**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**x**                               Annual ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of1934

**For the fiscal year ended December 30, 2006**

**OR**

**o**                                  TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**For the transition period from                   to                   **

**Commission File Number:  1-14725**

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**MONACO COACH CORPORATION**

(ExactName of Registrant as specified in its charter)

| **Delaware**                                                    |   | **35-1880244**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**91320Industrial WayCoburg, Oregon 97408**

(Addressof principal executive offices)

Registrant’stelephone number, including area code: **(541) 686-8011**

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

| Title of each class:                   | ** ** | **Name of each exchange on which registered:** |
|----------------------------------------|------------|------------------------------------------------|
| Common Stock, par value $.01 per share |       | New York Stock Exchange                        |

 

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

**None**

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

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

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

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Largeaccelerated filer o                                     Acceleratedfiler x                                     Non-acceleratedfiler o

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

Theaggregate market value of the Common Stock held by non-affiliates of the registranton December 30, 2006, based upon the closing sale price of the CommonStock on July 1, 2006 as reported on the New York Stock Exchange, wasapproximately $456.1 million. Shares of Common Stock held by officers anddirectors and their affiliated entities have been excluded in that such personsmay be deemed to be affiliates. This determination of affiliate status is notnecessarily conclusive for other purposes.

Asof March 1, 2007 the registrant had 29,845,496 shares of Common Stockoutstanding.

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**DOCUMENTSINCORPORATED BY REFERENCE**

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Theregistrant’s definitive Proxy Statement for its Annual Meeting of Stockholdersto be held on May 17, 2007 (the “Proxy Statement”) is incorporated byreference in Part III of this Form 10-K to the extent statedtherein.

Thisdocument consists of 81 pages. The Exhibit Index appears at pages 79-81.

 

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**INDEX**

| ** **     |
|----------------|
| PART I    |   |   |
| ITEM 1.        |   | BUSINESS |   |   |   |
| ITEM 1A.       |   | RISK FACTORS |   |   |   |
| ITEM  1B.      |   | UNRESOLVED STAFF COMMENTS |   |   |   |
| 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 EQUITY, RELATED  STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |   |   |   |
| ITEM  6.       |   | SELECTED FINANCIAL DATA |   |   |   |
| ITEM  7.       |   | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |   |   |
| ITEM  7A.      |   | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK |   |   |   |
| ITEM 8.        |   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |   |   |   |
| ITEM 9.        |   | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE |   |   |   |
| ITEM 9A.       |   | CONTROLS AND PROCEDURES |   |   |   |
| ITEM  9B.      |   | OTHER  INFORMATION |   |   |   |
| PART III  |   |   |   |
| ITEM 10.       |   | DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT, AND  CORPORATE GOVERNANCE |   |   |   |
| ITEM 11.       |   | EXECUTIVE COMPENSATION |   |   |   |
| ITEM 12.       |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS |   |   |   |
| ITEM 13.       |   | CERTAIN RELATIONSHIPS AND TRANSACTIONS, AND DIRECTOR  INDEPENDENCE |   |   |   |
| ITEM 14.       |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES |   |   |   |
| PART IV   |   |   |   |
| ITEM 15.       |   | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |   |   |   |
| SIGNATURES     |   |   |   |
| CERTIFICATIONS |   |   |   |
|                |  |  |  |  |  |  |  |

 

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**PART I**

This report containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These statements include without limitationthose below marked with an asterisk (*). In addition, Monaco Coach Corporation(the “Company”) may from time to time make oral forward-looking statementsthrough statements that include the words “believes,” “expects,” “anticipates,”or similar expressions. Such forward-looking statements involve known andunknown risks, uncertainties and other factors that may cause actual results,performance or achievements of the Company to differ materially from thoseexpressed or implied by such forward-looking statements, including those setforth below under Part I, Item 1A. Risk Factors.

**ITEM1.**                BUSINESS

**OVERVIEW**

MonacoCoach Corporation (the “Company”) is a leading manufacturer of premiumrecreational vehicles including Class A, B, and C motor coaches, as wellas towable recreational vehicles. The Company also develops and sells luxurymotorcoach resort facilities. These three operations, while closely tied intothe recreational lifestyle, are segmented for reporting purposes as theMotorized Recreational Vehicle (MRV) segment, the Towable Recreational Vehicle(TRV) segment, and the Motorhome Resort (MR) segment. The following tablerepresents the net sales by segment for the fiscal years 2004, 2005, and 2006. Allnumbers are in thousands:

| ** **                             | ** ** | **2004** | ** ** | **% of  Sales** | ** ** | **2005** | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
|----------------------------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|
| Motorized Recreational Vehicle Segment |       | $        | 1,234,233  |                 | 89.1       | %        | $          | 1,017,766            |       | 82.3     | %          | $                    | 941,657    |   | 72.5 | % |
| Towable Recreational Vehicle Segment   |       | 129,331  |       | 9.3                  | %          | 185,433  |       | 15.0                 | %          | 324,342  |       | 25.0                 | %          |
| Motorhome Resort Segment               |       | 22,705   |       | 1.6                  | %          | 33,039   |       | 2.7                  | %          | 31,987   |       | 2.5                  | %          |
| Total Net Sales                        |       | $        | 1,386,269  |                 | 100.0      | %        | $          | 1,236,238            |       | 100.0    | %          | $                    | 1,297,986  |   | 100.0 | % |

 

**RECENT BUSINESS CHANGES**

On November 18, 2005the Company acquired R-Vision, Inc., R-Vision Motorized, LLC, BisonManufacturing, LLC, and Roadmaster, LLC (collectively “R-Vision”), whichmanufactures entry level towable and motorized products. The Company believesthat developing relationships with a broad base of first-time buyers, coupledwith the Company’s strong emphasis on quality, customer service and designinnovation, will foster brand loyalty and increase the likelihood that, overtime, more customers will trade-up through the Company’s line of products. Attractinglarger numbers of first-time buyers is important to the Company because of ourbelief that many recreational vehicle customers purchase multiple recreationalvehicles during their lifetime.

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

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**MOTORIZED RECREATIONAL VEHICLE SEGMENT**

The Company is a leadingmanufacturer of motorized recreational vehicles. The Company’s motorized productline consists of 35 models under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,”and “R-Vision” brand names. The Company’s motorized products, which aretypically priced at the high end of their respective product categories, rangein suggested retail price from $45,000 to $600,000. Based upon retail registrationsin 2006, the Company believes it had a 23.8% share of the market for diesel Class Amotor coaches, a 7.7% share of the market for gas Class A motor coaches, a16.0% share of the market for all Class A motor coaches, and a 2.6% sharefor all Class C motor coaches. At December 30, 2006, the Company’sproducts were sold through an extensive network of approximately 317 dealerlots located primarily in the United States and Canada.

**TOWABLERECREATIONAL VEHICLE SEGMENT**

The Company manufactures 30 models of towablerecreational vehicles under the “Holiday Rambler,” “McKenzie”, and “R-Vision”brand names. The Company’s towable products, range in suggested retail pricefrom $11,000 to $80,000. Based upon retail registrations in 2006, the Companybelieves it had a 4.2% share of the market for fifth wheel towables and a 4.6%share of the market for travel trailers. At December 30, 2006, the Company’sproducts were sold through an extensive network of approximately 656 dealerlots located primarily in the United States and Canada.

**MOTORHOME RESORTS SEGMENT**

The Company’smotorhome resorts are located in Indio, California, and Las Vegas, Nevada. Theresorts provide high-end luxury destination locations for owners of Class Amotorhomes that include amenities such as golf courses, swimming pools, tenniscourts, and full recreational vehicle hookups for utilities. The Company sellsindividual lots through independent real estate agents, and the owner shares acommon interest in the resort amenities. As of December 30, 2006, theCompany had sold 689 of the 807 available lots. Both the Las Vegas and Indioresorts are fully developed, and will continue to provide resort lot salesactivity at least through the second quarter of 2007. In addition to these tworesorts, the Company has purchased a piece of property in La Quinta, Californiaand has another property under contract in Naples, Florida for development oftwo more upscale motorhome resort facilities.

