** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

** **

**FORM 10-K**

 

**ý        AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

**Forthe fiscal year ended December 29, 2001**

 

**OR**

** **

**o        TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from               to                   **

 

**Commission File Number:  1-14725**

 

**MONACOCOACH CORPORATION**

(Exact Name ofRegistrant as specified in its charter)

 

| **Delaware**                                                    |   | **35-1880244**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **91320 Industrial Way**                                        |   |                                  |
| **Coburg, Oregon**                                              |   | **97408**                             |
| (Address of  principal executive offices)                       |   | (Zip code)                            |
|                                                            |   |                                  |
| **(541) 686-8011**                                              |
| (Registrant’s  telephone number, including area code)      |

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

 

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  Indicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past ninety days.             YESý  NO o

 

  Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the Registrant’s knowledge,in definite proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K o

 

  The aggregate market value of the votingstock held by non-affiliates of the Registrant, based upon the closing saleprice of the Common Stock on March 22, 2002 as reported on the New York StockExchange, was approximately $532 million. Shares of Common Stock held by officers and directors and theiraffiliated entities have been excluded in that such persons may be deemed to beaffiliates.  This determination ofaffiliate status is not necessarily conclusive for other purposes.

 

As of March 22,2002, the Registrant had 28,771,447 shares of Common Stock outstanding.

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DOCUMENTSINCORPORATED BY REFERENCE

The Registrant’sdefinitive Proxy Statement for its Annual Meeting of Stockholders to be held onMay 15, 2002 (the “Proxy Statement”) is incorporated by reference in Part IIIof this Form 10-K to the extent stated therein.

 

This document consists of 54 pages.  The Exhibit Index appears at page 48 .

 

 

 

 

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**INDEX**

 

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

 

 

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PART I

 

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include without limitation those below marked with an asterisk(*).  In addition, the Company may fromtime to time make oral forward-looking statements through statements thatinclude the words “believes”, “expects”, “anticipates” or similar expressions.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of the Company to differ materially fromthose expressed or implied by such forward-looking statements, including thoseset forth below under “Factors That May Affect Future Operating Results” withinManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.  The Company cautions thereader, however, that these factors may not be exhaustive.

 

 

**ITEM 1.  BUSINESS**

 

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium Class A motor coaches,Class C motor coaches and towable recreational vehicles.  The Company’s product line consists ofthirty-two models of motor coaches and seven models of towables (fifth wheeltrailers and travel trailers) under the “Monaco”,  “Holiday Rambler”, “Royale Coach”, “Beaver”, “Safari”, and“McKenzie Towables” brand names.  TheCompany’s products, which are typically priced at the high end of theirrespective product categories, range in suggested retail price from $60,000 to$1.0 million for motor coaches and from $20,000 to $65,000 for towables.  Based upon retail registrations in 2001, theCompany believes it had a 20.5% share of the market for diesel Class A motor coaches,a 13.7% share of the market for mid-to-high end fifth wheel trailers (unitswith retail prices above $25,000) and a 23.9% share of the market formid-to-high end travel trailers (units with retail prices above $20,000).  The Company’s products are sold through anextensive network of 385 dealerships located primarily in the United States andCanada.

 

The Company is thesuccessor to a company formed in 1968 (the “Predecessor”) and commencedoperations on March 5, 1993 by acquiring all the assets and liabilities of itspredecessor company (the “Predecessor Acquisition”).  Prior to March 1996, the Company’s product line consistedexclusively of High-Line Class A motor coaches. In March 1996, the Companyacquired the Holiday Rambler Division of Harley-Davidson, Inc. (“HolidayRambler”), a manufacturer of a full line of Class A motor coaches and towables(the “Holiday Acquisition”). Additionally, on August 2, 2001, the Company acquired SMC Corporation(“SMC”), a manufacturer of a full line of Class A motor coaches (the “SMCAcquisition”).  The Company believesthat developing relationships with a broad base of first-time buyers, coupledwith the Company’s strong emphasis on quality, customer service and designinnovation, will foster brand loyalty and increase the likelihood that, overtime, more customers will trade-up through the Company’s line of products.  Attracting larger numbers of first-timebuyers is important to the Company because of the Company’s belief that manyrecreational vehicle customers purchase multiple recreational vehicles duringtheir lifetime.

 

 

PRODUCTS

 

The Company currentlymanufactures thirty-two motor coach and seven towable models, each of which hasdistinct features and attributes designed to target the model to a particularsuggested retail price range.  TheCompany’s product offerings currently target four product types within therecreational vehicle market: Class A motor coaches, Class C motor coaches,fifth wheel trailers and travel trailers. The Company does not currently compete in any other product categoriesof the recreational vehicle industry. During the  fourth quarter of2001, the Company introduced two new products, the Cayman, a new low pricededition of the Monaco brand diesel motor coach, and the Neptune, a new lowpriced edition of the Holiday Rambler brand diesel motor coach.  These products were designed to fill  retail price points previously without aproduct offering from the Company.

 

 

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  The following table highlights the Company’sproduct offerings as of December 29, 2001:

 

 

| COMPANY MOTOR  COACH PRODUCTS |
|-------------------------------|
|                          |   |   |   |   |
| **MODEL**                     |   | **CURRENT SUGGESTED**

**RETAIL PRICE RANGE** |   | **BRAND** |
| Class A                       |   |   |   |   |
| Royale Coach                  |   | $ 600,000-$1.0  million |   | Monaco |
| Marquis                       |   | $  450,000-$515,000 |   | Beaver |
| Signature Series              |   | $  400,000-$500,000 |   | Monaco |
| Executive                     |   | $  340,000-$400,000 |   | Monaco |
| Navigator                     |   | $  315,000-$395,000 |   | Holiday Rambler |
| Patriot                       |   | $  255,000-$355,000 |   | Beaver |
| Dynasty                       |   | $  250,000-$325,000 |   | Monaco |
| Imperial                      |   | $  230,000-$275,000 |   | Holiday Rambler |
| Contessa                      |   | $  220,000-$245,000 |   | Beaver |
| Windsor                       |   | $  215,000-$270,000 |   | Monaco |
| Camelot                       |   | $  185,000-$225,000 |   | Monaco |
| Zanzibar                      |   | $  185,000-$220,000 |   | Safari |
| Monterey                      |   | $  185,000-$200,000 |   | Beaver |
| Scepter                       |   | $  180,000-$225,000 |   | Holiday Rambler |
| Sahara                        |   | $ 165,000-$185,000 |   | Safari |
| Endeavor-Diesel               |   | $  155,000-$195,000 |   | Holiday Rambler |
| Santiam                       |   | $  155,000-$180,000 |   | Beaver |
| Diplomat                      |   | $  150,000-$195,000 |   | Monaco |
| Cheetah                       |   | $  140,000-$160,000 |   | Safari |
| Knight                        |   | $  120,000-$165,000 |   | Monaco |
| Ambassador                    |   | $  120,000-$165,000 |   | Holiday Rambler |
| Socialite                     |   | $  120,000-$185,000 |   | Monaco |
| Cayman                        |   | $  110,000-$130,000 |   | Monaco |
| Neptune                       |   | $  110,000-$130,000 |   | Holiday Rambler |
| Endeavor-Gasoline             |   | $  105,000-$120,000 |   | Holiday Rambler |
| LaPalma                       |   | $  90,000-$120,000 |   | Monaco |
| Vacationer                    |   | $  90,000-$115,000 |   | Holiday Rambler |
| Trek-Gasoline                 |   | $  85,000-$110,000 |   | Safari |
| Monarch                       |   | $  75,000-$110,000 |   | Monaco |
| Admiral                       |   | $  75,000-$100,000 |   | Holiday Rambler |
|                          |   |   |   |   |
| Class C                       |   |   |   |   |
| Atlantis                      |   | $ 60,000-$75,000 |   | Holiday Rambler |
| Rogue                         |   | $ 60,000-$70,000 |   | Monaco |

 

| COMPANY TOWABLE  PRODUCTS    |
|------------------------------|
|                         |   |   |   |   |
| **MODEL**                    |   | **CURRENT SUGGESTED**

**RETAIL PRICE RANGE** |   | **BRAND** |
| Medallion Fifth Wheel        |   | $ 40,000-$65,000 |   | McKenzie |
| Presidential Fifth  Wheel    |   | $ 40,000-$45,000 |   | Holiday Rambler |
| Presidential  Travel Trailer |   | $ 40,000-$45,000 |   | Holiday Rambler |
| Lakota Fifth Wheel           |   | $ 30,000-$50,000 |   | McKenzie |
| Alumascape Fifth Wheel       |   | $ 30,000-$35,000 |   | Holiday Rambler |
| Alumascape Travel  Trailer   |   | $ 20,000-$30,000 |   | Holiday Rambler |
| Lakota Travel  Trailer       |   | $ 20,000-$30,000 |   | McKenzie |

 

 

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In 2001, the average unitwholesale selling prices of the Company’s motor coaches, fifth wheel trailersand travel trailers were approximately $137,500, $30,100 and $23,000,respectively.  The Company’s motor coachproducts generated 90.3%, 89.6% and 88.8% of total revenues for the fiscalyears 2001, 2000 and 1999, respectively.

 

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

 

Each of the Company’srecreational vehicles comes fully equipped with a wide range of kitchen andbathroom appliances, audio and visual electronics, communication devices, andother amenities, including couches, dining tables, closets and storagespaces.  All of the Company’srecreational vehicles incorporate products from well-recognized suppliers,including: stereos, CD and cassette players, VCR’s, DVD’s and televisions fromQuasar, Bose, Panasonic and Sony; microwave ovens from Sharp, Magic Chef, andGeneral Electric; stoves and ranges from KitchenAid and Modern Maid; enginesfrom Cummins and Caterpillar; transmissions from Allison; and chassis from Fordand Workhorse.  The Company’s high endproducts offer top-of-the-line amenities, including 25” Sony stereotelevisions, GPS systems from Carin, fully automatic DSS (satellite) systems,Corian and Wilsonart solid surface kitchen and bath countertops, imported ceramictile and leather furniture, and Ralph Lauren and Martha Stewart fabrics.

 

 

PRODUCT DESIGN

 

To address changingconsumer preferences, the Company modifies and improves its products each modelyear and typically redesigns each model every three or four years.  The Company’s designers work with theCompany’s marketing, manufacturing and service departments to design a productthat is appealing to consumers, practical to manufacture and easy to service.  The designers try to maximize the qualityand value of each model at the strategic retail price point for thatmodel.  The marketing and sales staffsuggest features or characteristics that they believe could be integrated intothe various models to differentiate the Company’s products from those of itscompetitors.  By working withmanufacturing personnel, the Company’s product designers engineer therecreational vehicles so that they can be built efficiently and with highquality.  Service personnel suggestideas to improve the serviceability and reliability of the Company’s productsand give the designers feedback on the Company’s past designs.

 

The exteriors of theCompany’s recreational vehicles are designed to be aesthetically appealing toconsumers, aerodynamic in shape for fuel efficiency and practical tomanufacture.  The Company has anexperienced team of computer-aided design personnel to complete the productdesign and produce prints from which the products will be manufactured.

 

The Company expensed $6.2million, $5.1 million and $4.7 million for research and development in thefiscal years 2001, 2000 and 1999, respectively.

 

 

SALES ANDMARKETING

 

DEALERS

 

The Company expanded itsdealer network over the past year from 294 dealerships at the beginning of 2001to 385 dealerships primarily located in the United States and Canada atDecember 29, 2001.  Revenue generatedfrom shipments to dealerships located outside the United States wereapproximately 3.1%, 4.3% and 4.0% of total sales for the fiscal years 2001, 2000and 1999, respectively.  The Companyintends to continue to expand its dealer network, primarily by addingadditional motorized dealers to carry the Company’s new lower priced gas anddiesel

 

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units as well asSafari and Beaver dealers to increase unit sales for these two brands.*  The Company maintains an internal salesorganization consisting of 36 account executives who service the Company’sdealer network.

 

The Company analyzes andselects new dealers on the basis of such criteria as location, marketingability, sales history, financial strength and the capability of the dealer’srepair services.  The Company providesits dealers with a wide variety of support services, including advertisingsubsidies and technical training, and offers certain model pricing discounts todealers who exceed wholesale purchase volume milestones.  The Company’s sales staff is also availableto educate dealers about the characteristics and advantages of the Company’srecreational vehicles compared with competing products.  The Company offers dealers geographicexclusivity to carry a particular model. While the Company’s dealership contracts have renewable one or two-yearterms, historically the Company’s dealer turnover rate has been low.

 

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

 

 

 

ADVERTISING ANDPROMOTION

 

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

 

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

 

The Company attempts toencourage and reinforce customer loyalty through clubs for the owners of itsproducts so that they may share experiences and communicate with eachother.  The Company’s clubs currentlyhave more than 30,000 members.  TheCompany publishes magazines to enhance its relations with these clubs and holdsrallies for clubs to meet periodically to view the Company’s new models andobtain maintenance and service guidance. Attendance at Company-sponsored rallies can be as high as 2,100 recreationalvehicles per year.  The Companyfrequently receives support from its dealers and suppliers to host theserallies.

 

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

 

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CUSTOMER SERVICE

 

The Company believes thatcustomer satisfaction is vitally important in the recreational vehicle marketbecause of the large number of repeat customers and the rapid communication ofbusiness reputations among recreational vehicle enthusiasts.  The Company also believes that service is anintegral part of the total product the Company delivers and that responsive andprofessional customer service is consistent with the premium image the Companystrives to convey in the marketplace.

 

The Company offers awarranty to all purchasers of its new vehicles.  The Company’s current warranty covers its products for up to oneyear (or 24,000 miles, whichever occurs first) from the date of retail sale(five years for the front and sidewall frame structure, and three years for theMagnum chassis).  In addition, customersare protected by the warranties of major component suppliers such as those ofCummins Engine Company, Inc. (“Cummins”) (diesel engines), Caterpillar Inc.(“Caterpillar”) (diesel engines), Spicer Heavy Axle & Brake Division ofDana Corporation (“Dana”) (axles), Allison Transmission Division of GeneralMotors Corporation (“Allison”) (transmissions), Workhorse (chassis), and FordMotor Company (“Ford”).  The Company’swarranty covers all manufacturing-related problems and parts and systemfailures, regardless of whether the repair is made at a Company facility or byone of the Company’s dealers or authorized service centers.  As of December 29, 2001, the Company had 385dealerships providing service to owners of the Company’s products.  In addition, owners of the Company’s dieselproducts have access to the entire Cummins dealer network, which includes over2,000 repair centers.

 

The Company operatesservice centers in Harrisburg, Oregon, Bend, Oregon, Elkhart, Indiana,Leesburg, Florida, and Tampa, Florida. The Company had approximately 656 employees in customer service atDecember 29, 2001.  The Companymaintains individualized production records and a computerized warrantytracking system which enable the Company’s service personnel to identifyproblems quickly and to provide individualized customer service.  While many problems can be resolved on thetelephone, the customer may be referred to a nearby dealer or servicecenter.  The Company believes thatdedicated customer service phone lines are an ideal way to interact directlywith the Company’s customers and to quickly address their technical problems.

 

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

 

 

MANUFACTURING

 

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

 

The Company’s motor coachproduction capacity at the end of 2001 was 25 units per day at its Coburgfacility, 3 units per day at its Bend Facility,  and 25 units per day at its Wakarusa facility.  The Company believes that this manufacturingcapacity will position the Company to take advantage of future growth potentialof the Company’s products within the RV market.*  The Company’s current towables production capacity is  25 units per day at its  Elkhart facility.

 

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

 

Each facility has severalstations for manufacturing, organized into four broad categories: chassismanufacturing, body manufacturing, painting and finishing.  It takes from two weeks to two months tobuild each

 

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unit, depending onthe product.  The Company keeps adetailed log book during the manufacture of each product and inputs keyinformation into its computerized service tracking system.

