therecreational vehicle industry generally declines during the winter months,while sales are generally higher during the spring and summer months. With thebroader range of products we now offer, seasonal factors could have asignificant impact on our operating results 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 willconsistently be able to accurately forecast the timing, rate, and mix oforders. 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.

 

**OUR BUSINESS SEGMENTS ARECYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY**  The recreational vehicle industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic, demographic, and political conditions thataffect disposable income for leisure-time activities. Our business isparticularly influenced by cycle swings in the class A market. While there hasbeen strong secular demand for recreational vehicles since the early 90’s ithas been driven by demand for towable recreational products. Since 2004, therehas been a notable divergence in growth rates between towable and motorizedrecreational vehicles.

 

Class A unitshipments peaked at approximately 37,300 units in 1994 and declined toapproximately 33,000 units in 1995. The class A segment then went on a steadyclimb and in 1999 recorded the highest year, in recent history, of class Ashipments, approximately 49,400. Over the next two years motorhome shipmentsdeclined to 33,400 in 2001. Class A shipments then rose for the next threeyears and in 2004 reached, 46,300. Over the last three years, however,shipments of class A motorhomes have dropped reaching pre-1994 levels of 32,900in 2007.

 

The towable segmentmoved through many of the same cyclical peaks and troughs historically. Theshipment level peaked in 1994 at 201,100 dropping-off to 192,200 in 1996 andthen growing to 249,600 in 1999. Towable unit shipments suffered a two-yeardrop-off like class A motorhomes in 2000 and 2001, dropping to 207,600. Sincethen, the market has expanded significantly reaching 334,600 in 2006, butfalling in 2007 to 297,900. Unlike the class A market, the towablessegment did not experience a slow down in 2005 and 2006, because manufacturershave successfully introduced popular new models and the segment wassignificantly aided by units sold to support the hurricane relief efforts inthe gulf coast.  The decline in 2007reflects consumers’ uneasiness surrounding the economy, fuel prices anddeclining real estate values.

 

Our business is subjectto the cyclical nature of the RV industry and principally the class A segment.Some of the factors that contribute to this cyclicality include fuel availabilityand costs, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence. Increasing interestrates and fuel prices over the last three years have adversely affected the class Arecreational vehicle market. An extended continuation of these conditions wouldmaterially affect the results of our operations and financial condition.

 

Our recreational vehicleresort properties are also impacted by the overall recreational vehicleindustry.  In addition, our real estateinvestments in the resort properties are the subject to the impacts of lendingchallenges and general market declines in the real estate market.    As a result, we may experience delays indeveloping and selling our resorts. These delays may result in losses that could materially affect ourresults of operations and financial condition.

 

**WE RELY ON A RELATIVELY SMALLNUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES** Although our products were offered by over 700dealerships located primarily in the United States and Canada as of December 29,2007, a significant percentage of our sales are concentrated among a relativelysmall number of independent dealers. For fiscal years 2006 and 2007, sales toone dealer, Lazy Days RV Center, accounted for 8.5% and 9.1%, respectively, oftotal sales. For fiscal years 2006 and 2007, sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 33.2% and 33.1% oftotal sales, respectively. The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on ourbusiness, results of operations, and financial condition.

 

**WE MAY HAVE TO REPURCHASE ADEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAYITS LENDER**  Asis common in the recreational vehicle industry, we enter into repurchaseagreements with the financing institutions used by our dealers to finance theirpurchases of our products. These agreements require us to repurchase the dealer’sinventory in the event that the dealer defaults on its credit facility with itslender. Obligations under these agreements vary from period to period, buttotaled approximately $518.6 million as of December 29, 2007, withapproximately 3.9% concentrated with one dealer. If we were obligated torepurchase a significant number of units under any repurchase agreement, ourbusiness, operating results, and financial condition could be adverselyaffected.

 

12

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**OUR ACCOUNTS RECEIVABLE BALANCEIS SUBJECT TO RISK** We sell our product to dealers who arepredominantly located in the United States and Canada. The terms and conditionsof payment are a combination of open trade receivables and commitments fromdealer floor plan lending institutions. For our RV dealers, terms are net 30days for units that are financed by a third party lender. Terms of open tradereceivables are granted by us, on a very limited basis, to dealers who havebeen subjected to evaluative credit processes conducted by us. For openreceivables, terms vary from net 30 days to net 180 days, depending on thespecific agreement. Agreements for payment terms beyond 30 days generallyrequire additional collateral, as well as security interest in the inventorysold. As of December 29, 2007, total trade receivables were $88.2 million,with approximately $70.5 million, or 80.0% of the outstanding accountsreceivable balance concentrated among floor plan lenders. The remaining $17.7million of trade receivables were concentrated substantially with one dealer.For resort lot customers, funds are required at the time of closing.

 

**WE MAY EXPERIENCE A DECREASEIN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THESUPPLY OF FUEL** An interruption in the supply, or asignificant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect ourbusiness. Diesel fuel and gasoline have, at various times in the past, beeneither expensive or difficult to obtain.

 

**WE DEPEND ON SINGLE OR LIMITEDSOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THEPRODUCTION OF OUR PRODUCTS** A number of important components for ourproducts are purchased from a single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana) for all diesel motor coaches, andchassis (Workhorse and Ford) for gas motor coaches. We have no long-term supplycontracts with these suppliers or their distributors, and we cannot be certainthat these suppliers will be able to meet our future requirements.Consequently, the Company has periodically been placed on allocation of theseand other key components. The last significant allocation occurred in 1997 fromAllison, and in 1999 from Ford. An extended delay or interruption in the supplyof any components that we obtain from a single supplier or from a limitednumber of suppliers could adversely affect our business, results of operations,and financial condition.

 

**OUR INDUSTRY IS VERY COMPETITIVE.WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE** The marketfor our products is very competitive. We currently compete with a number of manufacturersof motor coaches, fifth wheel trailers, and travel trailers. Some of thesecompanies have greater financial resources than we have and extensivedistribution networks. These companies, or new competitors in the industry, maydevelop products that customers in the industry 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 or product features, quality problemsassociated with these introductions, or a lack of market acceptance of newmodels or features could affect us adversely. For example, unexpected costsassociated with model changes have affected our gross margin in the past.Further, new product introductions can divert revenues from existing models andresult in fewer sales of existing products.

 

**OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES** Ourcustomers require demanding specifications for product performance andreliability. Because our products are complex and often use advancedcomponents, processes and techniques, undetected errors and design flaws mayoccur. Product defects result in higher product service, warranty and replacementcosts and may cause serious damage to our customer relationships and industryreputation, all of which would negatively affect our sales and business.

 

**OUR BUSINESS IS SUBJECT TOVARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS** We aresubject to litigation arising in the ordinary course of our business, typicallyfor product liability and warranty claims that are common in the recreationalvehicle industry. While we do not believe that the outcome of any pendinglitigation, net of insurance coverage, will materially adversely affect ourbusiness, results of operations, or financial condition, we cannot provideassurances in this regard because litigation is an inherently uncertain process.*

 

To date, we have beensuccessful in obtaining product liability insurance on terms that we consideracceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $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. We cannot be certain we will be able to obtain insurancecoverage in the future at acceptable levels or that the costs of such insurancewill be reasonable. Further, successful assertion against us of one or a seriesof large uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

 

13

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**IN ORDER TO BE SUCCESSFUL, WEMUST ATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES,AND OUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OFOPERATIONS** The Company’s future prospects dependupon retaining and motivating key management personnel, including Kay L.Toolson, the Company’s Chairman and Chief Executive Officer, and John W.Nepute, the Company’s President. The loss of one or more of these keymanagement personnel could adversely affect the Company’s business. Theprospects of the Company also depend in part on its ability to attract andretain highly skilled engineers and other qualified technical, manufacturing,financial, managerial, and marketing personnel. Competition for such personnelis intense, and there can be no assurance that the Company will be successfulin attracting and retaining such personnel.

 

**WE MAY EXPERIENCE UNEXPECTEDPROBLEMS AND EXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATIONPLAN** As we continue to work towards involving automatedmachinery and equipment to improve efficiencies and quality, we will be subjectto certain risks involving implementing new technologies into our facilities.

 

Theexpansion into new machinery and equipment technologies involves risks,including the following:

 

·       We must rely on timely performance bycontractors, subcontractors, and government agencies, whose performance we maybe unable to control.

 

·       The development of new processes involvescosts associated with new machinery, training of employees, and compliance withenvironmental, health, and other government regulations.

 

·       The newly developed products may not besuccessful in the marketplace.

 

·       We may be unable to complete a plannedmachinery and equipment implementation in a timely manner, which could resultin lower production levels and an inability to satisfy customer demand for ourproducts.

 

**WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCEPLANNING SYSTEM (ERP) IMPLEMENTATION** During 2006,we began to implement a new ERP system and will be subject to certain risksincluding the following:

 

·       We must rely on timely performance bycontractors whose performance we may be unable to control.

 

·       The implementation could result insignificant and unexpected increases in our operating expenses and capitalexpenditures, particularly if the project takes longer than we expect.

 

·       The project could complicate and prolongour internal data gathering and analysis processes.

 

·       We may need to restructure or develop ourinternal processes to adapt to the new system.

 

·       We could require extended work hours fromour employees and use temporary outside resources, resulting in increasedexpenses, to resolve any software configuration issues or to processtransactions manually until issues are resolved.

 

·       As management focuses attention on theimplementation, they could be diverted from other issues.

 

·       The project could disrupt our operationsif the transition to the ERP system creates new or unexpected difficulties orif the system does not perform as expected.

 

**OUR STOCK PRICE HAS HISTORICALLYFLUCTUATED AND MAY CONTINUE TO FLUCTUATE** The marketprice of our 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 us or our competitors,general conditions in the recreational vehicle market, and other events orfactors. In addition, the stocks of many recreational vehicle companies haveexperienced price and volume fluctuations which have not necessarily beendirectly related to the companies’ operating performance, and the market priceof our Common Stock could experience similar fluctuations.

 

**ITEM1B.**          UNRESOLVEDSTAFF COMMENTS

** **

None

 

14

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**ITEM2.**                   PROPERTIES

** **

TheCompany is headquartered in Coburg, Oregon, approximately 100 miles fromPortland, Oregon. The following table summarizes the Company’s currentfacilities:

 

| ** **          | ** ** | ** **       | ** ** | **Approximate** | ** ** | ** **                                            |
|---------------------|------------|------------------|------------|-----------------|------------|-------------------------------------------------------|
| **Facility**        | ** ** | **Owned/Leased** | ** ** | **Sq. Footage** | ** ** | **Activity**                                          |
| Coburg,  Oregon     |       | Owned            |       | 816,000         |       | Administrative,  Motor/Towable and Chassis production |
| Burns,  Oregon      |       | Owned            |       | 176,000         |       | Fiberglass  Components production                     |
| Bend,  Oregon       |       | Leased           |       | 12,000          |       | Electrical  Design & Assembly                |
| Harrisburg,  Oregon |       | Owned            |       | 274,500         |       | Service,  Chassis and Wood Components production      |
| Wakarusa,  Indiana  |       | Owned            |       | 1,154,000       |       | Administrative,  Motor/Towable production             |
| Nappanee,  Indiana  |       | Owned            |       | 130,000         |       | Wood  Components production                           |
| Elkhart,  Indiana   |       | Owned            |       | 708,000         |       | Service/Chassis  production/Towable production (1)    |
| Wildwood,  Florida  |       | Owned            |       | 75,000          |       | Service                                               |
| Warsaw,  Indiana    |       | Owned            |       | 400,000         |       | Administrative  and Motor/Towable production          |
| Milford,  Indiana   |       | Owned            |       | 63,000          |       | Specialty  production                                 |
| Goshen,  Indiana    |       | Owned            |       | 104,000         |       | Administrative  and Specialty production              |

----

| (1)   The 276,000 square feet of towable production was idled in the third quarter  of 2007. |
|---------------------------------------------------------------------------------------------------|

 

The Company believesthat its existing facilities will be sufficient to meet its productionrequirements for the foreseeable future.* Should the Company require increasedproduction capacity in the future, the Company believes that additional oralternative space adequate to serve the Company’s foreseeable needs would beavailable on commercially reasonable terms.*

 

Inaddition to the properties noted above related to building and servicingrecreational vehicles, the Company owns two developed luxury motor coachresorts and two properties under development as of December 29, 2007 asfollows:

** **

| ** **             | ** ** | ** **    | ** ** | ** **         | ** ** | ** **    | ** ** | ** **      | ** ** | **Number of** |
|------------------------|------------|---------------|------------|--------------------|------------|---------------|------------|-----------------|------------|---------------|
| ** **             | ** ** | **Developed** | ** ** | **Number of**      | ** ** | **Number of** | ** ** | **Undeveloped** | ** ** | **Potential** |
| **Resort Location**    | ** ** | **Acreage**   | ** ** | **Developed Lots** | ** ** | **Lots Sold** | ** ** | **Acreage**     | ** ** | **New Lots**  |
| Las  Vegas, Nevada     |       | 42            |       | 407                |       | 377           |       | 0               |       | 0             |
| Indio,  California     |       | 80            |       | 400                |       | 368           |       | 0               |       | 0             |
| La  Quinta, California |       | 0             |       | 0                  |       | 0             |       | 80              |       | 352           |
| Naples,  Florida       |       | 0             |       | 0                  |       | 0             |       | 24              |       | 184           |

** **

**ITEM3.**                   LEGALPROCEEDINGS

** **

TheCompany is involved in legal proceedings arising in the ordinary course of itsbusiness, including a variety of product liability and warranty claims typicalin the recreational vehicle industry. The Company does not believe that theoutcome of its pending legal proceedings, net of insurance coverage, will havea material adverse effect on the business, financial condition, or results ofoperations of the Company.*

 

**ITEM4.**                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

** **

**None.**

** **

**15**

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** **

**PART II**

** **
| **ITEM 5.** | **MARKET FOR THE REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY  SECURITIES** |
|-------------|------------------------------------------------------------------------------------------------------------------------------|

** **

TheCompany’s Common Stock is traded on the New York Stock Exchange under thesymbol “MNC.” The following table sets forth for the periods indicated the highand low sale prices for the Common Stock (rounded to the nearest $.01 pershare).

 

| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| **2007**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 17.95      |       | $          | 13.72 |   |
| Second Quarter |       | $          | 17.25      |       | $          | 14.17 |   |
| Third Quarter  |       | $          | 15.86      |       | $          | 11.80 |   |
| Fourth Quarter |       | $          | 14.89      |       | $          | 8.24 |   |
|           |       |       |       |       |       |
| **2006**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 14.84      |       | $          | 12.50 |   |
| Second Quarter |       | $          | 14.53      |       | $          | 11.62 |   |
| Third Quarter  |       | $          | 13.22      |       | $          | 10.02 |   |
| Fourth Quarter |       | $          | 15.28      |       | $          | 10.87 |   |

 

Asof March 3, 2008, there were approximately 744 holders of record of theCompany’s Common Stock.  A substantiallygreater number of holders of our stock are “street name” of beneficial holders,whose shares are held by record by banks, brokers or other financialinstitutions.

 

**DIVIDENDPOLICY**

 

TheCompany began paying quarterly dividends at the rate of $.05 per share on itsCommon Stock in March 2004. In February 2005, the Company declared anincreased dividend of $.06 per share on all Common Stock owned by holders ofrecord as of March 1, 2005. The Company has paid quarterly cash dividendsat this rate since March 2005 and currently expects that comparable cashdividends will be paid on a quarterly basis going forward.  However, the Company reserves the right toalter or discontinue this practice at any time depending on its economic performanceand financial condition.*

 

**ISSUERPURCHASES OF EQUITY SECURITIES**

 

InJanuary 2008, the Board of Directors approved a stock repurchase programwhere by up to an aggregate of $30 million worth of the Company’s outstandingshares of Common Stock may be repurchased from time to time.  There is no time restriction on thisauthorization to purchase Common Stock. The program provides for the Company to repurchase shares through the openmarket and other approved transactions at prices deemed appropriate by management.  The timing and amount of repurchasetransactions under the program will depend upon market conditions and corporateand regulatory considerations.  During January 2008,the Company repurchased 313,400 shares of common stock on the open market for anaverage price of $9.03 per share.

 

**PERFORMANCEGRAPH**

 

**               ***Notwithstanding any statement to the contrary in any of our previous orfuture filings with the SEC, the following information relating to the priceperformance of our Common Stock shall not be deemed “filed” with the SEC or “SolicitingMaterial” under the Exchange Act, or subject to Regulation 14A or 14C, or toliabilities of Section 18 of the Exchange Act except to the extent wespecifically request that such information be treated as soliciting material orto the extent we specifically incorporate this information by reference.*

 

16

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                The graph depicted below shows a comparison ofcumulative total stockholder returns of our Common Stock, the New York StockExchange Composite Index and a peer group of companies selected by the Company(the “Peer Group”), whose primary business is recreational vehicles.  The Peer Group consists of CoachmenIndustries, Inc., National RV Holdings, Inc., Fleetwood Enterprises, Inc.,Thor Industries, Inc., and Winnebago Industries, Inc.  The graph assumes that $100 was invested on December 31,2002 at the closing price for our Common Stock on such date, and that alldividends are reinvested.  In accordancewith the guidelines of the SEC, the stockholder return for each entity in thePeer Group has been weighted on the basis of market capitalization as of eachmeasurement date set forth in the graph. Historic stock price performance should not be considered indicative offuture stock price performance.

 

**Total Return to Stockholders**

**(Assumes $100 investments on12/31/02)**

 
| **Total Return Analysis** | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** | **12/31/2007** | ** ** |
|---------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Monaco Coach              |       | $              | 100.00     |           | $          | 143.81         |       | $              | 125.38     |           | $          | 82.28          |       | $ | 89.29 |   | $ | 57.06 |   |
| Peer Group                |       | $              | 100.00     |           | $          | 158.40         |       | $              | 188.94     |           | $          | 180.54         |       | $ | 186.55 |   | $ | 147.52 |   |
| NYSE Composite            |       | $              | 100.00     |           | $          | 128.81         |       | $              | 145.00     |           | $          | 155.08         |       | $ | 182.78 |   | $ | 194.81 |   |

Source: CTA Integrated Communications www.ctaintegrated.com (303)665-4200. Data from ReutersBRIDGE Data Networks

 

**ITEM6.**                    SELECTEDFINANCIAL DATA

** **

**SELECTED HISTORICALCONSOLIDATED FINANCIAL DATA**

** **

The ConsolidatedStatements of Income Data set forth below with respect to fiscal years 2005,2006, and 2007 and the Consolidated Balance Sheet Data at December 30,2006 and December 29, 2007, are derived from, and should be read inconjunction with, the audited Consolidated Financial Statements and Notesthereto of the Company included in this Annual Report on Form 10-K. TheConsolidated Statements of Income Data set forth below with respect to fiscalyears 2004 and 2005 and the Consolidated Balance Sheet Data at January 1,2005, December 30, 2006, and December 29, 2007 are derived fromaudited consolidated financial statements of the Company which are not includedin this Annual Report on Form 10-K.

 

17

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The data set forth inthe following table should be read in conjunction with, and are qualified intheir entirety by, Management’s Discussion and Analysis of Financial Conditionand Results of Operations, the Company’s Consolidated Financial Statements andthe Notes thereto appearing elsewhere in this Annual Report on Form 10-K.

 

**Five-Year SelectedFinancial Data**

** **

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

 
| ** **                                                                  | ** ** | **Fiscal Year** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                  | ** ** | **2003**        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Consolidated Statements of Income Data:**                                 | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                   |       | $               | 1,158,083  |   | $ | 1,386,269 |   | $ | 1,236,238 |   | $ | 1,297,986 |   | $ | 1,272,130 |   |
| Cost of sales                                                               |       | 1,019,423       |       | 1,217,457 |   | 1,111,468 |   | 1,173,443 |   | 1,131,262 |   |
| Gross profit                                                                |       | 138,660         |       | 168,812 |   | 124,770 |   | 124,543 |   | 140,868 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Selling, general, and administrative expenses                               |       | 100,709         |       | 109,145 |   | 113,179 |   | 120,465 |   | 117,459 |   |
| Plant relocation costs                                                      |       | 0               |       | 0 |   | 4,370 |   | 269 |   | 0 |   |
| Operating income                                                            |       | 37,951          |       | 59,667 |   | 7,221 |   | 3,809 |   | 23,409 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Other income, net                                                           |       | 260             |       | 343 |   | 255 |   | 615 |   | 851 |   |
| Interest expense                                                            |       | (2,968          | )          | (1,547 | ) | (1,820 | ) | (4,430 | ) | (3,496 | ) |
| Loss from investment in joint venture                                       |       | 0               |       | 0 |   | 0 |   | 0 |   | (614 | ) |
| Income (loss)  before income taxes, continuing operations                   |       | 35,243          |       | 58,463 |   | 5,656 |   | (6 | ) | 20,150 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Provision for  (benefit from) income taxes, continuing operations           |       | 13,220          |       | 21,914 |   | 1,687 |   | (992 | ) | 8,137 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                                           |       | 22,023          |       | 36,549 |   | 3,969 |   | 986 |   | 12,013 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax provision (benefit) |       | 177             |       | 156 |   | (1,321 | ) | 18 |   | 0 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Net income                                                                  |       | $               | 22,200     |   | $ | 36,705 |   | $ | 2,648 |   | $ | 1,004 |   | $ | 12,013 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                           |       |            |       |   |   |   |   |   |   |   |   |
| Basic from  continuing operations                                           |       | $               | 0.75       |   | $ | 1.24 |   | $ | 0.13 |   | $ | 0.03 |   | $ | 0.40 |   |
| Basic from  discontinued operations                                         |       | 0.01            |       | 0.01 |   | (0.04 | ) | 0.00 |   | 0.00 |   |
| Basic                                                                       |       | $               | 0.76       |   | $ | 1.25 |   | $ | 0.09 |   | $ | 0.03 |   | $ | 0.40 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Diluted from  continuing operations                                         |       | $               | 0.74       |   | $ | 1.22 |   | $ | 0.13 |   | $ | 0.03 |   | $ | 0.40 |   |
| Diluted from  discontinued operations                                       |       | 0.01            |       | 0.01 |   | (0.04 | ) | 0.00 |   | 0.00 |   |
| Diluted                                                                     |       | $               | 0.75       |   | $ | 1.23 |   | $ | 0.09 |   | $ | 0.03 |   | $ | 0.40 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Weighted-average common shares                                              |       |            |       |   |   |   |   |   |   |   |   |
| outstanding:                                                                |       |            |       |   |   |   |   |   |   |   |   |
| Basic                                                                       |       | 29,062,649      |       | 29,370,455 |   | 29,516,794 |   | 29,712,957 |   | 29,931,730 |   |
| Diluted                                                                     |       | 29,567,012      |       | 29,958,646 |   | 29,858,036 |   | 29,902,830 |   | 30,346,917 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| Cash dividends per common share                                             |       | $               | 0.00       |   | $ | 0.20 |   | $ | 0.24 |   | $ | 0.24 |   | $ | 0.24 |   |
|                                                                        |       |            |       |   |   |   |   |   |   |   |   |
| **Consolidated Operating Data:**                                            | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Units sold (includes discontinued operations):                              |       |            |       |   |   |   |   |   |   |   |   |
| Motor coaches                                                               |       | 7,051           |       | 8,199 |   | 6,221 |   | 5,762 |   | 5,856 |   |
| Towables                                                                    |       | 2,593           |       | 4,621 |   | 9,337 |   | 19,861 |   | 16,276 |   |

 

18

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| ** **                                 | ** ** | **January 3,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 29,** | ** ** |
|--------------------------------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2004**            | ** ** | **2005**            | ** ** | **2005**              | ** ** | **2006**              | ** ** | **2007**              | ** ** |
| **Consolidated Balance Sheet Data:**       | ** ** | ** **          | ** ** | ** **          | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Working capital                            |       | $                   | 121,231    |                | $          | 141,907               |       | $                     | 127,191    |                  | $          | 109,806 |   | $ | 111,997 |   |
| Total assets                               |       | $                   | 478,669    |                | $          | 540,238               |       | $                     | 587,467    |                  | $          | 558,150 |   | $ | 563,768 |   |
| Long-term borrowings, less current portion |       | $                   | 15,000     |                | $          | —                |       | $                     | 34,786     |                  | $          | 29,071 |   | $ | 23,357 |   |
| Total stockholders’ equity            |       | $                   | 286,248    |                | $          | 319,616               |       | $                     | 316,732    |                  | $          | 315,321 |   | $ | 325,943 |   |
|                                            |            |                     |            |                     |            |                       |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7.**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

The following discussionshould be read in conjunction with the Consolidated Financial Statements andthe related notes that appear elsewhere in this Annual Report on Form 10-K.The various sections of the following discussion contain a number offorward-looking statements, all of which are based on current expectations andcould be affected by the uncertainties and risk factors described throughoutthis report and particularly in Part I, “Item 1A. Risk Factors” and in Part I,“Item 1. Business.”