The resortdevelopment business is regulated by various governmental authorities for siteplanning, environmental impact studies, and land usage. To comply with therequirements imposed by these various authorities, the Company employstechnical staff and utilizes outside legal counsel.

The motorhomeresort industry is highly fragmented, with no single development companyoccupying a dominant position. While there are no single large competitors inthe motorhome resort development segment, the Company nonetheless competes withstate, county, and national parks and campgrounds, privately owned campgroundssuch as KOA, and independent developers. The geographic markets that theCompany has targeted are located in the southeast (Florida), and the southwest(California and Nevada). These areas provide destination locations that havemajor cities or resort destinations that provide attractions outside of themotorhome resorts themselves.

*The Company’s website islocated at www.monaco-online.com. The Company provides free of charge through alink on its website access to its Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q and Current Reports on Form 8-K, as well as amendments tothose reports, as soon as reasonably practicable after the reports areelectronically filed with, or furnished to, the Securities and ExchangeCommission.*

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**MOTORIZED AND TOWABLE RECREATIONAL VEHICLE PRODUCTS**

The Company’s recreational vehicles (comprised of bothmotorized and towable vehicles) are designed to offer all the comforts of homewithin a 130 to 466 square foot area. Accordingly, the interior of therecreational vehicle is designed to maximize 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. Thefive 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’s recreational vehicles comesfully equipped with a wide range of kitchen and bathroom appliances, audio andvisual electronics, communication devices, and other amenities, includingcouches, dining tables, closets, and storage spaces. All of the Company’srecreational vehicles incorporate products from well-recognized suppliers,including: audio and video electronics from Sharp, RCA, and Sony; microwaveovens from Sharp, Magic Chef, and General Electric; stoves and ranges fromKitchenAid and Modern Maid; engines from Cummins and Caterpillar; transmissionsfrom Allison; and chassis from Ford, Workhorse, and the Company’s ownRoadmaster brand. The Company’s high end products offer top-of-the-lineamenities, including LCD televisions, GPS systems from Kenwood and Pioneer,fully automatic DSS (satellite) systems, Corian solid surface kitchen and bathcountertops, imported ceramic tile, granite, marble, leather furniture, andRalph Lauren fabrics.

The following tableillustrates our motorized and towable recreational vehicle segment offerings asof December 30, 2006 (revenues in thousands):

**COMPANYPRODUCTS**

| ** **          | ** ** | **RETAIL**          | ** ** | **GROSS REVENUES** | ** ** |
|---------------------|------------|---------------------|------------|-------------------------|------------|
| **TYPE**            | ** ** | ** **          | ** ** | **PRICE RANGE**    | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Class A Diesel |       | $135,000 - $600,000 |       | $                       | 1,014,131  |   | $ | 884,988 |   | $ | 842,275 |   |
| Class A Gas    |       | $80,000 -  $130,000 |       | $                       | 203,746    |   | $ | 125,696 |   | $ | 77,480 |   |
| Class C        |       | $45,000 - $86,000   |       | $                       | 17,329     |   | $ | 15,458 |   | $ | 27,979 |   |
| Towables            |       | $11,000 - $80,000   |       | $                       | 137,886    |   | $ | 191,003 |   | $ | 342,811 |   |
|                     |            |                     |            |                         |            |  |  |  |  |  |  |  |  |  |

 

To address changing consumer preferences, the Companymodifies and improves its products each model year and typically redesigns eachmodel every three or four years. The Company’s designers work with the Company’smarketing, manufacturing, and service departments to design a product that isappealing to consumers, practical to manufacture, and easy to service. Thedesigners try to maximize the quality and value of each model at the strategicretail price point for that model. The marketing and sales staff suggestfeatures or characteristics that they believe could be integrated into thevarious models to differentiate the Company’s products from those of its competitors.By working with manufacturing personnel, the Company’s product designersengineer the recreational vehicles so that they can be built efficiently andwith high quality. Service personnel suggest ideas to improve the serviceabilityand reliability of the Company’s products and give the designers feedback onthe Company’s past designs.

The exteriors ofthe Company’s recreational vehicles are designed to be aesthetically appealingto consumers, aerodynamic in shape for fuel efficiency, and practical tomanufacture. The Company has an experienced team of computer-aided designpersonnel to complete the product design and produce prints from which theproducts will be manufactured.

The Company expensed $1.3million, $1.5 million, and $1.9 million for research and development in fiscalyears 2004, 2005, and 2006, respectively.

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**SALES AND MARKETING FOR MOTORIZED AND TOWABLERECREATIONAL VEHICLES**

**DEALERS**

The Companyexpanded its dealer network over the past year to approximately 317 dealershiplots for its motorized products, and 656 dealership lots for its towableproducts. These lots are primarily located in the United States and Canada at December 30,2006 with considerable overlap of motorized and towable dealerships lots. Revenuesgenerated from shipments to dealerships located outside the United States wereapproximately 3.4%, 5.6%, and 8.0% of total sales for the fiscal years 2004,2005, and 2006, respectively. Sales to the Company’s dealerships are subject toconcentrations. Sales to the top dealer (Lazydays RV Center) in therecreational vehicle segments accounted for 10.9%, 10.9%, and 8.5% of totalsales for the years ended 2004, 2005, and 2006 respectively. The Companyintends to continue to expand its dealer network, primarily by targeting keygeographic regions where the Company’s products are not well represented.* TheCompany maintains an internal sales organization consisting of approximately 40account executives who service the Company’s dealer network.

The Companyanalyzes and selects new dealers on the basis of such criteria as location,marketing ability, sales history, financial strength, and the capability of thedealer’s repair services. The Company provides its dealers with a wide varietyof support services, including advertising assistance and technical training,as well as dealer incentives for retail sales of its products through theFranchise For The Future program. The Company’s sales staff is also availableto educate dealers about the characteristics and advantages of the Company’s recreationalvehicles compared with competing products. The Company offers dealersgeographic exclusivity to display a particular model. While the Company’sdealership contracts have renewable one to three year terms, historically theCompany’s dealer turnover rate has been low.

Dealers typically finance their inventory throughrevolving credit facilities established with asset-based third-party lendinginstitutions, including specialized finance companies and banks. It is industrypractice that such “floor plan” lenders require recreational vehiclemanufacturers to agree to repurchase (for a period of 12 to 15 months from thedate of the dealer’s purchase) motor coaches and towables previously sold tothe dealer in the event the dealer defaults on its financing agreements. TheCompany’s contingent obligations under these repurchase agreements are reducedby the proceeds received upon the sale of any repurchased units. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources,” and Note 19 of Notes to the Company’s ConsolidatedFinancial Statements.

**ADVERTISING ANDPROMOTIONS**

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

Additionally, theCompany attempts to encourage and reinforce customer loyalty through support ofowners’ clubs so that they may share experiences and communicate with eachother. The clubs of the Company’s products currently have more than 26,000members. The Company publishes magazines to enhance its relations with theseclubs and holds rallies for clubs to meet periodically to view the Company’snew models and obtain maintenance and service guidance. Attendance atCompany-sponsored rallies can be as high as 3,200 recreational vehicles peryear with support from its dealers and suppliers.

The Company’s websitesalso offer an extensive listing of the Company’s models, floor plans, andfeatures, including “virtual tours” of some models. A dealer locator featureidentifies for customers the closest dealers to their location for the model(s) theyare interested in purchasing. The Company’s website 

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alsoprovides information for upcoming rallies and club functions as well as linksto other RV lifestyle websites of interest to existing or potential customers.

**CUSTOMER SERVICE**

The Companybelieves that customer satisfaction is vitally important in the recreationalvehicle market because of the large number of repeat customers and the rapidcommunication of business reputations among recreational vehicle enthusiasts. TheCompany also believes that service is an integral part of the total product theCompany delivers and that responsive and professional customer service isconsistent with the premium image the Company strives to convey in themarketplace.