 

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

 

The Company purchases rawmaterials, parts, subcomponents, electronic systems, and appliances fromapproximately 1,000 vendors.  Theseitems are either directly mounted in the vehicle or are utilized insubassemblies which the Company assembles before installation in the vehicle.  The Company attempts to minimize its levelof inventory by ordering most parts as it needs them.  Certain key components that require longer purchasing lead timesare ordered based on planned needs. Examples of these components are diesel engines, axles, transmissions,chassis and interior designer fabrics. The Company has a variety of major suppliers, including Allison,Workhorse, Cummins, Caterpillar, Dana and Ford.   The Company does not have any long-term supply contracts withthese suppliers or their distributors, but believes it has good relationshipswith them.  To minimize the risksassociated with reliance on a single-source supplier, the Company typicallykeeps a 60-day supply of axles, engines, chassis and transmissions in stock oravailable at the suppliers’ facilities and believes that, in an emergency,other suppliers could fill the Company’s needs on an interim basis.*  The Company presently believes that itsallocation by suppliers of all components is sufficient to meet plannedproduction volumes, and the Company does not foresee any operating difficultiesas a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any ofthe Company’s other suppliers will be able to meet the Company’s futurerequirements for transmissions, chassis, or other key components.  An extended delay or interruption in thesupply of any components obtained from a single or limited source suppliercould have a material adverse effect on the Company’s business, results ofoperations and financial condition.

 

 

BACKLOG

 

The Company’s productsare generally manufactured against orders from the Company’s dealers. As ofDecember 29, 2001, the Company’s backlog of orders was $238.2 million, comparedto $80.6 million at December 30, 2000. The Company includes in its backlog all accepted purchase orders fromdealers shippable within the next six months. Orders in backlog can be canceled at the option of the purchaser at anytime without penalty and, therefore, backlog should not be used as a measure offuture sales.  The Company expects to fillall backlog orders.*

 

 

COMPETITION

 

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

 

 

GOVERNMENTREGULATION

 

The manufacture andoperation of recreational vehicles are subject to a variety of federal, stateand local regulations, including the National Traffic and Motor Vehicle SafetyAct and safety standards for recreational vehicles and their components thathave been promulgated by the Department of Transportation.  These standards permit the National HighwayTraffic Safety Administration to require a manufacturer to repair or recallvehicles with

 

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safety defects orvehicles that fail to conform to applicable safety standards. Because of itssales in Canada, the Company is also governed by similar laws and regulationspromulgated by the Canadian government. The Company has on occasion voluntarily recalled certain products.  The Company’s operating results could beadversely affected by a major product recall or if warranty claims in anyperiod exceed warranty reserves.

 

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

 

Many states regulate thesale, transportation and marketing of recreational vehicles.  The Company is also subject to stateconsumer protection laws and regulations, which in many cases requiremanufacturers to repurchase or replace chronically malfunctioning recreationalvehicles. Some states also legislate additional safety and construction standardsfor recreational vehicles.

 

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

 

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

 

The Company is subject toproduct liability and warranty claims arising in the ordinary course ofbusiness.  To date, the Company has beensuccessful in obtaining product liability insurance on terms the Companyconsiders acceptable.  The Company’scurrent policies jointly provide coverage against claims based on occurrenceswithin the policy periods up to a maximum of $100.1 million for each occurrenceand $102.0 million in the aggregate. There can be no assurance that the Company will be able to obtain insurancecoverage in the future at acceptable levels or that the costs of insurance willbe reasonable.  Furthermore, successfulassertion against the Company of one or a series of large uninsured claims, orof one or a series of claims exceeding any insurance coverage, could have amaterial adverse effect on the Company’s business, operating results andfinancial condition.

 

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

 

ENVIRONMENTALREGULATION AND REMEDIATION

 

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

 

The Company hassubmitted applications for “Title V” air permits for all of its existing andnew operations.  The air permits haveeither been issued or are in the process of being issued by the relevant stateagency.

 

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

 

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

 

While the Companyhas in the past provided notice to the relevant state agencies that air permitviolations have occurred at its facilities, the Company has resolved all suchissues with those agencies, and the Company believes that there are no ongoingviolations of any of its existing air permits at any of its owned or leasedfacilities at this time.*  However, thefailure of the Company to comply with present or future regulations couldsubject the Company to: (i) fines; (ii) potential civil and criminal liability;(iii) suspension of production or cessation of operations; (iv) alterations tothe manufacturing 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 Company is not currently involved inremediation activities at any of its facilities and none are in prospect.  Nevertheless, there can be no assurance thatthe Company will not discover environmental problems or incur remediation costsin the future.

 

 

EMPLOYEES

 

As of December 29, 2001,the Company had 4,822 employees, including 3,617 in production, 96 in sales,656 in service and 453 in management and administration.  The Company’s employees are not representedby any collective bargaining organization, and the Company has never experienceda work stoppage resulting from labor issues. The Company believes its relations with its employees are good.

 

 

DEPENDENCE ON KEYPERSONNEL

 

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

 

 

EXECUTIVE OFFICERSOF THE COMPANY

 

The following sets forthcertain information with respect to the executive officers of the Company as ofMarch 22, 2002:

 

| **Name**            |   | **Age** |   | **Position with the Company**                                      |
|---------------------|--------|---------|--------|--------------------------------------------------------------------|
| Kay L. Toolson      |   | 58      |   | Chairman and  Chief Executive Officer                              |
| John W. Nepute      |   | 50      |   | President                                                          |
| Richard E. Bond     |   | 48      |   | Senior Vice  President, Secretary and Chief Administrative Officer |
| Martin W.  Garriott |   | 46      |   | Vice President  and Director of Oregon Manufacturing               |
| Irvin M. Yoder      |   | 54      |   | Vice President  and Director of Indiana Manufacturing              |
| Patrick F.  Carroll |   | 44      |   | Vice President  of Product Development                             |
| P. Martin Daley     |   | 37      |   | Vice President  and Chief Financial Officer                        |
| Michael P. Snell    |   | 33      |   | Vice President  of Sales                                           |
| John B. Healey  Jr. |   | 36      |   | Vice President  of Corporate Purchasing                            |

 

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

 

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

 

Mr. Bond has served asSenior Vice President, Secretary and Chief Administrative Officer of theCompany since September 1999 and as Vice President, Secretary and ChiefAdministrative Officer beginning in August of 1998.  Prior to that and from February 1997, he served the Company asVice President, Secretary and General Counsel, having joined the Company inJanuary 1997.  From 1987 to December1996, he held the position of Vice President, Secretary and General Counsel ofHoliday Rambler, and originally joined Holiday Rambler as Vice President andAssistant General Counsel in 1984.

 

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

 

Mr. Yoder has served theCompany as Vice President and Director of Indiana Manufacturing since August1998.  Joining the Company upon theacquisition of Holiday Rambler in March 1996 as Director of Indiana MotorizedManufacturing, he served in that capacity through July 1998.  Mr. Yoder began his employment with HolidayRambler in 1969 and held a variety of production-related positions, serving asArea Manager of Motorized Production from 1980 until March 1996.

 

Mr. Carroll has served asVice President of Product Development since August 1998 and prior to that asDirector of Product Development since joining the Company in October 1995.  He has held a variety of marketing andproduct development positions with various recreational vehicle manufacturerssince 1979.

 

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

 

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

 

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

 

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**ITEM 2.  PROPERTIES**

 

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

 
| **FACILITY**        |   | **OWNED/**

**LEASED** |   | **APPROXIMATE**

**SQ FOOTAGE** |   | **ACTIVITY**                               |
|---------------------|--------|------------------------|--------|---------------------------------|--------|--------------------------------------------|
| Coburg, Oregon      |   | Owned                  |   | 822,000                         |   | Service & Motor  Coaches/Chassis prod. |
| Coburg, Oregon      |   | Leased                 |   | 38,000                          |   | Service                                    |
| Burns, Oregon       |   | Owned                  |   | 176,000                         |   | Fiberglass components  production          |
| Springfield, Oregon |   | Leased                 |   | 100,000                         |   | Fiberglass components  production          |
| Bend, Oregon        |   | Leased                 |   | 152,800                         |   | Service and  Motor Coaches production      |
| Harrisburg,  Oregon |   | Owned                  |   | 274,500                         |   | Service and  Chassis production            |
| Elkhart, Indiana    |   | Leased                 |   | 30,000                          |   | Bus Conversions  production                |
| Wakarusa, Indiana   |   | Owned                  |   | 1,154,000                       |   | Motor Coaches  production                  |
| Nappanee, Indiana   |   | Owned                  |   | 130,000                         |   | Wood Components  production                |
| Elkhart, Indiana    |   | Owned                  |   | 382,000                         |   | Service &  Towables/Chassis production |
| Leesburg, Florida   |   | Owned                  |   | 22,000                          |   | Service                                    |
| Tampa, Florida      |   | Owned                  |   | 35,000                          |   | Service                                    |

 

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

 

 

**ITEM 3.  LEGALPROCEEDINGS**

 

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

 

 

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

 

None.

 

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** **

**PART II**

 

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

 

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

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2001**       |   |     |   |    |   |
| First Quarter  |   | $        | 14.49  |    | $      | 10.89 |   |
| Second Quarter |   | $        | 22.13  |    | $      | 10.77 |   |
| Third Quarter  |   | $        | 20.73  |    | $      | 12.10 |   |
| Fourth Quarter |   | $        | 22.65  |    | $      | 13.91 |   |
|           |   |     |   |    |   |
| **2000**       |   |     |   |    |   |
| First Quarter  |   | $        | 16.67  |    | $      | 10.46 |   |
| Second Quarter |   | $        | 12.92  |    | $      | 7.38 |   |
| Third Quarter  |   | $        | 12.08  |    | $      | 8.17 |   |
| Fourth Quarter |   | $        | 12.25  |    | $      | 9.29 |   |

 

 

As of March 22, 2002,there were approximately 697 holders of record of the Company’s CommonStock.  The high and low closing salesprices listed above have been adjusted to reflect the stock splits approved bythe Board on August  6, 2001, May 19,1999, November 2, 1998 and March 16, 1998.

 

The Company has neverpaid dividends on its Common Stock and does not anticipate paying any cashdividends on its Common Stock in the foreseeable future.  The Company’s existing loan agreements limitthe payment of dividends on the Common Stock.

 

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

 

 

**ITEM 6.  SELECTEDFINANCIAL DATA**

 

SELECTEDHISTORICAL CONSOLIDATED FINANCIAL DATA

 

The ConsolidatedStatements of Income Data set forth below with respect to fiscal years 1999,2000 and 2001, and the Consolidated Balance Sheet Data at December 30, 2000 andDecember 29, 2001, are derived from, and should be read in conjunction with,the audited Consolidated Financial Statements and Notes thereto of the Companyincluded in this Annual Report on Form 10-K. The Consolidated Statements of Income Data set forth below with respectto fiscal years 1997 and 1998 and the Consolidated Balance Sheet Data atJanuary 3, 1998, January 2, 1999, and January 1, 2000 are derived from auditedconsolidated financial statements of the Company which are not included in thisAnnual Report on Form 10-K.

 

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

 

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** **

**Five-Year Selected Financial Data**

 

The followingtable sets forth financial data of Monaco Coach Corporation for the yearsindicated (in thousands of dollars, except share and per share data andconsolidated operating data).

 
|                                          |   | **Fiscal  Year** |
|-----------------------------------------------|--------|------------------|
|                                          |   | **1997 (1)**     |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
| **Consolidated  Statements of Income Data:**  |   |             |   |   |   |   |   |   |   |   |   |
| Net  sales                                    |   | $                | 441,895 |   | $ | 594,802 |   | $ | 780,815 |   | $ | 901,890 |   | $ | 937,073 |   |
| Cost  of sales                                |   | 382,367          |   | 512,570 |   | 658,536 |   | 772,240 |   | 823,083 |   |
| Gross  profit                                 |   | 59,528           |   | 82,232 |   | 122,279 |   | 129,650 |   | 113,990 |   |
| Selling,  general and administrative expenses |   | 36,307           |   | 41,571 |   | 48,791 |   | 59,175 |   | 70,687 |   |
| Amortization  of goodwill                     |   | 594              |   | 645 |   | 645 |   | 645 |   | 645 |   |
| Operating  income                             |   | 22,627           |   | 40,016 |   | 72,843 |   | 69,830 |   | 42,658 |   |
| Other  income, net                            |   | (468             | ) | (607 | ) | (142 | ) | (182 | ) | (334 | ) |
| Interest  expense                             |   | 2,379            |   | 1,861 |   | 1,143 |   | 632 |   | 2,357 |   |
| Gain  on sale of dealership assets            |   | 539              |   | — |   | — |   | — |   | — |   |
| Income  before provision for income taxes     |   | 21,255           |   | 38,762 |   | 71,842 |   | 69,380 |   | 40,635 |   |
| Provision  for income taxes                   |   | 8,819            |   | 16,093 |   | 28,081 |   | 26,859 |   | 15,716 |   |
| Net  income                                   |   | 12,436           |   | 22,669 |   | 43,761 |   | 42,521 |   | 24,919 |   |
| Redeemable  preferred stock dividends         |   | —           |   | — |   | — |   | — |   | — |   |
| Accretion  of redeemable preferred stock      |   | (317             | ) | — |   | — |   | — |   | — |   |
| Net  income attributable to common stock      |   | $                | 12,119 |   | $ | 22,669 |   | $ | 43,761 |   | $ | 42,521 |   | $ | 24,919 |   |
| Earnings per common share:                    |   |             |   |   |   |   |   |   |   |   |   |
| Basic                                         |   | $                | 0.48 |   | $ | 0.81 |   | $ | 1.55 |   | $ | 1.50 |   | $ | 0.87 |   |
| Diluted                                       |   | $                | 0.47 |   | $ | 0.79 |   | $ | 1.51 |   | $ | 1.47 |   | $ | 0.85 |   |
| Weighted average shares outstanding:          |   |             |   |   |   |   |   |   |   |   |   |
| Basic                                         |   | 25,298,763       |   | 27,987,004 |   | 28,213,444 |   | 28,377,123 |   | 28,531,593 |   |
| Diluted                                       |   | 26,318,196       |   | 28,622,976 |   | 29,050,453 |   | 28,978,264 |   | 29,288,688 |   |
|                                          |   |             |   |   |   |   |   |   |   |   |   |
| **Consolidated  Operating Data:**             |   |             |   |   |   |   |   |   |   |   |   |
| Units sold: (2)                               |   |             |   |   |   |   |   |   |   |   |   |
| Motor  coaches                                |   | 3,347            |   | 4,768 |   | 6,233 |   | 6,632 |   | 6,228 |   |
| Towables                                      |   | 2,397            |   | 2,217 |   | 3,269 |   | 3,377 |   | 3,261 |   |
| Dealerships  at end of period                 |   | 208              |   | 263 |   | 294 |   | 338 |   | 385 |   |
|                                          |   |             |   |   |   |   |   |   |   |   |   |
| **Consolidated  Balance Sheet Data:**         |   |             |   |   |   |   |   |   |   |   |   |
| Working  capital                              |   | $                | 10,412 |   | $ | 23,676 |   | $ | 38,888 |   | $ | 69,299 |   | $ | 63,694 |   |
| Total  assets                                 |   | 159,832          |   | 190,127 |   | 246,727 |   | 321,610 |   | 427,098 |   |
| Long-term  borrowings, less current portion   |   | 11,500           |   | 5,400 |   | — |   | — |   | 30,000 |   |
| Redeemable  preferred stock                   |   | —           |   | — |   | — |   | — |   | — |   |
| Total  stockholders’ equity              |   | 74,748           |   | 98,193 |   | 143,339 |   | 186,625 |   | 213,130 |   |

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| (1) | Includes the operations  of Holiday Rambler and the Holiday World Dealerships from March 4, 1996. The  Holiday World Dealerships generated $6.8 million in net sales in 1997, which  included the sale of 211 units in 1997, that were either previously owned or  not Holiday Rambler units, as well as service revenues. The Company sold  seven Holiday World Dealerships in 1996 and the remaining three dealerships  in 1997. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes units sold by  the Holiday World Dealerships that were either previously owned or not  Holiday Rambler units.                                                                                                                                                                                                                                                                                                             |

 

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** **

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND  RESULTS OFOPERATIONS**

 

OVERVIEW

 

The Company is thesuccessor to a company formed in 1968 (the “Predecessor”) and commencedoperations on March 5, 1993 by acquiring substantially all of the assets andliabilities of the Predecessor.  ThePredecessor’s management and the manufacturing of its High-Line Class A motorcoaches were largely unaffected by the Predecessor Acquisition.  However, the Company’s consolidatedfinancial statements for fiscal years 1999, 2000 and 2001 all containPredecessor Acquisition-related expenses, consisting primarily of the amortizationof goodwill.