 

**OVERVIEW**

** **

*Background*

* *

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium recreational vehiclesincluding class A, B, and C motor coaches, as well as towable recreationalvehicles. The Company also develops and sells luxury motorcoach resortfacilities. These three operations, while closely tied into the recreationallifestyle, are segmented for reporting purposes as the Motorized RecreationalVehicle (MRV) segment, the Towable Recreational Vehicle (TRV) segment, and theMotorhome Resort (MR) segment.

 

*Motorizedand Towable Recreational Vehicle Segment Products*

* *

Our products range insuggested retail price from $50,000 to $650,000 for motor coaches and from$14,000 to $70,000 for towables. Based upon retail registrations in 2007 byStatistical Surveys, Inc., we believe we had 25.9% share of the market fordiesel class A motor coaches, a 6.0% share of the market for gas class Amotor coaches, a 16.3% share of the market for all class A motor coaches,a 3.1% market for all class C motor coaches, a 3.6% share of the marketfor fifth wheel towables and a 4.5% share of the market for travel trailers.

 

*MotorhomeResort Segment*

* *

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California. In addition, the Company has property in LaQuinta, California, and in Naples, Florida that is currently being developedinto motorhome resorts. The Resorts offer sales of individual lots to owners,and also offer a common interest in the amenities at the resort. Lot prices atthe two resorts range from $79,900 to $339,900. Amenities at the Resortsinclude club house facilities, tennis, swimming, and golf. The Resorts providedestination locations for premium Class A recreational vehicle owners, andhelp to promote the recreational lifestyle.

 

*BusinessChanges*

* *

We have conducted aseries of acquisitions during our history. Beginning in March 1993, we commencedoperations by acquiring substantially all of the assets and liabilities of apredecessor company that had been formed in 1968. In March 1996, weacquired the Holiday Rambler Division of Harley-Davidson, Inc., a manufacturerof a full line of class A motor coaches and towables. In August 2001,we acquired SMC Corporation, manufacturer of the Beaver and Safari brand class Amotorhomes. In November 2002, we acquired from Outdoor Resorts of America(“ORA”) three luxury motorcoach resort properties being developed by ORA in LasVegas, Nevada, Indio, California, and Naples, Florida. In September 2003,we sold the property in Naples, Florida. In November of 2005, we acquiredR-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, andRoadmaster, LLC, (referred to as “R-Vision”), manufacturers of R-Vision, Bison,and Roadmaster motorized and towable products. The R-Vision acquisition wasaccounted for using the purchase method of accounting, through a cash offer on November 18,2005. All operations of R-Vision have been incorporated for the period of November 18,2005 through December 29, 2007 in the consolidated annual financialstatements of the Company.

 

 

19

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During the third quarterof 2005, the Company announced the closure of its Royale Coach operations in Elkhart,Indiana. Royale Coach produced Prevost bus conversion motor coaches with pricepoints in excess of $1.4 million. Royale Coach sold approximately 20 coaches peryear and was not a significant portion of the Company’s overall business. As ofthe end of 2006, the Company had sold all remaining assets of Royale Coach. Inaccordance with Statements of Financial Accounting Standards No. 142, “Accountingfor Goodwill and Other Intangible Assets” (“SFAS 142”), no goodwillamortization has been recorded for any of the Company’s acquisitions for theyears of 2005, 2006, or 2007. Instead, SFAS 142 requires annual testing ofgoodwill for impairment at the reporting unit level. We completed our annualtesting of goodwill during the third quarter of 2006 as required by SFAS 142and determined that there has been no impairment requiring a write down. SeeNote 1 of Notes to the Company’s Consolidated Financial Statements.

 

Duringthe first quarter of 2007, the Company completed the formation of a jointventure with International Truck and Engine Corporation (ITEC) for the purposeof manufacturing diesel chassis.  Webelieve that this joint venture, known as Custom Chassis Products LLC (CCP),enables us to take advantage of purchasing synergies, access engineering anddesign expertise from ITEC, and improve the utilization of our Roadmasterchassis manufacturing facility in Elkhart, Indiana.  Our ownership interest is 49%, and we areaccounting for the activity of this operation using the equity method ofaccounting.

 

**RESULTS OF OPERATIONS**

** **

Thefollowing table sets forth our results of continuing operations for the fiscalyears ended December 30, 2006 and December 29, 2007 (dollars inthousands):

 

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 1,297,986  |              | 100.0      | %          | $          | 1,272,130         |       | 100.0      | %          | $          | (25,856    | ) | (2.0 | )% |
| Cost of sales                                  |       | 1,173,443  |       | 90.4              | %          | 1,131,262  |       | 88.9              | %          | 42,181     |       | 3.6        | %          |
| Gross profit                                   |       | 124,543    |       | 9.6               | %          | 140,868    |       | 11.1              | %          | 16,325     |       | 13.1       | %          |
| Selling,  general, and administrative expenses |       | 120,465    |       | 9.3               | %          | 117,459    |       | 9.2               | %          | 3,006      |       | 2.5        | %          |
| Plant relocation costs                         |       | 269        |       | 0.0               | %          | 0          |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                           |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income                               |       | $          | 3,809      |              | 0.3        | %          | $          | 23,409            |       | 1.9        | %          | $          | 19,600     |   | 514.6 | % |

* *

*Performancein 2007*

* *

*Motorizedand Towable Recreational Vehicle Segments*

* *

In the first half of2007, there was an upswing in the motorized wholesale market, but ended theyear flat as compared to 2006.  Retailsales for the motorized market were down in 2007 as compared to 2006.  Dealers have cited declining retail sales asa result of reduced values in the housing market, higher fuel costs anddeclining consumer confidence.  Weincreased motorized sales during 2007 and increased our market share ofmotorized diesel products.

 

The towable segment ofthe RV industry, which slowed in 2006, continued to do so in 2007.  The towable wholesale market decreased in thefirst half of 2007 as compared to 2006, but experienced a slight upswing in thesecond half of the year as compared to earlier in the year.  Overall retail sales for the towable marketincreased slightly for 2007.  In 2007, weexperienced a decrease in our towable sales as a result of market conditionsand FEMA travel trailer sales that occurred in the first quarter of 2006.

 

Due to these marketconstraints, we focused on aligning our plants and component facilities to meetlower demands, while still optimizing manufacturing facility utilization. Inthe fourth quarter of 2007, we combined our towable operations to improveefficiencies in both motorized and towable production facilities.

 

The recreational vehicleindustry is extremely competitive, and retail customers have many choicesavailable to them. To distinguish ourselves within the industry, we continue torefine our Franchise For The Future (FFTF) program, which was first introducedin June of 2005.  This program isdesigned to introduce the concept to our dealer partners that our specificbrands have intrinsic values as a selling tool. To support this, and toencourage our dealers to participate in FFTF, we worked with outside marketingconsultants to develop brand signage, informational computer kiosks, and brandspecific displays that are placed within our various independent dealer locations.In 2007, we brought the administration of our FFTF program in-house.  This resulted not only in cost savings, butit has allowed us to sell the program benefits to dealers as part of our 

 

20

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process rather than justadminister the program.  In 2006, wefollowed this up with Monaco Financial Services (MFS). MFS is a brandedfinancing program from General Electric Commercial Distribution Finance (GECDF)and General Electric Consumer Finance (GECF). Through MFS, our dealer partnersearn rebates from GECDF and GECF for wholesale floorplanning and retailfinancing for customers. We believe that these concepts, along with otherfeatures designed to encourage our dealers to focus selling efforts on our variousproduct offerings, will assist them in their sales efforts through the strengthof improved brand identity.

 

*MotorhomeResorts Segment*

* *

Our motorhome resortsegment experienced a decline in lot sales during 2007.  We are nearing the end of the resort projectsin both Indio, California and Las Vegas, Nevada.  Sales decreased due to having fewer lotsavailable for sale as well as competition with resales of owner lots.  In addition, the current troubles in overallreal estate values have had an impact on the demand for resort lots.  Nevertheless, we remain confident that wewill continue to sell the remaining lots in the resorts.*  As part of our focus to continue the growthof this segment, we acquired property in La Quinta, California and Naples,Florida that are being developed into two new motorhome resorts.  We also continue to examine additionalproperties for potential resort locations throughout various regions of theUnited States.

 

*2007Compared With 2006*

* *

Net sales decreased 2.0%from $1.298 billion in 2006 to $1.272 billion in 2007. Gross diesel motorizedrevenues were up 4.6%, gas motorized revenues were up 2.9%, and towablerevenues were down 16.6%. For 2007, gross diesel motorized sales accounted for69.1% of sales, gas motorized sales accounted for 8.5% of sales, and towablesaccounted for 22.4% of sales. For 2006, gross diesel motorized sales accountedfor 65.2% of sales, gas motorized sales accounted for 8.2% of sales, andtowables accounted for 26.6% of sales. The Company’s overall average unitselling price increased from $51,000 in 2006, to $58,000 in 2007. The increasein average selling price resulted from a combination of increased sales of theCompany’s motorized products and decreased sales of the towable products.  Also contributing to the change was the saleof 874 lower priced towable products to the Federal Emergency ManagementAssociation (FEMA) in the first half of 2006.

 

Grossprofit increased by $16.3 million from $124.5 million in 2006 to $140.9 millionin 2007 and gross margin increased from 9.6% in 2006 to 11.1% in 2007. Changesin the components of cost of sales are set forth in the following table(dollars in thousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 802,631    |              | 61.8       | %          | $          | 790,226           |       | 62.1                     | %          | 0.3 | % |
| Direct labor         |       | 134,654    |       | 10.4              | %          | 126,074    |       | 9.9               | %          | (0.5                     | )%         |
| Warranty             |       | 38,884     |       | 3.0               | %          | 40,752     |       | 3.2               | %          | 0.2                      | %          |
| Other direct         |       | 77,154     |       | 5.9               | %          | 60,180     |       | 4.7               | %          | (1.2                     | )%         |
| Indirect             |       | 120,120    |       | 9.3               | %          | 114,030    |       | 9.0               | %          | (0.3                     | )%         |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 1,173,443  |              | 90.4       | %          | $          | 1,131,262         |       | 88.9                     | %          | (1.5 | )% |

 

·       Direct materials increases in 2007, as apercent of sales, were 0.3% or $3.8 million. Subsequent to the end of secondquarter of 2006, the Company implemented a series of price increases to correctan unfavorable material usage rate.  Thisresulted in a decrease of direct material of $9.9 million in 2007.  This decrease was more than offset by a $10.3million increase due to changes in product mix and a $3.4 million increase dueto classification of chassis purchased from the CCP joint venture.  The total cost of diesel chassis nowpurchased from CCP are included in this line item in 2007 whereas in 2006 onlythe materials portion of the overall chassis cost was included.

 

·       Direct labor decreases in 2007, as apercent of sales, were 0.5% or $6.4 million. This decrease was primarily theresult of improvements in our plants as we realigned production facilities andconsolidated component facilities to meet demand, which included the jointventure operations as discussed above.

 

·       Increases in warranty expense in 2007, asa percent of sales, were 0.2% or $2.6 million. These increases were due tomajor production changes that occurred from July 2005 to June 2006,which involved combining production lines and shifting the plant locationswhere units were built.  We have beenexperiencing higher warranty claims in 2007 related to the units producedduring the period of change as there is a lag period from the production dateto warranty claim submissions.

 

21

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·       Decreases in other direct costs in 2007,as a percent of sales, were 1.2% or $15.3 million.  This decrease was primarily the result ofimprovements in costs associated with health care costs, workers’ compensationexpense and other employee benefits of $8.9 million, as well as reductions inout-of-policy goodwill repairs of $1.3 million and delivery expenses of $5.1million.

 

·       Decreases in indirect costs in 2007 were$6.1 million.  These decreases were theresult of improvements in efficiencies at our plants due to consolidation ofcomponent facilities, including the changes due to the joint ventureoperations.

 

Selling, general,and administrative expenses (S,G,&A) decreased by $3.0 million from $120.5million in 2006 to $117.5 million in 2007 and decreased as a percent of salesfrom 9.3% in 2006 to 9.2% in 2007. Changes in S,G,&A expenses are set forthin the following table (dollars in thousands):

 

| ** **                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **% **       | ** ** | **Change in**  | ** ** |
|---------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|---------------------|------------|
| ** **                            | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus, and benefit expenses |       | $          | 24,416     |              | 1.9        | %          | $          | 28,362            |       | 2.2                 | %          | 0.3 | % |
| Selling expenses                      |       | 41,072     |       | 3.1               | %          | 33,744     |       | 2.6               | %          | (0.5                | )%         |
| Settlement expense                    |       | 10,000     |       | 0.8               | %          | 12,390     |       | 1.0               | %          | 0.2                 | %          |
| Marketing expenses                    |       | 9,795      |       | 0.8               | %          | 9,558      |       | 0.8               | %          | 0.0                 | %          |
| Other                                 |       | 35,182     |       | 2.7               | %          | 33,405     |       | 2.6               | %          | (0.1                | )%         |
|                                  |       |       |       |              |       |       |       |              |       |                |       |
| Total S,G,&A  expenses            |       | $          | 120,465    |              | 9.3        | %          | $          | 117,459           |       | 9.2                 | %          | (0.1 | )% |

 

·       Increases in salaries, bonus and benefitexpenses in 2007 were $3.9 million. This increase was due to increases inmanagement bonus expense of $3.4 million and long-term stock-based programexpenses of $1.3 million, partially offset by a decrease in wages and otherbenefits of $695,000.

 

·       Decreases in selling expenses in 2007were $7.3 million. Lower sales volumes at our resort properties resulted in adecrease of $1.2 million of resort selling costs.  A decrease of $5.3 million was the result ofour efforts to reduce sales program costs, as well as due to lower salesvolumes. The rest of the decrease was due to lower sales commissions of$480,000 and decreases in various other related selling expenses.

 

·       Settlement expense (litigation settlementexpense) in 2007 increased by $2.4 million. The total dollar increase was theresult of increases in the number of litigation cases in 2007 compared to 2006as well as increases in the amounts reserved for certain pending litigation.

 

·       Decreases in marketing costs in 2007 were$237,000. These reductions were the result of savings due to lower expenses forprinting, advertising and club magazines of $492,000, offset by an increase of$272,000 related to shows and rallies expenses.

 

·       Decreases in other expenses in 2007 were$1.8 million. This decrease was predominately due to reductions in bad debtexpense of $1.1 million and resort lot participation accrual expense of $1.4million, partially offset by an increase in depreciation expense of $1.0million.

 

Operating income was$23.4 million, or 1.9% of sales, for 2007 compared to $3.8 million, or 0.3% ofsales for 2006.  Increases in operatingincome were due predominately to higher gross margins and improvements inS,G,&A costs, partially offset by a reduction in sales.

 

Net interest expensedecreased from $4.4 million in 2006 to $3.5 million in 2007, reflecting a lowerlevel of borrowing during 2007.  TheCompany’s interest expense included $203,000 in 2006 and $320,000 in 2007related to the amortization of debt issuance costs recorded in conjunction withthe Company’s credit facilities.

 

22

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The Company reported aprovision for income taxes from continuing operations of $8.1 million, or aneffective tax rate of 40.4% for 2007, compared to a benefit for income taxesfrom continuing operations of $992,000, on a pre-tax loss of $6,000 for 2006.The 2006 tax benefit includes a deferred tax benefit of $367,000 attributableto a change in state income tax laws and a tax benefit of $445,000 associatedwith the reversal of federal and state tax reserves no longer required. The2007 tax provision includes a permanent difference related to non-taxdeductible executive compensation.

 

Net income for 2007 was$12.0 million compared to net income of $1.0 million (including income fromdiscontinued operations of $18,000, net of taxes, related to the closure of theRoyale Coach facility, and pre-tax charges of $269,000 for the relocation ofthe Beaver facility) in 2006.  Theincrease was due to a higher gross margin and decreases in S,G,&A expenses.This was partially offset by an increase in the effective tax rate.

 

*2007 versus 2006 for theMotorized Recreational Vehicle Segment*

* *

Thefollowing table sets forth the results of the MRV segment for the fiscal yearsended December 30, 2006 and December 29, 2007 (dollars in thousands):

 
| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 941,657    |              | 100.0      | %          | $          | 998,448           |       | 100.0      | %          | $          | 56,791     |   | 6.0 | % |
| Cost of sales                                                         |       | 869,110    |       | 92.3              | %          | 887,830    |       | 88.9              | %          | (18,720    | )          | (2.2       | )%         |
| Gross profit                                                          |       | 72,547     |       | 7.7               | %          | 110,618    |       | 11.1              | %          | 38,071     |       | 52.5       | %          |
| Selling,  general, and administrative expenses and corporate overhead |       | 78,478     |       | 8.3               | %          | 85,900     |       | 8.6               | %          | (7,422     | )          | 9.5        | %          |
| Plant relocation costs                                                |       | 269        |       | 0.0               | %          | 0          |       | 0.0               | %          | 269        |       | 1.0        | %          |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $          | (6,200     | )                 | (0.6       | )%         | $          | 24,718            |       | 2.5        | %          | $          | 30,918     |   | 498.7 | % |

 

Net sales for the MRVsegment were up from $941.7 million in 2006 to $998.4 million in 2007. In 2007,gross diesel motorized revenues were up 4.6% and gas motorized revenues were up2.9%. Diesel products accounted for 89.0% of the MRV segment’s 2007 grossrevenues while gas products were 11%. The overall increase in revenues reflectsthe Company’s increase in retail market share in 2007 as well as an increase indiesel class A average selling price. Our MRV segment unit sales were up1.7% year over year from 5,756 units in 2006 to 5,856 units in 2007. Dieselmotorized unit sales remained unchanged as a percentage, but were down to 4,295units versus 4,297 in 2006, and gas motorized unit sales were up 7.0% to 1,561units versus 1,459 in 2006. Total average MRV segment unit selling prices wereup from $165,000 in 2006 to $169,000 in 2007.

 

Grossprofit for 2007 increased to $110.6 million, up from $72.5 million in 2006, andgross margin increased from 7.7% in 2006 to 11.1% in 2007. Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 591,365    |              | 62.8       | %          | $          | 624,129           |       | 62.5                     | %          | (0.3 | )% |
| Direct labor         |       | 97,206     |       | 10.3              | %          | 95,400     |       | 9.5               | %          | (0.8                     | )%         |
| Warranty             |       | 29,603     |       | 3.1               | %          | 31,897     |       | 3.2               | %          | 0.1                      | %          |
| Other direct         |       | 50,278     |       | 5.4               | %          | 40,792     |       | 4.1               | %          | (1.3                     | )%         |
| Indirect             |       | 100,658    |       | 10.7              | %          | 95,612     |       | 9.6               | %          | (1.1                     | )%         |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 869,110    |              | 92.3       | %          | $          | 887,830           |       | 88.9                     | %          | (3.4 | )% |

 

·       Direct materials decreases in 2007, as apercent of sales, were 0.3% or $3.0 million. Subsequent to the end of second quarter of 2006, the Company implementeda series of price increases to correct an unfavorable material usage rate.  This resulted in a decrease of directmaterial of $9.9 million in 2007.  Thisdecrease was partially offset by a $3.5 million increase due to changes inproduct mix and a $3.4 million increase due to classification of chassispurchased from the CCP joint venture. The total cost of diesel chassis now purchased from CCP are included inthis line item in 2007 whereas in 2006 only the materials portion of theoverall chassis cost was included.

 

23

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·       Direct labor decreases in 2007, as apercent of sales, were 0.8% or $8.0 million. This decrease was primarily the result of improvements in our plants aswe realigned production facilities and consolidated component facilities tomeet demand, which included the joint venture operations as discussed above.

 

·       Increases in warranty costs in 2007, as apercent of sales, were 0.1% or $998,000. These increases were due to major production changes that occurred from July 2005to June 2006, which involved combining production lines and shifting theplant locations where units were built. We have been experiencing higher warranty claims in 2007 related to theunits produced during the period of change as there is a lag period from theproduction date to warranty claim submissions.

 

·       Decreases in other direct costs in 2007,as a percent of sales, were 1.3% or $13.0 million.  This decrease was primarily the result ofimprovements in costs associated with health care costs, workers’ compensationexpense and other employee benefits of $8.0 million, as well as reductions inout-of-policy goodwill repairs of $3.0 million and delivery expenses of $2.0million.

 

·       Decreases in indirect costs in 2007 were$5.0 million.  These decreases were theresult of improvements in efficiencies at our plants due to consolidation ofcomponent facilities, including the changes due to the joint ventureoperations.

 

S,G,&A expenses forthe MRV segment increased slightly as a percent of sales due to highermanagement bonus levels allocated to the MRV segment as a result of improvedprofits for the Company as a whole.  Inaddition, in the fourth quarter of 2006, we completed a study on the allocationof corporate overhead, and allocated certain costs on an activity basis. Thesecosts are now classified in S,G,&A expense versus corporate overheadallocation. Prior periods are shown as previously reported as reclassificationis impractical. Corporate overhead allocation is comprised of certain sharedservices such as executive, financial, information systems, legal, and investorrelations expenses.

 

Plant relocation costsreflect the costs incurred to relocate the Bend, Oregon manufacturingoperations to the Coburg, Oregon plant. We believe this relocation willultimately result in improved margins for the Oregon operations.*

 

Operating incomeincreased as both a percent of sales and in total dollars due to higher salesand higher gross margins, which were partially offset by higher S,G,&Aexpenses as a percent of sales.

 

*2007 versus 2006  for the Towable Recreational Vehicle Segment*

* *

Thefollowing table sets forth the results of the TRV segment for the fiscal yearsended December 30, 2006 and December 29, 2007 (dollars in thousands):

 

| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 324,342    |              | 100.0      | %          | $          | 261,391           |       | 100.0      | %          | $          | (62,951    | ) | (19.4 | )% |
| Cost of sales                                                         |       | 292,876    |       | 90.3              | %          | 238,684    |       | 91.3              | %          | 54,192     |       | 18.5       | %          |
| Gross profit                                                          |       | 31,466     |       | 9.7               | %          | 22,707     |       | 8.7               | %          | (8,759     | )          | (27.8      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 30,060     |       | 9.2               | %          | 23,611     |       | 9.0               | %          | 6,449      |       | 21.5       | %          |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income                                                      |       | $          | 1,406      |              | 0.5        | %          | $          | (904              | )          | (0.3       | )%         | $          | (2,310     | ) | 164.3 | % |

 

Net sales for the TRVsegment were down from $324.3 million in 2006 to $261.4 million in 2007. Theoverall decrease in revenues reflected the FEMA travel trailer sales filled inthe first quarter of 2006, as well as the softer market conditions in 2007 anddecreases in market share for some of our towable products. Our unit sales weredown 15.7% in 2007 to 16,276 units. Average unit selling prices remained at$18,000 for 2006 and 2007 due to a change in the product mix of sales.

 

24

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Grossprofit for 2007 decreased to $22.7 million, down from $31.5 million in 2006,and gross margin decreased to 8.7% in 2007, down from 9.7% in 2006. Changes inthe components of cost of sales are set forth in the following table (dollarsin thousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 200,846    |              | 61.9       | %          | $          | 162,000           |       | 62.0                     | %          | 0.1 | % |
| Direct labor         |       | 36,912     |       | 11.4              | %          | 30,407     |       | 11.6              | %          | 0.2                      | %          |
| Warranty             |       | 9,281      |       | 2.8               | %          | 8,856      |       | 3.4               | %          | 0.6                      | %          |
| Other direct         |       | 26,814     |       | 8.3               | %          | 19,354     |       | 7.4               | %          | (0.9                     | )%         |
| Indirect             |       | 19,023     |       | 5.9               | %          | 18,067     |       | 6.9               | %          | 1.0                      | %          |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 292,876    |              | 90.3       | %          | $          | 238,684           |       | 91.3                     | %          | 1.0 | % |

 

·       Direct material increases in 2007, as apercent of sales, were 0.1% or $261,000. This increase was a result of thechanges in the mix of products sold.  In2006 versus 2007, there was a substantial amount of sales to FEMA for traveltrailers in the first quarter.  Theseunits had a lower direct material cost.

 

·       Direct labor increases in 2007, as apercent of sales, were 0.2% or $523,000. The increase was the result ofinefficiencies in our plants due to lower run rates in 2007 compared to 2006,and the change in plant locations where units were built during the fourthquarter of 2007.

 

·       Increases in warranty expense in 2007, asa percent of sales, were 0.6% or $1.6 million. These increases were due tomajor production changes that occurred from July 2005 to June 2006,which involved combining production lines and shifting the plant locationswhere units were built.  We have beenexperiencing higher warranty claims in 2007 related to the units producedduring the period of change as there is a lag period from the production dateto warranty claim submissions.