**TheCompany offers a limited warranty to all new vehicle purchasers. The Company’scurrent limited warranty covers its products for up to one year (or 24,000miles, whichever occurs first) from the date of retail sale (a limitedstructural warranty has a duration of five years for the front and sidewallframe structure, and a limited three year warranty for the Roadmaster chassis).In addition, customers are protected by the limited warranties of majorcomponent suppliers such as those of Cummins Engine Company, Inc. (“Cummins”)(diesel engines), Caterpillar Inc. (“Caterpillar”) (diesel engines), SpicerHeavy Axle & Brake Division of Dana Corporation (“Dana”) (axles), AllisonTransmission Division of General Motors Corporation (“Allison”)(transmissions), Workhorse (chassis), Onan (generators), and Ford Motor Company(“Ford”) (chassis). The Company’s limited warranty covers all manufacturing-relatedproblems and parts and system failures, regardless of whether the repair is madeat a Company facility or by one of the Company’s dealers or authorized servicecenters. As of December 30, 2006, the Company had over 700 dealershipsproviding service to owners of the Company’s products. In addition, owners ofthe Company’s diesel products have access to the entire Cummins and Caterpillardealer networks, which include over 2,000 repair centers.**

The Companyoperates service centers in Harrisburg, Oregon; Elkhart, Indiana; and Wildwood,Florida. The Company had approximately 640 employees in customer service at December 30,2006. The Company maintains individualized production records and acomputerized warranty tracking system which enable the Company’s servicepersonnel to identify problems quickly and to provide individualized customerservice. While many problems can be resolved on the telephone, the customer maybe referred to a nearby dealer or service center. 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 expanded its on-line dealer supportnetwork to assist its service personnel and dealers in providing better serviceto the Company’s customers. Service personnel and dealerships are able toaccess information relating to specific models and sales orders, file warrantyclaims and track their status, and view the status of existing parts orders. TheCompany’s on-line dealer support network gives service personnel at dealershipsthe ability to order parts through an electronic parts catalog.

**MANUFACTURING**

The Companycurrently operates motorized manufacturing facilities in Coburg, Oregon;Wakarusa, Indiana; and Warsaw, Indiana. The Company’s towable manufacturingfacilities are in Elkhart, Indiana; Milford, Indiana; Warsaw, Indiana; Goshen,Indiana; and Coburg, Oregon.

The Company’s motorcoach production capacity at the end of 2006 based on a single shift five-daywork week, was 49 motorized products per day, and 124 towable units per day.The Company is currently utilizing approximately 48% of total capacity andtherefore believes it is positioned to take advantage of future growthpotential of the Company’s products within the RV market.*

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The Company believes that its manufacturing process isone of the most vertically integrated in the recreational 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 enables the Company to be more responsive to marketdynamics.

Each facility hasseveral stations for manufacturing, organized into four broad categories:chassis manufacturing, body manufacturing, painting, and finishing. It takesfrom one week to four weeks to build each unit, depending on the product. TheCompany keeps a detailed log book during the manufacture of each product andinputs key information into its computerized service tracking system. Each unitis given an inspection during which its appliances and plumbing systems arethoroughly tested. As a final quality control check, each motor coach is givena road test.

The Company purchases rawmaterials, parts, subcomponents, electronic systems, and appliances from approximately1,000 vendors. These items are either directly mounted in the vehicle or areutilized in subassemblies which the Company assembles before installation inthe vehicle. The Company attempts to minimize its level of inventory byordering most parts as it needs them. Certain key components that requirelonger purchasing lead times are ordered based on planned needs. Examples ofthese components are diesel engines, axles, transmissions, chassis, andinterior designer fabrics. The Company has a variety of major suppliers,including Allison, Workhorse, Cummins, Caterpillar, Dana, Onan, and Ford. TheCompany does not have any long-term supply contracts with these suppliers ortheir distributors, but believes it has good relationships with them. Tominimize the risks associated with reliance on a single-source supplier, theCompany typically keeps a 60-day supply of axles, engines, chassis, andtransmissions in stock or available at the suppliers’ facilities and believesthat, in an emergency, other suppliers could fill the Company’s needs on aninterim basis.* The Company presently believes that its allocation by suppliersof all components is sufficient to meet planned production volumes, and theCompany does not foresee any operating difficulties as a result of vendorsupply issues.* Nevertheless, there can be no assurance that Allison, Ford, orany of the Company’s other suppliers will be able to meet the Company’s futurerequirements for transmissions, chassis, or other key components. An extendeddelay or interruption in the supply of any components obtained from a single orlimited source supplier could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

**BACKLOG**

The Company’s products are generally manufacturedagainst orders from the Company’s dealers. As of December 30, 2006, theCompany’s backlog of orders was $180.9 million, compared to $297.6 million at December 31,2005. The Company includes in its backlog all accepted purchase orders fromdealers shippable within the next six months. Orders in backlog can be canceledat the option of the purchaser at any time without penalty and, therefore,backlog should not be used as a measure of future sales.

**COMPETITION**

The market forrecreational vehicles is highly competitive. The Company currently encounterssignificant competition at each price point for its recreational vehicleproducts. The Company believes that the principal competitive factors thataffect the market for the Company’s products include product quality, productfeatures, reliability, performance, quality of support and customer service,loyalty of customers, brand recognition, and price. The Company believes thatit competes favorably against its competitors with respect to each of thesefactors. The Company’s competitors in the motorized recreational vehiclesegment include, among others: Coachmen Industries, Inc., FleetwoodEnterprises, Inc., National R.V. Holdings, Inc., Thor Industries, Inc.,Forest River, and Winnebago Industries, Inc. The Company’s competitors inthe towable recreational vehicle segment include, among 

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others: FleetwoodEnterprises, Inc. and Thor Industries, Inc. Many of the Company’scompetitors have significant financial resources and extensive marketingcapabilities. There can be no assurance that either existing or new competitorswill not develop products that are superior to or that achieve better consumeracceptance than the Company’s products, or that the Company will continue toremain competitive.

**GOVERNMENT REGULATION**

The manufacture andoperation of recreational vehicles are subject to a variety of federal, state,and local regulations, including the National Traffic and Motor Vehicle SafetyAct and safety standards for recreational vehicles and their components thathave been promulgated by the Department of Transportation. These standardspermit the National Highway Traffic Safety Administration to require amanufacturer to repair or recall vehicles with safety defects or vehicles thatfail to conform to applicable safety standards. Because of its sales in Canada,the Company is also governed by similar laws and regulations promulgated by theCanadian government. The Company has on occasion voluntarily recalled certainproducts. The Company’s operating results could be adversely affected by amajor product recall or if warranty claims in any period exceed warrantyreserves.

The Company is amember of the Recreation Vehicle Industry Association (the “RVIA”), a voluntaryassociation of recreational vehicle manufacturers and suppliers, whichpromulgates recreational vehicle safety standards. Each of the productsmanufactured by the Company has an RVIA seal affixed to it to certify that suchstandards have been met.

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

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

The Company believes that its products and facilitiescomply in all material respects with the applicable vehicle safety, consumerprotection, RVIA, and OSHA regulations and standards. Amendments to any of theforegoing regulations and the implementation of new regulations couldsignificantly increase the cost of manufacturing, purchasing, operating, orselling the Company’s products and could materially and adversely affect theCompany’s net sales and operating results. The failure of the Company to complywith present or future regulations could result in fines being imposed on theCompany, potential civil and criminal liability, suspension of production orcessation of operations.

The Company issubject to product liability and warranty claims arising in the ordinary courseof business. To date, the Company has been successful in obtaining productliability insurance on terms the Company considers acceptable. The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million. Overallproduct liability insurance, including umbrella coverage, is available to amaximum amount of $100.0 million for each occurrence, as well as 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, successful assertion against the Company of one ora series of large uninsured claims, or of one or a series of claims exceedingany insurance coverage, could have a material adverse effect on the Company’sbusiness, operating results, and financial condition.