 

On March 4, 1996,the Company acquired from Harley-Davidson certain assets of Holiday Rambler(the “Holiday Acquisition”) in exchange for $21.5 million in cash, 65,217shares of the Company’s Redeemable Preferred Stock (which was subsequentlyconverted into 230,767 shares of the Company’s Common Stock), and theassumption of most of the liabilities of Holiday Rambler.  Concurrently, the Company acquired tenHoliday World Dealerships for $13.0 million, including a $12.0 million subordinatedpromissory note, and the assumption of certain liabilities.  The Company sold seven Holiday WorldDealerships in 1996, retired the $12.0 million note from the proceeds of thesesales, and sold the remaining three dealerships in 1997.  The Holiday Acquisition was accounted forusing the purchase method of accounting.

 

Beginning on March4, 1996, the acquired operations were incorporated into the Company’sconsolidated financial statements.  TheCompany’s consolidated financial statements for the fiscal years 1999, 2000 and2001 contain expenses related to the Holiday Acquisition, consisting ofinterest expense, the amortization of debt issuance costs and HolidayAcquisition goodwill.

 

On August 2, 2001,the Company acquired Safari Motor Coach (the “SMC Acquisition”) in exchange for $24.3 million in cash includingtransaction expenses.  The purchase wasaccounted for using the purchase method of accounting.  The purchase was effected through a tenderoffer on August 2, 2001, and completed through a back end merger on August 6,2001, at which time all shares of  SMCCorporation (SMC) were retired.

 

  Beginning on August 2, 2001, the acquiredSMC operations were incorporated into the Company’s consolidated financialstatements.  The Company’s consolidatedfinancial statements for the fiscal year 2001 contain expenses related to theSMC Acquisition, consisting of interest expense, and amortization of debtissuance costs.

 

RESULTS OF OPERATIONS

 

2001 COMPARED WITH 2000

 

Net salesincreased 3.9% from $901.9 million in 2000 to $937.1 million in 2001.  The Company’s overall unit sales were down5.2% from 10,009 in 2000 to 9,489 units in 2001.  The Company’s units sales were down 6.1% on the motorized sidereflecting lower sales during the first half of 2001 which were nearly offsetby increases in the latter part of 2001, mostly from the addition of the Safariand Beaver line of products.  Motorizedgross sales were up 2.7% reflecting the higher mix of diesel unit sales in2001.  The Company’s unit sales oftowable products in 2001 were down only 3.4% while gross sales were up 8.2% assales from the towable operations had a shift in the mix from the prior year offewer travel trailers and more higher priced fifth wheel units.  The Company’s overall average unit sellingprice increased from $91,800 in 2000 to $99,900 in 2001 reflecting thecontinuing increases in sales of diesel motor coaches.  The Company’s broad range of productofferings which include several in the less expensive gasoline motor coachmarket as well as the towable market is expected to keep the overall averageselling price under $120,000.*

 

Gross profit decreased by$15.7 million from $129.7 million in 2000 to $114.0 million in 2001 and grossmargin decreased from 14.4% in 2000 to 12.2% in 2001.  The decrease in gross margin in 2001 was due to a combination offactors resulting from competitive pressures in the market.  Through the first half of 2001, the Companyfound it necessary to offer above normal discounts to maintain sales todealers.  In addition, throughout 2001,the Company’s efforts to match production with the models that were sellingwell in the market resulted in 

 

15

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productioninefficiencies caused by shifting volume among production lines and changingthe mix of models produced on those lines, as well as integrating the Safariproduction into the Coburg facility. The Company’s overall gross margin may fluctuate in future periods ifthe mix of products shifts from higher to lower gross margin units or if theCompany encounters unexpected manufacturing difficulties or competitivepressures.

 

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

 

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

 

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

 

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

 

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

 

 

 

2000 COMPARED WITH 1999

 

Net salesincreased 15.5% from $780.8 million in 1999 to $901.9 million in 2000.  The Company’s overall unit sales were up5.3% from 9,502 in 1999 to 10,009 units in 2000.  The Company’s units sales were up 6.4% on the motorized side reflectinga full year of production in the facilities expanded in third quarter of 1999in Coburg, Oregon, combined with slightly higher production rates in the otherexisting motorized facilities in both Coburg, Oregon and Wakarusa, Indiana.  Motorized gross sales were up 17.6%reflecting the shift in sales from the Company’s gas units to diesel unitsales.  The Company’s fiscal year 2000sales of motorized units were helped by the introduction in late 1999 of one newgas and two new diesel motorized products which accounted for 1,344 of the6,632 motorized units sold in 2000.  TheCompany’s 1999 sales of motorized units were helped by the introduction of twonew motorized products introduced in 1998 which accounted for 1,643 of the6,233 motorized units sold in 1999.  TheCompany’s unit sales of towable products were up 3.3% from 1999 to 2000 asMcKenzie towable operations reported strong increases.  The Company’s overall average unit sellingprice increased from $82,900 in 1999 to $91,800 in 2000 reflecting the strongsales growth of the Company’s higher priced diesel motorized products.

 

Gross profit increased by$7.4 million from $122.3 million in 1999 to $129.7 million in 2000 and grossmargin decreased from 15.7% in 1999 to 14.4% in 2000.  The decrease in gross margin in 2000 was due to a combination offactors resulting from competitive pressures in the market.  In the second half of 2000, the Companyfound it necessary to offer above normal discounts to maintain sales todealers.  In addition, in efforts tomatch production to the models that were selling well in the market, theCompany experienced some production 

 

16

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inefficienciesresulting from shifting volume among production lines as well as changing themix of models produced on those lines.

 

Selling, general, andadministrative expenses increased by $10.4 million from $48.8 million in 1999to $59.2 million in 2000 and increased as a percentage of sales from 6.2% in1999 to 6.6% in 2000. Selling, general, and administrative expenses benefitedin 1999 from a $1.75 million reduction in the estimated accrual for 1998incentive based compensation.  Withoutthis benefit, selling, general, and administrative expenses in 1999 would havebeen $50.5 million or 6.5% of sales, only slightly lower than the 6.6% of salesin 2000.

 

Operating incomedecreased $3.0 million from $72.8 million in 1999 to $69.8 million in2000.  The Company’s static level ofselling, general, and administrative expense as a percentage of sales combinedwith the reduction in the Company’s gross margin, resulted in a decrease inoperating margin to 7.7% in 2000 compared to 9.3% in 1999.  The Company’s operating margin in 1999 waspositively affected by the $1.75 million reduction of incentive basedcompensation accrued for 1998.  Withoutthis benefit, the Company’s operating margin in 1999 would have been 9.1%.

 

Net interest expensedecreased $511,000 from $1.1 million in 1999 to $632,000 in 2000. The Companycapitalized $195,000 of interest expense in 1999 relating to the constructionin Oregon and $192,000 in 2000 relating to the construction in Indiana.  The Company’s interest expense included$176,000 in 1999 and $61,300 in 2000 related to the amortization of debtissuance costs recorded in conjunction with the Company’s creditfacilities.  Additionally, interestexpense in 1999 and 2000 included $639,000 and $52,700, respectively, fromaccelerated amortization of debt issuance costs related to the creditfacilities.  The Company paid off itslong term debt of approximately $10 million at the end of the first quarter of1999 and also reduced the amount of availability on its revolving line ofcredit.  The Company also paid off itsrevolving credit facility in the third quarter of 2000 and obtained financingfrom another lender.

 

The Company reported aprovision for income taxes of $28.1 million, or an effective tax rate of 39.1%,for 1999, compared to $26.9 million, or an effective tax rate of 38.7% for2000.

 

Net income decreased by$1.3 million from $43.8 million in 1999 to $42.5 million in 2000, due to theincrease in net sales being offset with a lower operating margin.

 

 

INFLATION

 

The Company doesnot believe that inflation has had a material impact on its results ofoperations for the periods presented.

 

CRITICAL ACCOUNTING POLICIES

 

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

 

WARRANTY COSTS  The Company provides an estimate for accruedwarranty costs at the time a product is sold. This estimate is based on historical average repair costs, as well asother reasonable assumptions as have been deemed appropriate by management.

 

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PRODUCT LIABILITY  The Company provides an estimate for accruedproduct liability based on current pending cases, as well as for those caseswhich are incurred but not reported. This estimate is developed by legal counsel based on professionaljudgment, as well as historical experience.

 

IMPAIRMENT OFGOODWILL  The Company assesses thepotential impairment of goodwill in accordance with Financial Accounting StandardsBoard (FASB) Statement No. 121.  Thisestimate involves management comparing historical cash flows from operations toprojected future cash flows to determine if goodwill has been impaired.

 

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

 

ACQUISITION OF SMCCORPORATION    The Company announced onJune 25, 2001 that it had agreed with Oregon based motor home manufacturer SMCCorporation (“SMC”) to acquire all of the outstanding shares of SMC pursuant toa cash tender offer at a price of $3.70 per share.  On August 6, the Company had completed it’s purchase of all SMCCorporation shares.  The anticipatedbenefits of this acquisition may not be achieved unless Monaco successfullyintegrates SMC into Monaco’s operations. SMC incurred a net loss from operations of $5.4 million for 2000 and$1.9 million for the first quarter of 2001. Unless Monaco is able to increase sales or reduce the operating expensesof SMC substantially from historical expense levels, the acquisition could havea material adverse affect on the financial condition and results of operationsof Monaco.  The process of integrationmay result in unforeseen operating difficulties and expenditures and may absorbsignificant management attention that would otherwise be available for theongoing development of Monaco’s business. This may cause an interruption or a loss of momentum in the operatingactivities of Monaco which in turn would have a material adverse affect onMonaco’s operating results and financial condition.  Moreover, the acquisition involves a number of additional risks,such as the assimilation of the operations and personnel of the acquiredbusiness, the incorporation of acquired products into Monaco’s existing productline, adverse short-term effects of reported operating results, theamortization of debt issuance costs, the loss of key employees of SMC as aresult of the acquisition, and the difficulty of integrating disparatecorporate cultures and presenting a unified corporate image.  Accordingly, the anticipated benefits maynot be realized or the acquisition may have a material adverse affect onMonaco’s operating results and financial condition.

 

CARRYING VALUES OF INTANGIBLEASSETS MAY BE SUBJECT TO PERIODIC WRITE-DOWN, ADVERSELY AFFECTING OUROPERATIONS  Goodwill and otherintangible assets are reviewed for impairment whenever an event or change incircumstances indicates that the carrying amount may not be recoverable. If thecarrying value of our intangible assets exceeds the expected undiscountedfuture cash flows, a loss would be recognized to the extent the carrying amountof assets exceeds their fair values. This loss may negatively impact ourresults of operation.

 

POTENTIALFLUCTUATIONS IN OPERATING RESULTS  TheCompany’s net sales, gross margin and operating results may fluctuatesignificantly from period to period due to factors such as the mix of productssold, the ability to utilize and expand manufacturing resources efficiently,material shortages, the introduction and consumer acceptance of new modelsoffered by the Company, competition, the addition or loss of dealers, thetiming of trade shows and rallies, and factors affecting the recreationalvehicle industry as a whole. In addition, the Company’s overall gross margin onits products may decline in future periods to the extent the Company increasesits sales of lower gross margin towable products or if the mix of motor coachessold shifts to lower gross margin units. Due to the relatively high sellingprices of the Company’s products (in particular, its High-Line Class A motorcoaches), a relatively small variation in the number of recreational vehiclessold in any quarter can have a significant effect on sales and operatingresults for that quarter. Demand in the overall recreational vehicle industrygenerally declines during the winter months, while sales and revenues aregenerally higher during the spring and summer months. With the broader range ofrecreational vehicles now offered by the Company, seasonal factors could have asignificant impact on the Company’s operating results in the future. Inaddition, unusually severe weather conditions in certain markets could delaythe timing of shipments from one quarter to another.

 

CYCLICALITY ANDECONOMIC SLOWDOWN  The recreationalvehicle industry has been characterized by cycles of growth and contraction inconsumer demand, reflecting prevailing economic, demographic and politicalconditions that affect disposable income for leisure-time activities. Unitsales of recreational vehicles (excluding conversion vehicles) reached a peakof approximately 259,000 units in 1994 and declined to approximately 247,000units in 1996.  The industry peakedagain in 1999 at approximately 321,000 units and began declining thereafter as 

 

18

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unit sales in 2000 and 2001 were approximately 300,000and 257,000, respectively. Furthermore, the Company offers a broad range ofrecreational vehicle products and is susceptible to the cyclicality inherent inthe recreational vehicle industry. Factors affecting cyclicality in therecreational vehicle industry include fuel availability and fuel prices,prevailing interest rates, the level of discretionary spending, theavailability of credit and overall consumer confidence.  In particular, the decline in consumerconfidence and/or a slowing of the overall economy has had a material adverseeffect on the recreational vehicle market. An extended continuance of these conditions could have a material adverseeffect on the Company’s business, results of operations and financialcondition.

 

MANAGEMENT OFGROWTH  Over the past several years theCompany has experienced significant growth in the number of its employees andthe scope of its business. This growth has resulted in the addition of newmanagement personnel and increased responsibilities for existing managementpersonnel, and has placed added pressure on the Company’s operating, financialand management information systems. While management believes it has beensuccessful in managing this expansion, there can be no assurance that theCompany will not encounter problems in the future associated with the continuedgrowth of the Company.  Failure toadequately support and manage the growth of its business could have a materialadverse effect on the Company’s business, results of operations and financialcondition.

 

MANUFACTURINGEXPANSION  The Company has significantlyincreased its manufacturing capacity over the last few years. The integrationof the Company’s facilities and the expansion of the Company’s manufacturingoperations involve a number of risks including unexpected building andproduction difficulties. In the past, the Company experienced startupinefficiencies in manufacturing a new model and also has experienced difficultyin increasing production rates at a plant. There can be no assurance that theCompany will successfully integrate its manufacturing facilities or that itwill achieve the anticipated benefits and efficiencies from its expandedmanufacturing operations. In addition, the Company’s operating results could bematerially and adversely affected if sales of the Company’s products do notincrease at a rate sufficient to offset the Company’s increased expense levelsresulting from this expansion.

 

The setup of newmodels and scale-up of production facilities involve various risks anduncertainties, including timely performance of a large number of contractors,subcontractors, suppliers and various government agencies that regulate andlicense construction, each of which is beyond the control of the Company. Thesetup of production for new models involves risks and costs associated with thedevelopment and acquisition of new production lines, molds and other machinery,the training of employees, and compliance with environmental, health and safetyand other regulatory requirements. The inability of the Company to complete thescale-up of its facilities and to commence full-scale commercial  production in a timely manner could have amaterial adverse effect on the Company’s business, results of operations andfinancial condition. In addition, the Company may from time to time experiencelower than anticipated yields or production constraints that may adverselyaffect its ability to satisfy customer orders. Any prolonged inability to satisfycustomer demand could have a material adverse effect on the Company’s business,results of operations and financial condition.

 

CONCENTRATION OFSALES TO CERTAIN DEALERS  Although theCompany’s products were offered by 385 dealerships located primarily in theUnited States and Canada at the end of 2001, a significant percentage of theCompany’s sales have been and will continue to be concentrated among arelatively small number of independent dealers.   Sales to Lazy Days RV Center, Inc. accounted for 12.1% of theCompany’s sales in 2000 and 11.7% in 2001. The Company’s 10 largest dealers, including Lazy Days RV Center, Inc.,accounted for a combined 36.0% of sales in 2000 and 39.0% in 2001.  The loss of a significant dealer or asubstantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations and financialcondition. See “Business—Sales and Marketing.”