 

·       Decreases in other direct costs in 2007,as a percent of sales, were 0.9% or $2.4 million. This decrease was primarilythe result of improvements in costs associated with health care costs, workers’compensation expense and other employee benefits of $784,000 and deliveryexpenses of $1.6 million.

 

·       Decreases in indirect costs in 2007 of$956,000 were due to decreases in the variable portion of costs relative to thereduction in sales.

 

S,G,&A expenses forthe TRV segment decreased, as both a percent of sales and in total dollars, dueto decreases in selling expenses.  Inaddition, in the fourth quarter of 2006 we completed a study on the allocationof corporate overhead, and allocated certain costs on an activity basis. Thesecosts are now classified in S,G,&A expense versus corporate overheadallocation. Prior periods are shown as previously reported as reclassificationis impractical. Corporate overhead allocation is comprised of certain sharedservices such as executive, financial, information systems, legal, and investorrelations expenses.

 

Operating incomedecreased, as both a percent of sales and in total dollars, due to lower salesand gross profit which was only partially offset by a decrease in S,G,&Aexpenses as a percent of sales.

 

25

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* *

*2007 versus 2006 for theMotorhome Resorts Segment*

* *

The following table setsforth the results of the MR segment for the fiscal years ended December 30,2006 and December 29, 2007 (dollars in thousands):

 

| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **2007**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 31,987     |              | 100.0      | %          | $          | 12,291            |       | 100.0      | %          | $          | (19,696    | ) | (61.6 | )% |
| Cost of sales                                                         |       | 11,457     |       | 35.8              | %          | 4,748      |       | 38.6              | %          | 6,709      |       | 58.6       | %          |
| Gross profit                                                          |       | 20,530     |       | 64.2              | %          | 7,543      |       | 61.4              | %          | (12,987    | )          | (63.3      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 11,927     |       | 37.3              | %          | 7,948      |       | 64.7              | %          | 3,979      |       | 33.4       | %          |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income                                                      |       | $          | 8,603      |              | 26.9       | %          | $          | (405              | )          | (3.3       | )%         | $          | (9,008     | ) | (104.7 | )% |

 

Net sales decreased61.6% to $12.3 million compared to $32.0 million for 2006. This is due in partto weather conditions in the first quarter of 2007, as well as fewer lotsavailable for sale in 2007.  As ourinventories of available lots shrink, there is greater competition within theCompany’s own resorts from owner resales. In addition, the current troubles in overall real estate values have hadan impact on the demand for resort lots.   The Company still expects that while sales may remain slower thanexpected, the needs for luxury resort locations within the industry will remainstrong.*

 

Gross profit for the MRsegment decreased to 61.4% of sales in 2007, compared to 64.2% of sales in2006.  The gross margin decrease was dueto the additions of some amenities designed to enhance the appeal of the resortsand demand for lots, but this also resulted in a slight increase to the cost ofsales.

 

S,G,&A expensesincreased, as a percent of sales, due to lower sales that were not entirelyoffset by a reduction in total S,G,&A dollars.  In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocatedcertain costs on an activity basis. These costs are now located in S,G,&Aexpense. Prior periods are shown as previously reported as reclassification isimpractical. Corporate overhead allocation is comprised of certain sharedservices such as executive, financial, information systems, legal and investorrelations expenses.

 

Operating income changedfrom a profit in 2006 to a loss in 2007 due to lower lot sales and an increasein S,G,&A expenses as a percent of sales*.*

 

*2006 Compared With 2005*

* *

The following table setsforth our results of operations for the fiscal years ended December 31,2005 and December 30, 2006 (dollars in thousands):

 

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 1,236,238  |              | 100.0      | %          | $          | 1,297,986         |       | 100.0      | %          | $          | 61,748     |   | 5.0 | % |
| Cost of sales                                  |       | 1,111,468  |       | 89.9              | %          | 1,173,443  |       | 90.4              | %          | (61,975    | )          | (5.6       | )%         |
| Gross profit                                   |       | 124,770    |       | 10.1              | %          | 124,543    |       | 9.6               | %          | (227       | )          | (0.2       | )%         |
| Selling,  general, and administrative expenses |       | 113,179    |       | 9.2               | %          | 120,465    |       | 9.3               | %          | (7,286     | )          | (6.4       | )%         |
| Plant relocation costs                         |       | 4,370      |       | 0.3               | %          | 269        |       | 0.0               | %          | 4,101      |       | 93.8       | %          |
|                                           |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income                               |       | $          | 7,221      |              | 0.6        | %          | $          | 3,809             |       | 0.3        | %          | $          | (3,412     | ) | (47.3 | )% |

 

Net sales increased 5.0%from $1.236 billion in 2005 to $1.298 billion in 2006. Gross diesel motorizedrevenues were down 4.8%, gas motorized revenues were down 25.3%, and towablerevenues were up 79.5%. For 2006, gross diesel motorized sales accounted for65.3% of sales, gas motorized sales accounted for 8.2% of sales, and towablesaccounted for 26.6% of sales. For 2005, gross diesel motorized sales accountedfor 72.7% of sales, gas motorized sales accounted for 

 

26

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11.6% sales, and towablesaccounted for 15.7% of sales. The Company’s overall average unit selling pricedecreased from $78,000 in 2005 to $50,000 in 2006. The reduction in averageselling price resulted from a combination of increased sales of the Company’stowable products, the acquisition of R-Vision (which sells predominantly lowerpriced towables) and the sale of 874 lower priced towable products to theFederal Emergency Management Association (FEMA) in the first half of 2006.

 

Grossprofit decreased by $227,000 from $124.8 million in 2005 to $124.5 million in2006 and gross margin decreased from 10.1% in 2005 to 9.6% in 2006. Changes inthe components of cost of sales are set forth in the following table (dollarsin thousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 769,823    |              | 62.3       | %          | $          | 802,631           |       | 61.8                     | %          | (0.5 | )% |
| Direct labor         |       | 125,943    |       | 10.2              | %          | 134,654    |       | 10.4              | %          | 0.2                      | %          |
| Warranty             |       | 28,861     |       | 2.3               | %          | 38,884     |       | 3.0               | %          | 0.7                      | %          |
| Other direct         |       | 71,525     |       | 5.8               | %          | 77,154     |       | 5.9               | %          | 0.1                      | %          |
| Indirect             |       | 115,316    |       | 9.3               | %          | 120,120    |       | 9.3               | %          | 0.0                      | %          |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 1,111,468  |              | 89.9       | %          | $          | 1,173,443         |       | 90.4                     | %          | 0.5 | % |

 

·       Direct material decreases in 2006, as apercent of sales, were $6.5 million. This decrease was a result of the Company’spurchasing initiatives associated with motorized and towable production. Theoverall total dollar increase in direct materials of $32.8 million was relatedto sales volume increases.

 

·       Direct labor increases in 2006, as apercent of sales, were $2.6 million. This increase was the result of inefficienciesin our plants as we realigned production facilities to meet demand. Theremaining portion of the overall total dollar increase of $8.7 million indirect labor was the result of sales volume increases.

 

·       Increases in warranty expense in 2006, asa percent of sales, were $9.0 million. These increases were the result ofhigher warranty costs associated with some of our current model year motorizedproducts. The remaining portion of the overall total dollar increase inwarranty costs of $10.2 million was the result of sales volume increases.

 

·       Increases in other direct costs in 2006,as a percent of sales, were $1.3 million. This increase was the result ofincreased fuel prices which raised delivery costs. The remaining portion of theoverall total dollar increase in other direct costs of $4.3 million was theresult of sales volume increases.

 

·       Indirect costs in 2006, as a percent ofsales, were essentially unchanged. The overall total dollar increase of $4.8million was the result of sales volume increases.

 

Selling,general, and administrative expenses (S,G,&A) increased by $7.3 millionfrom $113.2 million in 2005 to $120.5 million in 2006 and increased, as apercent of sales, from 9.2% in 2005 to 9.4% in 2006. Changes in S,G,&Aexpenses are set forth in the following table (dollars in thousands):

 

| ** **                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|---------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus, and benefit expenses |       | $          | 18,521     |              | 1.5        | %          | $          | 24,416            |       | 1.9                      | %          | 0.4 | % |
| Selling expenses                      |       | 42,849     |       | 3.4               | %          | 41,072     |       | 3.2               | %          | (0.2                     | )%         |
| Settlement expense                    |       | 9,635      |       | 0.8               | %          | 10,000     |       | 0.8               | %          | 0.0                      | %          |
| Marketing expenses                    |       | 11,679     |       | 1.0               | %          | 9,795      |       | 0.8               | %          | (0.2                     | )%         |
| Other                                 |       | 30,495     |       | 2.5               | %          | 35,182     |       | 2.7               | %          | 0.2                      | %          |
|                                  |       |       |       |              |       |       |       |              |       |                     |       |
| Total S,G,&A  expenses            |       | $          | 113,179    |              | 9.2        | %          | $          | 120,465           |       | 9.4                      | %          | 0.2 | % |

 

27

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·        Increases insalaries, bonus and benefit expenses in 2006 were $5.9 million. This increasewas due to the addition of $3.1 million in wages and salaries associated withthe acquisition of R-Vision, as well as to the addition of approximately $2.6million in stock based compensation expense. The remaining portion of theoverall total dollar increase was related to increases in management bonusexpense.

 

·        Decreases inselling expenses in 2006 were $1.8 million. This decrease was due to lowercosts for selling programs at our dealers’ facilities of $5.1 million, whichwere offset by higher compensation to our sales staff of $3.3 million.

 

·        Settlementexpense (litigation settlement expense) in 2006 increased by $365,000. Thetotal dollar increase was the result of slight increases in the number oflitigation cases in 2006 versus 2005.

 

·        Decreases inmarketing costs in 2006 were $2.6 million. These reductions were the result ofsavings due to lower expenses associated with shows and rallies of $1.0million, and lower expenses for printing and advertising of $823,000.

 

·        Increases inother expenses in 2006 were $4.7 million. This increase was due to $2.6 millionin costs associated with the implementation of our ERP system. The remainingportion of the overall total dollar increase was related to variable expensesassociated with sales volume increases.

 

Operatingincome decreased $3.4 million from $7.2 million in 2005 to $3.8 million in2006. The Company’s higher level of selling, general, and administrative expense,as a percent of sales, combined with the decreases in the Company’s grossmargin, resulted in a decrease in operating margin from 0.6% in 2005 to 0.3% in2006.

 

Netinterest expense increased from $1.8 million in 2005 to $4.4 million in 2006.This increase was related to higher debt levels during 2006. Increases in debtwere mostly due to debt incurred with the acquisition of R-Vision. The Company’sinterest expense included $173,000 in 2005 and $203,000 in 2006 related to theamortization of debt issuance costs recorded in conjunction with the Company’scredit facilities.

 

TheCompany reported a benefit for income taxes from continuing operations of$992,000, on a pre-tax loss of $6,000, for 2006 compared to a provision forincome taxes from continuing operations of $1.7 million, on pre-tax income of$5.7 million, for 2005. The 2006 tax benefit includes a deferred tax benefit of$367,000 attributable to a change in state income tax laws and a tax benefit of$445,000 associated with the reversal of federal and state tax reserves nolonger required. The 2005 provision included a tax benefit associated with thereversal of federal and state tax reserves no longer required of $277,000.

 

Netincome for 2006 was $1.0 million (including income from discontinued operationsof $18,000, net of taxes, related to the closure of the Royale Coach facility,and pre-tax charges of $269,000 for the relocation of the Beaver facility)compared to net income of $2.6 million in 2005 due to a lower gross margin, andincreases in S,G,&A expenses. This was partially offset by a decrease inthe effective tax rate. The Company did not expense stock options granted in2005 and earlier periods, however, if option expensing had been required, theeffect on net income for 2005 for all previously granted options would havebeen a decrease of $3.2 million. *See Note 17 of the Company’sconsolidated financial statements for information regarding the calculation ofthe impact of expensing stock options. The Company has reflected the cost ofstock-based awards in its results of operations beginning in 2006.*

 

28

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*2006versus 2005 for the Motorized Recreational Vehicle Segment*

* *

Thefollowing table sets forth the results of the MRV segment for the fiscal yearsended December 31, 2005 and December 30, 2006 (dollars in thousands):

 
| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 1,017,766  |              | 100.0      | %          | $          | 941,657           |       | 100.0      | %          | $          | (76,109    | ) | (7.5 | )% |
| Cost of sales                                                         |       | 925,014    |       | 90.9              | %          | 869,110    |       | 92.3              | %          | 55,904     |       | 6.0        | %          |
| Gross profit                                                          |       | 92,752     |       | 9.1               | %          | 72,547     |       | 7.7               | %          | (20,205    | )          | (21.8      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 89,479     |       | 8.8               | %          | 78,478     |       | 8.3               | %          | 11,001     |       | 12.3       | %          |
| Plant relocation costs                                                |       | 4,370      |       | 0.4               | %          | 269        |       | 0.0               | %          | 4,101      |       | 93.8       | %          |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating loss                                                        |       | $          | (1,097     | )                 | (0.1       | )%         | $          | (6,200            | )          | (0.6       | )%         | $          | (5,103     | ) | (465.2 | )% |

 

Totalnet sales for the MRV segment were down from $1.0 billion in 2005, to $941.7million in 2006. Gross diesel motorized revenues were down 4.8% and gasmotorized revenues were down 25.3%. Diesel products accounted for 88.9% of theMRV segment’s 2006 gross revenues while gas products were 11.1%. The overall decreasein revenues reflected continuing challenges in the marketplace as dealers soughtto lower their current inventories because of softened retail demand and higherinterest costs associated with their floorplan borrowings. Our MRV segment unitsales were down 7.3% year over year from 6,211 units in 2005 to 5,756 units in2006. Diesel motorized unit sales were down 3.9% to 4,297 units and gasmotorized unit sales were down 16.2% to 1,459 units. Total average MRV segmentunit selling prices remained at $165,000 for 2005 and 2006.

 

Grossprofit for 2006 decreased to $72.5 million, down from $92.8 million in 2005,and gross margin decreased from 9.1% in 2005 to 7.7% in 2006. Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 638,188    |              | 62.7       | %          | $          | 591,365           |       | 62.8                     | %          | 0.1 | % |
| Direct labor         |       | 102,903    |       | 10.1              | %          | 97,206     |       | 10.3              | %          | 0.2                      | %          |
| Warranty             |       | 24,737     |       | 2.4               | %          | 29,603     |       | 3.1               | %          | 0.7                      | %          |
| Other direct         |       | 53,944     |       | 5.3               | %          | 50,278     |       | 5.4               | %          | 0.1                      | %          |
| Indirect             |       | 105,242    |       | 10.4              | %          | 100,658    |       | 10.7              | %          | 0.3                      | %          |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 925,014    |              | 90.9       | %          | $          | 869,110           |       | 92.3                     | %          | 1.4 | % |

 

·        Directmaterial increases in 2006, as a percent of sales, were $942,000. This increasewas due to changes in the mix of products produced in 2006 versus 2005. Theoverall decrease in total dollars associated with direct materials of $46.8million was due to lower sales volumes in 2006 as compared to 2005.

 

·        Direct laborincreases in 2006, as a percent of sales, were $1.9 million. This increase wasthe result of inefficiencies in our plants as we realigned productionfacilities to meet demand. The overall decrease in total dollars associatedwith direct labor of $5.7 million was due to lower sales volumes in 2006 ascompared to 2005.

 

·        Increases inwarranty costs in 2006, as a percent of sales, were $6.6 million. Theseincreases were the result of combining production lines and shifting the plantlocations where units were built. The remaining impact to warranty expense is aresult of lower sales volumes in 2006 as compared to 2005.

 

·        Increases inother direct costs in 2006, as a percent of sales, were $942,000. This increasewas due to increases for fuel costs associated with the delivery of ourproducts to our dealers. The overall decrease in total dollars associated withother direct costs of $3.7 million was due to lower sales volumes in 2006 ascompared to 2005.

 

29

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·        Increases inindirect costs in 2006, as a percent of sales, were $2.8 million. The increasein indirect costs is related to inefficiencies in our plants as we ran lowerproduction rates in 2006 versus 2005. The overall decrease in total dollarsassociated with indirect costs of $4.6 million was due to lower sales volumesin 2006 as compared to 2005.

 

S,G,&Aexpenses for the MRV segment increased, as a percent of sales, due to lowersales levels and increases in selling expenses. In addition, in the fourthquarter of 2006 we completed a study on the allocation of corporate overhead,and allocated certain costs on an activity basis. These costs are nowclassified in S,G,&A expense versus corporate overhead allocation. Priorperiods are shown as previously reported as reclassification is impractical.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal, and investor relationsexpenses.

 

Plantrelocation costs reflect the costs incurred to relocate the Bend, Oregonmanufacturing operations to the Coburg, Oregon plant.

 

Operatingloss increased as both a percent of sales and in total dollars due to lowergross margins, which was offset by a decrease in S,G,&A and corporateoverhead allocation as a percent of sales.

 

*2006 versus 2005 for theTowable Recreational Vehicle Segment*

* *

Thefollowing table sets forth the results of the TRV segment for the fiscal yearsended December 31, 2005 and December 30, 2006 (dollars in thousands):

 
| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 185,433    |              | 100.0      | %          | $          | 324,342           |       | 100.0      | %          | $          | 138,909    |   | 74.9 | % |
| Cost of sales                                                         |       | 174,242    |       | 94.0              | %          | 292,876    |       | 90.3              | %          | (118,634   | )          | (68.1      | )%         |
| Gross profit                                                          |       | 11,191     |       | 6.0               | %          | 31,466     |       | 9.7               | %          | 20,275     |       | 181.2      | %          |
| Selling,  general, and administrative expenses and corporate overhead |       | 13,191     |       | 7.1               | %          | 30,060     |       | 9.2               | %          | (16,869    | )          | (127.9     | )%         |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $          | (2,000     | )                 | (1.1       | )%         | $          | 1,406             |       | 0.5        | %          | $          | 3,406      |   | 170.3 | % |

 

Total net sales for theTRV segment were up from $185.4 million in 2005, to $324.3 million in 2006. Theoverall increase in revenues reflected the impact of the R-Vision acquisitionin November 2005. Our unit sales were up 112.7% in 2006 to 19,861 units.Average unit selling prices declined from $20,000 in 2005 to $17,000 in 2006.The decrease in average selling price was mostly due to the full year of salesfrom R-Vision. Sales of these units are not expected to continue in the future.

 

Gross profit for 2006increased to $31.5 million, up from $11.2 million in 2005, and gross marginincreased to 9.7% in 2006, up from 6.0% in 2005. Changes in the components ofcost of sales are set forth in the following table (dollars in thousands):

 

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 119,424    |              | 64.4       | %          | $          | 200,846           |       | 61.9                     | %          | (2.5 | )% |
| Direct labor         |       | 23,039     |       | 12.4              | %          | 36,912     |       | 11.4              | %          | (1.0                     | )%         |
| Warranty             |       | 4,124      |       | 2.2               | %          | 9,281      |       | 2.8               | %          | 0.6                      | %          |
| Other direct         |       | 17,581     |       | 9.5               | %          | 26,814     |       | 8.3               | %          | (1.2                     | )%         |
| Indirect             |       | 10,074     |       | 5.5               | %          | 19,023     |       | 5.9               | %          | 0.4                      | %          |
|                 |       |       |       |              |       |       |       |              |       |                     |       |
| Total cost of  sales |       | $          | 174,242    |              | 94.0       | %          | $          | 292,876           |       | 90.3                     | %          | (3.7 | )% |

 

30

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·        Directmaterial decreases in 2006, as a percent of sales, were $8.1 million. Thisdecrease was due to the impact of a full year of R-Vision products which have alower material cost as a percent of sales. The overall increase in total dollarsassociated with direct materials of $81.4 million is the result of the increaseof sales volumes in 2006 compared to 2005.

 

·        Direct labordecreases in 2006, as a percent of sales, were $3.2 million. The decrease inlabor was the result of the improvements in our facilities from integrating theR-Vision acquisition, and using some of their production processes in ourlegacy plants. The overall increase in total dollars associated with directlabor of $13.9 million is the result of the increase of sales volumes in 2006compared to 2005.

 

·        Increases inwarranty expense in 2006, as a percent of sales, were $1.9 million. Thisincrease was due to a shift in the mix of towables produced. In 2005, there wasa large amount of FEMA travel trailer production that carried very littlewarranty cost associated with their sales. The overall increase in totaldollars associated with warranty costs of $5.2 million is the result of theincrease of sales volumes in 2006 compared to 2005.

 

·        Decreases inother direct costs in 2006, as a percent of sales, were $3.9 million. Thisdecrease was the result of the inclusion of a full year’s sales of R-Visionproducts which have a lower direct cost structure than our legacy products. Theoverall increase in total dollars associated with other direct costs of $9.2 millionis the result of the increase of sales volumes in 2006 compared to 2005.

 

·        Increases inindirect costs in 2006, as a percent of sales, were $1.3 million. Theseincreases relate to inefficiencies in some of our plants as we reduced outputin the second half of 2006. The overall increase in total dollars associatedwith indirect costs of $8.9 million is the result of the increase of salesvolumes in 2006 compared to 2005.

 

S,G,&Aexpenses for the TRV segment increased as both a percent of sales and in totaldollars due to increases in selling expenses. In addition, in the fourth quarterof 2006 we completed a study on the allocation of corporate overhead, andallocated certain costs on an activity basis. These costs are now classified inS,G,&A expense versus corporate overhead allocation. Prior periods areshown as previously reported as reclassification is impractical. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal, and investor relations expenses.

 

Operatingincome changed from a loss in 2005 to a profit in 2006 due to higher revenuescoupled with improved gross margins that were only partially offset byincreases in S,G,&A expenses as a percent of sales.

 

*2006 versus 2005 for theMotorhome Resorts Segment*

* *

The following table setsforth the results of the MR segment for the fiscal years ended December 31,2005 and December 30, 2006 (dollars in thousands):

 
| ** **                                                            | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $          | 33,039     |              | 100.0      | %          | $          | 31,987            |       | 100.0      | %          | $          | (1,052     | ) | (3.2 | )% |
| Cost of sales                                                         |       | 12,212     |       | 37.0              | %          | 11,457     |       | 35.8              | %          | 755        |       | 6.2        | %          |
| Gross profit                                                          |       | 20,827     |       | 63.0              | %          | 20,530     |       | 64.2              | %          | (297       | )          | (1.4       | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 10,509     |       | 31.8              | %          | 11,927     |       | 37.3              | %          | (1,418     | )          | (13.5      | )%         |
|                                                                  |       |       |       |              |       |       |       |              |       |       |       |       |       |
| Operating income                                                      |       | $          | 10,318     |              | 31.2       | %          | $          | 8,603             |       | 26.9       | %          | $          | (1,715     | ) | (16.6 | )% |

 

31

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Netsales decreased 3.2% to $32.0 million compared to $33.0 million for 2005. Salesof lots in 2006 were impacted by newly developed lots not being available untilthe second half of the year as well as access issues at our Las Vegas locationdue to nearby construction.

 

Grossprofit for the MR segment increased to 64.2% of sales in 2006, compared to63.0% of sales in 2005. This was the result of the sales of higher marginedlots in the final phases of the development.

 

S,G,&Aexpenses increased due to increases in spending associated with marketingcosts. In addition, in the fourth quarter of 2006 we completed a study on theallocation of corporate overhead, and allocated certain costs on an activitybasis. These costs are now located in S,G,&A expense. Prior periods areshown as previously reported as reclassification is impractical. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

 

Operatingincome decreased due to lower sales levels and higher S,G,&A and corporateoverhead costs*.*

 

**LIQUIDITY AND CAPITALRESOURCES**

** **

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities. During 2007, the Companygenerated cash of $34.8 million from operating activities and had a net cashbalance of $6.3 million at December 29, 2007. The Company recognized $31.3million from net income and non-cash expenses such as depreciation,amortization, and stock based compensation. Major sources of cash flows fromoperating activities include an increase in trade accounts payable of $10.2million, an increase in income tax payable of $10.6 million, and an increase inaccrued expenses and other liabilities of $4.3 million. The uses of cash in2007 include an increase of $6.6 million in accounts receivable, an increase of$6.4 million in inventory, and an increase of $8.0 million in land held fordevelopment.  Increases in trade accountspayable relate to the increases in purchases for raw materials near the end of2007 versus 2006. In 2006, material was brought into the plants prior to the regularlyscheduled shutdown and was paid for before the end of 2006. Increases in incometax payable relate to the higher net income for 2007 as compared to 2006.  Increases in accrued expenses and otherliabilities are associated with an increase in the accrual for management bonusdue to the improved operating results of 2007. Increases in accounts receivable are mostly the result of highershipments of products near the end of 2007 versus the same period in 2006.  Increases in inventory levels in fiscal 2007were the result of the Company increasing finished goods at year end.  The increase in land held for development isdue to the purchase of the Naples, Florida property for resort development infiscal 2007.