In 2002, theNational Highway Traffic Safety Administration (NHTSA), enacted new vehiclesafety legislation referred to as the TREAD Act that imposes significant earlywarning reporting (“EWR”) 

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requirements on vehicle manufacturers, including theCompany. The Company believes that it has met the EWR requirements of the TREADAct that became effective during 2003.

Certain U.S. tax laws currently afford favorable taxtreatment for the purchase and sale of recreational 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 begiven that any increase in personal income tax rates will not have a materialadverse effect on the Company’s business, operating results, and financialcondition by reducing demand for the Company’s products.

**ENVIRONMENTAL REGULATION AND REMEDIATION**

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

The Company isaware that Elkhart County, Indiana, has been designated as a non-attainmentarea under the Clean Air Standards for Ozone and PM2.5. Regardless, the Companydoes not anticipate any new conditions that will require additional airpollution control equipment at operations located in Elkhart or at any of ourother existing operations, although new regulations and their interpretation maychange over time, and there can be no assurance that additional expenditureswill not be required.*

During 2004,additional federal Maximum Achievable Control Technology (“MACT”) regulationswere adopted. The Company is in compliance with the new MACT regulations, andwill not require any material capital expenditures at its facilities beyondthose which have already been incurred.* However, the ongoing interpretation ofthese regulations is uncertain and there can be no assurance that additionalcapital expenditures will not be required.

The Company is aware of no unresolved violations ofany of its existing air permits at any of its owned or leased facilities atthis time. However, the failure of the Company to comply with present or futureregulations could subject the Company to: (i) fines; (ii) potentialcivil and criminal liability; (iii) suspension of production or cessationof operations; (iv) alterations to the manufacturing process; or (v) costlycleanup or capital expenditures, any of which could have a material adverseeffect on the Company’s business, results of operations, and financialcondition.

**REMEDIATION  **TheCompany is currently unaware of any sites owned or facilities operated by theCompany that require environmental remediation. However, the failure of theCompany to comply with present or future regulations could subject the Companyto: (i) fines; (ii) potential civil and criminal liability; (iii) suspensionof production or cessation of operations; (iv) alterations to themanufacturing process; or (v) costly cleanup or capital expenditures, anyof which could have a material adverse effect on the Company’s business,results of operations, and financial condition.

**EMPLOYEES**

As of December 30,2006, the Company had 5,292 full-time employees, including 3,943 in production,91 in sales, 640 in service, and 618 in management and administration. TheCompany’s employees are not represented by any collective bargainingorganization, and the Company has never experienced a work stoppage resultingfrom labor issues. The Company believes its relations with its employees aregood.

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**EXECUTIVE OFFICERS OF THE COMPANY**

Thefollowing sets forth certain information with respect to the executive officersof the Company as of December 30, 2006:

| **Name**           | ** ** | ** ** | ** ** | **Age**                                                             | ** ** | **Position with the Company** |
|--------------------|------------|------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------|
| Kay L. Toolson     |       | 63         |       | Chairman and Chief Executive Officer                                |
| John W. Nepute     |       | 55         |       | President                                                           |
| Richard E. Bond    |       | 53         |       | Senior Vice President, Secretary, and Chief  Administrative Officer |
| P. Martin Daley    |       | 42         |       | Vice President and Chief Financial Officer                          |
| Michael P. Snell   |       | 38         |       | Vice President of Sales and Marketing                               |
| Charles J. Kimball |       | 41         |       | Chief Accounting Officer and Corporate Controller                   |

 

Mr. Toolson has served as Chief Executive Officer ofthe Company and its predecessor since 1986 and as Chairman of the Company sinceJuly 1993. He served as President of the Company from 1986 to October 2000,except for the periods from October 1995 to January 1997 and August 1998to September 1999. From 1973 to 1986, Mr. Toolson held executivepositions with two motor coach manufacturers.

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

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

Mr. Daley has served as Vice President and ChiefFinancial Officer since October 2000. He served as Corporate Controllerfrom March 1996 to October 2000. Prior to that, he served as theOregon Controller since joining the Company in November 1994.

Mr. Snell has served as Vice President of Sales andMarketing since November 2004. Prior to that and since joining the Companyin October 1994, he held various positions including Vice President ofSales and National Sales Manager of Monaco Motorized Sales.

Mr. Kimball has served asChief Accounting Officer since November 2006, and as Corporate Controllersince October 2000. Prior to that and since joining the Company in October 1997he served as the Oregon Division Controller. Before joining the Company, Mr. Kimballworked in the public accounting sector.

**ITEM 1A.**        RISKFACTORS

We have listedbelow various risks and uncertainties relating to our businesses. This list isnot inclusive of all the risks and uncertainties we face, but any of thesecould cause our actual results to differ materially from the resultscontemplated by the forward-looking statements contained in this report or thatwe may issue from time to time in the future.

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

**WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS**   Ournet sales, gross margin, and operating results may fluctuate significantly fromperiod to period due to a number of factors, many of which are not readilypredictable. These factors include the following:

·       Thevarying margins associated with the mix of products we sell in any particularperiod.

·       Thefact that we typically ship a large amount of products near quarter end.

·       Ourability to utilize and expand our manufacturing resources efficiently.

·       Shortagesof materials used in our products.

·       Theeffects of inflation on the costs of materials used in our products.

·       Adetermination by us that goodwill or other intangible assets are impaired andhave to be written down to their fair values, resulting in a charge to ourresults of operations.

·       Ourability to introduce new models that achieve consumer acceptance.

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

·       Theaddition or loss of our dealers.

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

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

·       Ourinability to acquire and develop key pieces of property for on-going resortactivity.

·       Fluctuationsin demand for our resort lots due to changing economic and other conditions.

Our overall gross margin may decline in future periodsto the extent that we increase the percentage of sales of lower gross margintowable products or if the mix of motor coaches we sell shifts to lower grossmargin units. In addition, a relatively small variation in the number ofrecreational vehicles we sell in any quarter can have a significant impact ontotal sales and operating results for that quarter.

Demand in the recreational vehicle industry generallydeclines during the winter months, while sales are generally higher during thespring and summer months. With the broader range of products we now offer, seasonalfactors could have a significant impact on our operating results in the future.Additionally, unusually severe weather conditions in certain markets coulddelay the timing of shipments from one quarter to another.

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We attempt to forecast orders for our productsaccurately and commence purchasing and manufacturing prior to receipt of suchorders. However, it is highly unlikely that we will consistently be able toaccurately forecast the timing, rate, and mix of orders. This aspect of ourbusiness makes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results, and cash flow for any given quarter.

**THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL ANDSUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY**   Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic,and political conditions that affect disposable income for leisure-timeactivities. Our business is particularly influenced by cycle swings in theclass A market. While there has been strong secular demand for recreationalvehicles since the early 90’s it has been driven by demand for towablerecreational products. Since 2004 there has been a notable divergence in growthrates between towable and motorized recreational vehicles.

Class A unit shipments peaked at approximately37,300 units in 1994 and declined to approximately 33,000 units in 1995. Theclass A segment then went on a steady climb and in 1999 recorded the highestyear, in recent history, of class A shipments, approximately 49,400. Over thenext 2 years motorhome shipments declined to 33,400 in 2001. Class Ashipments then rose for the next 3 years and in 2004 reached, 46,300. Over thelast 2 years however shipments of class A motorhomes have dropped reaching apre-1994 level of 32,700 in 2006.

The towable segment moved through many of the samecyclical peaks and troughs historically. The shipment level peaked in 1994 at201,100 dropping-off to 192,200 in 1996 and then growing to 249,600 in 1999. Towableunit shipments suffered a two-year drop-off like class A motorhomes in 2000 and2001, dropping to 207,600. Since then the market has expanded significantlyreaching 334,600 in 2006. Unlike the Class A market, the towables segmentdid not experience a slow down over the last 2 years because manufacturers havesuccessfully introduced popular new models and the segment was significantlyaided by units sold to support the hurricane relief efforts in the gulf coast.