 

POTENTIALLIABILITY UNDER REPURCHASE AGREEMENTS As is common in the recreational vehicle industry, the Company entersinto repurchase agreements with the financing institutions used by its dealersto finance their purchases. These agreements obligate the Company to repurchasea dealer’s inventory under certain circumstances in the event of a default bythe dealer to its lender. If the Company were obligated to repurchase asignificant number of its products in the future, it could have a materialadverse effect on the Company’s financial condition, business and results ofoperations. The Company’s contingent obligations under repurchase agreementsvary from period to period and totaled approximately $366.8 million as ofDecember 29, 2001, with approximately 

 

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7.4% concentrated with one dealer. See “Liquidity andCapital Resources” and Note 16 of Notes to the Company’s Consolidated FinancialStatements.

 

AVAILABILITY ANDCOST OF FUEL  An interruption in thesupply, or a significant increase in the price or tax on the sale, of diesel fuelor gasoline on a regional or national basis could have a material adverseeffect on the Company’s business, results of operations and financialcondition. Diesel fuel and gasoline have, at various times in the past, beendifficult to obtain, and there can be no assurance that the supply of dieselfuel or gasoline will continue uninterrupted, that rationing will not beimposed, or that the price of or tax on diesel fuel or gasoline, will notsignificantly increase in the future, any of which could have a materialadverse effect on the Company’s business, results of operations and financialcondition.

 

DEPENDENCE ONCERTAIN SUPPLIERS  A number of importantcomponents for certain of the Company’s products are purchased from single orlimited sources, including its turbo diesel engines (Cummins and Caterpillar),substantially all of its transmissions (Allison), axles (Dana) for all dieselmotor coaches and chassis (Workhorse and Ford) for certain of its motor homeproducts.  The Company has no long termsupply contracts with these suppliers or their distributors, and there can beno assurance that these suppliers will be able to meet the Company’s futurerequirements for these components. In 1997, Allison put all chassismanufacturers on allocation with respect to one of the transmissions theCompany uses, and in 1999 Ford put one of its gasoline powered chassis onallocation. The Company presently believes that its allocation by suppliers ofall 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 extended delay or interruption in thesupply of any components obtained from a single or limited source suppliercould have a material adverse effect on the Company’s business, results ofoperations and financial condition.  See “Business — Changes.”

 

NEW PRODUCTINTRODUCTIONS  The Company believes thatthe introduction of new features and new models will be critical to its futuresuccess. Delays in the introduction of new models or product features or a lackof market acceptance of new models or features and/or quality problems with newmodels or features could have a material adverse effect on the Company’sbusiness, results of operations and financial condition. For example,unexpected costs associated with model changes have adversely affected theCompany’s gross margin in the past. Future product introductions could divertrevenues from existing models and adversely affect the Company’s business,results of operations and financial condition.

 

COMPETITION  The market for the Company’s products ishighly competitive. The Company currently competes with a number of othermanufacturers of motor coaches, fifth wheel trailers and travel trailers, manyof which have significant financial resources and extensive distributioncapabilities.  There can be no assurancethat either existing or new competitors will not develop products that aresuperior to, or that achieve better consumer acceptance than, the Company’sproducts, or that the Company will continue to remain competitive.

 

RISKS OFLITIGATION  The Company is subject tolitigation arising in the ordinary course of its business, including a varietyof product liability and warranty claims typical in the recreational vehicleindustry.  Although the Company does notbelieve that the outcome of any pending litigation, net of insurance coverage,will have a material adverse effect on the business, results of operations orfinancial condition of the Company, due to the inherent uncertaintiesassociated with litigation there can be no assurance in this regard.*

 

To date, theCompany has been successful in obtaining product liability insurance on termsthe Company considers acceptable. The Company’s current policies jointlyprovide coverage against claims based on occurrences within the policy periodsup to a maximum of $100.1 million for each occurrence and $102.0  million in the aggregate. There can be noassurance that the Company will be able to obtain insurance coverage in thefuture at acceptable levels or that the costs of insurance will be reasonable.Furthermore, successful assertion against the Company of one or a series oflarge uninsured claims, or of one or a series of claims exceeding any insurancecoverage, could have a material adverse effect on the Company’s business,results of operations and financial condition.

 

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WE MAY BE UNABLE TO ATTRACTAND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING  Our success depends upon attracting andretaining highly skilled professionals. A number of our employees are highlyskilled engineers and other technical professionals, and our failure tocontinue to attract and retain such individuals could adversely affect ourability to compete in the industry.

 

FLUCTUATIONS IN QUARTERLYPERFORMANCE CAN RESULT IN INCREASES IN OUR INVENTORY AND RELATED CARRYINGCOSTS, CAN DIMINISH OUR OPERATING RESULTS AND CASH FLOW AND CAN RESULT IN ALOWER STOCK PRICE In the past three fiscal years, our sales volumes have notfluctuated more than 10% quarter to quarter. This quarter to quarter variationis not seasonal or predictable. We attempt to accurately forecast orders forour products and commence purchasing and manufacturing prior to the receipt ofsuch orders. However, it is highly unlikely that we will consistentlyaccurately forecast the timing and rate of orders. This aspect of our businessmakes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results and cash flow for any given quarter. Inaddition, our quarterly operating results are affected by competitive pricing,announcements regarding new product developments and cyclical conditions in theindustry. Accordingly, we may experience wide quarterly fluctuations in our operatingperformance and profitability, which may adversely affect our stock price evenif our year to year performance is more stable, which it also may not be. Inaddition, many of our products require significant manufacturing time, makingit difficult to increase production on short notice. If we are unable tosatisfy  unexpected customer orders, ourbusiness and customer relationships could suffer.

 

 

 CARRYING VALUES OF INVENTORIES OF OUR PRODUCTS AND COMPONENTSTHEREFORE MAY BE SUBJECT TO PERIODIC WRITE-DOWN, ADVERSELY AFFECTING OUROPERATIONS  To be competitive in some ofour markets, we will occasionally be required to build up inventories ofcertain products in anticipation of future orders. There can be no assurancethat we will not experience problems of obsolete, excess or slow-movinginventory if we are not able to properly balance inventories against theprospect of future orders, and our operations may be adversely affected byinventory write-downs.

 

OUR PRODUCTS COULD FAIL TOPERFORM ACCORDING TO SPECIFICATION OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TOOUR CUSTOMER RELATIONSHIPS AND INDUSTRY REPUTATION AND RESULTING IN LOSS OFSALES  Our customers require demandingspecifications for product performance and reliability. Because our productsare complex and often use state-of-the-art components, processes andtechniques, undetected errors and design flaws may occur. Product defectsresult in higher product service and warranty and replacement costs and maycause serious damage to our customer relationships and industry reputation, allof which will negatively impact our sales and business.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During 2001, the Company had cash flows of $21.0 million fromoperating activities.  The Companygenerated $32.5 million from net income and non-cash expenses such asdepreciation and amortization, which was partially offset by a net increase inthe Company’s working capital accounts, as adjusted by the working capitalaccounts from the SMC Acquisition, excluding the Company's current bankdebt.  Accounts receivable, adjusted for$1.7 million from SMC, increased $13.2 million due to a higher number ofshipments of product the final week of the quarter.  Inventories, adjusted for $25.4 million related to SMC, decreasedby $12.7 million, reflecting the results of the Company’s plan to reducefinished goods levels from the prior year. Accounts payable, adjusted for $24.1 million from SMC, decreased by$10.3 million.  Accrued liabilities,after adding $34.1 million from SMC, decreased by $5.7 million.  While current demand for the Company’sproducts remains strong, a significant decrease could result in negative cashflows from operations.

 

During the third quarterof 2001, the Company paid off its revolving line of credit and obtained a newline of credit with a consortium of lenders. The Company’s new permanent credit facility consists of a revolving lineof credit of up to $70.0 million (the “Revolving Loan”) and a term note of$40.0 million (the “Term Loan”).  At theelection of the Company, the Revolving Loan and Term Loan bear interest atvarying rates that fluctuate based on the Prime rate or LIBOR, and aredetermined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused availableportion of the Revolving Loan at varying rates, determined by the 

 

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Company’s leverageratio.  The Revolving loan is due andpayable in full on September 30, 2004, while the Term Loan is due and payablein full on September 28, 2005 and both require monthly interest payments.  The balance outstanding under the RevolvingLoan at December 29, 2001 was $26.0 million and the balance on the Term Loanwas $40.0 million.  The Revolving Loanand Term Loan are collateralized by all the assets of the Company and includevarious restrictions and financial covenants. The Company was in compliance with the debt covenants at December 29,2001.  The Company utilizes “zerobalance” bank disbursement accounts in which an advance on the line of creditis automatically made for checks clearing each day.  Since the balance of the disbursement account at the bank returnsto zero at the end of each day, the outstanding checks of the Company arereflected as a liability.  Theoutstanding check liability is combined with the Company’s positive cashbalance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

 

 

The Company’s principalworking capital requirements are for purchases of inventory and financing oftrade receivables.  The Company’sdealers typically finance product purchases under wholesale floor plan arrangementswith third parties as described below. At December 29, 2001, the Company had working capital of approximately$63.7 million, a decrease of $5.6 million from working capital of $69.3 millionat December 30, 2000.  The Company hasbeen using short-term credit facilities and cash flow to finance itsconstruction of facilities and other capital expenditures.

 

The Company believes thatcash flow from operations and funds available under its credit facilities willbe sufficient to meet the Company’s liquidity requirements for the next 12months.*  The Company’s capitalexpenditures were $10.2 million in 2001, primarily for completing the Company’swarranty and service center projects. In the fiscal year 2001, the Company also spent about $4 to $5 millionon routine capital expenditures for computer system upgrades and additions,smaller scale plant remodeling projects and normal replacement of outdated orworn-out equipment.  The Company isexpecting capital expenditures in 2002 to be approximately $12 to $15 million,which includes minor modifications to existing manufacturing facilities.*  The Company may require additional equity ordebt financing to address working capital and facilities expansion needs,particularly if the Company significantly increases the level of workingcapital assets such as inventory and accounts receivable.  The Company may also from time to time seekto acquire businesses that would complement the Company’s current business, andany such acquisition could require additional financing.  There can be no assurance that additionalfinancing will be available if required or on terms deemed favorable by theCompany.

 

As is typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  The Company has agreementswith several institutional lenders under which the Company currently hasrepurchase obligations.  The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units.  The Company’s obligations under theserepurchase agreements vary from period to period.  At December 29, 2001, approximately $366.8 million of productssold by the Company to independent dealers were subject to potential repurchaseunder existing floor plan financing agreements with approximately 7.44%concentrated with one dealer.  If theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, its business, operating results and financial conditioncould be adversely affected.

 

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

                                                                                                                                                                                                
|                                |   | **PAYMENTS DUE BY PERIOD** |   |
|-------------------------------------|--------|----------------------------|--------|
|                                |   |                       |   |
| **Contractual  Obligations**        |   | **1 year or  less**        |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|                                |   | **(in  thousands)**        |   |
| Long-term debt (1)                  |   | $                          | 10,000 |   | $ | 30,000 |   | $ | 0 |   | $ | 0 |   | $ | 40,000 |   |
| Operating Leases  (2)               |   | 2,938                      |   | 3,539 |   | 1,350 |   | 4,333 |   | 12,160 |   |
| Total Contractual Cash  Obligations |   | $                          | 12,938 |   | $ | 33,539 |   | $ | 1,350 |   | $ | 4,333 |   | $ | 52,160 |   |

 

                                                                                                                                                

 
|                        |   | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** |      |
|-----------------------------|--------|-----------------------------------------------|-----------|
|                        |   |                                          |      |
| **Other  Commitments**      |   | **1 year or  less**                           |      | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|                        |   | **(in  thousands)**                           |      |
| Lines of Credit (3)         |   | $                                             | 0         |   | $ | 70,000 |   | 0 |   | 0 |   | $ | 70,000 |   |
| Guarantees                  |   | 11,200                                        | (4)  | 16,039 | (2) | 0 |   | 0 |   | 27,239 |   |
| Repurchase  Obligations (5) |   | 0                                             |      | 366,800 |   | 0 |   | 0 |   | 366,800 |   |
| Total Commitments           |   | $                                             | 11,200    |   | $ | 452,839 |   | 0 |   | 0 |   | $ | 464,039 |   |

----

| (1) | See Note 7 to the financials.                                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (2) | See Note 11 to the financials.                                                                                                     |
| (3) | See Note 6 to the financials.  The amount listed represents available  borrowings on the line of credit at December 29, 2001. |
| (4) | See Note 16 to the financials.                                                                                                     |
| (5) | Reflects obligations under manufacturer repurchase  commitments.  See Note 16 to the financials.                              |

 

 

NEWLY ISSUEDFINANCIAL REPORTING PRONOUNCEMENTS

 

In June 2001, theFinancial Accounting Standards Board (FASB or the “Board”) issued Statement ofFinancial Accounting Standards No. 141 (SFAS 141), Business Combinations, andNo. 142 (SFAS 142), Goodwill and Other Intangible Assets, collectively referredto as the “Standards”.  The provisionsof SFAS 141 (1) require that the purchase method of accounting be used for allbusiness combinations initiated after June 30, 2001, (2) provide specificcriteria for the initial recognition and measurement of intangible assets apartfrom goodwill, and (3) require that unamortized negative goodwill be writtenoff immediately as an extraordinary gain instead of being deferred andamortized. SFAS 141 also requires that upon adoption of SFAS 142 the Companyreclassify the carrying amounts of certain intangible assets into or out ofgoodwill, based on certain criteria. SFAS 142 primarily addresses theaccounting for goodwill and intangible assets subsequent to their initialrecognition. The provisions of SFAS 142 (1) prohibit the amortization ofgoodwill and indefinite-lived intangible assets, (2) require that goodwill andindefinite-lived intangible assets be tested annually for impairment (and ininterim periods if certain events occur indicating that the carrying value ofgoodwill and/or indefinite-lived intangible assets may be impaired), (3)require that reporting units be identified for the purpose of assessingpotential future impairments of goodwill, and (4) remove the forty-yearlimitation on  the amortization periodof intangible assets that have finite lives.

 

The Company willadopt the provisions of SFAS 142 in its first quarter of 2002. The Company ispreparing for its adoption of SFAS 142 and is making the determinations as towhat its reporting units are and what amounts of goodwill, intangible assets,other assets, and liabilities should be allocated to those reporting units. TheCompany expects that it will no longer record $645,000 of annual amortizationexpense relating to its existing goodwill and indefinite-lived intangibles, asadjusted for the reclassifications just mentioned.

 

SFAS 142 requiresthat goodwill be tested annually for impairment using a two-step process. Thefirst step is to identify a potential impairment and, in transition, this stepmust be measured as of the beginning of the fiscal year. However, a company hassix months from the date of adoption to complete the first step. The Companyexpects to complete that first step of the goodwill impairment test during thefirst quarter of 2002. The second step of the goodwill impairment test measuresthe amount of the impairment loss (measured as of the beginning of the year ofadoption), if any, and must be completed by the end of the Company’s fiscalyear. Intangible assets deemed to have an indefinite life will be tested forimpairment using a one-step process which compares the fair value to thecarrying amount of the asset as of the beginning of the fiscal year, andpursuant to the requirements of SFAS 142 will be completed during the firstquarter of 2002. Any impairment loss resulting from the transitional impairmenttests will be reflected as the cumulative effect of a change in accountingprinciple in the first quarter of 2002. The Company is in the process of assessing the impact of SFAS 142 on thefinancial statements.

 

 

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In June 2001, FASB issued Statement No. 143,Accounting for Asset Retirement Obligations. FASB Statement No. 143 is effective for the fiscal years beginning afterJune 15, 2002.  FASB Statement No. 143,addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. FASB Statement No. 143 requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The impact of this pronouncement on theCompany’s financial statements is not expected to be material.