 

TheCompany has a $40.0 million term loan (the “Term Debt”), which it incurred tocomplete the acquisition of R-Vision. In addition, it also utilizes a revolvingline of credit of $105.0 million. At the end of the 2007 year, there was nobalance outstanding on the revolving line of credit (the “Revolving Loan”), andTerm Debt borrowings were $28.6 million. At the election of the Company, theRevolving Loan and the Term Debt bear interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’s leverageratio. The Company also pays interest quarterly on the unused available portionof the Revolving Loan at varying rates, determined by the Company’s leverageratio. The Revolving Loan is due and payable in full on November 17, 2009and requires interest payments quarterly. The Term Debt requires quarterlyinterest payments and quarterly principal payments of $1.4 million, with afinal balloon payment of $12.9 million due on November 18, 2010. Both theRevolving Loan and Term Debt are collateralized by all the assets of theCompany and the credit facilities include various restrictions and financialcovenants. The Company was in compliance with these covenants at December 29,2007. The Company utilizes “zero balance” bank disbursement accounts in which anadvance on the line of credit is automatically made for checks clearing eachday. Since the balance of the disbursement account at the bank returns to zeroat the end of each day, the outstanding checks of the Company are reflected asa liability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. The cash balance at December 29, 2007 isthe cash maintained in the R-Vision bank accounts held with different financialinstitutions and thus not combined with the Company’s net book overdraftbalance.

 

InNovember 2005, the Company obtained a term loan of $500,000 from the Stateof Oregon in connection with the relocation of jobs to the Coburg, Oregonproduction facilities from the Bend, Oregon facility. The principal andinterest is due on April 30, 2009. The loan bears a 5% annual interestrate.

 

32

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TheCompany’s principal working capital requirements are for purchases of inventoryand financing of trade receivables. Many of the Company’s dealers financeproduct purchases under wholesale floor plan arrangements with third parties asdescribed below. At December 29, 2007, the Company had working capital ofapproximately $112.0 million, an increase of $2.2 million from working capitalof $109.8 million at December 30, 2006. The Company has been usingshort-term credit facilities and operating cash flow to finance its capitalexpenditures.

 

TheCompany believes that cash flow from operations and funds available under itsanticipated credit facilities will be sufficient to meet the Company’sliquidity requirements for the next 12 months.* The Company’s capitalexpenditures were $5.3 million and $9.3 million in 2007 and 2006, respectively,which included costs related to additions of automated machinery in many of itsproduction facilities, upgrades to its information systems infrastructure, andother various capitalized upgrades to existing facilities. The Companyanticipates that capital expenditures for all of 2008 will be approximately$8.0 to $10.0 million, which includes expenditures to purchase additionalmachinery and equipment in both the Company’s Coburg, Oregon and Wakarusa,Indiana facilities, as well as upgrades to existing information systemsinfrastructures.* The Company may require additional equity or debt financingto address working capital and facilities expansion needs, particularly if theCompany significantly increases the level of working capital assets such asinventory 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 noassurance that additional financing will be available if required or on termsdeemed favorable by the Company.

 

Asis typical in the recreational vehicle industry, many of the Company’s retaildealers utilize wholesale floor plan financing arrangements with third partylending institutions to finance their purchases of the Company’s products.Under the terms of these floor plan arrangements, institutional lenderscustomarily require the recreational vehicle manufacturer to agree torepurchase any unsold units if the dealer defaults on its credit facility fromthe lender, subject to certain conditions. The Company has agreements withseveral institutional lenders under which the Company currently has repurchaseobligations. The Company’s contingent obligations under these repurchase agreementsare reduced by the proceeds received upon the sale of any repurchased units.The Company’s obligations under these repurchase agreements vary from period toperiod up to 15 months. At December 29, 2007, approximately $518.6 millionof products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 3.9% concentrated with one dealer. Historically, the Company hasbeen successful in mitigating losses associated with repurchase obligations.During 2007, the losses associated with the exercise of repurchase agreementswere approximately $313,000, ($232,000, and $79,000 in 2006 and 2005,respectively). Gross repurchase amounts for 2007, 2006, and 2005, were $2.6million, $4.5 million, and $2.7 million, respectively. Dealers for the Companyundergo credit review prior to becoming a dealer and periodically thereafter. Financialinstitutions that provide floor plan financing also perform credit reviews andfloor checks on an ongoing basis. We closely monitor sales to dealers that area higher credit risk. The repurchase period is limited, usually to a maximum of15 months. We believe these activities help to minimize the number of requiredrepurchases. Additionally, the repurchase agreement specifies that the dealeris required to make principal payments during the repurchase period. Since theCompany repurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount. Thislower repurchase amount helps mitigate our loss when we offer the inventory toanother dealer at an amount lower than the original invoice as incentive forthe dealer to take the repurchased inventory. This helps minimize the losses weincur on repurchased inventory.

 

**OFF-BALANCE SHEETARRANGEMENTS**

** **

Asof December 29, 2007, the Company did not have any off-balance sheetarrangements that have, or are reasonably likely to have, a current or future materialeffect on the Company’s consolidated financial condition, results ofoperations, liquidity, capital expenditures or capital resources.

 

33

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**CONTRACTUAL OBLIGATIONS**

** **

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

 

**PAYMENTS DUE BY PERIOD**

*** ***
| ** **                            | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  (1)** | ** ** | **1 year or less**         | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt (2)                    |       | $                                         | 5,714      |   | $ | 23,357 |   | $ | 0 |   | $ | 0 |   | $ | 29,071 |   |
| Operating Leases (3)                  |       | 2,351                                     |       | 4,238 |   | 3,440 |   | 1,103 |   | 11,132 |   |
|                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations   |       | $                                         | 8,065      |   | $ | 27,595 |   | $ | 3,440 |   | $ | 1,103 |   | $ | 40,203 |   |

*** ***

**AMOUNT OF COMMITMENTEXPIRATION BY PERIOD**

*** ***
| ** **                 | ** ** | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** | ** ** |
|----------------------------|------------|------------------------------------------------------------------------|------------|
| **Other Commitments** | ** ** | **1 year or less**                                      | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit (4)         |       | $                                                                      | 0          |   | $ | 105,000 |   | $ | 0 |   | $ | 0 |   | $ | 105,000 |   |
| Guarantees (3)             |       | 0                                                                      |       | 0 |   | 10,930 |   | 0 |   | 10,930 |   |
| Repurchase Obligations (5) |       | 172,689                                                                |       | 345,897 |   | 0 |   | 0 |   | 518,586 |   |
|                       |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Total  Commitments         |       | $                                                                      | 172,689    |   | $ | 450,897 |   | $ | 10,930 |   | $ | 0 |   | $ | 634,516 |   |

 

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(1)             Theuncertain tax liability of $745,000 is excluded from the table as we can notmake a reasonably reliable estimate of the period in which it will bepaid.  See Note 13 of Notes to theConsolidated Financial Statements.

(2)             See Note 10of Notes to the Consolidated Financial Statements.

(3)             See Note 15of Notes to the Consolidated Financial Statements.

(4)             See Note 9of Notes to the Consolidated Financial Statements. The amount listed representsavailable borrowings on the line of credit at December 29, 2007.

(5)             Reflectsobligations under manufacturer repurchase commitments. See Note 20 of Notes tothe Consolidated Financial Statements.

 

**INFLATION**

** **

During2005 and to a lesser extent in 2006, we experienced increases in the prices ofcertain commodity items that we use in the manufacturing of our products. Theseinclude, but are not limited to, steel, copper, aluminum, petroleum, and wood.While these raw materials are not necessarily indicative of widespreadinflationary trends, they had an impact on our production costs. Accordingly,in the second half of 2006 we adjusted selling prices to compensate forincreases in commodity pricing. Also, due to increases in fuel prices,particularly in 2006, our cost of delivering coaches to our dealers rose.Accordingly, we increased our delivery charges in early 2007 to offset theserising costs. While we do not anticipate additional price increases, we mayfrom time to time increase our prices to maintain gross profit margins. If weshould continue to experience adverse trends in these prices it could have amaterial adverse impact on our business going forward. See “Results of Operations2007 Compared with 2006.”

 

**CRITICAL ACCOUNTINGPOLICIES**

** **

Thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to warranty costs, product liability, and impairment of goodwill.We base our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies and related judgments andestimates affect the preparation of our consolidated financial statements.

 

34

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**WARRANTYCOSTS**  Estimated warrantycosts are provided for at the time of sale of products with warranties coveringthe products for up to one year from the date of retail sale (five years forthe front and sidewall frame structure, and three years on the Roadmasterchassis). These estimates are based on historical average repair costs, as wellas other reasonable assumptions as have been deemed appropriate by management.

 

**PRODUCTLIABILITY** 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 legalcounsel based on professional judgment, as well as historical experience.

 

**IMPAIRMENTOF GOODWILL** The Company assesses the potential impairmentof goodwill in accordance with Financial Accounting Standards Board (FASB)Statement No. 142. This annual test involves management comparing the fairvalue of each of the Company’s reporting units to the respective carryingamounts, including goodwill, of the net book value of the reporting unit, todetermine if goodwill has been impaired. The Company uses an estimate ofdiscounted future cash flows to determine fair value for each reporting unit.

 

**INVENTORYALLOWANCE** The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated fair market value. These write-downs are based on assumptions aboutfuture sales demand and market conditions. If actual sales demand or marketconditions change from those projected by management, additional inventorywrite-downs may be required.

 

**INCOMETAXES** In conjunction withpreparing its consolidated financial statements, the Company must estimate itsincome taxes in each of the jurisdictions in which it operates. This processinvolves estimating actual current tax expense together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which are included in the consolidated balance sheets. The Companymust then assess the likelihood that the deferred tax assets will be recoveredfrom future taxable income, and to the extent management believes that recoveryis not likely, a valuation allowance must be established. Significantmanagement judgment is required in determining the Company’s provision forincome taxes, deferred tax assets and liabilities, and any valuation allowancerecorded against net deferred tax assets. A discussion of the income taxprovision and the components of the deferred tax assets and liabilities can befound in Note 13 to the Company’s consolidated financial statements.

 

**REPURCHASEOBLIGATIONS** Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement. The Company has recorded a liability associatedwith the disposition of repurchased inventory. To determine the appropriateliability, the Company calculates a reserve, based on an estimate of potentialnet losses, along with qualitative and quantitative factors, including dealerinventory turn rates, and the financial strength of individual dealers.

 

**NEW ACCOUNTINGPRONOUNCEMENTS**

** **

*FIN 48*

* *

InJune 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes” (the “Interpretation”). The Interpretation clarifies the accounting foruncertainty in income taxes recognized in accordance with FASB 109, “Accountingfor Income Taxes” by defining a criterion that an individual tax position mustbe met for any part of the benefit to be recognized in the financialstatements. The Interpretation is effective for fiscal years beginning after December 15,2006.  See Note 13 to the Company’sconsolidated financial statements included with this Annual Report on Form 10-K.

 

Wehave adopted the Interpretation as of the beginning of fiscal year 2007 andthere was no material effect on our financial position or results ofoperations.

 

*FAS 157*

* *

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statementdefines fair value, establishes a framework for measuring fair value, andexpands disclosure requirements regarding fair value measurements.  SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. We believe that the adoption for SFAS No. 157 will not have amaterial effect on our financial position or results of operations.

 

35

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*FAS 159*

* *

InFebruary 2007, the FASB issued SFAS No. 159, “Fair Value Option forFinancial Assets and Financial Liabilities.” This statement permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value.  Entities that elect the fair value optionwill report unrealized gains and losses in earnings at each subsequentreporting date.  The fair value optionmay be elected on an instrument-by-instrument basis, with few exceptions.  SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. We believe that the adoption for SFAS No. 159 will not have amaterial effect on our financial position or results of operations.

 

*EITF 06-11*

* *

InJune 2007, the FASB Emerging Issues Task Force issued EITF Issue No. 06-11,“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”  EITF 06-11 requires that a realized incometax benefit from dividends or dividend equivalent units paid on unvestedrestricted shares and restricted share units be reflected as an increase incontributed surplus and reflected as an addition to the Company’s excess taxbenefit pool, as defined under FAS 123R. EITF 06-11 is effective for the Company in the first quarter of fiscalyear 2009.  We are assessing the impactthat the EITF will have on our financial position and results of operations.

 

**ITEM7A.**           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

Weare exposed to market risks related to fluctuations in interest rates on ourborrowings. We do not currently use rate swaps, futures contracts or options onfutures, or other types of derivative financial instruments. Our line of creditpermits a combination of fixed and variable interest rate options which allowsus to minimize the effect of rising interest rates by locking in fixed ratesfor periods of up to 6 months. We believe these features of our creditfacilities help us reduce the risk associated with interest rate fluctuations.

 

36

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**ITEM8.**                    FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

** **

**INDEXTO FINANCIAL STATEMENTS**

 
| Monaco Coach Corporation—Consolidated Financial  Statements:                                                                                     |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of  Independent Registered Public Accounting Firm                                                                                              |   | 38     |
| Consolidated  Balance Sheets as of December 30, 2006 and December 29, 2007                                                                  |   | 39     |
| Consolidated  Statements of Income for the Years Ended December 31, 2005,  December 30, 2006, and December 29, 2007                    |   | 40     |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31,  2005, December 30, 2006, and December 29, 2007 |   | 41     |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2005,  December 30, 2006, and December 29, 2007                |   | 42     |
| Notes to  Consolidated Financial Statements                                                                                                           |   | 43     |

 

37

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**Report of IndependentRegistered Public Accounting Firm**

** **

**To the Stockholders and Board of Directors of Monaco CoachCorporation**

** **

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, stockholders’ equity and cash flows present fairly, inall material respects, the financial position of Monaco Coach Corporation andits subsidiaries (the “Company”) at December 29, 2007 and December 30,2006 and the results of their operations and their cash flows for each of thethree years in the period ended December 29, 2007 in conformity withaccounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained,in all material respects, effective internal control over financial reportingas of December 29, 2007, based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).  The Company’s management is responsible for thesefinancial statements, for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Report onInternal Control over Financial Reporting. Our responsibility is to express opinions on these financial statementsand on the Company’s internal control over financial reporting based on ourintegrated audits.  We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of material misstatementand whether effective internal control over financial reporting was maintainedin all material respects.  Our audits ofthe financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

As discussed in Note 17to the consolidated financial statements, the Company changed the manner inwhich it accounts for stock-based compensation in 2006. As discussed in Note 1to the consolidated financial statements, the Company changed the manner inwhich it accounts for uncertain tax positions as of December 31, 2006.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
| Portland, Oregon               |
|                           |
| March 13, 2008            |

** **

**38**

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** **

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

** **
| ** **                                                                                                                   | ** ** | **December 30,** | ** ** | **December 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2007**              | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current assets:                                                                                                              |       |                  |       |                  |       |
| Cash                                                                                                                         |       | $                     | 4,984      |                  | $          | 6,282 |   |
| Trade  receivables, net                                                                                                      |       | 81,588                |       | 88,170                |       |
| Inventories, net                                                                                                             |       | 155,871               |       | 158,236               |       |
| Resort lot  inventory                                                                                                        |       | 7,997                 |       | 8,838                 |       |
| Prepaid expenses                                                                                                             |       | 5,624                 |       | 5,142                 |       |
| Income taxes  receivable                                                                                                     |       | 6,901                 |       | 0                     |       |
| Deferred income  taxes                                                                                                       |       | 38,038                |       | 37,608                |       |
| Total current  assets                                                                                                        |       | 301,003               |       | 304,276               |       |
|                                                                                                                         |       |                  |       |                  |       |
| Property, plant, and equipment, net                                                                                          |       | 153,895               |       | 144,291               |       |
| Land held for development                                                                                                    |       | 16,300                |       | 24,321                |       |
| Investment in joint venture                                                                                                  |       | 0                     |       | 4,059                 |       |
| Debt issuance costs, net of accumulated amortization  of $912 and $1,098, respectively                                       |       | 540                   |       | 498                   |       |
| Goodwill                                                                                                                     |       | 86,412                |       | 86,323                |       |
|                                                                                                                         |       |                  |       |                  |       |
| Total assets                                                                                                                 |       | $                     | 558,150    |                  | $          | 563,768 |   |
|                                                                                                                         |       |                  |       |                  |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                         |       |                  |       |                  |       |
| Book overdraft                                                                                                               |       | $                     | 16,626     |                  | $          | 1,601 |   |
| Current portion  of long-term debt                                                                                           |       | 5,714                 |       | 5,714                 |       |
| Line of credit                                                                                                               |       | 2,036                 |       | 0                     |       |
| Income taxes  payable                                                                                                        |       | 0                     |       | 3,726                 |       |
| Accounts payable                                                                                                             |       | 72,591                |       | 82,833                |       |
| Product  liability reserve                                                                                                   |       | 15,764                |       | 14,625                |       |
| Product warranty  reserve                                                                                                    |       | 33,804                |       | 35,171                |       |
| Accrued expenses  and other liabilities                                                                                      |       | 44,364                |       | 48,609                |       |
| Discontinued  operations                                                                                                     |       | 298                   |       | 0                     |       |
| Total current  liabilities                                                                                                   |       | 191,197               |       | 192,279               |       |
|                                                                                                                         |       |                  |       |                  |       |
| Long-term debt, less current portion                                                                                         |       | 29,071                |       | 23,357                |       |
| Deferred income taxes                                                                                                        |       | 21,678                |       | 21,506                |       |
| Deferred revenue                                                                                                             |       | 883                   |       | 683                   |       |
| Total  liabilities                                                                                                           |       | 242,829               |       | 237,825               |       |
|                                                                                                                         |       |                  |       |                  |       |
| Commitments and contingencies (Note 20)                                                                                      |       |                  |       |                  |       |
|                                                                                                                         |       |                  |       |                  |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                | ** ** | ** **            | ** ** | ** **            | ** ** |
| Preferred stock,  $.01 par value; 1,934,783 shares authorized, no shares outstanding                                         |       |                  |       |                  |       |
| Common stock,  $.01 par value; 50,000,000 shares authorized, 29,769,356 and 29,989,534  issued and outstanding, respectively |       | 298                   |       | 300                   |       |
| Additional paid-in capital                                                                                                   |       | 63,722                |       | 69,514                |       |
| Retained earnings                                                                                                            |       | 251,301               |       | 256,129               |       |
| Total  stockholders’ equity                                                                                             |       | 315,321               |       | 325,943               |       |
|                                                                                                                         |       |                  |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                     | 558,150    |                  | $          | 563,768 |   |

** **

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

39

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**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF INCOMEfor the years ended December 31, 2005, December 30, 2006, and December 29,2007(in thousands of dollars, except share and per share data)**

** **
| ** **                                                                  | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                   |       | $          | 1,236,238  |       | $          | 1,297,986  |       | $ | 1,272,130 |   |
| Cost of sales                                                               |       | 1,111,468  |       | 1,173,443  |       | 1,131,262  |       |
| Gross profit                                                                |       | 124,770    |       | 124,543    |       | 140,868    |       |
|                                                                        |       |       |       |       |       |       |       |
| Selling, general, and administrative expenses                               |       | 113,179    |       | 120,465    |       | 117,459    |       |
| Plant relocation costs                                                      |       | 4,370      |       | 269        |       | 0          |       |
| Operating income                                                            |       | 7,221      |       | 3,809      |       | 23,409     |       |
|                                                                        |       |       |       |       |       |       |       |
| Other income, net                                                           |       | 255        |       | 615        |       | 851        |       |
| Interest expense                                                            |       | (1,820     | )          | (4,430     | )          | (3,496     | )          |
| Loss from investment in joint venture                                       |       | 0          |       | 0          |       | (614       | )          |
| Income (loss)  before income taxes, continuing operations                   |       | 5,656      |       | (6         | )          | 20,150     |       |
|                                                                        |       |       |       |       |       |       |       |
| Provision for (benefit from) income taxes, continuing  operations           |       | 1,687      |       | (992       | )          | 8,137      |       |
| Income from continuing operations                                           |       | 3,969      |       | 986        |       | 12,013     |       |
|                                                                        |       |       |       |       |       |       |       |
| Income (loss) from discontinued operations, net of tax  provision (benefit) |       | (1,321     | )          | 18         |       | 0          |       |
| Net income                                                                  |       | $          | 2,648      |       | $          | 1,004      |       | $ | 12,013 |   |
|                                                                        |       |       |       |       |       |       |       |
| Earnings (loss) per common share:                                           |       |       |       |       |       |       |       |
| Basic from  continuing operations                                           |       | $          | 0.13       |       | $          | 0.03       |       | $ | 0.40 |   |
| Basic from  discontinued operations                                         |       | (0.04      | )          | 0.00       |       | 0.00       |       |
| Basic                                                                       |       | $          | 0.09       |       | $          | 0.03       |       | $ | 0.40 |   |
|                                                                        |       |       |       |       |       |       |       |
| Diluted from  continuing operations                                         |       | $          | 0.13       |       | $          | 0.03       |       | $ | 0.40 |   |
| Diluted from  discontinued operations                                       |       | (0.04      | )          | 0.00       |       | 0.00       |       |
| Diluted                                                                     |       | $          | 0.09       |       | $          | 0.03       |       | $ | 0.40 |   |
|                                                                        |       |       |       |       |       |       |       |
| Weighted-average common shares outstanding:                                 |       |       |       |       |       |       |       |
| Basic                                                                       |       | 29,516,794 |       | 29,712,957 |       | 29,931,730 |       |
| Diluted                                                                     |       | 29,858,036 |       | 29,902,830 |       | 30,346,917 |       |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

40

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** **

**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYfor the years ended December 31, 2005, December 30, 2006, and December 29,2007(in thousands of dollars, except share data)**

** **
| ** **                                | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balances, January 1, 2005            |       | 29,425,787       |       | $           | 294        |           | $          | 57,454       |       | $          | 261,868    |   | $ | 319,616 |   |
| Issuance of common stock                  |       | 135,979          |       | 2           |       | 1,420          |       |         |       | 1,422      |       |
| Stock-based compensation expense          |       |             |       |        |       | 16             |       |         |       | 16         |       |
| Tax benefit of stock options exercised    |       |             |       |        |       | 115            |       |         |       | 115        |       |
| Dividends paid                            |       |             |       |        |       |           |       | (7,085       | )          | (7,085     | )          |
| Net income                                |       |             |       |        |       |           |       | 2,648        |       | 2,648      |       |
| Balances, December 31, 2005          |       | 29,561,766       |       | 296         |       | 59,005         |       | 257,431      |       | 316,732    |       |
| Issuance of common stock                  |       | 207,590          |       | 2           |       | 1,797          |       |         |       | 1,799      |       |
| Stock-based compensation expense          |       |             |       |        |       | 2,759          |       |         |       | 2,759      |       |
| Tax benefit of stock-based award activity |       |             |       |        |       | 161            |       |         |       | 161        |       |
| Dividends paid                            |       |             |       |        |       |           |       | (7,134       | )          | (7,134     | )          |
| Net income                                |       |             |       |        |       |           |       | 1,004        |       | 1,004      |       |
| Balances, December 30, 2006          |       | 29,769,356       |       | 298         |       | 63,722         |       | 251,301      |       | 315,321    |       |
| Issuance of common stock                  |       | 220,178          |       | 2           |       | 1,506          |       |         |       | 1,508      |       |
| Stock-based compensation expense          |       |             |       |        |       | 4,011          |       |         |       | 4,011      |       |
| Tax benefit of stock-based award activity |       |             |       |        |       | 275            |       |         |       | 275        |       |
| Dividends paid                            |       |             |       |        |       |           |       | (7,185       | )          | (7,185     | )          |
| Net income                                |       |             |       |        |       |           |       | 12,013       |       | 12,013     |       |
| Balances, December 29, 2007          |       | 29,989,534       |       | $           | 300        |           | $          | 69,514       |       | $          | 256,129    |   | $ | 325,943 |   |

** **

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

** **

**41**

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** **

**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSfor the years ended December 31, 2005, December 30, 2006, and December 29,2007(in thousands of dollars)**