Our business is subject to the cyclical nature of thisindustry and principally the class A segment. Some of the factors thatcontribute to this cyclicality include fuel availability and costs, interestrate levels, the level of discretionary spending, and availability of creditand overall consumer confidence. Increasing interest rates and fuel prices overthe last 2 years have adversely affected the Class A recreational vehiclemarket. An extended continuation of these conditions would materially affectour business, results of operations, and financial condition.

**WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERSFOR A SIGNIFICANT PERCENTAGE OF OUR SALES**   Although ourproducts were offered by over 700 dealerships located primarily in the UnitedStates and Canada as of December 30, 2006, a significant percentage of oursales are concentrated among a relatively small number of independent dealers. Forfiscal years 2005 and 2006, sales to one dealer, Lazy Days RV Center, accountedfor 10.9% and 8.5%, respectively, of total sales. For fiscal years 2005 and2006, sales to our 10 largest dealers, including Lazy Days RV Center, accountedfor a total of 38.7% and 33.2% of total sales, respectively. The loss of asignificant dealer or a substantial decrease in sales by any of these dealerscould have a material impact on our business, results of operations, andfinancial condition.

**WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER**   As is common in the recreational vehicleindustry, we enter into repurchase agreements with the financing institutionsused by our dealers to finance their purchases of our products. Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer defaults on its credit facility with its lender. Obligations underthese agreements vary from period to period, but totaled approximately $566.7million as of December 30, 2006, 

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with approximately 6.6%concentrated with one dealer. If we were obligated to repurchase a significantnumber of units under any repurchase agreement, our business, operatingresults, and financial condition could be adversely affected.

**OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**   Wesell our product to dealers who are predominantly located in the United Statesand Canada. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions. Forour RV dealers, terms are net 30 days for units that are financed by a thirdparty lender. Terms of open trade receivables are granted by us, on a verylimited basis, to dealers who have been subjected to evaluative creditprocesses conducted by us. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Agreements for payment termsbeyond 30 days generally require additional collateral, as well as securityinterest in the inventory sold. As of December 30, 2006, total trade receivableswere $81.6 million, with approximately $49.5 million, or 60.7% of theoutstanding accounts receivable balance concentrated among floor plan lenders.The remaining $32.1 million of trade receivables were concentratedsubstantially all with one dealer. For resort lot customers, funds are requiredat the time of closing.

**WE MAY EXPERIENCE A DECREASE IN SALES OF OURPRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL**   Aninterruption in the supply, or a significant increase in the price or tax onthe sale, of diesel fuel or gasoline on a regional or national basis couldsignificantly affect our business. Diesel fuel and gasoline have, at varioustimes in the past, been either expensive or difficult to obtain.

**WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDEUS WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS**   A number of important components for ourproducts are purchased from a single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana) for all diesel motor coaches, andchassis (Workhorse and Ford) for gas motor coaches. We have no long-term supplycontracts with these suppliers or their distributors, and we cannot be certainthat these suppliers will be able to meet our future requirements. Consequently,the Company has periodically been placed on allocation of these and other keycomponents. The last significant allocation occurred in 1997 from Allison, andin 1999 from Ford. An extended delay or interruption in the supply of anycomponents that we obtain from a single supplier or from a limited number of supplierscould adversely affect our business, results of operations, and financialcondition.

**OUR INDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUETO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE**   Themarket for our products is very competitive. We currently compete with a numberof manufacturers of motor coaches, fifth wheel trailers, and travel trailers. Someof these companies have greater financial resources than we have and extensivedistribution networks. These companies, or new competitors in the industry, maydevelop products that customers in the industry prefer over our products.

We believe that the introduction of new products andnew features is critical to our success. Delays in the introduction of newmodels or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely. For example, unexpected costs associated with modelchanges have affected our gross margin in the past. Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

**OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES**   Ourcustomers require demanding specifications for product performance andreliability. Because our products are complex and often use 

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advanced components,processes and techniques, undetected errors and design flaws may occur. Productdefects result in higher product service, warranty and replacement costs andmay cause serious damage to our customer relationships and industry reputation,all of which would negatively affect our sales and business.

**OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OFLITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS**   Weare subject to litigation arising in the ordinary course of our business,typically for product liability and warranty claims that are common in therecreational vehicle industry. While we do not believe that the outcome of anypending litigation, net of insurance coverage, will materially adversely affectour business, results of operations, or financial condition, we cannot provideassurances in this regard because litigation is an inherently uncertainprocess.*

To date, we have been successful in obtaining productliability insurance on terms that we consider acceptable. The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million. Overallproduct liability insurance, including umbrella coverage, is available to amaximum amount of $100.0 million for each occurrence, as well as in theaggregate. We cannot be certain we will be able to obtain insurance coverage inthe future at acceptable levels or that the costs of such insurance will bereasonable. Further, successful assertion against us of one or a series oflarge uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

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

**OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS**   Inthe past few years, we have significantly expanded the size and scope of ourbusiness, which has required us to hire additional employees. Some of these newemployees include new management personnel. In addition, our current managementpersonnel have assumed additional responsibilities. The increase in our sizeover a relatively short period of time has put pressure on our operating,financial, and management information systems. If we continue to expand, suchgrowth would put additional pressure on these systems and may cause suchsystems to malfunction or to experience significant delays.

**WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN**   Aswe continue to work towards involving automated machinery and equipment toimprove efficiencies and quality, we will be subject to certain risks involvingimplementing new technologies into our facilities.

The expansion intonew machinery and equipment technologies involves risks, including thefollowing:

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

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

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

·       Wemay be unable to complete a planned machinery and equipment implementation in atimely manner, which could result in lower production levels and an inabilityto satisfy customer demand for our products.

**WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNINGSYSTEM (ERP) IMPLEMENTATION**   During 2006 we began to implementa new ERP system and will be subject to certain risks including the following:

·       Wemust rely on timely performance by contractors whose performance we may beunable to control.

·       Theimplementation could result in significant and unexpected increases in ouroperating expenses and capital expenditures, particularly if the project takeslonger than we expect.

·       Theproject could complicate and prolong our internal data gathering and analysisprocesses.

·       Wemay need to restructure or develop our internal processes to adapt to the newsystem.

·       Wecould require extended work hours from our employees and use temporary outsideresources, resulting in increased expenses, to resolve any softwareconfiguration issues or to process transactions manually until issues areresolved.

·       Asmanagement focuses attention on the implementation, they could be diverted fromother issues.

·       Theproject could disrupt our operations if the transition to the ERP systemcreates new or unexpected difficulties or if the system does not perform asexpected.

**OUR STOCKPRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE**   Themarket price of our Common Stock is subject to wide fluctuations in response toquarter-to-quarter variations in operating results, changes in earningsestimates by analysts, announcements of new products by us or our competitors,general conditions in the recreational vehicle market, and other events orfactors. In addition, the stocks of many recreational vehicle companies haveexperienced price and volume fluctuations which have not necessarily beendirectly related to the companies’ operating performance, and the market priceof our Common Stock could experience similar fluctuations.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

(Not Applicable)

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**ITEM 2.**                PROPERTIES

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

| **FACILITY**       | ** ** | ** ** | ** ** | **OWNED/  LEASED** | ** ** | **APPROXIMATE  SQ FOOTAGE** | ** ** | **ACTIVITY**                                     |
|--------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------------------------|
| Coburg, Oregon     |       | Owned      |       |               | 816,000    |                        |       | Motor Coaches/Chassis  production                |
| Burns, Oregon      |       | Owned      |       |               | 176,000    |                        |       | Fiberglass components  production                |
| Bend, Oregon       |       | Leased     |       |               | 12,000     |                        |       | Electrical  Design & Assembly           |
| Harrisburg, Oregon |       | Owned      |       |               | 274,500    |                        |       | Service, Chassis, and  Wood component production |
| Wakarusa, Indiana  |       | Owned      |       |               | 1,154,000  |                        |       | Motor Coaches production                         |
| Nappanee, Indiana  |       | Owned      |       |               | 130,000    |                        |       | Wood Components  production                      |
| Elkhart, Indiana   |       | Owned      |       |               | 382,000    |                        |       | Service and  Towables/Chassis production         |
| Wildwood, Florida  |       | Owned      |       |               | 75,000     |                        |       | Service                                          |
| Warsaw, Indiana    |       | Owned      |       |               | 400,000    |                        |       | Motor/Towable production                         |
| Milford, Indiana   |       | Owned      |       |               | 63,000     |                        |       | Specialty production                             |
| Goshen, Indiana    |       | Owned      |       |               | 104,000    |                        |       | Administrative and specialty production          |