 

In August 2001, FASB issued statement No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets. FASB Statement No. 144 iseffective for the fiscal years beginning after December 15, 2001. Thisstatement supersedes FASB Statement No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of, and theaccounting and reporting provisions of APB Opinion No. 30, Reporting theResults of Operations — Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions, for the disposal of a segment of a business. FASB Statement No.121 did not address the accounting for a segment of a business accounted for asa discontinued operation under APB Opinion No. 30, accordingly two accountingmodels existed for long-lived assets to be disposed of.  FASB Statement No. 144, establishes a singleaccounting model, based on the framework established in Statement No. 121, forlong-lived assets to be disposed of by sale. In addition, FASB Statement No.144 resolves significant implementation issues related to Statement No.121.  The Company is in the process ofassessing the impact of SFAS 144 on the financial statements.

 

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

 

                     Not Applicable

 

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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

 
| INDEX TO  FINANCIAL STATEMENTS                                    |
|-------------------------------------------------------------------|
|                                                              |   |   |   |
|                                                              |   |   |   |
| Monaco Coach  Corporation—Consolidated Financial Statements: |   |   |
|                                                              | Report of Independent  Accountants |   |   |
|                                                              | Consolidated  Balance Sheets as of December 30, 2000 and December 29, 2001 |   |   |
|                                                              | Consolidated  Statements of Income for the Fiscal Years Ended January 1, 2000,  December 30, 2000 and December 29, 2001 |   |   |
|                                                              |   |   |
|                                                              | Consolidated Statements of  Stockholders’ Equity for the Fiscal Years Ended  January 1, 2000,  December 30, 2000  and December 29, 2001 |   |   |
|                                                              |   |   |
|                                                              | Consolidated  Statements of Cash Flows for the Fiscal Years Ended January 1, 2000,  December 30, 2000 and December 29, 2001 |   |   |
|                                                              |   |   |
|                                                              | Notes  to Consolidated Financial Statements |   |   |
|                                                              |   |   |   |
| Schedule  Included in Item 14(a):                                 |   |   |
|                                                              | II  Valuation and Qualifying Accounts |   |   |
|                                                                   |  |  |  |  |

 

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# **Reportof Independent Accountants**

 

 

 

 

To theStockholders and Board of Directors of Monaco Coach Corporation:

 

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income, of stockholders’equity, and of cash flows listed in the accompanying index present fairly, inall material respects, the financial position of Monaco Coach Corporation andSubsidiaries (the Company) at December 30, 2000 and December 29, 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended December 29, 2001, in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.These financial statements and the financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these financial statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

 

/s/PricewaterhouseCoopers LLP

 

 

Portland, Oregon

January 26, 2002 

 

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**MONACOCOACH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

*(inthousands of dollars, except share and per share data)*

 

 

 
|                                                                                                                         |   | **December  30, 2000** |    | **December  29, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                                   |   |                   |    |                   |   |
| Current assets:                                                                                                              |   |                   |    |                   |   |
| Trade  receivables, net of $164 and $541, respectively                                                                       |   | $                      | 67,998  |                   | $      | 82,885 |   |
| Inventories                                                                                                                  |   | 114,397                |    | 127,075                |   |
| Prepaid  expenses                                                                                                            |   | 1,046                  |    | 2,063                  |   |
| Deferred income  taxes                                                                                                       |   | 13,197                 |    | 27,327                 |   |
| Total  current assets                                                                                                        |   | 196,638                |    | 239,350                |   |
|                                                                                                                         |   |                   |    |                   |   |
| Notes  receivable                                                                                                            |   | 2,800                  |    | 8,157                  |   |
| Property,  plant and equipment, net                                                                                          |   | 103,590                |    | 122,795                |   |
| Debt  issuance costs, net of accumulated amortization of $75                                                                 |   |                   |    | 940                    |   |
| Goodwill,  net of accumulated amortization of $4,675 and $5,320, respectively                                                |   | 18,582                 |    | 55,856                 |   |
|                                                                                                                         |   |                   |    |                   |   |
| Total assets                                                                                                                 |   | $                      | 321,610 |                   | $      | 427,098 |   |
|                                                                                                                         |   |                   |    |                   |   |
| **LIABILITIES**                                                                                                              |   |                   |    |                   |   |
| Current liabilities:                                                                                                         |   |                   |    |                   |   |
| Book  overdraft                                                                                                              |   | $                      | 15,178  |                   | $      | 5,889 |   |
| Line  of credit                                                                                                              |   | 20,585                 |    | 26,004                 |   |
| Current  portion of long-term note payable                                                                                   |   |                   |    | 10,000                 |   |
| Accounts  payable                                                                                                            |   | 53,098                 |    | 66,859                 |   |
| Accrued expenses  and other liabilities                                                                                      |   | 38,478                 |    | 66,904                 |   |
| Total  current liabilities                                                                                                   |   | 127,339                |    | 175,656                |   |
|                                                                                                                         |   |                   |    |                   |   |
| Long-term  note payable                                                                                                      |   |                   |    | 30,000                 |   |
| Deferred income  taxes                                                                                                       |   | 7,646                  |    | 8,312                  |   |
|                                                                                                                         |   | 134,985                |    | 213,968                |   |
|                                                                                                                         |   |                   |    |                   |   |
| Commitments and contingencies (Note 16)                                                                                      |   |                   |    |                   |   |
|                                                                                                                         |   |                   |    |                   |   |
| **STOCKHOLDERS’  EQUITY**                                                                                               |   |                   |    |                   |   |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 18,952,107 and  28,632,774 issued and outstanding, respectively |   | 190                    |    | 286                    |   |
| Additional  paid-in capital                                                                                                  |   | 47,032                 |    | 48,522                 |   |
| Retained  earnings                                                                                                           |   | 139,403                |    | 164,322                |   |
| Total  stockholders’ equity                                                                                             |   | 186,625                |    | 213,130                |   |
| Total liabilities and  stockholders’ equity                                                                             |   | $                      | 321,610 |                   | $      | 427,098 |   |
|                                                                                                                         |   |                   |    |                   |   |
| The accompanying notes  are an integral part of these consolidated financial statements.                                |

 

28

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**MONACOCOACH CORPORATION**

** CONSOLIDATED STATEMENTS OF INCOME**

**for the years ended January 1, 2000, December 30, 2000 andDecember 29, 2001**

*(inthousands of dollars, except share and per share data)*

 

 
|                                                                                           |   | **1999**   |    | **2000**   |   | **2001**   |   |
|------------------------------------------------------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
|                                                                                           |   |       |    |       |   |       |   |
| Net  sales                                                                                     |   | $          | 780,815 |       | $      | 901,890    |   | $ | 937,073 |   |
| Cost of sales                                                                                  |   | 658,536    |    | 772,240    |   | 823,083    |   |
| Gross  profit                                                                                  |   | 122,279    |    | 129,650    |   | 113,990    |   |
|                                                                                           |   |       |    |       |   |       |   |
| Selling,  general and administrative expenses                                                  |   | 48,791     |    | 59,175     |   | 70,687     |   |
| Amortization of  goodwill                                                                      |   | 645        |    | 645        |   | 645        |   |
| Operating  income                                                                              |   | 72,843     |    | 69,830     |   | 42,658     |   |
|                                                                                           |   |       |    |       |   |       |   |
| Other  income, net                                                                             |   | 142        |    | 182        |   | 334        |   |
| Interest expense                                                                               |   | (1,143     | )       | (632       | )      | (2,357     | )      |
| Income  before income taxes                                                                    |   | 71,842     |    | 69,380     |   | 40,635     |   |
|                                                                                           |   |       |    |       |   |       |   |
| Provision for  income taxes                                                                    |   | 28,081     |    | 26,859     |   | 15,716     |   |
|                                                                                           |   |       |    |       |   |       |   |
| Net income                                                                                     |   | $          | 43,761  |       | $      | 42,521     |   | $ | 24,919 |   |
|                                                                                           |   |       |    |       |   |       |   |
| Earnings per common share:                                                                     |   |       |    |       |   |       |   |
| Basic                                                                                          |   | $          | 1.55    |       | $      | 1.50       |   | $ | .87 |   |
| Diluted                                                                                        |   | $          | 1.51    |       | $      | 1.47       |   | $ | .85 |   |
|                                                                                           |   |       |    |       |   |       |   |
| Weighted average common shares outstanding:                                                    |   |       |    |       |   |       |   |
| Basic                                                                                          |   | 28,213,445 |    | 28,377,123 |   | 28,531,593 |   |
| Diluted                                                                                        |   | 29,050,454 |    | 28,978,265 |   | 29,288,688 |   |
|                                                                                           |   |       |    |       |   |       |   |
| The accompanying notes  are an integral part of these consolidated financial statements.  |

 

29

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**MONACOCOACH CORPORATION**

** CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**for the years ended January 1, 2000,December 30, 2000  and December 29, 2001**

*(in thousands of dollars, exceptshare data)*

 
|                                                                                           |   | **Common  Stock** |   | **Additional  Paid-in**

**Capital** |   | **Retained**

**Earnings** |   | **Total** |   |
|------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------------------------------------|--------|----------------------------|--------|-----------|--------|
|                                                                                           |   | **Shares**        |   | **Amount**                           |   |                       |   |      |
|                                                                                           |   |              |   |                                 |   |                       |   |      |   |   |   |
| Balances,  January 2, 1999                                                                     |   | 12,481,095        |   | $                                    | 125    |                       | $      | 44,947    |   | $ | 53,121 |   | $ | 98,193 |   |
| Issuance  of common stock                                                                      |   | 116,311           |   | 1                                    |   | 956                        |   |      |   | 957 |   |
| Tax  benefit of stock options exercised                                                        |   |              |   |                                 |   | 428                        |   |      |   | 428 |   |
| Stock  splits                                                                                  |   | 6,273,678         |   | 63                                   |   | (63                        | )      |      |   | 0 |   |
| Net income                                                                                     |   |              |   |                                 |   |                       |   | 43,761    |   | 43,761 |   |
| Balances,  January 1, 2000                                                                     |   | 18,871,084        |   | 189                                  |   | 46,268                     |   | 96,882    |   | 143,339 |   |
| Issuance  of common stock                                                                      |   | 81,023            |   | 1                                    |   | 727                        |   |      |   | 728 |   |
| Tax  benefit of stock options exercised                                                        |   |              |   |                                 |   | 37                         |   |      |   | 37 |   |
| Net income                                                                                     |   |              |   |                                 |   |                       |   | 42,521    |   | 42,521 |   |
| Balances,  December 30, 2000                                                                   |   | 18,952,107        |   | 190                                  |   | 47,032                     |   | 139,403   |   | 186,625 |   |
| Issuance  of common stock                                                                      |   | 161,848           |   | 1                                    |   | 1,115                      |   |      |   | 1,116 |   |
| Tax  benefit of stock options exercised                                                        |   |              |   |                                 |   | 470                        |   |      |   | 470 |   |
| Stock  splits                                                                                  |   | 9,518,819         |   | 95                                   |   | (95                        | )      |      |   | 0 |   |
| Net income                                                                                     |   |              |   |                                 |   |                       |   | 24,919    |   | 24,919 |   |
| Balances, December 29,  2001                                                                   |   | 28,632,774        |   | $                                    | 286    |                       | $      | 48,522    |   | $ | 164,322 |   | $ | 213,130 |   |
|                                                                                           |   |              |   |                                 |   |                       |   |      |   |   |   |
| The accompanying  notes are an integral part of these consolidated financial statements.  |

 

30

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**MONACOCOACH CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**for the years ended January 1, 2000, December 30, 2000 andDecember 29, 2001**

*(inthousands of dollars)*

 

 
|                                                                                           |   | **1999** |   | **2000** |   | **2001** |   |
|------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Increase  (Decrease) in Cash**:                                                              |   |     |   |     |   |     |   |
|                                                                                           |   |     |   |     |   |     |   |
| Cash flows from operating activities:                                                          |   |     |   |     |   |     |   |
| Net  income                                                                                    |   | $        | 43,761 |     | $      | 42,521   |   | $ | 24,919 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:             |   |     |   |     |   |     |   |
| Depreciation  and amortization                                                                 |   | 5,904    |   | 6,359    |   | 7,543    |   |
| Gain  on disposal of equipment                                                                 |   |     |   |     |   | (74      | )      |
| Deferred  income taxes                                                                         |   | (1,491   | )      | 3,609    |   | 6,005    |   |
| Change in assets and liabilities:                                                              |   |     |   |     |   |     |   |
| Trade  receivables, net                                                                        |   | (465     | )      | (31,460  | )      | (13,154  | )      |
| Inventories                                                                                    |   | (28,030  | )      | (26,801  | )      | 12,682   |   |
| Prepaid  expenses                                                                              |   | (179     | )      | (724     | )      | (903     | )      |
| Accounts  payable                                                                              |   | 8,414    |   | 16,186   |   | (10,318  | )      |
| Income  taxes payable                                                                          |   | (2,743   | )      | (1,406   | )      | 0        |   |
| Accrued expenses  and other liabilities                                                        |   | 6,990    |   | (1,931   | )      | (5,720   | )      |
| Net cash  provided by operating activities                                                     |   | 32,161   |   | 6,353    |   | 20,980   |   |
| Cash flows from investing activities:                                                          |   |     |   |     |   |     |   |
| Additions  to property, plant and equipment                                                    |   | (32,228  | )      | (19,750  | )      | (10,210  | )      |
| Proceeds  from sale of assets                                                                  |   |     |   |     |   | 106      |   |
| Collections on notes receivable                                                                |   | 910      |   |     |   |     |   |
| Payment  for business acquisition                                                              |   |     |   |     |   | (24,320  | )      |
| Issuance of  notes receivable                                                             |   |     |   | (2,800   | )      | (5,357   | )      |
| Net cash used in  investing activities                                                         |   | (31,318  | )      | (22,550  | )      | (39,781  | )      |
| Cash flows from financing activities:                                                          |   |     |   |     |   |     |   |
| Book  overdraft                                                                                |   | 1,959    |   | 2,700    |   | (10,840  | )      |
| Borrowings  (payments) on line of credit, net                                                  |   | 6,213    |   | 12,732   |   | (10,930  | )      |
| (Payments)  borrowings on long-term notes payable                                              |   | (10,400  | )      |     |   | 40,000   |   |
| Issuance  of common stock                                                                      |   | 1,385    |   | 765      |   | 1,586    |   |
| Debt issuance  costs                                                                           |   |     |   |     |   | (1,015   | )      |
| Net cash (used  in) provided by financing activities                                           |   | (843     | )      | 16,197   |   | 18,801   |   |
| Net  change in cash                                                                            |   | 0        |   | 0        |   | 0        |   |
| Cash at  beginning of period                                                                   |   | 0        |   | 0        |   | 0        |   |
| Cash at end of period                                                                          |   | $        | 0      |     | $      | 0        |   | $ | 0 |   |
|                                                                                           |   |     |   |     |   |     |   |
| The accompanying notes  are an integral part of these consolidated financial statements.  |

** **

 

31

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**MONACO COACH CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 ** 1.   BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:**

 

**Business**

 

Monaco CoachCorporation and its subsidiaries (the “Company”) manufacture premium motorcoaches, bus conversions and towable recreational vehicles at manufacturingfacilities in Oregon and Indiana.  Theseproducts are sold primarily to independent dealers throughout the United Statesand Canada.

 

Pursuant to  Statement of Financial Accounting Standards(SFAS) No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” effective for fiscal years beginning after December 31, 1997, theCompany has determined that it has a single reportable operating segmentconsisting of the design, manufacture, and sale (wholesale) of recreationalvehicles including motor coaches and towable fifth wheel and traveltrailers.  These product lines havesimilar economic characteristics and are similar in the nature of products,manufacturing processes, customer characteristics, and distribution methods.

 

**Consolidation Policy**

 

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

 

**Fiscal Period**

 

The Companyfollows a 52/53 week fiscal year period ending on the Saturday closest toDecember 31.  Interim periods also endon the Saturday closest to the calendar quarter end.  For 1999, 2000, and 2001, all fiscal periods were 52 weekslong.  All references to years in theconsolidated financial statements relate to fiscal years rather than calendaryears.

 

**Stock Splits**

 

On August 6, 2001,the Board of Directors declared a three-for-two stock split in the form of a50% stock dividend on the Company’s Common stock.  Accordingly, all historical weighted average share and per shareamounts have been restated to reflect the stock split.  Share amounts presented in the ConsolidatedStatement of Stockholders’ Equity reflect the actual share amounts outstandingfor each period presented.