** **
| ** **                                                                                   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Increase (Decrease) in Cash:**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                         |       |       |       |       |       |       |       |
| Cash flows from operating activities:                                                        |       |       |       |       |       |       |       |
| Net income                                                                                   |       | $          | 2,648      |       | $          | 1,004      |       | $ | 12,013 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |       |       |       |       |       |       |
| Loss on sale of  assets                                                                      |       | 276        |       | 14         |       | 58         |       |
| Depreciation and  amortization                                                               |       | 10,678     |       | 14,177     |       | 14,132     |       |
| Deferred income  taxes                                                                       |       | (2,943     | )          | (1,900     | )          | 347        |       |
| Stock-based  compensation expense                                                            |       | 16         |       | 2,759      |       | 4,108      |       |
| Net losses in  equity investment                                                             |       | 0          |       | 0          |       | 614        |       |
| Changes in  working capital accounts:                                                        |       |       |       |       |       |       |       |
| Trade  receivables, net                                                                      |       | 39,203     |       | 21,078     |       | (6,582     | )          |
| Inventories                                                                                  |       | (2,916     | )          | 27,421     |       | (6,425     | )          |
| Resort lot inventory                                                                         |       | 145        |       | 1,138      |       | (841       | )          |
| Prepaid expenses                                                                             |       | 1,422      |       | (1,270     | )          | 479        |       |
| Land held for  development                                                                   |       | 0          |       | (16,300    | )          | (8,022     | )          |
| Accounts payable                                                                             |       | (5,947     | )          | (5,708     | )          | 10,242     |       |
| Product  liability reserve                                                                   |       | (1,619     | )          | (3,762     | )          | (1,139     | )          |
| Product warranty  reserve                                                                    |       | (4,486     | )          | 902        |       | 1,093      |       |
| Income taxes  payable                                                                        |       | (2,293     | )          | (6,664     | )          | 10,627     |       |
| Accrued expenses  and other liabilities                                                      |       | 805        |       | 7,224      |       | 4,277      |       |
| Deferred revenue                                                                             |       | 0          |       | 883        |       | (200       | )          |
| Discontinued  operations                                                                     |       | (662       | )          | 4,271      |       | (18        | )          |
| Net cash  provided by operating activities                                                   |       | 34,327     |       | 45,267     |       | 34,763     |       |
|                                                                                         |       |       |       |       |       |       |       |
| Cash flows from investing activities:                                                        |       |       |       |       |       |       |       |
| Additions to  property, plant, and equipment                                                 |       | (17,718    | )          | (9,324     | )          | (5,279     | )          |
| Investment in  joint venture                                                                 |       | 0          |       | 0          |       | (366       | )          |
| Payment for  business acquisition, net of cash acquired                                      |       | (54,601    | )          | 0          |       | 0          |       |
| Proceeds from  sale of assets                                                                |       | 123        |       | 215        |       | 644        |       |
| Discontinued  operations                                                                     |       | (4         | )          | 0          |       | 0          |       |
| Net cash used in  investing activities                                                       |       | (72,200    | )          | (9,109     | )          | (5,001     | )          |
|                                                                                         |       |       |       |       |       |       |       |
| Cash flows from financing activities:                                                        |       |       |       |       |       |       |       |
| Book overdraft                                                                               |       | 12,475     |       | 2,076      |       | (15,025    | )          |
| Payments on  lines of credit, net                                                            |       | (9,062     | )          | (22,964    | )          | (2,036     | )          |
| Borrowing  (payments) on long-term notes payable                                             |       | 40,500     |       | (5,715     | )          | (5,714     | )          |
| Debt issuance  costs                                                                         |       | (298       | )          | (79        | )          | (278       | )          |
| Dividends paid                                                                               |       | (7,085     | )          | (7,134     | )          | (7,194     | )          |
| Issuance of  common stock                                                                    |       | 1,537      |       | 1,799      |       | 1,508      |       |
| Tax benefit of  stock-based award activity                                                   |       | 0          |       | 161        |       | 275        |       |
| Discontinued  operations                                                                     |       | 392        |       | 96         |       | 0          |       |
| Net cash  provided by (used in) financing activities                                         |       | 38,459     |       | (31,760    | )          | (28,464    | )          |
|                                                                                         |       |       |       |       |       |       |       |
| Net change in cash                                                                           |       | 586        |       | 4,398      |       | 1,298      |       |
| Cash at beginning of period                                                                  |       | 0          |       | 586        |       | 4,984      |       |
|                                                                                         |       |       |       |       |       |       |       |
| Cash at end of period                                                                        |       | $          | 586        |       | $          | 4,984      |       | $ | 6,282 |   |

** **

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

** **

**42**

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** **

 

 

** **

**MONACO COACH CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.     BUSINESS AND SIGNIFICANT ACCOUNTINGPOLICIES:**

** **

**Business**

** **

MonacoCoach Corporation and its subsidiaries (the “Company”) manufacture premiummotor coaches and towable recreational vehicles at manufacturing facilities inOregon and Indiana. These products are sold to independent dealers primarilythroughout the United States and Canada. In addition, the Company owns twomotor coach resort properties, where the developed lots are sold to retailcustomers, and two additional parcels of land that are being developed intoresorts.

 

TheCompany’s core business activities are comprised of three distinct operations.The first is the design, manufacture, and sale of motorized recreationalvehicles. The second is the design, manufacture, and sale of towablerecreational vehicles. The third is the development and sale of motor coachrecreation resort lots. Accordingly, the Company has presented segmentedfinancial information for these three segments at Note 12 of the Company’sNotes to Consolidated Financial Statements.

 

**Consolidation Policy**

** **

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All material intercompany transactions and balanceshave been eliminated. The Company has no material variable interest in anyvariable interest entities.

 

**Fiscal Period**

** **

The Company follows a52/53 week fiscal year period ending on the Saturday closest to December 31.Interim periods also end on the Saturday closest to the calendar quarter end.The fiscal periods were 52 weeks long for 2005, 2006, and 2007. All referencesto years in the consolidated financial statements relate to fiscal years ratherthan calendar years.

 

**Estimates and IndustryFactors**

** **

*Estimates*—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The Company bases estimates on various assumptions that arebelieved to be reasonable under the circumstances. Actual results could differfrom those estimates and such differences may be material to the consolidatedfinancial statements.  Management iscontinually evaluating and updating these estimates, and it is possible that theseestimates will change in the near future.

 

*CreditRisk*—The Companydistributes its motorized and towable recreational vehicles through anindependent dealer network for recreational vehicles. Sales to one customerwere approximately 11% of net revenues for fiscal year 2005, 9% for 2006, and9% for 2007. The net revenues generated from this customer are reported in themotorized and towable segments. No other individual dealers represented over10% of net revenues in 2005, 2006, or 2007. The loss of a significant dealer ora substantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations, and financialcondition. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions.**For resort lot customers, funds are required at the time ofclosing. For our RV dealers, terms are net 30 days for units that are financedby a third party lender. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Terms beyond 30 daysgenerally require additional collateral, as well as security interest in theinventory sold.

 

43

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Asof December 29, 2007, total trade receivables were $88.2 million, net of$714,000 for allowance for doubtful accounts ($81.6 million, net of $708,000 atDecember 30, 2006). At December 29, 2007 approximately $70.5 million,or 80.0% of the outstanding accounts receivable balance was concentrated amongfloor plan lenders ($49.5 million, or 60.7% at December 30, 2006). Theremaining open $17.7 million of secured trade receivables were substantiallyconcentrated with one dealer. Terms of open trade receivables are granted bythe Company, on a very limited basis, to dealers who have been subjected toevaluative credit processes conducted by the Company. These processes includeevaluating the strength of the dealership’s balance sheet, how long thedealership has been in existence, reputation within the industry, and creditreferences.

 

Concentrationsof credit risk exist for accounts receivable and repurchase agreements (seeNote 20), primarily for the Company’s largest dealers. As of December 29,2007, the Company had one dealer that comprised 16.6% of the outstanding tradereceivables. The Company generally sells to dealers throughout the UnitedStates and there is no geographic concentration of credit risk.

 

*Product Warranty Reserve*—Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis). These estimates are based on historical average repaircosts, as well as other reasonable assumptions deemed appropriate bymanagement. The adjustments are related to the R-Vision acquisition. Thefollowing table discloses significant changes in the product warranty reserve:

 

| ** **        | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Beginning balance |       | $                  | 31,884     |     | $          | 32,902   |       | $ | 33,804 |   |
| Expense           |       | 28,861             |       | 38,884   |       | 40,752   |       |
| Payments          |       | (33,348            | )          | (37,982  | )          | (39,385  | )          |
| Adjustments       |       | 5,505              |       | 0        |       | 0        |       |
|              |       |               |       |     |       |     |       |
| Ending balance    |       | $                  | 32,902     |     | $          | 33,804   |       | $ | 35,171 |   |

 

*Product Liability Reserve*—Estimatedlitigation costs are provided for at the time of sale of products or at thetime a determination is made that an estimable loss has occurred. Theseestimates are developed by legal counsel based on professional judgment andhistorical experience. The adjustments are related to the R-Vision acquisition.The following table discloses significant changes in the product liabilityreserve:

 

|              |   | **2005**            |   | **2006** |   | **2007** |   |
|-------------------|--------|---------------------|--------|----------|--------|----------|--------|
|              |   | **(in  thousands)** |   |
| Beginning balance |   | $                   | 20,233 |     | $      | 19,275   |   | $ | 15,764 |   |
| Expense           |   | 9,635               |   | 10,000   |   | 12,390   |   |
| Payments          |   | (11,254             | )      | (13,689  | )      | (13,529  | )      |
| Adjustments       |   | 661                 |   | 178      |   | 0        |   |
|              |   |                |   |     |   |     |   |
| Ending balance    |   | $                   | 19,275 |     | $      | 15,764   |   | $ | 14,625 |   |

 

**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 ofwork-in-process and finished recreational vehicles includes material, labor,and manufacturing overhead costs.

 

44

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**Inventory Allowance**

** **

The Company writes downits inventory for obsolescence, and the difference between the cost ofinventory and its estimated market value. These write-downs are based onassumptions about future sales demand and market conditions. If actual salesdemand or market conditions change from those projected by management,additional inventory write-downs may be required.

 

**Resort Lot Inventory**

** **

Resortlot inventories consist of construction-in-progress on motor coach properties,as well as fully developed motor coach properties. These properties are statedat the lower of cost (specific identification) or market. Costs of land,construction, and interest incurred during construction are capitalized as thecost basis for lots available for sale. The cost of land is allocated to eachphase of the total project based on acreage used. Allocated land cost plus allother costs of construction for each phase have been allocated to eachdeveloped lot on a pro rata basis, using individual lot selling prices as apercent of total sales for the total development.

 

**Property, Plant, andEquipment**

** **

Property,plant, and equipment, including significant improvements thereto, are stated atcost less accumulated depreciation and amortization. Cost includes expendituresfor major improvements, replacements and renewals and the net amount ofinterest cost associated with significant capital additions during periods ofconstruction. Maintenance and repairs are charged to expense as incurred.Replacements and renewals are capitalized. When assets are sold, retired orotherwise disposed of, the cost and accumulated depreciation are removed fromthe accounts and any resulting gain or loss is reflected in income.

 

Thecost of plant and equipment is depreciated using the straight-line method overthe estimated useful lives of the related assets. Buildings are generallydepreciated over 39 years and equipment is depreciated over 3 to 10 years.Leasehold improvements are amortized under the straight-line method based onthe shorter of the lease periods or the estimated useful lives.

 

Ateach balance sheet date, management assesses whether there has been anytriggering events that might indicate permanent impairment in the value ofproperty, plant, and equipment assets. The amount of any such impairment isdetermined by comparing anticipated undiscounted future cash flows fromoperating activities with the associated carrying value. The factors consideredby management in performing this assessment include current operating results,trends and prospects, as well as the effects of obsolescence, demand,competition, and other economic factors.

 

**Brand Elements andSignage**

** **

Aspart of its franchise program for dealers, the Company places certain fixedassets at independent dealerships. These assets are comprised of informationalcomputer kiosks, brand island displays, furniture and fixtures, as well asoutdoor storefront signage. These assets are leased to dealers over 10 yearsthrough an operating lease, and the Company depreciates the assets over theirrespective economic useful lives, generally three years. As of December 30,2006 and December 29, 2007 the brand elements and signage assets have abalance of approximately $4.9 million and $3.6 million, respectively (net ofaccumulated depreciation of approximately $1.7 million and $4.1 million,respectively). These assets are classified with property, plant, and equipment.

 

**Land Held forDevelopment**

** **

In June 2006, the Company acquired an 80 acrepiece of undeveloped land near La Quinta, California for $16.3 million.  In addition, on April 20, 2007, theCompany acquired a 24 acre parcel near Naples, Florida for the purchase priceof $8.0 million.  These two propertiesare being developed as motorcoach only resorts.

 

**Debt Issuance Costs**

** **

Unamortized debt issuancecosts of $540,000 and $498,000 (at December 30, 2006, and December 29,2007, respectively), are being amortized on a straight-line basis over theterms of the related loans.

 

45

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**Goodwill**

** **

Goodwillrepresents the excess of the cost of acquisition over the fair value of netassets acquired. Total goodwill of $86.3 million as of December 29, 2007,included $55.3 million of goodwill arising from the various acquisitions ofassets and operations prior to January 1, 2005. The Company recorded $30.7million of goodwill associated with the November 18, 2005 acquisition ofR-Vision. In 2006, the Company recorded additional goodwill of $490,000 relatedto adjustments to the allocation of the purchase price of R-Vision. In 2006 and2007, the Company also recorded a reduction of $30,000 and $89,000,respectively for the tax benefit realized on the excess of tax-deductiblegoodwill over goodwill for financial reporting purposes related to R-Vision.

 

During 2006, the Companyreorganized its reporting structure which resulted in the splitting of the RVsegment information of the Motorized Recreational Vehicle reporting segment andthe Towable Recreational Vehicle reporting segment. The allocation of goodwillto the reporting segments was based on relative fair values in each segment.The amount of goodwill assigned to each reportable segment and changes incarrying amounts of such is as follows (all dollars represented are inthousands):

 

| ** **                                                           | ** ** | ** **       | ** ** | ** **    | ** ** | **Motorized**    | ** ** | **Towable**      | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                           | ** ** | **Recreational** | ** ** | **Motorhome** | ** ** | **Recreational** | ** ** | **Recreational** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Vehicle**      | ** ** | **Resorts**   | ** ** | **Vehicle**      | ** ** | **Vehicle**      | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Segment**      | ** ** | **Segment**   | ** ** | **Segment**      | ** ** | **Segment**      | ** ** | **Total**  | ** ** |
| Balance,  January 1, 2005                                       |       | $                | 55,254     |          | $          | 0                |       | N/A              |       | N/A        |       | $ | 55,254 |   |
| Allocation of  goodwill due to reorganization of reporting structure |       | (55,254          | )          | 0             |       | $                | 46,966     |             | $          | 8,288      |       | 0 |   |
| Goodwill  acquired                                                   |       | 0                |       | 0             |       | 0                |       | 30,698           |       | 30,698     |       |
| Balance,  December 31, 2005                                     |       | N/A              |       | 0             |       | 46,966           |       | 38,986           |       | 85,952     |       |
| Adjustment to  allocation of purchase price of R-Vision              |       | 0                |       | 0             |       | 0                |       | 490              |       | 490        |       |
| Excess of tax  deductible goodwill                                   |       | 0                |       | 0             |       | 0                |       | (30              | )          | (30        | )          |
| Balance,  December  30, 2006                                    |       | N/A              |       | 0             |       | 46,966           |       | 39,446           |       | 86,412     |       |
| Excess of tax  deductible goodwill                                   |       | 0                |       | 0             |       | 0                |       | (89              | )          | (89        | )          |
| Balance,  December  29, 2007                                    |       | $                | N/A        |          | $          | 0                |       | $                | 46,966     |       | $          | 39,357 |   | $ | 86,323 |   |

 

SFAS142 requires that management assess at least annually whether there has beenpermanent impairment in the value of goodwill at the individual reporting unitbasis. To assess whether or not there has been impairment, the Company’smanagement compares the fair value of each reporting unit to its carryingamount, including goodwill, of net book value to determine if goodwill has beenimpaired. The Company determines the fair value of each reporting unit using anestimate of discounted future cash flows. As required by SFAS 142, managementcompleted its annual testing during 2005, 2006, and 2007 and has determinedthat there was no impairment of goodwill.

 

**Deferred Revenue**

** **

Deferred revenue of$683,000 as of December 29, 2007 is related to the $1 million received in2006 from GE Commercial Distribution Finance Corporation (GECDFC) relatedto the Monaco Financial Services agreement. The deferred earnings are anonrefundable incentive payment received from GECDFC for use of the Company’sname in branding and are being recognized over the term of the agreement, whichis five years.

** **

**46**

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** **

**Stock-Based Award Plans**

** **

AtDecember 29, 2007, the Company had three stock-based award plans (see Note17). As of January 1, 2006, the Company adopted the provisions of FAS123R, “Share-Based Payments” (the “Statement”). The Statement replaces FAS 123,“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” The Statement establishes fairvalue as the measurement objective in accounting for share-based paymentarrangements and requires a fair-value-based measurement method in accountingfor share-based payments to employees, except for equity instruments held byemployee share ownership plans. We elected to adopt the modified prospectiveapplication method of the Statement.

 

Priorto the adoption, the Company accounted for stock-based employee compensationplans under the recognition and measurement principles of APB Opinion No. 25.No stock-based employee compensation cost related to these options werereflected in net income of prior periods, as all options granted under thoseplans had an exercise price equal to the market value of the underlying CommonStock on the date of grant.

 

**Income Taxes**

** **

The Company adopted FIN48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FAS 109,”(the “Interpretation”) as of the beginning of fiscal year 2007 with no materialeffect on our financial position or results of operations.  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in accordance with FAS 109, “Accountingfor Income Taxes,” by defining a criteria that an individual tax position mustmeet for any part of the benefit to be recognized in the financialstatements.  See Note 13 of the Company’sNotes to Consolidated Financial Statements.

 

Deferredtaxes are recognized based on the difference between the financial statementand tax basis of assets and liabilities at enacted tax rates in effect in theyears in which the differences are expected to reverse. Deferred tax expense orbenefit represents the change in deferred tax asset/liability balances. Avaluation allowance is established for deferred tax assets when it is morelikely than not that the deferred tax asset will not be realized**.**

 

TheCompany has elected to utilize the practical transition option provided by FAS123R to determine its pool of windfall tax benefits that are available toabsorb tax deficiencies recognized subsequent to the Company’s adoption of FAS123R.

 

**Revenue Recognition**

** **

The Company recognizesrevenue from the sale of recreational vehicles upon shipment and recognizesrevenue from resort lot sales upon closing. The title and risk of loss pass tothe dealers upon shipment of recreational vehicles. The Company does not offerany rights of return to our dealers, or resort lot customers.

 

InDecember 2003, the Securities and Exchange Commission issued StaffAccounting Bulletin (SAB) No. 104, Revenue Recognition in FinancialStatements. SAB No. 104 provides guidance for revenue recognition undercertain circumstances. The Company has complied with the guidance provided bySAB No. 104 for fiscal years 2005, 2006, and 2007.

 

**Repurchase Obligations**

** **

Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company may execute a repurchase agreement. The Company hasrecorded a liability associated with the disposition of repurchased inventory.To determine the appropriate liability, the Company calculates a reserve basedon an estimate of potential net losses and qualitative and quantitativefactors, including dealer inventory turn rates and the financial strength ofindividual dealers.

 

47

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**Advertising and PrintingCosts**

** **

The Company expensesadvertising and printing costs as incurred, except for prepaid show costs,which are expensed when the event takes place. Advertising and printing costs,including retail programs, are recorded as selling, general and administrativeexpenses, while discounts off of invoice, or sales allowances (includingwholesale volume incentives), are recorded as adjustments to net sales. During2007, approximately $9.6 million ($11.6 million in 2005 and $9.8 million in2006) of advertising and printing costs were expensed.

 

**Research and DevelopmentCosts**

** **

Researchand development costs consist of salaries and employee benefits, contractservices fees, utilities, materials and operating supplies and are charged toexpense as incurred and were $1.7 million in 2007 ($1.5 million in 2005and $1.9 million in 2006).

 

**New AccountingPronouncements**

** **

*FAS 157*

* *

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements.” The Statement defines fair value,establishes a framework for measuring fair value, and expands disclosurerequirements regarding fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007.  We believe that the adoption forSFAS No. 157 will not have a material effect on our financial position orresults of operations.

 

*FAS 159*

* *

In February 2007, the FASB issuedSFAS No. 159, “Fair Value Option for Financial Assets and FinancialLiabilities.” This statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  Entities that elect the fair value optionwill report unrealized gains and losses in earnings at each subsequentreporting date.  The fair value optionmay be elected on an instrument-by-instrument basis, with few exceptions.  SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. We believe that the adoption for SFAS No. 159 will not have amaterial effect on our financial position or results of operations.

 

*EITF 06-11*

 

In June 2007, the FASB EmergingIssues Task Force issued EITF Issue No. 06-11, “Accounting for Income TaxBenefits of Dividends on Share-Based Payment Awards.”  EITF 06-11 requires that a realized incometax benefit from dividends or dividend equivalent units paid on unvestedrestricted shares and restricted share units be reflected as an increase incontributed surplus and reflected as an addition to the Company’s excess taxbenefit pool, as defined under FAS 123R. EITF 06-11 is effective for the Company in the first quarter of fiscalyear 2009.  We are assessing the impactthat the EITF will have on our financial position and results of operations.

 

**Supplemental Cash FlowDisclosures:**

 

| ** **                       | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Cash paid during the period for: |       |               |       |     |       |     |       |
| Interest                         |       | $                  | 1,355      |     | $          | 4,099    |       | $ | 3,399 |   |
| Income taxes                     |       | $                  | 6,160      |     | $          | 7,708    |       | $ | 2,843 |   |

 

48

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**2.     ACQUISITION:**

** **

**R-Vision**

** **

TheCompany announced on November 9, 2005 that it had reached an agreement toacquire the Indiana-based R-Vision companies and affiliates in an all cashtransaction. The acquisition was completed on November 18, 2005. TheR-Vision companies and affiliates consist of R-Vision, Inc., R-VisionMotorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC collectivelyknown as “R-Vision.” R-Vision manufactures towable and motorized recreationalvehicle products, and the acquisition was primarily to strengthen the Company’stowable recreational vehicle segment. R-Vision’s results of operations for theperiod November 18, 2005 to December 31, 2005 are included in theconsolidated financial statements of the Company.

 

The cash paid forR-Vision, including transaction costs of $584,985, totaled $54,623,512, net ofcash acquired. All the goodwill associated with the R-Vision acquisition wasallocated to the towable recreational vehicle segment. This was based on theconclusion that the purchase price allocated to the motorized portion ofR-Vision, based on relative fair values, did not exceed its carrying amount ofnet book value. Of the total goodwill acquired, $33.8 million is expected to bedeductible for tax purposes. The total R-Vision assets acquired and liabilitiesassumed of R-Vision based on estimated fair values at November 18, 2005,is as follows:

 

| ** **                           | ** ** | **(in thousands)** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| Receivables                          |       | $                  | 14,571     |   |
| Inventories                          |       | 18,160             |       |
| Prepaids and other assets            |       | 618                |       |
| Property and equipment               |       | 12,945             |       |
| Goodwill                             |       | 31,188             |       |
| Total assets  acquired               |       | 77,482             |       |
|                                 |       |               |       |
| Accounts payable                     |       | 8,769              |       |
| Accrued liabilities                  |       | 12,142             |       |
| Current deferred tax liability       |       | 1,184              |       |
| Long-term deferred tax liability     |       | 808                |       |
| Total  liabilities assumed           |       | 22,903             |       |
|                                 |       |               |       |
| Total assets and liabilities assumed |       | $                  | 54,579     |   |

 

Thepurchase price was derived from a calculation of a multiple of earnings beforeinterest, taxes, depreciation and amortization for a trailing 12-month period(adjusted for certain non-recurring expense items), which exceeded the bookvalue of R-Vision and generated goodwill of $30.7 million. The allocation ofthe purchase price and the related goodwill has been adjusted in 2006 for theresolution of pre-acquisition contingencies of $490,000 for estimates forreserve amounts related to product litigation and deferred taxes established toaccount for certain book to tax basis differences as of the acquisition date.

 

49

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Thefollowing unaudited pro forma information presents the consolidated results asif the acquisition had occurred at the beginning of the period and givingeffect to the adjustments for the related interest on financing the purchaseprice, goodwill and depreciation. The pro-forma information does notnecessarily reflect results that would have occurred nor is it necessarilyindicative of future operating results.

 

|                              |   | **2005**                                  |      |
|-----------------------------------|--------|-------------------------------------------|-----------|
|                              |   | **Unaudited**                             |      |
|                              |   | **(in thousands, except per share data)** |      |
| Net sales                         |   | $                                         | 1,455,189 |   |
| Net income                        |   | 12,079                                    |      |
| Diluted earnings per common share |   | $                                         | 0.40      |   |

 

**3.     DISCONTINUED OPERATIONS:**

** **

Duringthe third quarter of 2005, the Company announced that it planned to close itsRoyale Coach operations in Elkhart, Indiana. Royale Coach produces Prevost busconversion motor coaches with price points in excess of $1.4 million. RoyaleCoach sold approximately 20 coaches per year and was not a significant portionof the Company’s overall business. Plant closure costs of approximately$1.3 million (net of tax) were recognized in 2005. The net income (loss)from discontinued operations for the fiscal years ended December 31, 2005and December 30, 2006 is net of a tax benefit of $868,000 and tax expenseof $28,000, respectively.  There was noaffect on net income from discontinued operations for 2007.