 

The Company believes that its existing facilities willbe sufficient to meet its production requirements for the foreseeable future.* Shouldthe Company 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.*

Inaddition to the properties noted above related to building and servicingrecreational vehicles, the Company owns two luxury motor coach resorts underdevelopment, and one piece of undeveloped property as follows at December 30,2006:

| **RESORT LOCATION** | ** ** | ** ** | ** ** | **DEVELOPED  ACREAGE** | ** ** | **NUMBER OF  DEVELOPED LOTS** | ** ** | **NUMBER OF  LOTS SOLD** | ** ** | **UNDEVELOPED  ACREAGE** | ** ** | **NUMBER OF  POTENTIAL  NEW LOTS** | ** ** |
|--------------------------|------------|------------|------------|------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|--------------------------|------------|----------------------------------------------|------------|
| Las Vegas, Nevada        |       |       | 42         |                   |       |                                    | 407        |                               |       |                     | 352        |                                         |       |   | 0 |   |   |   | 0 |   |   |
| Indio, California        |       |       | 80         |                   |       |                                    | 400        |                               |       |                     | 337        |                                         |       |   | 0 |   |   |   | 0 |   |   |
| La Quinta, California    |       |       | 0          |                   |       |                                    | 0          |                               |       |                     | 0          |                                         |       |   | 86 |   |   |   | 400 |   |   |

 

**ITEM 3.**                LEGALPROCEEDINGS

The Company is involved inlegal proceedings arising in the ordinary course of its business, including avariety of product liability and warranty claims typical in the recreationalvehicle industry. The Company does not believe that the outcome of its pendinglegal proceedings, net of insurance coverage, will have a material adverse effecton the business, financial condition, or results of operations of the Company.*

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

**None.**

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OFEQUITY SECURITIES

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

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2006**       |       |     |       |    |       |
| First Quarter  |       | $        | 14.84      |    | $          | 12.50 |   |
| Second Quarter |       | $        | 14.53      |    | $          | 11.62 |   |
| Third Quarter  |       | $        | 13.22      |    | $          | 10.02 |   |
| Fourth Quarter |       | $        | 15.28      |    | $          | 10.87 |   |
| **2005**       |       |     |       |    |       |
| First Quarter  |       | $        | 20.80      |    | $          | 15.70 |   |
| Second Quarter |       | $        | 17.24      |    | $          | 12.90 |   |
| Third Quarter  |       | $        | 18.52      |    | $          | 14.01 |   |
| Fourth Quarter |       | $        | 15.51      |    | $          | 11.85 |   |

 

As of March 13, 2007, there were approximately 855holders of record of the Company’s Common Stock.

The Company began payingquarterly dividends at the rate of $.05 per share on its Common Stock in March 2004.In February 2005, the Company declared an increased dividend of $.06 pershare on all Common Stock owned by holders of record as of March 1, 2005. TheCompany has paid quarterly cash dividends at this rate since March 2005and currently expects that comparable cash dividends will be paid on a quarterlybasis going forward, however, the Company reserves the right to alter ordiscontinue this practice at any time depending on its economic performance andfinancial condition.*

**ITEM 6.**                SELECTEDFINANCIAL DATA

**SELECTED HISTORICALCONSOLIDATED FINANCIAL DATA**

The Consolidated Statements of Income Data set forthbelow with respect to fiscal years 2004, 2005, and 2006 and the ConsolidatedBalance Sheet Data at December 31, 2005 and December 30, 2006, arederived from, and should be read in conjunction with, the audited ConsolidatedFinancial Statements and Notes thereto of the Company included in this AnnualReport on Form 10-K. The Consolidated Statements of Income Data setforth below with respect to fiscal years 2002 and 2003 and the ConsolidatedBalance Sheet Data at December 28, 2002, January 3, 2004, and January 1,2005 are derived from audited consolidated financial statements of the Companywhich are not included in this Annual Report on Form 10-K.

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

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**Five-Year SelectedFinancial Data**

Thefollowing table sets forth financial data of Monaco Coach Corporation for theyears indicated (in thousands of dollars, except share and per share data andconsolidated operating data).

| ** **                                                        | ** ** | **Fiscal Year** | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **2002**             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Consolidated Statements of  Income Data:**                      |       |                 |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                    | 1,212,385  |   | $ | 1,158,083 |   | $ | 1,386,269 |   | $ | 1,236,238 |   | $ | 1,297,986 |   |
| Cost of sales                                                     |       | 1,050,270            |       | 1,019,423 |   | 1,217,457 |   | 1,111,468 |   | 1,173,443 |   |
| Gross profit                                                      |       | 162,115              |       | 138,660 |   | 168,812 |   | 124,770 |   | 124,543 |   |
| Selling, general, and administrative  expenses                    |       | 86,115               |       | 100,709 |   | 109,145 |   | 113,179 |   | 120,465 |   |
| Plant relocation costs                                            |       | 0                    |       | 0 |   | 0 |   | 4,370 |   | 269 |   |
| Operating income                                                  |       | 76,000               |       | 37,951 |   | 59,667 |   | 7,221 |   | 3,809 |   |
| Other income, net                                                 |       | 105                  |       | 260 |   | 343 |   | 255 |   | 615 |   |
| Interest expense                                                  |       | (2,752               | )          | (2,968 | ) | (1,547 | ) | (1,820 | ) | (4,430 | ) |
| Income (loss) before  income taxes and discontinued operations    |       | 73,353               |       | 35,243 |   | 58,463 |   | 5,656 |   | (6 | ) |
| Provision for (benefit  from) income taxes, continuing operation  |       | 28,794               |       | 13,220 |   | 21,914 |   | 1,687 |   | (992 | ) |
| Income from continuing operations                                 |       | 44,559               |       | 22,023 |   | 36,549 |   | 3,969 |   | 986 |   |
| Income (loss) from  discontinued operations, net of tax provision |       | (44                  | )          | 177 |   | 156 |   | (1,321 | ) | 18 |   |
| Net income                                                        |       | $                    | 44,515     |   | $ | 22,200 |   | $ | 36,705 |   | $ | 2,648 |   | $ | 1,004 |   |
| Earnings (loss) per  common share:                                |       |                 |       |   |   |   |   |   |   |   |   |
| Basic from continuing operations                                  |       | $                    | 1.55       |   | $ | 0.75 |   | $ | 1.24 |   | $ | 0.13 |   | $ | 0.03 |   |
| Basic from discontinued operations                                |       | 0.00                 |       | 0.01 |   | 0.01 |   | (0.04 | ) | 0.00 |   |
| Basic                                                             |       | $                    | 1.55       |   | $ | 0.76 |   | $ | 1.25 |   | $ | 0.09 |   | $ | 0.03 |   |
| Diluted from continuing  operations                               |       | $                    | 1.51       |   | $ | 0.74 |   | $ | 1.22 |   | $ | 0.13 |   | $ | 0.03 |   |
| Diluted from discontinued  operations                             |       | 0.00                 |       | 0.01 |   | 0.01 |   | (0.04 | ) | 0.00 |   |
| Diluted                                                           |       | $                    | 1.51       |   | $ | 0.75 |   | $ | 1.23 |   | $ | 0.09 |   | $ | 0.03 |   |
| Weighted average common  shares outstanding:                      |       |                 |       |   |   |   |   |   |   |   |   |
| Basic                                                             |       | 28,812,473           |       | 29,062,649 |   | 29,370,455 |   | 29,516,794 |   | 29,712,957 |   |
| Diluted                                                           |       | 29,573,420           |       | 29,567,012 |   | 29,958,646 |   | 29,858,036 |   | 29,902,830 |   |
| Cash dividends per  common share                                  |       | $                    | 0.00       |   | $ | 0.00 |   | $ | 0.20 |   | $ | 0.24 |   | $ | 0.24 |   |
| **Consolidated  Operating Data:**                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Units sold (includes  discontinued  operations):                  |       |                 |       |   |   |   |   |   |   |   |   |
| Motor coaches                                                     |       | 8,005                |       | 7,051 |   | 8,199 |   | 6,221 |   | 5,762 |   |
| Towables                                                          |       | 3,206                |       | 2,593 |   | 4,621 |   | 9,337 |   | 19,861 |   |