 

**Estimates and Industry Factors**

 

Estimates - The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Concentration ofCredit Risk - TheCompany distributes its products through an independent dealer network forrecreational vehicles.  Sales to onecustomer were approximately 10%, 12%, and 12% of net revenues for the fiscalyears ended January 1, 2000, December 30, 2000, and December 29, 2001,respectively.  No other individualdealers represented over 10% of net revenues in 1999, 2000, or 2001.  The loss of a significant dealer or asubstantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations and financial results.

 

Concentrations ofcredit risk exist for accounts receivable and repurchase agreements (see Note16), primarily for the Company’s largest dealers.  The Company generally sells to dealers throughout the UnitedStates and there is no geographic concentration of credit risk.

 

 

32

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Reliance on KeySuppliers - TheCompany’s production strategy relies on certain key suppliers’ ability todeliver subassemblies and component parts in time to meet manufacturingschedules.  The Company has a variety ofkey suppliers, including Allison, Workhorse, Cummins, Dana, and Ford.  The Company does not have any long-termcontracts with these suppliers or their distributors.  In 1997, Allison put all chassis manufacturers on allocation withrespect to one of the transmissions the Company uses, and in 1999 Ford put oneof its gasoline powered chassis on allocation. In light of these dependencies, it is possible that failure of Allison,Ford or any of the other suppliers to meet the Company’s future requirementsfor transmissions, chassis or other key components could have a materialnear-term impact on the Company’s business, results of operations and financialcondition.

 

Warranty Claims - Estimated warranty costs are providedfor at the time of sale of products with warranties covering the products forup to one year from the date of retail sale (five years for the front andsidewall frame structure, and three years on Magnum chassis).  These estimates are based on historicalaverage repair costs, as well as other reasonable assumptions as have beendeemed appropriate by management.

 

Litigation Claims - Estimated litigation costs are providedfor at the time of sale of products, or at the time a determination is madethat an estimable loss has occurred. These estimates are developed by legal counsel based on professionaljudgment, as well as historical experience.

 

**Inventories**

 

Inventoriesconsist of raw materials, work-in-process and finished recreational vehiclesand are stated at the lower of cost (first-in, first-out) or market.  Cost of work-in-process and finishedrecreational vehicles includes material, labor and manufacturing overheadcosts.

 

**Property, Plant and Equipment**

 

Property, plantand equipment, including significant improvements thereto, are stated at costless accumulated depreciation and amortization.  Cost includes expenditures for major improvements, replacementsand renewals and the net amount of interest cost associated with significantcapital additions during periods of construction.  Capitalized interest was $195,000 in 1999, $192,000 in 2000, andzero in 2001.  Maintenance and repairsare charged to expense as incurred. Replacements and renewals are capitalized.  When assets are sold, retired or otherwise disposed of, the costand accumulated depreciation are removed from the accounts and any resultinggain or loss is reflected in income.

 

The cost of plantand equipment is depreciated using the straight-line method over the estimateduseful lives of the related assets. Buildings are generally depreciated over 39 years and equipment isdepreciated over 3 to 10 years. Leasehold improvements are amortized under the straight-line methodbased on the shorter of the lease periods or the estimated useful lives.

 

At each balancesheet date, management assesses whether there has been permanent impairment inthe value of long-lived assets.  Theamount of any such impairment is determined by comparing anticipatedundiscounted future cash flows from operating activities with the associatedcarrying 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.

 

 

33

----

 

 

**Goodwill and Debt Issuance Costs**

 

Goodwillrepresents the excess of the cost of acquisition over the fair value of netassets acquired.  The Company is thesuccessor to a company formed in 1968 (the “Predecessor”) and commencedoperations on March 5, 1993 by acquiring substantially all of the assets andliabilities of the Predecessor.  Thegoodwill arising from the acquisition of the assets and operations of theCompany’s Predecessor in March 1993 has been amortized on a straight-line basisover 40 years and, at December 29, 2001, the unamortized amount was $16.1million.  In March 1996, the Companyacquired the Holiday Rambler Division of Harley-Davidson, Inc. (“HolidayRambler”).  The goodwill arising fromthe acquisition of Holiday Rambler has been amortized on a straight-line basisover 20 years and, at December 29, 2001, the unamortized amount was $1.8 million.  The Company also recorded $37.9 million ofgoodwill associated with the August 2, 2001 acquisition of SMC Corporation(SMC).  For the fiscal year endedDecember 29, 2001, in accordance with the Financial Accounting Standards Board(FASB) Statement No. 142, “Accounting for Goodwill and Other IntangibleAssets”, no amortization of goodwill associated with the acquisition of SMC hasbeen recorded.

 

At each balancesheet date, management assesses whether there has been permanent impairment inthe value of goodwill.  The amount ofany such impairment is determined by comparing anticipated undiscounted futurecash flows from operating activities with the associated carrying value.  The factors considered by management inperforming this assessment include current operating results, trends andprospects, as well as the effects of obsolescence, demand, competition andother economic factors.  As of December29, 2001, in accordance with FASB Statement No. 121, management has determinedthat there has been no impairment of goodwill requiring a write down.

 

**Income Taxes**

 

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

 

**Revenue Recognition**

 

The Companyrecognizes revenue from the sale of recreational vehicles upon shipment.

 

In December 1999, the Securities and ExchangeCommission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognitionin Financial Statements.  SAB No. 101provides guidance for revenue recognition under certain circumstances.  The Company has complied with the guidanceprovided by SAB No. 101 for the fiscal years 1999, 2000 and 2001.

 

**Advertising Costs**

 

The Companyexpenses advertising costs as incurred, except for prepaid show costs which areexpensed when the event takes place. During 2001, approximately $10.1 million ($6.4 million in 1999 and $7.8million in 2000) of advertising costs were expensed.

 

 

34

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**Research and Development Costs**

 

Research anddevelopment costs are charged to expense as incurred and were $6.2 million for2001 ($4.7 million in 1999 and $5.1 million for 2000).

 

**New Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board (FASB or the “Board”) issued Statement ofFinancial Accounting Standards No. 141 (SFAS 141), Business Combinations, andNo. 142 (SFAS 142), Goodwill and Other Intangible Assets, collectively referredto as the “Standards”.  The provisionsof SFAS 141 (1) require that the purchase method of accounting be used for allbusiness combinations initiated after June 30, 2001, (2) provide specificcriteria for the initial recognition and measurement of intangible assets apartfrom goodwill, and (3) require that unamortized negative goodwill be writtenoff immediately as an extraordinary gain instead of being deferred andamortized. SFAS 141 also requires that upon adoption of SFAS 142 the Companyreclassify the carrying amounts of certain intangible assets into or out ofgoodwill, based on certain criteria. SFAS 142 primarily addresses theaccounting for goodwill and intangible assets subsequent to their initialrecognition. The provisions of SFAS 142 (1) prohibit the amortization of goodwilland indefinite-lived intangible assets, (2) require that goodwill andindefinite-lived intangible assets be tested annually for impairment (and ininterim periods if certain events occur indicating that the carrying value ofgoodwill and/or indefinite-lived intangible assets may be impaired), (3)require that reporting units be identified for the purpose of assessingpotential future impairments of goodwill, and (4) remove the forty-yearlimitation on  the amortization periodof intangible assets that have finite lives.

 

The Company willadopt the provisions of SFAS 142 in its first quarter of 2002. The Company ispreparing for its adoption of SFAS 142 and is making the determinations as towhat its reporting units are and what amounts of goodwill, intangible assets,other assets, and liabilities should be allocated to those reporting units. TheCompany expects that it will no longer record $645,000 of annual amortizationexpense relating to its existing goodwill and indefinite-lived intangibles, asadjusted for the reclassifications just mentioned.

 

SFAS 142 requiresthat goodwill be tested annually for impairment using a two-step process. Thefirst step is to identify a potential impairment and, in transition, this stepmust be measured as of the beginning of the fiscal year. However, a company hassix months from the date of adoption to complete the first step. The Companyexpects to complete that first step of the goodwill impairment test during thefirst quarter of 2002. The second step of the goodwill impairment test measuresthe amount of the impairment loss (measured as of the beginning of the year ofadoption), if any, and must be completed by the end of the Company’s fiscalyear. Intangible assets deemed to have an indefinite life will be tested forimpairment using a one-step process which compares the fair value to thecarrying amount of the asset as of the beginning of the fiscal year, andpursuant to the requirements of SFAS 142 will be completed during the firstquarter of 2002. Any impairment loss resulting from the transitional impairmenttests will be reflected as the cumulative effect of a change in accountingprinciple in the first quarter of 2002. The Company is in the process of assessing the impact of SFAS 142 on thefinancial statements.

 

 

35

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In June 2001, FASB issued Statement No. 143, Accounting for AssetRetirement Obligations.  FASB StatementNo. 143 is effective for the fiscal years beginning after June 15, 2002.  FASB Statement No. 143, addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. FASBStatement No. 143 requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made. The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset. The impactof this pronouncement on the Company’s financial statements is not expected tobe material.

 

In August 2001, FASB issued statement No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets. FASB Statement No. 144 iseffective for the fiscal years beginning after December 15, 2001. Thisstatement supersedes FASB Statement No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of, and theaccounting and reporting provisions of APB Opinion No. 30, Reporting theResults of Operations — Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions, for the disposal of a segment of a business. FASB Statement No.121 did not address the accounting for a segment of a business accounted for asa discontinued operation under APB Opinion No. 30, accordingly two accountingmodels existed for long-lived assets to be disposed of.  FASB Statement No. 144, establishes a singleaccounting model, based on the framework established in Statement No. 121, forlong-lived assets to be disposed of by sale. In addition, FASB Statement No.144 resolves significant implementation issues related to Statement No.121.  The Company is in the process ofassessing the impact of SFAS 144 on the financial statements.

 

 

**Supplemental Cash Flow Disclosures:**
|                                                                              |   | **1999**           |   | **2000** |   | **2001** |   |
|-----------------------------------------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                                                              |   | **(in thousands)** |   |
| Cash paid during the period for:                                                  |   |               |   |     |   |     |   |
| Interest,  net of amount capitalized of $195 in 1999, $192 in 2000 and $0 in 2001 |   | $                  | 1,131  |     | $      | 632      |   | $ | 2,206 |   |
| Income  taxes                                                                     |   | 30,823             |   | 28,226   |   | 16,231   |   |
|                                                                                   |        |                    |        |          |        |          |        |  |  |  |

 

**2.     ACQUISITION OF SMC CORPORATION:**

** **

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

 

 

36

----

 

** **

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

 

|                                           |   | **(in thousands)** |    |
|------------------------------------------------|--------|--------------------|---------|
| Receivables                                    |   | $                  | 1,733   |   |
| Inventories                                    |   | 25,360             |    |
| Deferred  tax asset                            |   | 19,469             |    |
| Property  and equipment                        |   | 15,850             |    |
| Prepaids  and other assets                     |   | 114                |    |
| Goodwill                                       |   | 37,919             |    |
| Total  assets acquired                         |   | 100,445            |    |
|                                           |   |               |    |
| Book  overdraft                                |   | (1,551             | )       |
| Notes  payable                                 |   | (16,349            | )       |
| Accounts  payable                              |   | (24,079            | )       |
| Accrued  liabilities                           |   | (34,146            | )       |
| Total  liabilities assumed                     |   |               | (76,125 | ) |
|                                           |   |               |    |
| Total assets acquired  and liabilities assumed |   | $                  | 24,320  |   |

 

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

 

 

The followingunaudited pro forma information presents the consolidated results as if theacquisition had occurred at the beginning of the period and giving effect tothe adjustments for the related interest on financing the purchase price,goodwill and depreciation.  The proforma information does not necessarily reflect results that would have occurredor is it necessarily indicative of future operating results.

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

 

 

37

----

 

 

**3.  INVENTORIES:**

 

                Inventories consist of the following:

 

|            |   | **December  30,**

**2001** | ** ** | **December  29,**

**2000** | ** ** |
|-----------------|--------|-----------------------------|------------|-----------------------------|------------|
|            |   | ** **                  | ** ** |
|            |   | **(in thousands)**          | ** ** |
| Raw  materials  |   | $                           | 45,187     |                        | $          | 53,160 |   |
| Work-in-process |   | 31,739                      |       | 44,436                      |       |
| Finished units  |   | 37,471                      |       | 29,479                      |       |
|            |   | $                           | 114,397    |                        | $          | 127,075 |   |

 

** **

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

 

                Property, plant and equipment consist of thefollowing:

 

|                                            |   | **December  30,**

**2001** | ** ** | **December  29,**

**2000** | ** ** |
|-------------------------------------------------|--------|-----------------------------|------------|-----------------------------|------------|
|                                            |   | ** **                  | ** ** |
|                                            |   | **(in thousands)**          | ** ** |
| Land                                            |   | $                           | 6,687      |                        | $          | 11,999 |   |
| Buildings                                       |   | 83,564                      |       | 99,333                      |       |
| Equipment                                       |   | 20,559                      |       | 22,838                      |       |
| Furniture  and fixtures                         |   | 6,644                       |       | 9,479                       |       |
| Vehicles                                        |   | 1,232                       |       | 1,571                       |       |
| Leasehold  improvements                         |   | 854                         |       | 1,472                       |       |
| Construction in  progress                       |   | 3,504                       |       | 2,376                       |       |
|                                            |   | 123,044                     |       | 149,068                     | ** ** |
| Less accumulated  depreciation and amortization |   | 19,454                      |       | 26,273                      |       |
|                                            |   | $                           | 103,590    |                        | $          | 122,795 | ** ** |

 

** **

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

 

|                                    |   | **December  30,**

**2001** | ** ** | **December  29,**

**2000** | ** ** |
|-----------------------------------------|--------|-----------------------------|------------|-----------------------------|------------|
|                                    |   | ** **                  | ** ** |
|                                    |   | **(in thousands)**          | ** ** |
| Payroll,  vacation and related accruals |   | $                           | 11,371     |                        | $          | 12,580 |   |
| Payroll  and property taxes             |   | 1,491                       |       | 1,172                       |       |
| Reserve  for warranty claims            |   | 15,479                      |       | 29,721                      |       |
| Reserve  for product liability claims   |   | 6,391                       |       | 17,597                      |       |
| Promotional  and advertising            |   | 1,271                       |       | 1,345                       |       |
| Other                                   |   | 2,475                       |       | 4,489                       |       |
|                                    |   | $                           | 38,478     |                        | $          | 66,904 |   |

 

38

----

 

 

** 6.    LINE OF CREDIT:**

 

During the thirdquarter of 2001, the Company obtained a new credit facility from a consortiumof lenders.  The Company’s new permanentcredit facility consists of a revolving line of credit of up to $70.0 million(the “Revolving Loan”).  At the electionof the Company, the Revolving Loan bears interest at variable rates based onthe Prime Rate or LIBOR.  The RevolvingLoan is due and payable in full on September 30, 2004, and requires monthlyinterest payments.  The balanceoutstanding under the Revolving Loan at December 29, 2001 was $26.0million.  The Revolving Loan iscollateralized by all of the assets of the Company, and include variousrestrictions and financial covenants.

 

The weightedaverage interest rate on the outstanding borrowings under the revolving line ofcredit was 8.9% and 5.8% for 2000 and 2001, respectively.  Interest expense on the unused availableportion of the line was $44,000 or 0.4% and $85,000 or 0.2% of weighted averageoutstanding borrowings for 2000 and 2001, respectively.  The revolving line of credit is collateralizedby 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, 2001, the Company was incompliance with these covenants.

 

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

** **

The Company has a long-term note payable of $40million outstanding at December 29, 2001. The term note bears interest at varying rates that fluctuate based onthe Prime rate or LIBOR, and are determined based on the Company’s leverageratio.  The term note requires monthlyinterest payments and quarterly principal payments and is collateralized by allthe assets of the Company.  The termnote is due and payable in full on September 28, 2005.  As of December 29, 2001, the interest rateon the term debt was 3.94%.