 

The operating results ofRoyale Coach are presented in the Company’s Consolidated Statements of Incomeas discontinued operations, net of income tax, and all prior periods have beenreclassified. The components of discontinued operations for the periodspresented are as follows.

 

| ** **                                                      | ** ** | **2005**           | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| Net sales                                                       |       | $                  | 5,452      |     | $          | 4,835 |   |
| Cost of sales                                                   |       | 5,923              |       | 4,916    |       |
| Gross profit  (loss)                                            |       | (471               | )          | (81      | )          |
| Selling, general and administrative expenses                    |       | 1,718              |       | (127     | )          |
| Income (loss)  from discontinued operations before income taxes |       | (2,189             | )          | 46       |       |
| Income tax expense (benefit)                                    |       | (868               | )          | 28       |       |
| Income (loss)  from discontinued operations                     |       | $                  | (1,321     | )        | $          | 18 |   |

 

**4.     PLANT RELOCATION:**

** **

During the secondquarter of 2005, the Company announced plans to close the Bend, Oregonproduction operations and relocate them to the Coburg, Oregon facility. TheBend, Oregon operations ceased as of June 15, 2005. The Company recognizedpre-tax charges in 2005 and 2006 of $4.4 million and $269,000, respectively.The charges were primarily for the impairment of property, plant and equipmentand future rental expense related to the facility.

 

50

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Theaccrued liability for restructuring reserves consists of the following:

 

|             |   | **December 30,**   |   | **December 29,** |   |
|------------------|--------|-------------------------|--------|-----------------------|--------|
|             |   | **2006**                |   | **2007**              |   |
|             |   | **(in thousands)** |   |
| Lease commitment |   | $                       | 29     |                  | $      | 25 |   |
| Other            |   | 107                     |   | 118                   |   |
|             |   | $                       | 136    |                  | $      | 143 |   |

 

**5.     INVENTORIES, NET:**

** **

Inventoriesconsist of the following:

 

|                  |   | **December 30,**   |    | **December 29,** |   |
|-----------------------|--------|-------------------------|---------|-----------------------|--------|
|                  |   | **2006**                |    | **2007**              |   |
|                  |   | **(in thousands)** |    |
| Raw materials         |   | $                       | 84,069  |                  | $      | 79,640 |   |
| Work-in-process       |   | 55,473                  |    | 54,760                |   |
| Finished units        |   | 26,773                  |    | 33,241                |   |
| Raw material reserves |   | (10,444                 | )       | (9,405                | )      |
|                  |   |                    |    |                  |   |
|                  |   | $                       | 155,871 |                  | $      | 158,236 |   |

 

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

** **

Property,plant, and equipment consist of the following:

 

 

|                                           |   | **December 30,**   |    | **December 29,** |   |
|------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                           |   | **2006**                |    | **2007**              |   |
|                                           |   | **(in thousands)** |    |
| Land                                           |   | $                       | 15,226  |                  | $      | 15,438 |   |
| Buildings                                      |   | 128,073                 |    | 130,140               |   |
| Equipment                                      |   | 45,341                  |    | 44,702                |   |
| Furniture and fixtures                         |   | 22,397                  |    | 21,972                |   |
| Vehicles                                       |   | 3,473                   |    | 2,809                 |   |
| Leasehold improvements                         |   | 2,002                   |    | 1,649                 |   |
| Brand elements signage                         |   | 6,617                   |    | 7,686                 |   |
| Construction in progress                       |   | 3,398                   |    | 1,321                 |   |
|                                           |   | 226,527                 |    | 225,717               |   |
| Less accumulated depreciation and amortization |   | 72,632                  |    | 81,426                |   |
|                                           |   | $                       | 153,895 |                  | $      | 144,291 |   |

 

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** **

 

 

** **

**7.     JOINT VENTURE:**

** **

On February 25,2007, the Company closed a transaction with International Truck and EngineCorporation to form a joint venture to manufacture all of the Company’s dieselchassis.  The terms of the agreementgrant the Company a 49% ownership in the joint venture, known as Custom ChassisProducts, LLC (CCP).  The investment isaccounted for under the equity method. The Company contributed $4,060,000 of inventory, $246,000 of fixedassets, and $140,000 of cash to CCP and incurred transaction costs of$226,000.  The Company’s portion of CCP’snet loss for the year ended December 29, 2007 is $614,000.  As of December 29, 2007, the Company hasa net trade payable to the joint venture of $17.0 million.

 

**8.     ACCRUED EXPENSES AND OTHER LIABILITIES:**

** **

Accruedexpenses and other liabilities consist of the following:

 

| ** **                                             | ** ** | **December 30,**   | ** ** | **December 29,** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2006**                | ** ** | **2007**              | ** ** |
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| ** **                                             | ** ** | ** **              | ** ** | ** **            | ** ** |
| Payroll, vacation, payroll taxes and related  accruals |       | $                       | 15,997     |                  | $          | 20,142 |   |
| Promotional and advertising                            |       | 13,594                  |       | 13,171                |       |
| Health insurance reserves and premiums payable         |       | 5,997                   |       | 5,575                 |       |
| Resorts profit sharing accruals                        |       | 3,700                   |       | 4,118                 |       |
| Other                                                  |       | 5,076                   |       | 5,603                 |       |
|                                                   |       | $                       | 44,364     |                  | $          | 48,609 |   |

 

At December 29,2007, a balance of $20.9 million related to dealer incentives under our FFTFprogram is classified as accounts payable on the consolidated balance sheet($22.0 million at December 30, 2006).

 

**9.     LINE OF CREDIT:**

** **

TheCompany’s credit facilities consist of a revolving line of credit of up to$105.0 million. At the end of the 2007 fiscal year, there was no balanceoutstanding on the revolving line of credit (the “Revolving Loan”). At theelection of the Company, the Revolving Loan bears interest at varying ratesthat fluctuate based on the prime rate or LIBOR and are determined based on theCompany’s leverage ratio. The Company also pays interest quarterly on theunused available portion of the Revolving Loan at varying rates, determined bythe Company’s leverage ratio. The Revolving Loan is due and payable in full on November 17,2009 and requires monthly interest payments. The Company also has four unusedletters of credit of $3.8 million outstanding as of December 29,2007.

 

Theweighted-average interest rate on the outstanding borrowings under theRevolving Loan was 6.8% and 7.4% for 2006 and 2007, respectively. Interestexpense on the unused available portion of the line was $229,000 or 1.3% and$371,000 or 19.6% of weighted average outstanding borrowings for 2006 and 2007,respectively. The Revolving Loan is collateralized by substantially all theassets of the Company. The agreement contains restrictive covenants as to theCompany’s leverage ratio, current ratio, fixed charge coverage ratio, andtangible net worth. As of December 29, 2007, the Company was in compliancewith these covenants.

** **

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

** **

InNovember 2005, the Company amended its credit facilities to borrow $40.0million of term debt (the “Term Debt”) to effect the acquisition of R-Vision(see Note 2). In January 2007, the Company amended its credit facilitiesagreement to modify certain restrictive covenants. At the end of the 2007 year,borrowings outstanding were $28.6 million. At the election of the Company, theTerm Debt bears interest at varying rates that fluctuate based on the primerate or LIBOR and are determined based on the Company’s leverage ratio. TheTerm Debt requires quarterly interest payments and quarterly principal paymentsof $1.4 million, with a final balloon payment of $12.9 million due on November 18,2010. As of year end 2007, the weighted-average interest rate on the Term Debtwas 6.3%. The Term Debt is collateralized by all the assets of the Company. Theagreement contains restrictive covenants as to the Company’s leverage ratio,current ratio, fixed charge coverage ratio, and tangible net worth. As of December 29,2007, the Company was in compliance with these covenants.

 

52

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InNovember 2005, the Company obtained a term loan of $500,000 from the Stateof Oregon in connection with the relocation of jobs to the Coburg, Oregonproduction facilities from the Bend, Oregon facility. The principal andinterest is due on April 30, 2009. The loan bears a 5% annual interestrate.

 

The following tabledisplays the scheduled principal payments by year that will be due in thousandson the term loans.

 

| ** ** | ** ** | **Amount  of**   | ** ** |
|------------|------------|------------------|------------|
|       | ** ** | **payment  due** | ** ** |
|       |       |             |       |
| 2008       |       | $                | 5,714      |   |
| 2009       |       | 6,214            |       |
| 2010       |       | 17,143           |       |
|       |       |             |       |
|       |       | $                | 29,071     |   |

 

**11.**   PREFERREDSTOCK:

** **

TheCompany has authorized “blank check” preferred stock (1,934,783 sharesauthorized, $.01 par value) (“Preferred Stock”), which may be issued from timeto time in one or more series upon authorization by the Company’s Board ofDirectors. The Board of Directors, without further approval of thestockholders, is authorized to fix the dividend rights and terms, conversionrights, voting rights, redemption rights and terms, liquidation preferences,and any other rights, preferences, privileges, and restrictions applicable toeach series of the Preferred Stock. There were no shares of Preferred Stockoutstanding as of December 30, 2006 or December 29, 2007.

 

**12.   SEGMENT REPORTING:**

** **

TheCompany is a leading manufacturer of premium class A, B and C motorcoaches (Motorized Recreational Vehicle Segment) and towable recreationalvehicles (Towable Recreational Vehicle Segment). Our product line currentlyconsists of a broad line of motor coaches, fifth wheel trailers, traveltrailers, and specialty trailers under the “Monaco,” “Holiday Rambler,” “Beaver,”“Safari,” “McKenzie,” “R-Vision,” “Bison,” and “Roadmaster” brand names.

 

Inaddition to the manufacturing of premium recreational vehicles, the Companyalso owns and operates two motorhome resort properties (Motorhome ResortSegment) located in Las Vegas, Nevada, and Indio, California. In addition tothese two resorts, the Company also has property in La Quinta, California andin Naples, Florida that are being developed into resorts.  The resorts offer sales of individual lots torecreational vehicle owners and also offer a common interest in the amenitiesat the resort. The resorts provide destination locations for premium class Arecreational vehicle owners and help to promote the recreational vehiclelifestyle.

 

53

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The following tableprovides the results of operations of the three segments of the Company for theyears 2005, 2006, and 2007, respectively.

 

| ** **                                                            | ** ** | **2005**           | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **(in thousands)** | ** ** |
| **Motorized Recreational Vehicle Segment**                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                  | 1,017,766  |       | $          | 941,657    |       | $ | 998,448 |   |
| Cost of sales                                                         |       | 925,014            |       | 869,110    |       | 887,830    |       |
| Gross profit                                                          |       | 92,752             |       | 72,547     |       | 110,618    |       |
|                                                                  |       |               |       |       |       |       |       |
| Selling,  general, and administrative expenses and corporate overhead |       | 89,479             |       | 78,478     |       | 85,900     |       |
| Plant relocation costs                                                |       | 4,370              |       | 269        |       | 0          |       |
|                                                                  |       |               |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                  | (1,097     | )          | $          | (6,200     | )          | $ | 24,718 |   |
|                                                                  |       |               |       |       |       |       |       |
| **Towable Recreational Vehicle Segment**                              |       |               |       |       |       |       |       |
| ** **                                                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                  | 185,433    |       | $          | 324,342    |       | $ | 261,391 |   |
| Cost of sales                                                         |       | 174,242            |       | 292,876    |       | 238,684    |       |
| Gross profit                                                          |       | 11,191             |       | 31,466     |       | 22,707     |       |
|                                                                  |       |               |       |       |       |       |       |
| Selling,  general, and administrative expenses and corporate overhead |       | 13,191             |       | 30,060     |       | 23,611     |       |
|                                                                  |       |               |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                  | (2,000     | )          | $          | 1,406      |       | $ | (904 | ) |
|                                                                  |       |               |       |       |       |       |       |
| **Motorhome Resorts Segment**                                         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                  | 33,039     |       | $          | 31,987     |       | $ | 12,291 |   |
| Cost of sales                                                         |       | 12,212             |       | 11,457     |       | 4,748      |       |
| Gross profit                                                          |       | 20,827             |       | 20,530     |       | 7,543      |       |
|                                                                  |       |               |       |       |       |       |       |
| Selling,  general, and administrative expenses and corporate overhead |       | 10,509             |       | 11,927     |       | 7,948      |       |
|                                                                  |       |               |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                  | 10,318     |       | $          | 8,603      |       | $ | (405 | ) |

 

54

----

 

| ** **                                                                  | ** ** | **2005**           | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | **(in thousands)** | ** ** |
| **Reconciliation to Net Income**                             | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating income (loss):                                                    |       |               |       |       |       |       |       |
| Motorized  recreational vehicle segment                                     |       | $                  | (1,097     | )          | $          | (6,200     | )          | $ | 24,718 |   |
| Towable  recreational vehicle segment                                       |       | (2,000             | )          | 1,406      |       | (904       | )          |
| Motorhome  resorts segment                                                  |       | 10,318             |       | 8,603      |       | (405       | )          |
| Total operating  income                                                     |       | 7,221              |       | 3,809      |       | 23,409     |       |
|                                                                        |       |               |       |       |       |       |       |
| Other income, net                                                           |       | 255                |       | 615        |       | 851        |       |
| Interest expense                                                            |       | (1,820             | )          | (4,430     | )          | (3,496     | )          |
| Loss from investment in joint venture                                       |       | 0                  |       | 0          |       | (614       | )          |
| Income (loss)  before income taxes, continuing operations                   |       | 5,656              |       | (6         | )          | 20,150     |       |
|                                                                        |       |               |       |       |       |       |       |
| Provision for  (benefit from) income taxes, continuing operations           |       | 1,687              |       | (992       | )          | 8,137      |       |
| Income from continuing operations                                           |       | 3,969              |       | 986        |       | 12,013     |       |
|                                                                        |       |               |       |       |       |       |       |
| Income (loss)  from discontinued operations, net of tax provision (benefit) |       | (1,321             | )          | 18         |       | 0          |       |
|                                                                        |       |               |       |       |       |       |       |
| Net income                                                                  |       | $                  | 2,648      |       | $          | 1,004      |       | $ | 12,013 |   |

 

Thefollowing table provides information for the respective segments related toassets:

 

| ** **                             | ** ** | **December 30,**   | ** ** | **December 29,** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**                | ** ** | **2007**              | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** **            | ** ** |
| Motorized recreational vehicle segment |       | $                       | 306,196    |                  | $          | 297,910 |   |
| Towable recreational vehicle segment   |       | 87,153                  |       | 87,811                |       |
| Motorhome resort segment               |       | 25,954                  |       | 34,814                |       |
| Total segment  assets                  |       | $                       | 419,303    |                  | $          | 420,535 |   |

 

The Company includes thetotal of inventories and resort lot inventory in the measure of the segments’assets that are used for decision making purposes. Property, plant, andequipment specific to the segments are also included in the measure of thesegments’ assets for decision making purposes. Remaining assets are accountedfor at the corporate level and are not allocated out to the business segments.Total depreciation expense is allocated among the segments either based on theassociated assets being allocated to the segment or through the corporateoverhead allocation of expenses. Corporate overhead is comprised of certainshared services, and is allocated to the respective segments based on acombination of activities performed for the segment as well as the relativesegment’s percent of sales for the Company in total.

 

55

----

 

Thefollowing table reconciles assets of the segments to total consolidated assets:

 

| ** **                                           | ** ** | **December 30,**   | ** ** | **December 29,** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**                | ** ** | **2007**              | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| **Reconciliation of segment assets to total assets** |       |                    |       |                  |       |
|                                                 |       |                    |       |                  |       |
| Total assets allocated to segments                   |       | $                       | 419,303    |                  | $          | 420,535 |   |
|                                                 |       |                    |       |                  |       |
| Assets not allocated to segments:                    |       |                    |       |                  |       |
| Cash                                                 |       | 4,984                   |       | 6,282                 |       |
| Trade  receivables, net                              |       | 81,588                  |       | 88,170                |       |
| Prepaid expenses                                     |       | 5,624                   |       | 5,142                 |       |
| Income tax  receivable                               |       | 6,901                   |       | 0                     |       |
| Deferred income  taxes                               |       | 38,038                  |       | 37,608                |       |
| Property, plant,  and equipment, net                 |       | 1,172                   |       | 1,474                 |       |
| Investment in  joint venture                         |       | 0                       |       | 4,059                 |       |
| Debt issuance  costs, net                            |       | 540                     |       | 498                   |       |
| Total assets                                         |       | $                       | 558,150    |                  | $          | 563,768 |   |

 

Thefollowing table provides information for the respective segments related tocapital expenditures:

 

| ** **                                     | ** ** | **December 30,**   | ** ** | **December 29,** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**                | ** ** | **2007**              | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
|                                           |       |                    |       |                  |       |
| Motorized recreational vehicle segment         |       | $                       | 7,589      |                  | $          | 2,932 |   |
| Towable recreational vehicle segment           |       | 736                     |       | 1,593                 |       |
| Motorhome resort segment                       |       | 999                     |       | 96                    |       |
| Total segment  capital expenditures            |       |                    | 9,324      |                  |       | 4,621 |   |
| Capital expenditures not allocated to segments |       | 0                       |       | 658                   |       |
| Total capital  expenditures                    |       | $                       | 9,324      |                  | $          | 5,279 |   |

 

Thefollowing table provides information for the respective segments relating todepreciation expense:

 

| ** **                             | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                             | ** ** | **(in thousands)** | ** ** |
|                                   |       |               |       |     |       |     |       |
| Motorized recreational vehicle segment |       | $                  | 9,603      |     | $          | 11,871   |       | $ | 11,498 |   |
| Towable recreational vehicle segment   |       | 818                |       | 1,951    |       | 2,151    |       |
| Motorhome resort segment               |       | 74                 |       | 111      |       | 160      |       |
| Total segment  depreciation expense    |       | $                  | 10,495     |     | $          | 13,933   |       | $ | 13,809 |   |

** **

**13.**   INCOMETAXES:

** **

The Company adopted FIN48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FAS 109”,(the Interpretation) as of the beginning of fiscal year 2007.  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in accordance with FAS 109, “Accountingfor Income Taxes”, by defining a criterion that an individual tax position mustbe met for any part of the benefit to be recognized in the financialstatements.

 

As of the beginning offiscal year 2007, the Company’s total unrecognized tax benefits were $850,000,and all of these benefits, if recognized, would positively affect the Company’seffective tax rate.  The Company also hadaccrued interest related to these unrecognized tax benefits of $55,000 as ofthe date of adoption.  Accrued interestas of 

 

56

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December 29, 2007increased to $97,000.  The interestexpense associated with income tax contingencies is classified as income taxesin the Company’s financial statements. In fiscal year 2007, the Company recognized interest expense of$42,000.  Penalties associated withincome taxes are classified as selling, general and administrativeexpenses.  Penalties expense was zero forfiscal year 2007.

 

Asof the date of adoption, the federal and a portion of the state uncertaintyrelates to subjectivity in the measurement of certain deductions claimed forUnited States income tax purposes and the remainder of the state uncertaintyrelates to state income tax apportionment matters.  A reconciliation of the beginning and endingamount of the unrecognized tax benefits is as follows.

 

| ** **                                  | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------|------------|--------------------|------------|
|                                        |       |               |       |
| Balance at December 30, 2006           |       | $                  | 850        |   |
| Reductions for tax positions of prior years |       | (45                | )          |
| Lapse of statute of limitations             |       | (60                | )          |
| Balance at December 29, 2007           |       | $                  | 745        |   |

 

As of December 29,2007, the Company’s 2004 through 2006 U.S. federal and state income tax returnsremain subject to examination.  Inaddition, some 2003 state income tax returns are also still subject toexamination.  In the next 12 months, itis reasonably possible that the lapse of statutes of limitations for federaland state tax returns may reduce the unrecognized tax benefits related to theuncertainty in the measurement of certain deductions claimed for U.S. federaland state income tax purposes by approximately $100,000.

 

Theprovision for income taxes for continuing operations is as follows:

 

| ** **                                 | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Current:                                   |       |               |       |     |       |     |       |
| Federal                                    |       | $                  | 4,729      |     | $          | 970      |       | $ | 6,765 |   |
| State                                      |       | (169               | )          | 258      |       | 1,111    |       |
|                                       |       | 4,560              |       | 1,228    |       | 7,876    |       |
| Deferred:                                  |       |               |       |     |       |     |       |
| Federal                                    |       | (2,573             | )          | (1,249   | )          | (59      | )          |
| State                                      |       | (300               | )          | (971     | )          | 320      |       |
| Provision for  (benefit from) income taxes |       | $                  | 1,687      |     | $          | (992     | )          | $ | 8,137 |   |

 

Thereconciliation of the provision for income taxes at the U.S. federal statutoryrate to the Company’s effective income tax rate is as follows:

 

| ** **                                             | ** ** | **2005**           | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
|                                                   |       |               |       |     |       |     |       |
| Expected U.S. federal income taxes at statutory  rates |       | $                  | 1,923      |     | $          | (2       | )          | $ | 7,053 |   |
| State and local income taxes, net of federal benefit   |       | (305               | )          | (788     | )          | 948      |       |
| Domestic manufacturing deduction                       |       | (90                | )          | (51      | )          | (427     | )          |
| Other                                                  |       | 159                |       | (151     | )          | 563      |       |
| Provision for (benefit  from) income taxes             |       | $                  | 1,687      |     | $          | (992     | )          | $ | 8,137 |   |

 

57

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

 

| ** **                                            | ** ** | **December 30,** | ** ** | **December 29,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | **2007**              | ** ** |
| ** **                                            | ** ** | **(in thousands)**    | ** ** |
| Current deferred income tax assets:                   |       |                  |       |                  |       |
| Warranty  liability                                   |       | $                     | 11,308     |                  | $          | 11,780 |   |
| Product  liability                                    |       | 6,244                 |       | 5,804                 |       |
| Inventory  allowances                                 |       | 3,902                 |       | 3,587                 |       |
| Franchise and  other incentive accruals               |       | 10,532                |       | 10,293                |       |
| Compensation and  related accruals                    |       | 2,030                 |       | 2,463                 |       |
| Insurance  accruals                                   |       | 2,637                 |       | 2,036                 |       |
| Other                                                 |       | 1,092                 |       | 1,323                 |       |
| Net operating  loss carryforward                      |       | 293                   |       | 322                   |       |
|                                                  |       | $                     | 38,038     |                  | $          | 37,608 |   |
|                                                  |       |                  |       |                  |       |
| Long-term deferred income tax liabilities:            |       |                  |       |                  |       |
| Depreciation                                          |       | $                     | 15,835     |                  | $          | 15,262 |   |
| Amortization                                          |       | 6,859                 |       | 8,231                 |       |
| Compensation and  related accruals                    |       | (734                  | )          | (1,441                | )          |
| Net operating  loss (NOL) carryforward                |       | (263                  | )          | (143                  | )          |
| State tax credit  carryforward                        |       | (303                  | )          | (519                  | )          |
| Other                                                 |       | 0                     |       | (198                  | )          |
| Valuation  allowance on state tax credit carryforward |       | 284                   |       | 314                   |       |
|                                                  |       | $                     | 21,678     |                  | $          | 21,506 |   |

 

Management believes thatthe temporary differences which gave rise to the deferred income tax assetswill be realized in the foreseeable future, except for a portion of thebenefits arising from the state tax credit carryforward. Accordingly,management has provided a valuation allowance for the portion of the state taxcredit carryforward that may not be fully realized. Net operating losscarryforwards expire between 2015 and 2026 and state tax credits expire between2008 and 2014.

 

58

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**14.**  EARNINGS PERSHARE:

** **

Basic earnings percommon share is based on the weighted-average number of shares outstandingduring the period. Diluted earnings per common share is based on the weightedaverage number of shares outstanding during the period, after consideration ofthe dilutive effect of outstanding stock-based awards. For the fiscal yearending 2007, there were 778,342 anti-dilutive stock-based awards excluded fromthe diluted earnings per share calculation (385,890 and 819,500 for the fiscalyears ending 2005 and 2006, respectively). The weighted-average number ofcommon shares used in the computation of earnings per common share for theyears ended December 31, 2005, December 30, 2006, and December 29,2007 are as follows:

 

| ** **                                       | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issued and outstanding shares (weighted-average) |       | 29,516,794 |       | 29,712,957 |       | 29,931,730 |       |
|                                             |       |       |       |       |       |       |       |
| **Effect of Dilutive Securities**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based awards                               |       | 341,242    |       | 189,873    |       | 415,187    |       |
|                                             |       |       |       |       |       |       |       |
| **Diluted**                                      |       | 29,858,036 |       | 29,902,830 |       | 30,346,917 |       |

 

| ** **                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash dividends per common share     |       | $        | 0.24       |     | $          | 0.24     |       | $ | 0.24 |   |
| Cash dividends paid*(in thousands)* |       | $        | 7,085      |     | $          | 7,134    |       | $ | 7,194 |   |

 

**15.**  LEASES:

** **

TheCompany has commitments under certain noncancelable operating leases. Totalrental expense for the fiscal years ended December 31, 2005, December 30,2006, and December 29, 2007 related to operating leases amounting toapproximately $3.6 million, $3.4 million, and $2.9 million, respectively. TheCompany’s most significant lease is an operating lease for an aircraft thatexpires June 10, 2012. The future minimum rental commitment under the term ofthis lease is $1.3 million annually in 2008 through 2011 and $664,000 in2012.  The Company has guaranteed up to$10.9 million of any deficiency in the event that the lessor’s net salesproceeds from the aircraft are less than $13.4 million. The Company hascommitments under certain noncancelable subleases. As of December 29,2007, the total minimum sublease rental income to be received in the future isapproximately $2.0 million. Sublease rental income will be recognized ratablyover the next eight years.