 

| ** **                                  | ** ** | **December 28,  2002** | ** ** | **January 3,  2004** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Consolidated  Balance Sheet Data:**       |       |                        |       |                      |       |                      |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Working capital                             |       |                        | $          | 114,241                   |       |                      |       | $                           | 121,231    |                        |       |   | $ | 141,907 |   |   |   | $ | 127,191 |   |   |   | $ | 109,806 |   |   |
| Total assets                                |       |                        | 547,417    |                      |       |                      | 478,669    |                        |       |                        | 540,238    |   |   |   | 587,467 |   |   |   | 558,150 |   |   |
| Long-term  borrowings, less current portion |       |                        | 30,333     |                      |       |                      | 15,000     |                        |       |                        | 0          |   |   |   | 34,786 |   |   |   | 29,071 |   |   |
| Total stockholders’  equity            |       |                        | 260,627    |                      |       |                      | 286,248    |                        |       |                        | 319,616    |   |   |   | 316,732 |   |   |   | 315,321 |   |   |
|                                             |            |                             |            |                           |            |                           |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

**OVERVIEW**

*Background*

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

*Motorized andTowable Recreational Vehicle Segment Products*

Our products range insuggested retail price from $45,000 to $600,000 for motor coaches and from$11,000 to $80,000 for towables. Based upon retail registrations in 2006, webelieve we had 23.8% share of the market for diesel Class A motor coaches,a 7.7% share of the market for gas Class A motor coaches, a 16.0% share ofthe market for all Class A motor coaches, a 2.6% market for allClass C motor coaches, a 4.2% share of the market for fifth wheel towablesand a 4.6% share of the market for travel trailers.

*Motorhome ResortSegment*

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California. In addition, the Company has acquired a piece ofproperty in La Quinta, California, and has a second piece of property inNaples, Florida under contract for future developments. The Resorts offer salesof individual lots to owners, and also offer a common interest in the amenitiesat the resort. Lot prices at the two resorts range from $79,900 to $339,900.Amenities at the Resorts include club house facilities, tennis, swimming, andgolf. The Resorts provide destination locations for premium Class Arecreational vehicle owners, and help to promote the recreational lifestyle.

*Business Changes*

We have conducted a series of acquisitions during ourhistory. Beginning in March 1993, we commenced operations by acquiringsubstantially all of the assets and liabilities of a predecessor company thathad been formed in 1968. In March 1996, we acquired the Holiday RamblerDivision of Harley-Davidson, Inc., a manufacturer of a full line ofClass A motor coaches and towables. In August 2001, we acquired SMCCorporation, manufacturer of the Beaver and Safari brand Class Amotorhomes. In November 2002, we acquired from Outdoor Resorts of America(“ORA”) three luxury motorcoach resort properties being developed by ORA in LasVegas, Nevada, Indio, California, and Naples, Florida. In September 2003,we sold the property in Naples, Florida. In November of 2005, we acquiredR-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC,and Roadmaster, LLC, (referred to as “R-Vision”), manufacturers of R-Vision,Bison, and Roadmaster motorized and towable products. The R-Vision acquisitionwas accounted for using the purchase method of accounting, through a cash offeron 

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November 18, 2005.All operations of R-Vision have been incorporated for the period ofNovember 18, 2005 through December 30, 2006 in the consolidatedannual financial statements of the Company.

During the third quarter of2005, the Company announced the closure of its Royale Coach operations in Elkhart,Indiana. Royale Coach produced Prevost bus conversion motor coaches with pricepoints in excess of $1.4 million. Royale Coach sold approximately 20 coachesper year and was not a significant portion of the Company’s overall business.As of the end of 2006, the Company had sold all remaining assets of RoyaleCoach. In accordance with Statements of Financial Accounting StandardsNo. 142, “Accounting for Goodwill and Other Intangible Assets” (“SFAS142”), no goodwill amortization has been recorded for any of the Company’sacquisitions for the years of 2004, 2005, or 2006. Instead, SFAS 142 requiresannual testing of goodwill for impairment at the reporting unit level. We completedour annual testing of goodwill during the third quarter of 2006 as required bySFAS 142 and determined that there has been no impairment requiring a writedown. See Note 1 of Notes to the Company’s Consolidated Financial Statements.

**RESULTS OF OPERATIONS**

Thefollowing table sets forth our results of continuing operations for the fiscalyears ended December 31, 2005, and December 30, 2006 (dollars inthousands):

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

 

*Performance in 2006*

*Motorized andTowable Recreational Vehicle Segments*

The beginning of 2006 began with a temporary upswingin the motorized wholesale markets. Our dealer partners were optimistic thatthe slow downs in the industry that occurred in 2005 were behind them and,accordingly, they increased their orders. However, as the first quarter came toa close and headed into the second quarter, which is usually the most robustfor motorhome sales, it became evident that the retail markets were stilllagging wholesale shipments. As a result, the second half of the year, andparticularly the third quarter, were below expectations. Similar to themotorized segment, the towable segment, which had been very strong in 2005,began to show signs of slowing. The heated pace that was in part fueled by thehurricane season of 2005 which resulted in a huge demand for travel trailers,slowed at the beginning of the second quarter. Due to these market constraints,we used this opportunity to focus on aligning our plants and componentfacilities to meet lower demands, while still optimizing manufacturing facilityutilization.

While 2006 was challenging on several fronts, weworked aggressively to introduce new and innovative products such as our fullslide options on several models, and a new lower priced front-end dieselmotorized coach. We also worked with the R-Vision management team to leveragetheir expertise in low cost manufacturing processes, and introduced theseprocesses into our legacy towable plants.

The recreational vehicleindustry is extremely competitive, and retail customers have many choicesavailable to them. To distinguish ourselves within the industry, we introducedour Franchise For The Future (FFTF) program in June of 2005. This programis designed to introduce the concept to our dealer 

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partnersthat our specific brands have intrinsic values as a selling tool. To supportthis, and to encourage our dealers to participate in FFTF, we worked withoutside marketing consultants to develop brand signage, informational computerkiosks, and brand specific displays that are placed within our variousindependent dealer locations. In 2006, we followed this up with MonacoFinancial Services (MFS). MFS is a branded financing program from GeneralElectric Commercial Distribution Finance (GECDF) and General Electric ConsumerFinance (GECF). Through MFS, our dealer partners earn rebates from GECDF andGECF for wholesale floorplanning, and retail financing for customers. Webelieve that these concepts, along with other features designed to encourageour dealers to focus selling efforts on our various product offerings, willassist them in their sales efforts through the strength of improved brandidentity.

*Motorhome ResortsSegment*

While 2006 was difficultfor the recreational vehicle industry, our motorhome resort properties salesand profits were strong contributors to our operations. Both our properties inLas Vegas, Nevada and Indio, California continued to attract new owners, and weanticipate selling through most of the remaining lots in the first half of2007.* In addition, we expect to develop two new projects, one in southernCalifornia and the other in southern Florida during 2007, with lots availableat these new resorts sometime late in the fourth quarter of 2007, or early2008.*

*2006 Compared With 2005*

Net sales increased 5.0% from $1.236 billion in 2005to $1.298 billion in 2006. Gross diesel motorized revenues were down 4.8%, gasmotorized revenues were down 25.3%, and towable revenues were up 79.5%. For2006, gross diesel motorized sales accounted for 65.3% of sales, gas motorizedsales accounted for 8.2% of sales, and towables accounted for 26.6% of sales.For 2005, gross diesel motorized sales accounted for 72.7% of sales, gasmotorized sales accounted for 11.6% sales, and towables accounted for 15.7% ofsales. The Company’s overall average unit selling price decreased from $78,000in 2005, to $50,000 in 2006. The reduction in average selling price resultedfrom a combination of increased sales of the Company’s towable products, theacquisition of R-Vision (which sells predominantly lower priced towables) andthe sale of 874 lower priced towable products to the Federal EmergencyManagement Association (FEMA) in the first half of 2006.