 

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

** **

| **Year** |   | **Amount of payment due** |   |
|----------|--------|---------------------------|--------|
| 2002     |   | $                         | 10,000 |   |   |
| 2003     |   | $                         | 12,500 |   |   |
| 2004     |   | $                         | 10,000 |   |   |
| 2005     |   | $                         | 7,500  |   |   |
|     |   | $                         | 40,000 |   | ** ** |

 

**8.   PREFERRED STOCK:**

 

The Company hasauthorized “blank check” preferred stock (1,934,783 shares authorized, $.01 parvalue) (“Preferred Stock”), which may be issued from time to time in one ormore series upon authorization by the Company’s Board of Directors.  The Board of Directors, without furtherapproval of the stockholders, is authorized to fix the dividend rights andterms, conversion rights, voting rights, redemption rights and terms,liquidation preferences, and any other rights, preferences, privileges andrestrictions applicable to each series of the Preferred Stock.  There were no shares of Preferred Stockoutstanding as of December 30, 2000 or December 29, 2001.

 

39

----

 

 

**9.   INCOME TAXES:**

 

The provision forincome taxes is as follows:

 

|                        |   | **1999**           |       | **2000** |   | **2001** |   |
|-----------------------------|--------|--------------------|------------|----------|--------|----------|--------|
|                        |   | **(in thousands)** | ** ** |
| Current:                    |   |               |       |     |   |     |   |
| Federal                     |   | $                  | 24,439     |     | $      | 19,120   |   | $ | 8,262 |   |
| State                       |   | 5,133              |       | 4,130    |   | 1,606    |   |
|                        |   | 29,572             |       | 23,250   |   | 9,868    |   |
| Deferred:                   |   |               |       |     |   |     |   |
| Federal                     |   | (1,222             | )          | 2,945    |   | 4,880    |   |
| State                       |   | (269               | )          | 664      |   | 968      |   |
| Provision for income  taxes |   | $                  | 28,081     |     | $      | 26,859   |   | $ | 15,716 |   |

 

 

The reconciliationof the provision for income taxes at the U.S. federal statutory rate to theCompany’s effective income tax rate is as follows:

 

|                                                   |   | **1999**           |       | **2000** |   | **2001** | ** ** |
|--------------------------------------------------------|--------|--------------------|------------|----------|--------|----------|------------|
|                                                   |   | **(in thousands)** | ** ** |
| Expected  U.S. federal income taxes at statutory rates |   | $                  | 25,145     |     | $      | 24,283   |       | $ | 14,222 |   |
| State  and local income taxes, net of federal benefit  |   | 3,162              |       | 3,116    |   | 1,673    |       |
| Other                                                  |   | (226               | )          | (540     | )      | (179     | )          |
|                                                   |   | $                  | 28,081     |     | $      | 26,859   |       | $ | 15,716 |   |

 

 

 

 

The components ofthe current net deferred tax asset and long-term net deferred tax liabilityare:

 

|                                       |   | **December  30,**

**2000** |   | **December  29,**

**2001** |   |
|--------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| Current deferred income tax assets:        |   |                        |   |                        |   |
| Warranty  liability                        |   | $                           | 6,121  |                        | $      | 11,909 |   |
| Product  liability                         |   | 2,527                       |   | 6,376                       |   |
| Inventory  reserves                        |   | 1,853                       |   | 3,144                       |   |
| Payroll  and related accruals              |   | 958                         |   | 1,911                       |   |
| Other accruals                             |   | 1,738                       |   | 3,987                       |   |
|                                       |   | $                           | 13,197 |                        | $      | 27,327 |   |
| Long-term deferred income tax liabilities: |   |                        |   |                        |   |
| Depreciation                               |   | $                           | 5,197  |                        | $      | 8,741 |   |
| Amortization                               |   | 2,449                       |   | 2,846                       |   |
| Net  operating loss (NOL) carryforward     |   | 0                           |   | (6,070                      | )      |
| Valuation  allowance on NOL carryforward   |   | 0                           |   | 2,795                       |   |
|                                       |   | $                           | 7,646  |                        | $      | 8,312 |   |

 

 

40

----

 

 

Managementbelieves that the temporary differences which gave rise to the deferred incometax assets will be realized in the foreseeable future, except for benefitsarising from the NOL carryforward associated with the SMC Acquisition.  Accordingly, management has provided a valuationallowance for the portion of the NOL carryforward that may not be fullyrecognized.

** **

**10.  EARNINGS PER SHARE:**

 

Basic earnings percommon share is based on the weighted average number of shares outstandingduring the period using net income attributable to common stock as thenumerator.  Diluted earnings per commonshare is based on the weighted average number of shares outstanding during theperiod, after consideration of the dilutive effect of stock options andconvertible preferred stock, using net income as the numerator.  The weighted average number of common sharesused in the computation of earnings per common share for the years endedJanuary 1, 2000, December 30, 2000, and December 29, 2001 are as follows:

 

|                                              |   | **1999**   |   | **2000**   |   | **2001**   |   |
|---------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| **Basic**                                         |   |       |   |       |   |       |   |
| Issued  and outstanding shares (weighted average) |   | 28,213,445 |   | 28,377,123 |   | 28,531,593 |   |
|                                              |   |       |   |       |   |       |   |
| **Effect  of Dilutive Securities**                |   |       |   |       |   |       |   |
| Stock  options                                    |   | 837,009    |   | 601,142    |   | 757,095    |   |
|                                              |   |       |   |       |   |       |   |
| **Diluted**                                       |   | 29,050,454 |   | 28,978,265 |   | 29,288,688 |   |

 

 

 

**11.     LEASES:**

 

The Company hascommitments under certain noncancelable operating leases.   Total rental expense for the fiscal yearsended January 1, 2000, December 30, 2000, and December 29, 2001 related tooperating leases amounted to approximately $1.0 million, $2.4 million and $2.8million, respectively.  The Company'smost significant lease is a two-year operating lease for an aircraft withannual renewals for up to three additional years.  The future minimum rental commitments under the initial term ofthis lease are $1.4 million in both 2002 and 2003.  In addition, if the Company chooses the return option at the endof the initial lease term in February of 2004, the Company has guaranteed up to$16 million of any deficiency in the event that the Lessor's net sales proceedsof the aircraft are less than $18.5 million.

 

Approximate futureminimum rental commitments under these leases at December 29, 2001 aresummarized as follows:

 

| **Fiscal  Year**      |   | **(in thousands** | **)**  |
|-----------------------|--------|-------------------|--------|
| 2002                  |   | 2,938             |   |
| 2003                  |   | 2,182             |   |
| 2004                  |   | 682               |   |
| 2005                  |   | 675               |   |
| 2006                  |   | 675               |   |
| 2007 and 

thereafter |   | 5,008             |   |

 

 

41

----

 

 

**12.    BONUS PLAN:**

 

The Company has adiscretionary bonus plan for certain key employees.  Bonus expense included in selling, general and administrativeexpenses for the years ended January 1, 2000, December 30, 2000, and December29, 2001 was $8.0 million, $9.0 million and $6.1 million, respectively.

 

 

**13.    STOCK OPTION PLANS:**

 

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

 

**Stock Purchase Plan**

 

The Company’sPurchase Plan qualifies under Section 423 of the Internal Revenue Code.  The Company has reserved 683,087 shares ofCommon Stock for issuance under the Purchase Plan.  During the years ended December 30, 2000 and December 29, 2001,52,725 shares and 64,643 shares, respectively, were purchased under thePurchase Plan.  The weighted-averagefair value of purchase rights granted in 2000 and 2001 was $9.57 and $8.74,respectively.  Under the Purchase Plan,an eligible employee may purchase shares of common stock from the Companythrough payroll deductions of up to 10% of base compensation, at a price pershare equal to 85% of the lesser of the fair market value of the Company’sCommon Stock as of the first day (grant date) or the last day (purchase date)of each six-month offering period under the Purchase Plan.

 

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

 

**Directors’ Option Plan**

 

Each non-employeedirector of the Company is entitled to participate in the Company’s “DirectorPlan”.  The Board of Directors and thestockholders have authorized a total of 352,500 shares of Common Stock forissuance pursuant to the Director Plan. Under the terms of  the DirectorPlan, each eligible non-employee director is automatically granted an option topurchase 8,000 shares of Common Stock (the “Initial Option”) on the later ofthe effective date of the Company’s initial public offering or the date onwhich the optionee first becomes a director of the Company.  Thereafter, each optionee is automaticallygranted an additional option to purchase 3,500 shares of Common Stock (a“Subsequent Option”) on September 30 of each year if, on such date, theoptionee has served as a director of the Company for at least six months.  Each Initial Option vests over five years atthe rate of 20% of the shares subject to the Initial Option at the end of eachanniversary following the date of grant. Each Subsequent Option vests in full on the fifth anniversary of itsdate of grant.  The exercise price ofeach option is the fair market value of the Common Stock as determined by theclosing price reported by the New York Stock Exchange on the date of grant.  As of December 29, 2001, 24,300 options hadbeen exercised, and options to purchase 135,750 shares of common stock wereoutstanding.

 

 

42

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**Option Plan**

 

The Option Planprovides for the grant to employees of incentive stock options within themeaning of Section 422 of the Internal Revenue Code of 1986, as amended (the“Code”), and for the grant to employees and consultants of the Company ofnonstatutory stock options.  A total of2,657,813 shares of Common Stock have been reserved for issuance under the OptionPlan.  As of December 29, 2001, optionsto purchase 1,235,023 shares of Common Stock were outstanding.  These options vest ratably over five yearscommencing with the date of grant.

 

The exercise priceof all incentive stock options granted under the Option Plan must be at leastequal to the fair market value of a share of the Company’s Common Stock on thedate of grant.  With respect to anyparticipant possessing more than 10% of the voting power of the Company’soutstanding capital stock, the exercise price of any option granted must equalat least 110% of the fair market value on the grant date, and the maximum termof the option must not exceed five years. The terms of all other options granted under the Option Plan may notexceed ten years.

 

Transactionsinvolving the Director Plan and the Option Plan are summarized withcorresponding weighted-average exercise prices as follows:

 
|                              |   | **Shares** |   | **Price** |   |
|-----------------------------------|--------|------------|--------|-----------|--------|
| Outstanding  at January 2, 1999   |   | 1,172,317  |   | $         | 3.99   |   |
| Granted                           |   | 232,727    |   | 10.44     |   |
| Exercised                         |   | (186,398   | )      | 3.48      |   |
| Forfeited                         |   | (4,458     | )      | 5.62      |   |
| Outstanding  at January 1, 2000   |   | 1,214,188  |   | 5.99      |   |
| Granted                           |   | 206,851    |   | 12.43     |   |
| Exercised                         |   | (68,810    | )      | 3.25      |   |
| Forfeited                         |   | (14,661    | )      | 7.93      |   |
| Outstanding  at December 30, 2000 |   | 1,337,568  |   | 6.48      |   |
| Granted                           |   | 218,401    |   | 12.42     |   |
| Exercised                         |   | (140,163   | )      | 3.95      |   |
| Forfeited                         |   | (45,033    | )      | 8.21      |   |
| Outstanding at December  29, 2001 |   | 1,370,773  |   | $         | 7.62   |   |

 

For various priceranges, weighted average characteristics of all outstanding stock options atDecember 29, 2001 were as follows:  
|                              |          | **Options  Outstanding** |    | **Options  Exercisable**                   |   |
|-----------------------------------|---------------|--------------------------|---------|--------------------------------------------|--------|
| **Range of**

**Exercise Prices** |          | **Shares**               |    | **Remaining**

** Life**

**(years)** |   | **Weighted-  Average**

** Price** |   | **Shares** |   | **Weighted-  Average**

** Price** |   |
| $                                 | 1.62          |                     | 94,786  |                                       | 1.2    |   | $ | 0.65 |   | 94,786 |   | $ | 0.65 |   |
| $                                 | 1.63 - 3.25   |                     | 268,286 |                                       | 3.3    |   | 2.81 |   | 268,286 |   | 2.81 |   |
| $                                 | 3.26 - 4.88   |                     | 155,909 |                                       | 5.1    |   | 3.59 |   | 102,236 |   | 3.52 |   |
| $                                 | 6.50 - 8.13   |                     | 230,263 |                                       | 6.3    |   | 7.73 |   | 123,729 |   | 7.74 |   |
| $                                 | 9.75 - 11.38  |                     | 228,827 |                                       | 7.4    |   | 10.32 |   | 77,521 |   | 10.25 |   |
| $                                 | 11.39 - 13.00 |                     | 358,952 |                                       | 8.8    |   | 12.30 |   | 32,790 |   | 12.66 |   |
| $                                 | 13.01 - 14.63 |                     | 14,000  |                                       | 9.8    |   | 14.25 |   | — |   | — |   |
| $                                 | 14.64 - 16.25 |                     | 19,750  |                                       | 9.4    |   | 16.19 |   | — |   | — |   |
|                              |          | 1,370,773                |    |                                       |   |   |   | 699,348 |   |   |   |
|                                   |               |                          |         |                                            |        |  |  |  |  |  |  |  |  |  |

 

 

 

43

----

 

 

The Companycomplies with the disclosure-only provisions of SFAS No. 123, “Accounting forStock-Based Compensation”, and thus no compensation cost has been recognizedfor the Director Plan, the Option Plan or the Purchase Plan.  Had compensation cost for the threestock-based compensation plans been determined based on the fair value ofoptions at the date of grant consistent with the provisions of SFAS No. 123,the Company’s pro forma net income and pro forma earnings per share would havebeen as follows:

 

|                                           |   | **1999**                                  |   | **2000** |   | **2001** |   |
|------------------------------------------------|--------|-------------------------------------------|--------|----------|--------|----------|--------|
|                                           |   | **(In thousands, except per share data)** |   |
| Net  income — as reported                 |   | $                                         | 43,761 |     | $      | 42,521   |   | $ | 24,919 |   |
| Net  income — pro forma                   |   | 43,067                                    |   | 41,743   |   | 23,880   |   |
|                                           |   |                                      |   |     |   |     |   |
| Diluted  earnings per share — as reported |   | $                                         | 1.51   |     | $      | 1.47     |   | $ | 0.85 |   |
| Diluted  earnings per share — pro forma   |   | 1.48                                      |   | 1.44     |   | 0.82     |   |

 

The pro forma effecton net income for 1999, 2000 and 2001 is not representative of the pro formaeffect in future years because compensation expense related to grants made inprior years is not considered.  Forpurposes of the above pro forma information, the fair value of each optiongrant was estimated at the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions:

 

|                      |   | **1999** |   | **2000** |   | **2001** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk-free  interest rate  |   | 5.29     | %      | 6.27     | %      | 4.42     | %      |
| Expected  life (in years) |   | 6.65     |   | 5.68     |   | 6.23     |   |
| Expected  volatility      |   | 55.65    | %      | 54.63    | %      | 55.02    | %      |
| Expected  dividend yield  |   | 0.00     | %      | 0.00     | %      | 0.00     | %      |

 

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

 

The fair value ofthe Company’s financial instruments are presented below.  The estimates require subjective judgmentsand are approximate.  Changes inmethodologies and assumptions could significantly affect estimates.

 

Line of Credit - The carrying amount outstanding on therevolving line of credit is $20.6 million and $26.0 million at December 30,2000 and December 29, 2001, respectively, which approximates the estimated fairvalue as this instrument requires interest payments at a market rate ofinterest plus a margin.

 

Long-term NotePayable - Thecarrying amount outstanding on the long-term note payable is $40.0 million(including $10.0 million of current payable) at December 29, 2001, whichapproximates the estimated fair value as this instrument requires interestpayments at a market rate of interest plus a margin.

 

 

 

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

 

The Companysponsors a 401(k) defined contribution plan covering substantially allfull-time employees.  Companycontributions to the plan totaled $571,000 in 1999, $593,000 in 2000 and$629,000 in 2001.