 

Approximate futureminimum rental commitments under these leases at December 29, 2007 aresummarized as follows:

 

| **Fiscal Year**     | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|--------------------|------------|
| 2008                |       | $                  | 2,351      |   |
| 2009                |       | $                  | 2,186      |   |
| 2010                |       | $                  | 2,052      |   |
| 2011                |       | $                  | 2,052      |   |
| 2012                |       | $                  | 1,388      |   |
| 2013 and thereafter |       | $                  | 1,103      |   |

 

**16.**  BONUS PLAN:

** **

The Company has adiscretionary bonus plan for certain key employees. Bonus expense included inselling, general, and administrative expenses for the years ended December 31,2005, December 30, 2006, and December 29, 2007 was $607,000, $2.2million, and $5.6 million, respectively.

 

59

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**17.  STOCK-BASED AWARD PLANS:**

** **

TheCompany has an Employee Stock Purchase Plan (the “Purchase Plan”) - 2007, a non-employee1993 Director Stock Plan (the “Director Plan”), and an amended and restated1993 Stock Plan (the “Stock Plan”). The compensation expense recognized in 2007for the plans was $4.1 million with an income tax benefit of $1.6 million ($2.8million and $1.1 million, respectively, in 2006). The amount of cash receivedfrom the exercise of stock options, stock issued under the Stock Purchase Plan,and stock issued in lieu of some directors’ cash retainer was $1.5 million. Thetax benefit realized from stock-based award activity in 2007 was $275,000.

 

**Stock Purchase Plan**

** **

ThePurchase Plan qualifies under Section 423 of the Internal Revenue Code.The Purchase Plan was approved by the Board of Directors in 2007 andstockholder approval will be sought at the 2008 Annual Meeting ofStockholders.  The Company has 400,000shares of Common Stock reserved for issuance under the Purchase Plan, of whichnone have been issued as of December 29, 2007. Under the Purchase Plan, aneligible employee may purchase shares of Common Stock from the Company throughpayroll deductions of up to 10% of base compensation, at a price per shareequal to 85% of the lesser of the fair market value of the Company’s CommonStock as of the first day (grant date) or the last day (purchase date) of eachoffering period under the Purchase Plan. The first offering period is twelve months and ends on July 15,2008.  Subsequent offering periods underthe Purchase Plan are each six months.

 

TheEmployee Stock Purchase Plan — 1993 was previously in effect.  As of December 29, 2007, the Company hadissued 621,495 shares of Common Stock under the 1993 Purchase Plan. During theyears ended December 30, 2006 and December 29, 2007, 69,644 sharesand 28,968 shares, respectively, were issued under the 1993 Purchase Plan. Theweighted-average fair value of purchase rights granted in 2006 and 2007 was$11.28 and $14.90, respectively.

 

ThePurchase Plan is administered by a committee appointed by the Board ofDirectors. Any employee who is customarily employed for at least 20 hours perweek 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 ofDirectors, and who does not own 5% or more of the total combined voting power orvalue of all classes of the Company’s outstanding capital stock, is eligible toparticipate in the Purchase Plan.

 

**Director Plan**

** **

EffectiveMay 17, 2006, no further awards will be made under the Director Plan, butit will continue to govern awards previously granted thereunder. Subsequentequity awards to directors are being made under the Stock Plan. The Board ofDirectors and the stockholders had authorized a total of 352,500 shares ofCommon Stock for issuance pursuant to the Director Plan. On May 17, 2006authorization for 76,924 shares were transferred from the Director Plan to theStock Plan, which represented the number of shares reserved under the DirectorPlan that had not been issued pursuant to awards granted under the plan plusthe number of shares reserved that were not subject to any outstanding awardsgranted under the plan.

 

Optionsgranted under the Director Plan to non-employee directors on the date theoptionee first became a director vest ratably over a five-year period, whilesubsequent annual grants vest in full on the fifth anniversary of their grantdate. The exercise price of all options granted under the Director Plan wasequal to the fair market value of a share of the Company’s Common Stock on thedate of grant. The maximum term of these options is ten years. As of December 29,2007, 110,100 options had been exercised, and options to purchase 138,450shares of Common Stock were outstanding. As of December 29, 2007, 15,526shares of Common Stock had been issued in lieu of some directors’ cash retaineras allowed by the Director Plan up to May 17, 2006.

 

**Stock Plan**

** **

TheStock Plan, as amended on May 17, 2006, provides for the grant ofstock-based awards to employees, directors and consultants who provide servicesto the Company and its affiliates. Allowed awards include stock options,restricted stock, restricted stock units, stock appreciation rights,performance shares, performance units, dividend equivalents and other stockawards. A total of 5,534,737 shares of Common Stock have been reserved forissuance under the Stock Plan, which includes the transfer of unused shareauthorizations under the Director Plan on May 17, 2006.

 

60

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Thestock options issued subsequent to May 16, 2002, the restricted stockunits and the performance share awards include a retirement eligible provision.Employees and directors who reach the retirement age of 62 and have providedfive years of service meet the provision. The recognition of compensation expenseassociated with these awards is accelerated based upon this criteria and isderived by the use of the non-substantive vesting period approach. Thisapproach was followed under APB 25 and subsequently with the adoption of FAS123R.

 

TheStock Plan provides for the issuance of shares of Common Stock to directors’ inlieu of the annual cash retainer.  As of December 29,2007, 13,830 shares of Common Stock have been issued in lieu of the cashretainer.  Prior to May 17, 2006,such shares were issued under the provisions of the Director Plan.

 

**Stock Options**

** **

Acomponent of the Stock Plan permits the Company to grant stock options. As of December 29,2007, 1,725,959 options had been exercised, and options to purchase 1,005,534shares of Common Stock were outstanding. These options vest ratably over fiveyears commencing with the date of grant.

 

Theexercise price of all stock options granted under the Stock Plan must be atleast equal to the fair market value of a share of the Company’s Common Stockon the date of grant. With respect to any participant possessing more than 10%of the voting power of the Company’s outstanding capital stock, the exerciseprice of any incentive stock option granted must equal at least 110% of thefair market value on the grant date, and the maximum term of the option mustnot exceed five years. The terms of all other options granted under the StockPlan may not exceed ten years. Options outstanding to participants who meet theretirement eligible provision vest upon actual retirement or the normal vestingperiod, whichever is earlier.

 

Inthe fourth quarter of 2005, the Company elected to accelerate all non-vestedstock options outstanding with an exercise price greater than $16 per share.The purpose of the acceleration was to enable the Company to avoid recognizingcompensation expense associated with these options in future periods in itsconsolidated statements of income pursuant to Financial Accounting StandardsBoard Statement No. 123R. Under FAS No. 123R, the Company beganapplying the expense recognition provisions relating to stock options beginningin the first quarter of fiscal 2006. In approving the acceleration, the Companyconsidered its impact on future financial results, stockholder value andemployee retention. The Company believes that the acceleration was in the bestinterest of stockholders as it reduces the Company’s reported compensationexpense in periods subsequent to fiscal 2005 in light of these accountingregulations. The compensation expense in future periods that is eliminated as aresult of the acceleration of the vesting of these options is approximately$3.7 million. This acceleration did not result in a charge to the Company’sexpenses in the consolidated statements of income in fiscal 2005.

 

61

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Optiontransactions involving the Director Plan and the Stock Plan are summarized withthe corresponding weighted-average exercise prices as follows:

 

| ** **                            | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **         | ** ** |
|---------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|--------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **         | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate**      | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic**      | ** ** |
| ** **                            | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**          | ** ** |
| ** **                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | **(in thousands)** | ** ** |
| Outstanding at January 1, 2005   |       | 1,314,573  |       | $             | 14.08      |            |       |               |       |   |
| Granted                               |       | 292,020    |       | 16.13         |       |            |       |               |       |
| Exercised                             |       | (72,078    | )          | 5.87          |       |            |       |               |       |
| Forfeited                             |       | (65,240    | )          | 18.14         |       |            |       |               |       |
| Outstanding at December 31, 2005 |       | 1,469,275  |       | 14.71         |       |            |       |               |       |
| Exercised                             |       | (128,475   | )          | 7.44          |       |            |       |               |       |
| Forfeited                             |       | (33,950    | )          | 20.01         |       |            |       |               |       |
| Outstanding at December 30, 2006 |       | 1,306,850  |       | 15.28         |       | 5.2             |       | $                  | 19,974     |   |
| Exercised                             |       | (144,426   | )          | 7.61          |       |            |       |               |       |
| Forfeited                             |       | (18,440    | )          | 20.58         |       |            |       |               |       |
| Outstanding at December 29, 2007 |       | 1,143,984  |       | $             | 16.17      |            | 4.6        |               | $          | 18,495 |   |
|                                  |       |       |       |          |       |            |       |               |       |
| Exercisable at December 29, 2007 |       | 1,085,694  |       | $             | 16.36      |            | 4.5        |               | $          | 17,759 |   |

 

Thetotal intrinsic value of options exercised during fiscal years 2005, 2006, and2007 was approximately $739,000, $819,000, and $1.1 million, respectively. Theproforma weighted-average grant-date fair value of options granted in 2005 was$5.41.

 

Therewas $441,000 and $231,000 of stock option related compensation expenserecognized from the combination of the Stock Plan, the Stock Purchase Plan andthe Director Plan in 2006 and 2007, respectively. The total remaining expenseto be recognized in future periods for outstanding non-vested stock options isapproximately $119,000. The expense is expected to be recognized over aweighted-average period of 2.0 years.

 

**Restricted Stock UnitGrant**

** **

Acomponent of the Stock Plan permits the Company to grant shares of restrictedstock units (RSU’s). These grants are compensation expense under the rules ofFAS 123R, and are required to be recognized in the Company’s consolidatedstatements of income. The valuation of the RSU’s is based on the closing marketprice of the Common Stock on the date of grant. The RSU’s vest ratably overfour years or cliff vest at four years for employees and cliff vest atthree years for directors. RSU’s outstanding to participants who meet theretirement eligible provision vest upon actual retirement or the normal vestingperiod, whichever is earlier. Under Section 162(m) of the InternalRevenue Code of 1986, as amended, RSU’s granted to certain employees requireperformance criteria to be met in order for the units to cliff vest at threeyears. The performance criteria is based on the return on equity. As of December 29,2007, there are 132,686 RSU’s outstanding that require the attainment of the performancecriteria.

 

Thenumber of performance based RSU’s issued in 2006 and 2007 was 72,695 and59,991, respectively and the associated compensation expense recognized in thefiscal years was $725,000 and $894,000, respectively. During the fiscal years2006 and 2007, $1.3 million and $2.2 million, respectively was recorded ascompensation expense related to all RSU’s. A forfeiture rate is applied to themajority of the RSU’s granted to employees based on the historical forfeitureexperience with stock options. The total remaining expense to be recognized infuture periods for outstanding non-vested RSU’s is approximately $3.4 million.The expense is expected to be recognized over a weighted-average period of 2.5years.

 

62

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RSU’sgranted after fiscal year 2005 earn dividend equivalents that are paid out atthe time the RSU’s vest.  The expenserecognized for dividend equivalents in 2006 and 2007 was approximately $44,000and $97,000, respectively.

 

Restrictedstock unit transactions under the Stock Plan are summarized with theweighted-average grant-date fair value as follows:

 

| ** **                           | ** ** | ** **      | ** ** | **Weighted-**  | ** ** |
|--------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                           | ** ** | ** **      | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **Restricted**  | ** ** | **Grant-Date** | ** ** |
| ** **                           | ** ** | **Stock Units** | ** ** | **Fair Value** | ** ** |
| ** **                           | ** ** | ** **      | ** ** | ** **     | ** ** |
| Non-vested at January 1, 2005   |       | 0               |       | $              | 0.00       |   |
| Granted                              |       | 53,250          |       | 14.73          |       |
| Non-vested at December 31, 2005 |       | 53,250          |       | 14.73          |       |
| Granted                              |       | 254,159         |       | 12.71          |       |
| Forfeited                            |       | (27,500         | )          | 14.67          |       |
| Non-vested at December 30, 2006 |       | 279,909         |       | 12.90          |       |
| Granted                              |       | 224,209         |       | 16.24          |       |
| Vested                               |       | (38,219         | )          | 12.95          |       |
| Forfeited                            |       | (10,604         | )          | 14.33          |       |
| Non-vested at December 29, 2007 |       | 455,295         |       | $              | 14.51      |   |

 

**Performance Share Awards**

** **

Acomponent of the Stock Plan also permits the Company to grant performance shareawards (PSA’s). Grants in 2006 included target payouts to participants of atotal of 164,909 shares under a two-year performance plan and 164,909 sharesunder a three-year performance plan. Grants in 2007 included target payouts toparticipants of a total of 138,714 shares under a three-year performanceplan.  The plans require the achievementof performance based on Return on Net Assets-adjusted (RONA) and TotalShareholder Return (TSR) compared to a group of peer companies. Depending onthe ranking of the Company’s performance against the peer group, theparticipants could earn from 0% up to 200% of the target payout of performanceshares. A participant who retires during a performance period and meets theretirement eligible provision is entitled to receive 100% of the award thatwould have otherwise been earned had the participant remained employed throughthe end of the performance period. The award to such a participant will besettled at the end of the normal performance period.

 

The fair value of shareawards requiring achievement of the goal based on TSR is estimated on the dateof grant using a lattice-based valuation model that uses assumptions noted inthe following table. Because lattice-based option valuation models incorporateranges of assumptions for inputs, those ranges are disclosed. Expectedvolatilities were based on historical volatility of the Company’s stock and theaverage of the competitor companies’ stock, as well as other factors. TheCompany used historical data to estimate employee termination within thevaluation model. The expected term of awards granted was derived from theoutput of the option valuation model and represents the period of time thatawards granted are expected to be outstanding. The risk-free interest rate isbased on interest rates on total constant maturity U.S. Treasury notes withlives consistent with the expected lives of the related option. The grant-datefair value of the TSR related awards granted in 2006 is $10.62 and $11.99 pershare for the two-year and three-year performance plan, respectively.  The grant-date fair value of the TSR relatedawards granted in 2007 is $22.25.

 

| ** **                                         | ** ** | **2006**   | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|------------|
| Risk-free interest rate                            |       | 4.97%-5.00 | %          | 4.50     | %          |
| Expected life (in years)                           |       | 2 to 3     |       | 3        |       |
| Expected volatility of the Company                 |       | 40.40      | %          | 38.60    | %          |
| Expected dividend yield                            |       | 1.90       | %          | 1.40     | %          |
| Peer companies’ average volatility experience |       | 33.90      | %          | 33.10    | %          |

 

63

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Thefair value of the share awards requiring achievement of the goal based on RONAis the Common Stock market price at grant date, which was $12.73 and $16.75 forthe awards granted in 2006 and 2007, respectively. The recognition of compensationexpense is initially based on the probable outcome of the performance conditionand adjusted for subsequent changes in the estimated or actual outcome. TheCompany reassesses at each reporting date whether achievement of theperformance condition is probable. The assessment involves comparing theCompany’s forecasted RONA for the performance period to the historical RONAachieved by a group of peer companies.

 

TheTSR goal is based on the market price of the Company’s Common Stock as comparedto the peer group. This is considered a market condition under FAS 123R, thuscompensation expense recognized is not reversed if the goal is not achieved bythe end of the performance period. The compensation expense related to shareawards that are forfeited is reversed. If the performance goal related to RONAis not met, no compensation expense is recognized and any recognized compensationexpense is reversed as of the end of the plan period. A total of $981,000 and$1.6 million of compensation expense was recorded during the fiscal years ended2006 and 2007, respectively, relating to the performance share awards. As of December 30,2006, it was not probable that the RONA goal would be met at the end of theperformance periods and thus compensation expense recognized throughout 2006was reversed. The total remaining expense expected to be recognized in futureperiods for outstanding PSA’s is approximately $1.1 million. The expense isexpected to be recognized over a weighted-average period of 1.8 years.

 

Performanceshare award transactions under the Stock Plan are summarized with theweighted-average grant-date fair value as follows:

 

| ** **                           | ** ** | **Performance**  | ** ** | **Weighted-**  | ** ** |
|--------------------------------------|------------|------------------|------------|----------------|------------|
| ** **                           | ** ** | **Share Awards** | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **at Target**    | ** ** | **Grant-Date** | ** ** |
| ** **                           | ** ** | **Payout**       | ** ** | **Fair Value** | ** ** |
| ** **                           | ** ** | ** **       | ** ** | ** **     | ** ** |
| Non-vested at December 31, 2005 |       | 0                |       | $              | 0.00       |   |
| Granted                              |       | 329,818          |       | 12.02          |       |
| Non-vested at December 30, 2006 |       | 329,818          |       | 12.02          |       |
| Granted                              |       | 138,714          |       | 19.50          |       |
| Forfeited                            |       | (5,438           | )          | 14.22          |       |
| Non-vested at December 29, 2007 |       | 463,094          |       | $              | 14.23      |   |

 

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FAS 123 to stock-basedcompensation in the fiscal year ended 2005 compared to the fair valuerecognition provisions of FAS 123R that are applied to the stock-based paymentarrangements in the fiscal years ended 2006 and 2007.

 

| ** **                                                                                                                            | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                            | ** ** | **(in thousands, except per share data)** | ** ** |
| Net income before stock-based compensation expense                                                                                    |       | $                                         | 2,648      |     | $          | 2,690    |       | $ | 14,461 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based methods  for all awards, net of related tax effects |       | (3,219                                    | )          | (1,686   | )          | (2,448   | )          |
| Net income (loss)*                                                                                                                    |       | $                                         | (571       | )        | $          | 1,004    |       | $ | 12,013 |   |
| Earnings (loss) per share:                                                                                                            |       |                                      |       |     |       |     |       |
| Basic - as  reported                                                                                                                  |       | $                                         | 0.09       |     | $          | 0.03     |       | $ | 0.40 |   |
| Basic - with  stock-based compensation                                                                                                |       | $                                         | (0.02      | )        | $          | 0.03     |       | $ | 0.40 |   |
|                                                                                                                                  |       |                                      |       |     |       |     |       |
| Diluted - as  reported                                                                                                                |       | $                                         | 0.09       |     | $          | 0.03     |       | $ | 0.40 |   |
| Diluted - with  stock-based compensation                                                                                              |       | $                                         | (0.02      | )        | $          | 0.03     |       | $ | 0.40 |   |

 

----

*      Net loss prior to 2006 is pro-forma for the effect ofFAS 123R.

 

64

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For purposes of theabove information, the fair value of each option grant was estimated at thedate of grant using the Black-Scholes option pricing model based on theweighted-average assumptions noted in the following table. There were nooptions granted in 2006 or 2007. Expected volatility was based on historicalvolatility of the Company’s Common Stock, and other factors. The Company usedhistorical data to estimate option exercise and employee termination within thevaluation model. The expected term of options granted was derived from theoutput of the option valuation model and represents the period of time thatoptions granted are expected to be outstanding. The risk-free interest rate isbased on interest rates on total constant maturity U.S. Treasury notes withlives consistent with the expected lives of the related option.

 

| ** **               | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|
| Risk-free interest rate  |       | 4.03     | %          |
| Expected life (in years) |       | 6.69     |       |
| Expected volatility      |       | 31.25    | %          |
| Expected dividend yield  |       | 1.70     | %          |

 

**18.  FAIR VALUE OF FINANCIAL INSTRUMENTS:**

** **

Thefair value of the Company’s financial instruments are presented below. Theestimates require subjective judgments and are approximate. Changes inmethodologies and assumptions could significantly affect estimates.

 

*Lineof Credit -**The*carrying amount outstanding on therevolving line of credit is $2.0 million and zero at December 30, 2006 andDecember 29, 2007, respectively, which approximates the estimated fairvalue as this instrument requires interest payments at a market rate ofinterest plus a margin.

 

*Long-TermNotes Payable -*The carrying amount outstanding on thelong-term notes payable is $29.1 million (including $5.7 million ofcurrent payable) at December 29, 2007, which approximates the estimatedfair value as these instruments require interest payments at a market valuerate of interest plus a margin.

 

**19.  401(K) DEFINED CONTRIBUTION PLAN:**

** **

TheCompany sponsors a 401(k) defined contribution plan covering substantiallyall full-time employees. Company contributions to the plan totaledapproximately $880,000 in 2005, $787,000 in 2006, and $863,000 in 2007.

 

**20.  COMMITMENTS AND CONTINGENCIES:**

** **

**Repurchase Agreements**

** **

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in the vehicles.Upon request of a lending institution financing a dealer’s purchases of theCompany’s product, the Company may execute a repurchase agreement. Theseagreements provide that, for up to 15 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event a dealer defaults onits floorplan credit arrangement with its lender. It has been the Company’sexperience that the chance of default by dealers has been very low.

 

TheCompany’s liability under repurchase agreements is limited to the unpaidbalance owed to the lending institution by reason of its extending credit tothe dealer to purchase its vehicles, reduced by the resale value of vehicleswhich may be repurchased. The risk of loss is spread over numerous dealers andfinancial institutions.

 

Lossesof approximately $79,000, $232,000 and $313,000 were incurred in 2005, 2006,and 2007, respectively. The approximate amount subject to contingent repurchaseobligations arising from these agreements at December 29, 2007 is $518.6million, with approximately 3.9% concentrated with one dealer. The Company hasrecorded a liability of approximately $362,000 for potential losses resultingfrom guarantees on repurchase obligations for products shipped to dealers. Ifthe Company were obligated to repurchase a significant number of units underany repurchase agreement, its business, operating results, and financialcondition could be adversely affected.

 

65

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** **

**Product Liability**

** **

TheCompany is subject to regulations which may require the Company to recallproducts with design or safety defects, and such recall could have a materialadverse effect on the Company’s business, results of operations, and financialcondition.

 

TheCompany has from time to time been subject to product liability claims. Todate, the Company has been successful in obtaining product liability insuranceon 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 liabilityinsurance, including umbrella coverage, is available to a maximum amount of$100.0 million for each occurrence, as well as in the aggregate. The Companyhas recorded an accrual for its probable exposure on product liability claims.  Successful assertion against the Company ofone or a series of large uninsured claims, or of one or a series of claimsexceeding any insurance coverage, could have a material adverse effect on theCompany’s business, results of operations, and financial condition.

 

**Letter of Credit onBehalf of the Joint Venture**

** **

TheCompany has an unused letter of credit of $1.0 million outstanding as of December 29,2007 on behalf of CCP.  The letter ofcredit is with a tire vendor and expires on June 1, 2008.

 

**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 probable settlements. Management believesthat any ultimate liability which may result from these proceedings will nothave a material adverse effect on the Company’s consolidated financialstatements.

 

**21.   SUBSEQUENT EVENT:**

** **

In January 2008, the Board ofDirectors approved a stock repurchase program where by up to an aggregate of$30 million worth of the Company’s outstanding shares of Common Stock may berepurchased from time to time.  There isno time restriction on this authorization to purchase our Common Stock.  The program provides for the Company torepurchase shares through the open market and other approved transactions atprices deemed appropriate by management. The timing and amount of repurchase transactions under the program willdepend upon market conditions and corporate and regulatory considerations.  During January 2008, the Companyrepurchased 313,400 shares of common stock on the open market for an averageprice of $9.03 per share.

 

66

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

** **
| ** **                             | ** ** | **1st**                                   | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Year ended December 30,  2006** | ** ** | **Quarter**                               | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                             | ** ** | **(in thousands, except per share data)** | ** ** |
|                                   |       |                                      |       |        |       |        |       |        |       |
| Net sales                              |       | $                                         | 385,068    |        | $          | 321,283     |       | $           | 292,473    |   | $ | 299,163 |   |
| Gross profit                           |       | $                                         | 48,449     |        | $          | 30,491      |       | $           | 18,533     |   | $ | 27,071 |   |
| Operating income (loss)                |       | $                                         | 14,470     |        | $          | 793         |       | $           | (10,941    | ) | $ | (512 | ) |
| Net income (loss):                     |       |                                      |       |        |       |        |       |        |       |
| Continuing  operations                 |       | $                                         | 8,293      |        | $          | 479         |       | $           | (7,098     | ) | $ | (687 | ) |
| Discontinued  operations               |       | 0                                         |       | (107        | )          | 0           |       | 125         |       |
|                                   |       | $                                         | 8,293      |        | $          | 372         |       | $           | (7,098     | ) | $ | (562 | ) |
| Earnings (loss) per share-basic:       |       |                                      |       |        |       |        |       |        |       |
| Continuing  operations                 |       | $                                         | 0.28       |        | $          | 0.01        |       | $           | (0.24      | ) | $ | (0.02 | ) |
| Discontinued  operations               |       | 0.00                                      |       | 0.00        |       | 0.00        |       | 0.00        |       |
| Basic                                  |       | $                                         | 0.28       |        | $          | 0.01        |       | $           | (0.24      | ) | $ | (0.02 | ) |
|                                   |       |                                      |       |        |       |        |       |        |       |
| Earnings (loss) per share-diluted:     |       |                                      |       |        |       |        |       |        |       |
| Continuing  operations                 |       | $                                         | 0.28       |        | $          | 0.01        |       | $           | (0.24      | ) | $ | (0.02 | ) |
| Discontinued  operations               |       | 0.00                                      |       | 0.00        |       | 0.00        |       | 0.00        |       |
| Diluted                                |       | $                                         | 0.28       |        | $          | 0.01        |       | $           | (0.24      | ) | $ | (0.02 | ) |

 
| ** **                            | ** ** | **1st**                                    | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Year ended December 29, 2007** | ** ** | **Quarter**                                | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                            | ** ** | **(in  thousands, except per share data)** | ** ** |
|                                  |       |                                       |       |        |       |        |       |        |       |
| Net sales                             |       | $                                          | 322,244    |        | $          | 335,319     |       | $           | 322,422    |   | $ | 292,146 |   |
| Gross profit                          |       | $                                          | 35,996     |        | $          | 36,598      |       | $           | 36,179     |   | $ | 260,051 |   |
| Operating income                      |       | $                                          | 3,638      |        | $          | 8,732       |       | $           | 6,518      |   | $ | 32,095 |   |
| Net income                            |       | $                                          | 1,499      |        | $          | 4,464       |       | $           | 3,681      |   | $ | 2,369 |   |
|                                  |       |                                       |       |        |       |        |       |        |       |
| Earnings per share:                   |       |                                       |       |        |       |        |       |        |       |
| Basic                                 |       | $                                          | 0.05       |        | $          | 0.15        |       | $           | 0.12       |   | $ | 0.08 |   |
| Diluted                               |       | $                                          | 0.05       |        | $          | 0.15        |       | $           | 0.12       |   | $ | 0.08 |   |

 

67

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**ITEM9.**             CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

** **

Not Applicable.

 

**ITEM9A.**          CONTROLS ANDPROCEDURES

** **

***Evaluationof Disclosure Controls and Procedures***

*** ***

Ourmanagement evaluated, with the participation of our Chief Executive Officer andour Chief Financial Officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Annual Report on Form 10-K.Based on this evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that our disclosure controls and procedures areeffective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 is accumulatedand communicated to our management including our principal financial officers,as appropriate to allow timely decisions regarding required disclosure, andthat such information is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission rules andforms.

 

Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures will prevent allerror and all fraud. Because of inherent limitations in any system ofdisclosure controls and procedures, no evaluation of controls can provideabsolute assurance that all instances of error or fraud, if any, within theCompany may be detected. However, our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, has designed our disclosure controlsand procedures to provide reasonable assurance of achieving their objectivesand have, pursuant to the evaluation discussed above, concluded that ourdisclosure controls and procedures are, in fact, effective at this reasonableassurance level.

 

***Changesin Internal Controls***

*** ***

Therewas no change in our internal control over financial reporting that occurredduring the period covered by this Annual Report on Form 10-K that hasmaterially effected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

***Management’sReport on Internal Control Over Financial Reporting***

*** ***

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Internal control over financial reportingincludes those policies and procedures that:

 

·       pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

 

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and

 

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 29, 2007. In making this assessment, managementused the criteria set forth in Internal Control-Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

68

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Basedon its assessment of internal controls over financial reporting, management hasconcluded that, as of December 29, 2007, the Company’s internal controlover financial reporting was effective to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

 

**ITEM9B.**          OTHERINFORMATION

** **

None

 

**PART III**

** **

**ITEM10.**            DIRECTORS,EXECUTIVE OFFICERS OF REGISTRANT, AND CORPORATE GOVERNANCE

** **

The information requiredby this item concerning the executive officers is set forth in Part I,Item 1 - “Business” of this Annual Report on Form 10-K.

 

Information required bythis Item regarding directors and compliance with Section 16(a) ofthe Exchange Act is set forth under the captions “Proposal One—Election ofDirectors” and Section 16(a) “Beneficial Ownership ReportingCompliance” in the Company’s definitive 2008 Proxy Statement and is incorporatedherein by reference.

 

Information required bythis Item regarding the Company’s Audit Committee and designated “audit committeefinancial expert” is set forth under the caption “Board of Directors andCommittee Meetings - Audit Committee” in the Company’s definitive 2008 ProxyStatement and is incorporated herein by reference.

 

The Company has compliedwith the requirements of Section 303A.12(a) of the New York StockExchange Listed Company Manual by filing, with the New York Stock Exchange, its2007 Section 12(a) CEO Certification. The Company’s CEO/CFO certifications filed pursuant to Section 302 ofthe Sarbanes Oxley Act is filed as an exhibit to this Annual Report on Form10-K.

 

**Corporate Governance,Code of Ethics, and Code of Business Conduct**

** **

The Company has certaincorporate governance guidelines, a code of ethics that applies to its seniorfinancial officers, as well as a code of business conduct. The code of ethics,code of conduct, as well as other corporate governance information is posted onour Internet web-site. The Internet address for our website ishttp://www.monaco-online.com, and the code of ethics, code of conduct, andother corporate governance information may be found as follows:

 

*1.**               **From our main Web page, first click on “Company”*

 

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

 

*3.**               **Next, select “Corporate Governance” from the “Investor Relations” Menu*

 

*4.**                **Next, clickon “Code of Ethics for Executive Officers” (or “Code of Business Conduct,” orany other “Corporate Governance”* relatedtopic).

 

We intend to satisfy the disclosurerequirement under Item 5.05 of Form 8-K regarding an amendment to, orwaiver from, a provision of this Code of Ethics for Senior Financial Officersby posting such information on our website, at the address and locationspecified above.  Our website is intendedto be an inactive, textual reference only. None of the material on the website is part of this Annual Report on Form 10-K.

 

69

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**ITEM11.**            EXECUTIVECOMPENSATION

** **

Informationrequired by this Item regarding compensation of the Company’s directors andexecutive officers is set forth under the captions “Compensation Discussion andAnalysis and Executive Compensation” and “Director Compensation” in the Company’sdefinitive 2008 Proxy Statement and is incorporated herein by reference.

 

Informationrequired by this Item regarding certain relationships of the members of theCompensation Committee is set forth under the caption “Compensation CommitteeInterlocks and Insider Participation” in the Company’s definitive 2008 ProxyStatement and is incorporated herein by reference.

 

Informationrequired by this Item regarding the Compensation Committee Report is set forthunder the caption “Report of the Compensation Committee” in the Company’sdefinitive 2008 Proxy Statement and is incorporated herein by reference.

 

**ITEM12.**      SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

** **

Informationrequired by this Item regarding beneficial ownership of the Company’s CommonStock by certain beneficial owners and management is set forth under thecaption “Security Ownership” in the Company’s definitive 2008 Proxy Statementand is incorporated herein by reference.

 

**Equity Compensation PlanInformation**

** **

Thefollowing table sets forth information with respect to the Company’s equitycompensation plans as of the end of the most recently completed fiscal year.

** **

| **Plan Category**                                            | ** ** | **(a)  Number of securities  to be issued upon  exercise of  outstanding options,  warrants, and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants, and rights** | ** ** | **(c)  Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders.     |       | 2,062,373                                                                                                 | *          | $16.17                                                                                   | **         | 1,584,256                                                                                                                                                |       |
| Equity  compensation plans not approved by security holders. |       | —                                                                                                    |       | —                                                                                   |       | 400,000                                                                                                                                                  | ***        |
|                                                         |       |                                                                                                      |       |                                                                                     |       |                                                                                                                                                     |       |
| Total                                                        |       | 2,062,373                                                                                                 |       | $16.17                                                                                   |       | 1,984,256                                                                                                                                                |       |

----

*                    Includes, asof December 29, 2007, stock options and the target number of shares thatcould be issued under restricted stock units and performance share awardspursuant to the 1993 Stock Plan.

 

**             Theweighted-average exercise price is calculated on the outstanding optionsgranted under the 1993 Stock Plan. Restricted stock units and performance shareawards outstanding are not reflected in the weighted-average price calculationdue to the fact that such rights have no exercise price.

 

***      The Board ofDirectors approved a new Employee Stock Purchase Plan in 2007.  Stockholder approval of the plan will besought at the May 2008 Annual Meeting of Stockholders.

 

70

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** **

**ITEM13.**            CERTAINRELATIONSHIPS AND TRANSACTIONS, AND DIRECTOR INDEPENDENCE

** **

Informationrequired by this Item regarding transactions with related persons is set forthunder the caption “Transactions With Related Persons” in the Company’sdefinitive 2008 Proxy Statement and is incorporated herein by reference.

 

Informationrequired by this Item regarding director independence is set forth under thecaption “Director Independence” in the Company’s definitive 2008 ProxyStatement and is incorporated herein by reference.

 

**ITEM14.**            PRINCIPALACCOUNTANT FEES AND SERVICES

** **

The information requiredby this item is included under the caption “Ratification of Appointment of IndependentRegistered Public Accounting Firm” in the Company’s definitive 2008 ProxyStatement and is incorporated herein by reference.

 

71

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** **

**PART IV**

** **

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 
| (a)                                                                                                                                                                                                                            | The following documents are filed as part of this  Report on Form 10-K: |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 1.                                                                                                                                                                                                                             | * *                                                                     | *Financial Statements.*The Consolidated Financial Statements  of Monaco Coach Corporation and the Report of Independent Registered Public  Accounting Firm are filed in Item 8 within this Annual Report on  Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | * * |
|                                                                                                                                                                                                                           | * *                                                                     | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | * * |
| 2.                                                                                                                                                                                                                             | * *                                                                     | *Financial Statement Schedule.*None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | * * |
|                                                                                                                                                                                                                           | * *                                                                     | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | * * |
| Schedules not listed above have been omitted because  they are not applicable or are not required or the information required to be  set forth therein is included in the consolidated financial statements or  notes thereto. |                                                                         |
|                                                                                                                                                                                                                           |                                                                         |
| 3.                                                                                                                                                                                                                             | * *                                                                     | *Exhibits.*The following Exhibits are filed as part of, or  incorporated by reference into, this Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | * * |
|                                                                                                                                                                                                                           | * *                                                                     | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | * * |
| 2.1                                                                                                                                                                                                                            |                                                                         | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts Motorcoach Country  Club, Inc., dated November 27, 2002 (Incorporated herein by  reference to Exhibit 2.2 to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2                                                                                                                                                                                                                            |                                                                         | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts of Las Vegas, Inc.,  dated November 27, 2002 (Incorporated herein by reference to  Exhibit 2.3 to the Registrant’s Annual Report on Form 10-K for the  year ended December 28, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.3                                                                                                                                                                                                                            |                                                                         | Stock and Unit  Purchase Agreement dated November 9, 2005, by and among the Company,  R-Vision Holdings LLC, William L. Warrick, Arlen J. Paul, Dennis Bailey,  William Devos, Ruth A. Hollingsworth, Shannon E. Warrick, Bradford  J. Warrick, William Lewis Warrick, Jodie D. Warrick, Helen L. Krizman,  Warrick LP, William L. Warrick as Trustee of the William Warrick 1998  Irrevocable Trust for the Benefit of Shannon Elizabeth Warrick, William L.  Warrick as Trustee of the William Warrick 1998 Irrevocable Trust for the  Benefit of William Lewis Warrick, William L. Warrick as Trustee of the William  Warrick 1998 Irrevocable Trust for the Benefit of Bradford James Warrick, and  William L. Warrick as Trustee of the William Warrick 1998 Irrevocable Trust  for the Benefit of Jodie Dawn Warrick, R-Vision Inc., R-Vision Motorized LLC,  Roadmaster LLC, Bison Manufacturing LLC and A.J.P. R.V., Inc., and  William L. Warrick as Sellers’ Representative (Incorporated herein by  reference to Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K filed with the SEC on November 23, 2005). |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.4                                                                                                                                                                                                                            |                                                                         | Asset Purchase  Agreement dated November 18, 2005, by and among the Company, R-Vision  Holdings LLC, A.J.P. R.V., Inc., and William L. Warrick as Sellers’  Representative (Incorporated herein by reference to Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K filed with the SEC on  November 23, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 (Incorporated herein by reference to Exhibit 3.1 to the  Registrant’s Current Report on Form 8-K filed with the SEC on  November 16, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.4                                                                                                                                                                                                                            |                                                                         | Amendment to the  Amended and Restated Bylaws of Registrant, effective as of November 12, 2007  (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current  Report on Form 8-K filed with the SEC on November 15, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                           |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |

 

72

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| 10.2       |   | 1993 Director Option  Plan as Amended Through May 13, 2003. (Incorporated herein by reference  to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 28, 2003).                                                                                                                                                                                                                                                                                               |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3† |   | 1993 Stock Option Plan  as amended through May 17, 2006. (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  with the SEC on May 23, 2006).                                                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.1     |   | Form of 1993  Stock Plan Performance Share Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.2     |   | Form of 1993  Stock Plan Restricted Stock Units for Kay L. Toolson and John W. Nepute.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.3     |   | Form of 1993  Stock Plan Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.4     |   | Form of 1993  Stock Plan Restricted Stock Units for Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.5     |   | Form of Director  Option Agreement, Initial Grant. (Incorporated herein by reference to  Exhibit 10.8 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.6     |   | Form of Director  Option Agreement, Subsequent Grant. (Incorporated herein by reference to  Exhibit 10.9 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.7     |   | Form of 1993  Stock Plan Stock Option Agreement. (Incorporated herein by reference to  Exhibit 10.10 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.8     |   | Form of Annual  Irrevocable Election Under Director Stock Plan. (Incorporated herein by  reference to Exhibit 10.11 to the Registrant’s Annual Report on 10-K for  the year ended December 31, 2005).                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 Appendix B to the  Registrant’s definitive Proxy Statement filed with the Securities and  Exchange Commission on April 5, 2004).                                                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6       |   | Third Amended and  Restated Credit Agreement dated November 18, 2005, by and among the  Company, the subsidiaries of the Company party thereto as co-borrowers, the  lenders party thereto from time to time, U.S. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  with the SEC on November 23, 2005). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.1     |   | First Amendment to  Third Amended and Restated Credit dated January 4, 2007, by and among  the Company, the subsidiaries of the Company party thereto as co-borrowers,  the lenders party thereto from time to time, US Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to Exhibit 10.6.1  to the Registrant’s Annual Report on 10-K for the year ended December 30,  2006).                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.2     |   | Second Amendment to  Third Amended and Restated Credit Agreement dated January 17, 2008, by  and among Borrowers and Administrative Lender.                                                                                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.3     |   | Third Amendment to  Third Amended and Restated Credit Agreement and Waiver of Event of Default  dated January 18, 2008, by and among the Company, the subsidiaries of  the Company party thereto as co-borrowers, each of the Lenders and US Bank  National Association, as the Administrative Lender.                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7       |   | Annual Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8       |   | Joint Venture  Agreement dated January 24, 2007 between the Registrant and  International Truck and Engine Corporation (Incorporated herein by reference  to Exhibit 10.8 to the Annual Report on 10-K for the year ended December 30,  2006).                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9† |   | 2007 Employee Stock  Purchase Plan (Incorporated herein by reference to Exhibit 10.1 to the  Registrant’s Registration Statement on Form S-8 (Reg.  No. 333-143976)).                                                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 11.1       |   | Computation of earnings  per share (see Note 14 of Notes to Consolidated Financial Statements included  in Item 8 hereto).                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1       |   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

73

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| 23.1   |   | Consent of Independent  Registered Public Accounting Firm.                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                               |
| 24.1   |   | Power of Attorney  (included on the signature pages hereof).                                                                                  |
|   |   |                                                                                                                                               |
| 31.1   |   | Certification of CFO  under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                           |
|   |   |                                                                                                                                               |
| 31.2   |   | Certification of CEO  under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                           |
|   |   |                                                                                                                                               |
| 32     |   | Certification of CEO  and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                               |

----

†                     The itemlisted is a compensatory plan.

 

74

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**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| March 13, 2008 |   | MONACO COACH CORPORATION |
|---------------------|--------|--------------------------|
|                |   |                     |
|                | By:    | /s/ KAY L. TOOLSON       |
|                |   | Kay L. Toolson           |
|                |   | Chief Executive Officer  |

 

75

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**POWEROF ATTORNEY**

** **

KNOW ALL PERSONS BYTHESE PRESENTS, 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 on Form 10-Kand to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

 

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

 
| **Signature**                    | ** ** | **Title**                                  | ** ** | **Date**            | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                                 | ** ** | ** **          | ** ** |
| /s/ Kay L. Toolson               |       | Chairman of the Board and Chief Executive  |       | March 13, 2008 |       |
| (Kay L. Toolson)                 |       | Officer (Principal Executive Officer)      |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ P. Martin Daley              |       | Vice President and Chief Financial Officer |       | March 13, 2008 |       |
| (P. Martin Daley)                |       | (Principal Financial Officer)              |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Charles J. Kimball           |       | Chief Accounting Officer                   |       | March 13, 2008 |       |
| (Charles J. Kimball)             |       | (Principal Accounting Officer)             |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ John F. Cogan                |       | Director                                   |       | March 13, 2008 |       |
| (John F. Cogan)                  |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Richard E. Colliver          |       | Director                                   |       | March 13, 2008 |       |
| (Richard E. Colliver)            |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Robert P.  Hanafee, Jr. |       | Director                                   |       | March 13, 2008 |       |
| (Robert P.  Hanafee, Jr.)   |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ L. Ben Lytle                 |       | Director                                   |       | March 13, 2008 |       |
| (L. Ben Lytle)                   |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Dennis D. Oklak              |       | Director                                   |       | March 13, 2008 |       |
| (Dennis D. Oklak)                |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Richard A. Rouse             |       | Director                                   |       | March 13, 2008 |       |
| (Richard A. Rouse)               |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Daniel C. Ustian             |       | Director                                   |       | March 13, 2008 |       |
| (Daniel C. Ustian)               |       |                                       |       |                |       |
|                             |       |                                       |       |                |       |
| /s/ Roger A. Vandenberg          |       | Director                                   |       | March 13, 2008 |       |
| (Roger A. Vandenberg)            |       |                                       |       |                |       |

 

76

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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 Motorcoach Country  Club, Inc., dated November 27, 2002 (Incorporated herein by  reference to Exhibit 2.2 to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2                  |       | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts of Las  Vegas, Inc., dated November 27, 2002 (Incorporated herein by  reference to Exhibit 2.3 to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.3                  |       | Stock and Unit  Purchase Agreement dated November 9, 2005, by and among the Company,  R-Vision Holdings LLC, William L. Warrick, Arlen J. Paul, Dennis Bailey, William  Devos, Ruth A. Hollingsworth, Shannon E. Warrick, Bradford J.  Warrick, William Lewis Warrick, Jodie D. Warrick, Helen L. Krizman, Warrick  LP, William L. Warrick as Trustee of the William Warrick 1998 Irrevocable  Trust for the Benefit of Shannon Elizabeth Warrick, William L. Warrick as  Trustee of the William Warrick 1998 Irrevocable Trust for the Benefit of  William Lewis Warrick, William L. Warrick as Trustee of the William Warrick  1998 Irrevocable Trust for the Benefit of Bradford James Warrick, and William  L. Warrick as Trustee of the William Warrick 1998 Irrevocable Trust for the  Benefit of Jodie Dawn Warrick, R-Vision Inc., R-Vision Motorized LLC,  Roadmaster LLC, Bison Manufacturing LLC and A.J.P. R.V., Inc., and  William L. Warrick as Sellers’ Representative (Incorporated herein by  reference to Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K filed with the SEC on November 23, 2005). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.4                  |       | Asset Purchase  Agreement dated November 18, 2005, by and among the Company, R-Vision  Holdings LLC, A.J.P. R.V., Inc., and William L. Warrick as Sellers’  Representative (Incorporated herein by reference to Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K filed with the SEC on  November 23, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 (Incorporated herein by reference to Exhibit 3.1 to the  Registrant’s Current Report on Form 8-K filed with the SEC on  November 16, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.4                  |       | Amendment to the  Amended and Restated Bylaws of Registrant, effective as of November 12,  2007 (Incorporated herein by reference to Exhibit 3.2 to the  Registrant’s Current Report on Form 8-K filed with the SEC on  November 15, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

77

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| 10.2       |   | 1993 Director Option  Plan as Amended Through May 13, 2003. (Incorporated herein by reference  to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 28, 2003).                                                                                                                                                                                                                                                                                               |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3† |   | 1993 Stock Option Plan  as amended through May 17, 2006. (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  with the SEC on May 23, 2006).                                                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.1     |   | Form of 1993  Stock Plan Performance Share Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.2     |   | Form of 1993  Stock Plan Restricted Stock Units for Kay L. Toolson and John W. Nepute.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.3     |   | Form of 1993  Stock Plan Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.4     |   | Form of 1993  Stock Plan Restricted Stock Units for Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.5     |   | Form of Director  Option Agreement, Initial Grant. (Incorporated herein by reference to  Exhibit 10.8 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.6     |   | Form of Director  Option Agreement, Subsequent Grant. (Incorporated herein by reference to  Exhibit 10.9 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.7     |   | Form of 1993  Stock Plan Stock Option Agreement. (Incorporated herein by reference to  Exhibit 10.10 to the Registrant’s Annual Report on 10-K for the year  ended December 31, 2005).                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.8     |   | Form of Annual  Irrevocable Election Under Director Stock Plan. (Incorporated herein by  reference to Exhibit 10.11 to the Registrant’s Annual Report on 10-K for  the year ended December 31, 2005).                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 Appendix B to the  Registrant’s definitive Proxy Statement filed with the Securities and Exchange  Commission on April 5, 2004).                                                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6       |   | Third Amended and  Restated Credit Agreement dated November 18, 2005, by and among the  Company, the subsidiaries of the Company party thereto as co-borrowers, the  lenders party thereto from time to time, U.S. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  with the SEC on November 23, 2005). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.1     |   | First Amendment to  Third Amended and Restated Credit dated January 4, 2007, by and among  the Company, the subsidiaries of the Company party thereto as co-borrowers,  the lenders party thereto from time to time, US Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to Exhibit 10.6.1  to the Registrant’s Annual Report on 10-K for the year ended December 30,  2006).                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.2     |   | Second Amendment to  Third Amended and Restated Credit Agreement dated January 17, 2008, by  and among Borrowers and Administrative Lender.                                                                                                                                                                                                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6.3     |   | Third Amendment to  Third Amended and Restated Credit Agreement and Waiver of Event of Default  dated January 18, 2008, by and among the Company, the subsidiaries of  the Company party thereto as co-borrowers, each of the Lenders and US Bank  National Association, as the Administrative Lender.                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7       |   | Annual Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8       |   | Joint Venture Agreement  dated January 24, 2007 between the Registrant and International Truck  and Engine Corporation (Incorporated herein by reference to Exhibit 10.8 to  the Annual Report on 10-K for the year ended December 30, 2006).                                                                                                                                                                                                                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9† |   | 2007 Employee Stock  Purchase Plan (Incorporated herein by reference to Exhibit 10.1 to the  Registrant’s Registration Statement on Form S-8 (Reg.  No. 333-143976)).                                                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 11.1       |   | Computation of  earnings per share (see Note 14 of Notes to Consolidated Financial Statements  included in Item 8 hereto).                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1       |   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

78

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| 23.1   |   | Consent of Independent  Registered Public Accounting Firm.                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                               |
| 24.1   |   | Power of Attorney  (included on the signature pages hereof).                                                                                  |
|   |   |                                                                                                                                               |
| 31.1   |   | Certification of CFO  under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                           |
|   |   |                                                                                                                                               |
| 31.2   |   | Certification of CEO  under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                           |
|   |   |                                                                                                                                               |
| 32     |   | Certification of CEO  and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                               |

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†                     The itemlisted is a compensatory plan.

 

79

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