 

44

----

 

 

**16.  COMMITMENTS AND CONTINGENCIES:**

** **

**Repurchase Agreements**

 

Substantially allof the Company’s sales to independent dealers are made on terms requiring cashon delivery.  The Company does notfinance dealer purchases.  However, mostpurchases are financed on a “floor plan” basis by a bank or finance companywhich lends the dealer all or substantially all of the wholesale purchase priceand retains a security interest in the vehicles.  Upon request of a lending institution financing a dealer’s purchasesof the Company’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

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

 

No significant netlosses were incurred during the years ended January 1, 2000, December 30, 2000or December 29, 2001.  The approximateamount subject to contingent repurchase obligations arising from theseagreements at December 29, 2001 is $366.8 million, with approximately 7.44%concentrated with one dealer.  If theCompany were obligated to repurchase a significant number of recreationalvehicles in the future, losses and reduction in new recreational vehicle salescould result.

 

**Product Liability**

 

The Company issubject to regulations which may require the Company to recall products withdesign or safety defects, and such recall could have a material adverse effecton the Company’s business, results of operations and financial condition.

 

The Company hasfrom time to time been subject to product liability claims.  To date, the Company has been successful inobtaining product liability insurance on terms the Company considersacceptable.  The terms of the policycontain a self-insured retention amount of $100,000 per occurrence, with amaximum annual aggregate self-insured retention of $1.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.1 millionfor each occurrence and an annual aggregate of $102.0 million.  There can be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the cost of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations and financial condition.

 

**Litigation**

 

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

 

45

----

 

 

**Debt Guarantee**

 

In 2000, theCompany loaned $2.8 million to Outdoor Resorts of Las Vegas (“ORLV”) for thepurpose of constructing a luxury motor coach resort in Las Vegas, Nevada, andan additional amount of $5.3 million in 2001 for resorts in Naples, Florida andIndio, California.  Accrued interestreceivable from the loans was $639,000 at December 29, 2001, of whichapproximately $200,000 was in arrears due to delays in development of theproject in Las Vegas, Nevada.

 

As part of thefinancing structure for the new resorts, the Company also agreed to act asco-guarantor with ORLV’s parent company, Outdoor Resorts of America (“ORA”), ona $12.0 million construction loan.  Inreturn for the Company’s loan and guarantee commitment, ORLV has agreed to payinterest and income participation to the Company.  At December 29, 2001, ORLV had drawn $9.7 million on theconstruction loan.

 

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

 
| **Year ended January 1, 2000**   |   | **1st  Quarter**                           |    | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |    |
|----------------------------------|--------|--------------------------------------------|---------|------------------|--------|------------------|--------|------------------|---------|
|                             |   | **(In thousands, except per share data)**  |    |
| Net sales                        |   | $                                          | 193,201 |             | $      | 199,178          |   | $                | 196,694 |   | $ | 191,742 |   |
| Gross  profit                    |   | 29,164                                     |    | 31,347           |   | 30,998           |   | 30,770           |    |
| Operating  income                |   | 17,300                                     |    | 18,919           |   | 18,373           |   | 18,251           |    |
| Net  income                      |   | 9,878                                      |    | 11,457           |   | 11,227           |   | 11,199           |    |
| Earnings per common share:       |   |                                       |    |             |   |             |   |             |    |
| Basic                            |   | $                                          | 0.35    |             | $      | 0.41             |   | $                | 0.40    |   | $ | 0.40 |   |
| Diluted                          |   | $                                          | 0.34    |             | $      | 0.39             |   | $                | 0.39    |   | $ | 0.38 |   |
|                             |   |                                       |    |             |   |             |   |             |    |
| **Year ended December 30, 2000** |   | **1st Quarter**                            |    | **2nd Quarter**  |   | **3rd Quarter**  |   | **4th Quarter**  |    |
|                             |   | **(In thousands, except per  share data)** |    |
| Net sales                        |   | $                                          | 237,983 |             | $      | 226,091          |   | $                | 226,393 |   | $ | 211,423 |   |
| Gross  profit                    |   | 37,314                                     |    | 32,117           |   | 30,908           |   | 29,311           |    |
| Operating  income                |   | 21,375                                     |    | 18,217           |   | 16,143           |   | 14,095           |    |
| Net  income                      |   | 12,918                                     |    | 11,148           |   | 9,807            |   | 8,648            |    |
| Earnings per common share:       |   |                                       |    |             |   |             |   |             |    |
| Basic                            |   | $                                          | 0.46    |             | $      | 0.39             |   | $                | 0.35    |   | $ | 0.30 |   |
| Diluted                          |   | $                                          | 0.44    |             | $      | 0.39             |   | $                | 0.34    |   | $ | 0.30 |   |
|                             |   |                                       |    |             |   |             |   |             |    |
| **Year ended December 29, 2001** |   | **1st Quarter**                            |    | **2nd Quarter**  |   | **3rd Quarter**  |   | **4th Quarter**  |    |
|                             |   | **(In thousands, except per  share data)** |    |
| Net  sales                       |   | $                                          | 211,228 |             | $      | 223,424          |   | $                | 240,831 |   | $ | 261,590 |   |
| Gross  profit                    |   | 25,488                                     |    | 25,804           |   | 30,548           |   | 32,150           |    |
| Operating  income                |   | 9,088                                      |    | 9,153            |   | 11,438           |   | 12,979           |    |
| Net  income                      |   | 5,197                                      |    | 5,480            |   | 6,623            |   | 7,619            |    |
| Earnings per common share:       |   |                                       |    |             |   |             |   |             |    |
| Basic                            |   | $                                          | 0.18    |             | $      | 0.19             |   | $                | 0.23    |   | $ | 0.27 |   |
| Diluted                          |   | $                                          | 0.18    |             | $      | 0.19             |   | $                | 0.23    |   | $ | 0.26 |   |

 

 

46

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**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**

**                  FINANCIAL DISCLOSURE**

 

                Not Applicable.

 

47

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**PART III**

 

**ITEM10.****                                             ****DIRECTORSAND EXECUTIVE OFFICERS OF REGISTRANT**

 

Informationrequired by this Item regarding directors and executive officers set forthunder the captions “Proposal 1 - Election of Directors” and “Compliance withSection 16(a) of the Securities Exchange Act” in the Registrant’s definitiveProxy Statement is incorporated herein by reference.

 

**ITEM11.****                                             ****EXECUTIVECOMPENSATION**

 

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

 

**ITEM12.****                                             ****SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Informationrequired by this Item regarding beneficial ownership of the Registrant’s CommonStock by certain beneficial owners and management of the Registrant set forthunder the caption “Security Ownership of Certain Beneficial Owners andManagement” in the Proxy Statement is incorporated herein by reference.

 

**ITEM13.****                                             ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Informationrequired by this Item regarding certain relationships and related transactionswith management set forth under the caption “Additional Information -Compensation Committee Interlocks and Insider Participation” in the ProxyStatement is incorporated herein by reference.

 

48

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**PART IV**

 

**ITEM 14.****                                             ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ONFORM 8-K**

 

(a)   The following documents are filed as part ofthis Report on Form 10-K:

 

1.     Financial Statements.  The Consolidated Financial Statements ofMonaco Coach Corporation  and the Reportof Independent Accountants are filed in Item 8 within this Annual Reporton Form 10-K.

 

2.     Financial Statement Schedule.  The following financial statement scheduleof Monaco Coach Corporation for the fiscal years ended January 1, 2000, December30, 2000 and December 29, 2001 is filed as part of this Annual Report onForm 10-K and should be read in conjunction with the ConsolidatedFinancial Statements, and related notes thereto, of Monaco Coach Corporation.

 

| **Schedule** |   |                               |   | **Page** |   |
|--------------|--------|------------------------------------|--------|----------|--------|
| II           |   | Valuation and  Qualifying Accounts |   | 52       |   |

 

Schedules notlisted above have been omitted because they are not applicable or are notrequired or the information required to be set forth therein is included in theconsolidated financial statements or notes thereto.

 

3.     Exhibits.  The following Exhibits are filed as part of, or incorporated byreference into, this Report on Form 10-K.

 
| 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 & Restated Certificate of Incorporation dated June  30, 1999 (Incorporated herein by reference to Exhibit (3.2) to the  Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000).                         |
|   |   |                                                                                                                                                                                                                                                                       |
| 3.3    |   | Bylaws of Registrant, as amended to date (Incorporated herein by  reference to Exhibit (3.2) to the Registrant’s Annual Report on Form 10-K for  the year ended January 1, 1994).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.1   |   | Form of Indemnification Agreement for directors and executive  officers (Incorporated herein by reference to Exhibit (10.2) to the  Registrant’s Registration Statement on Form S-1 (Reg. No. 33-67374) declared  effective on September 23, 1993).                   |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.2+  |   | 1993 Incentive Stock Option Plan and form of option agreement  thereunder (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).                                                     |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.3+  |   | 1993 Director Option 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).                  |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.4+  |   | 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).          |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.7+  |   | Executive Variable Compensation Plan (Incorporated herein by  reference to Exhibit A to the Registrant’s definitive Proxy Statement filed  with the Securities and Exchange Commission on April 19, 1999).                                                            |
|   |   |                                                                                                                                                                                                                                                                       |
| 10.8   |   | Agreement and Plan of Merger dated as of June 23, 2001, among Monaco  Coach Corporation, Salmon Acquisition, Inc., and SMC Corporation  (incorporated herein by reference to Monaco’s, Schedule 13D filed with the  Commission on July 3, 2001, Exhibit 99. (2) (b)). |

 

49

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| 10.9   |   | Credit Agreement dated September 28, 2001 with U.S. Bank National  Association (Incorporated herein by reference to Exhibit (10.1) to the  Registrant’s  quarterly report on Form  10-Q filed November 13, 2001). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                        |
| 11.1   |   | Computation of earnings per share (see Note 10 of Notes to  Consolidated Financial Statements included in Item 8 hereto).                                                                                                   |
|   |   |                                                                                                                                                                                                                        |
| 21.1   |   | Subsidiaries of Registrant.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                        |
| 23.1   |   | Consent of Independent Accountants.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                        |
| 24.1   |   | Power of Attorney (included on the signature pages hereof).                                                                                                                                                                 |

 

 

----

+                                                                                         The item listed is a compensatory plan.

 

 

 
| (b)    |   | REPORTS ON FORM 8-K.  No  reports on Form 8-K were filed by the Company |
|--------|--------|------------------------------------------------------------------------------|
|   |   | during the year ended December 29, 2001.                                     |

 

 

50

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**SIGNATURES**

 

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

 
| March 29, 2002 | MONACO COACH CORPORATION |
|----------------|--------------------------|
|           |                     |
|           | By:                      | /s/ Kay L. Toolson |   |
|           |                     | Kay L. Toolson |
|           |                     | Chief Executive Officer |

 

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONSBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints Kay L. Toolson and P. Martin Daley, and each of them, jointlyand severally, his attorneys-in-fact, each with the power of substitution, forhim in any and all capacities, to sign any and all amendments to this Report onForm 10-K and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each of said attorneys-in-fact, or hissubstitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report on 10-K hasbeen signed by the following persons in the capacities and on the datesindicated:

 
| **Signature**                                          |   | **Title**                                                                                |   | **Date**       |
|--------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|----------------|
|                                                   |   |                                                                                     |   |           |
| /s/ Kay L.  Toolson

(Kay L. Toolson)                  |   | Chairman of the  Board and Chief Executive Officer (Principal Executive Officer)         |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ P. Martin  Daley 

(P. Martin  Daley)              |   | Vice President  and Chief Financial Officer (Principal Financial and Accounting Officer) |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ Robert P.  Hanafee, Jr.

(Robert P.  Hanafee, Jr.) |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ Michael J.  Kluger

(Michael J.  Kluger)           |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ L. Ben Lytle

(L. Ben Lytle)                       |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ Carl E.  Ring, Jr.

(Carl E. Ring,  Jr.)           |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ Richard A.  Rouse

(Richard A.  Rouse)             |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |
| /s/ Roger A.  Vandenberg

(Roger A.  Vandenberg)       |   | Director                                                                                 |   | March 29, 2002 |
|                                                   |   |                                                                                     |   |           |

 

51

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**MONACO COACH CORPORATION**

 

**SCHEDULEII—VALUATION AND QUALIFYING ACCOUNTS**

 

*(in thousands)*

 

 
| **Description**                      |   | **Balance at  Beginning of Period** |   | **Adjustment  for SMC Acquisition *** |   | **Charge to  Expense** |   | **Claims  Paid** |   | **Balance at  End of Period** |   |
|--------------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|------------------------|--------|------------------|--------|-------------------------------|--------|
| Fiscal year ended January 1, 2000:   |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for warranty claims         |   | $                                   | 11,906 |                                  |   |                   | $      | 14,881           |   | $                             | 11,487 |   | $ | 15,300 |   |
|                                 |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for product liability       |   | $                                   | 5,698  |                                  |   |                   | $      | 5,625            |   | $                             | 3,780  |   | $ | 7,543 |   |
|                                 |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Fiscal year ended December 30, 2000: |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for warranty claims         |   | $                                   | 15,300 |                                  |   |                   | $      | 17,474           |   | $                             | 17,295 |   | $ | 15,479 |   |
|                                 |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for product liability       |   | $                                   | 7,543  |                                  |   |                   | $      | 5,489            |   | $                             | 6,641  |   | $ | 6,391 |   |
|                                 |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Fiscal year ended December 29, 2001: |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for warranty claims         |   | $                                   | 15,479 |                                  | $      | 14,037                 |   | $                | 21,800 |                          | $      | 21,595 |   | $ | 29,721 |   |
|                                 |   |                                |   |                                  |   |                   |   |             |   |                          |   |
| Reserve  for product liability       |   | $                                   | 6,391  |                                  | $      | 9,874                  |   | $                | 6,108  |                          | $      | 4,776 |   | $ | 17,597 |   |

 

----

*  Opening balance sheet entries for SMCAcquisition, see Note 2 to the financial statements.

 

 

52

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EXHIBIT INDEX

** **
| **Exhibit No.** |   | **Exhibit**                                                                                                                                                                                                                                                                |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 & Restated Certificate of Incorporation dated June  30, 1999 (Incorporated herein by reference to Exhibit (3.2) to the  Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000).                         |
|            |   |                                                                                                                                                                                                                                                                       |
| 3.3             |   | Bylaws of Registrant, as amended to date (Incorporated herein by  reference to Exhibit (3.2) to the Registrant’s Annual Report on Form 10-K for  the year ended January 1, 1994).                                                                                     |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.1            |   | Form of Indemnification Agreement for directors and executive  officers (Incorporated herein by reference to Exhibit (10.2) to the  Registrant’s Registration Statement on Form S-1 (Reg. No. 33-67374) declared  effective on September 23, 1993).                   |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.2+           |   | 1993 Incentive Stock Option Plan and form of option agreement  thereunder (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).                                                     |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.3+           |   | 1993 Director Option 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).                  |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.4+           |   | 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).          |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.7+           |   | Executive Variable Compensation Plan (Incorporated herein by  reference to Exhibit A to the Registrant’s definitive Proxy Statement filed  with the Securities and Exchange Commission on April 19, 1999).                                                            |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.8            |   | Agreement and Plan of Merger dated as of June 23, 2001, among Monaco  Coach Corporation, Salmon Acquisition, Inc., and SMC Corporation  (incorporated herein by reference to Monaco’s, Schedule 13D filed with the  Commission on July 3, 2001, Exhibit 99. (2) (b)). |
|            |   |                                                                                                                                                                                                                                                                       |
| 10.9            |   | Credit Agreement dated September 28, 2001 with U.S. Bank National  Association (Incorporated herein by reference to Exhibit (10.1) to the  Registrant’s  quarterly report on Form  10-Q filed November 13, 2001).                                                |
|            |   |                                                                                                                                                                                                                                                                       |
| 11.1            |   | Computation of earnings per share (see Note 10 of Notes to  Consolidated Financial Statements included in Item 8 hereto).                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                       |
| 21.1            |   | Subsidiaries of Registrant.                                                                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                       |
| 23.1            |   | Consent of Independent Accountants.                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                       |
| 24.1            |   | Power of Attorney (included on the signature pages hereof).                                                                                                                                                                                                                |

 

 

----

+        The item listed is a compensatory plan.

 

53

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