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

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

 

·       Directmaterial decreases in 2006, as a percent of sales, were $6.5 million. Thisdecrease was a result of the Company’s purchasing initiatives associated withmotorized and towable production. The overall total dollar increase in directmaterials of $32.8 million was related to sales volume increases.

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·       Directlabor increases in 2006, as a percent of sales, were $2.6 million. Thisincrease was the result of inefficiencies in our plants as we realignedproduction facilities to meet demand. The remaining portion of the overalltotal dollar increase of $8.7 million in direct labor was the result of salesvolume increases.

·       Increasesin warranty expense in 2006, as a percent of sales, were $9.0 million. Theseincreases were the result of higher warranty costs associated with some of ourcurrent model year motorized products. The remaining portion of the overalltotal dollar increase in warranty costs of $10.2 million was the result ofsales volume increases.

·       Increasesin other direct costs in 2006, as a percent of sales, were $1.3 million Thisincrease was the result of increased fuel prices which raised delivery costs. Theremaining portion of the overall total dollar increase in other direct costs of$4.3 million was the result of sales volume increases.

·       Indirectcosts in 2006, as a percent of sales, were essentially unchanged. The overalltotal dollar increase of $4.8 million was the result of sales volume increases.

Selling,general, and administrative expenses (S,G,&A) increased by $7.3 millionfrom $113.2 million in 2005 to $120.5 million in 2006 and increased as apercentage of sales from 9.2% in 2005 to 9.4% in 2006. Increases in spendingover the prior year, as a percentage of sales, are set forth in the followingtable (dollars in thousands):

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

 

·       Increasesin salaries, bonus and benefit expenses in 2006 were $5.9 million. Thisincrease was due to the addition of $3.1 million in wages and salariesassociated with the acquisition of R-Vision, as well as to the addition ofapproximately $2.6 million in stock based compensation expense. The remainingportion of the overall total dollar increase was related to increases inmanagement bonus expense.

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

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

·       Decreasesin marketing costs in 2006 were $2.6 million. These reductions were the resultof savings due to lower expenses associated with shows and rallies of $1.0million, and lower expenses for printing and advertising of $823,000.

·       Increasesin other expenses in 2006 were $4.7 million. This increase was due to $2.6million in costs associated with the implementation of our ERP system. Theremaining portion of the overall total dollar increase was related to variableexpenses associated with sales volume increases.

Operating income decreased $3.4 million from $7.2million in 2005 to $3.8 million in 2006. The Company’s higher level of selling,general, and administrative expense as a percentage of sales combined 

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with the decreases in theCompany’s gross margin, resulted in a decrease in operating margin from 0.6% in2005 to 0.3% in 2006.

Net interest expense increased from $1.8 million in2005 to $4.4 million in 2006. This increase was related to higher debt levelsduring 2006. Increases in debt were mostly due to debt incurred with theacquisition of R-Vision. The Company’s interest expense included $173,000 in2005 and $203,000 in 2006 related to the amortization of debt issuance costsrecorded in conjunction with the Company’s credit facilities.

The Company reported a benefit for income taxes fromcontinuing operations of $992,000, on a pretax loss of $6,000, for 2006compared to a provision for income taxes from continuing operations of $1.7million, on pretax income of $5.7 million, for 2005. The 2006 tax benefitincludes a deferred tax benefit of $367,000 attributable to a change in stateincome tax laws and a tax benefit of $445,000 associated with the reversal offederal and state tax reserves no longer required. The 2005 provision includeda tax benefit associated with the reversal of federal and state tax reserves nolonger required of $277,000.

Net income for 2006 was$1.0 million (including income from discontinued operations of $18,000, net oftaxes, related to the closure of the Royale Coach facility, and pre-tax chargesof $269,000 for the relocation of the Beaver facility) compared to net incomeof $2.6 million in 2005 due to a lower gross margin, and increases in S,G,&Aexpenses. This was partially offset by a decrease in the effective tax rate.The Company did not expense stock options granted in 2005 and earlier periods,however, if option expensing had been required, the effect on net income for2005 for all previously granted options would have been a decrease of $3.2million. *See Note 16 of the Company’s consolidated financialstatements for information regarding the calculation of the impact of expensingstock options. The Company has reflected the cost of stock-based awards in itsresults of operations beginning in 2006.*

*2006 versus 2005for the Motorized Recreational Vehicle Segment*

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

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 1,017,766  |              |       | 100.0      | %          |              | $          | 941,657    |       |       | 100.0      | % |   | $ | (76,109 | ) | (7.5 | )% |
| Cost of sales                                  |       | 925,014    |       |              | 90.9       | %          |       | 869,110           |       |       | 92.3       | %          |       | 55,904 |   | 6.0 | % |
| Gross profit                                   |       | 92,752     |       |              | 9.1        | %          |       | 72,547            |       |       | 7.7        | %          |       | (20,205 | ) | (21.8 | )% |
| Selling, general,  and administrative expenses |       | 46,331     |       |              | 4.6        | %          |       | 44,306            |       |       | 4.7        | %          |       | 2,025 |   | 4.4 | % |
| Corporate  overhead allocation                 |       | 43,148     |       |              | 4.2        | %          |       | 34,172            |       |       | 3.6        | %          |       | 8,976 |   | 20.8 | % |
| Plant relocation  costs                        |       | 4,370      |       |              | 0.4        | %          |       | 269               |       |       | 0.0        | %          |       | 4,101 |   | 93.8 | % |
| Operating loss                                 |       | $          | (1,097     | )                 |       | (0.1       | )%         |              | $          | (6,200     | )          |       | (0.6       | )% |   | $ | (5,103 | ) | (465.2 | )% |

 

Total net sales for the MRV segment were down from$1.0 billion in 2005, to $941.7 million in 2006. Gross diesel motorizedrevenues were down 4.8% and gas motorized revenues were down 25.3%. Dieselproducts accounted for 88.9% of the MRV segment’s 2006 gross revenues while gasproducts were 11.1%. The overall decrease in revenues reflected continuingchallenges in the marketplace as dealers sought to lower their current inventoriesbecause of softened retail demand and higher interest costs associated withtheir floorplan borrowings. Our MRV segment unit sales were down 7.3% year overyear from 6,211 units in 2005 to 5,756 units in 2006. Diesel motorized unitsales were down 3.9% to 4,297 units and gas motorized unit sales were down16.2% to 1,459 units. Total average MRV segment unit selling prices remained at$165,000 for 2005 and 2006.

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

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

 

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

·       Directlabor increases in 2006, as a percent of sales, were $1.9 million. Thisincrease was the result of inefficiencies in our plants as we realignedproduction facilities to meet demand. The overall decrease in total dollarsassociated with direct labor of $5.7 million was due to lower sales volumes in2006 as compared to 2005.

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

·       Increasesin other direct costs in 2006, as a percent of sales, were $942,000. Thisincrease was due to increases for fuel costs associated with the delivery ofour products to our dealers. The overall decrease in total dollars associatedwith other direct costs of $3.7 million was due to lower sales volumes in 2006as compared to 2005.

·       Increasesin indirect costs in 2006, as a percent of sales, were $2.8 million. Theincrease in indirect costs are related to inefficiencies in our plants as weran lower production rates in 2006 versus 2005. The overall decrease in totaldollars associated with indirect costs of $4.6 million was due to lower salesvolumes in 2006 as compared to 2005.

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

Plant relocation costs reflect the costs incurred torelocate the Bend, Oregon manufacturing operations to the Coburg, Oregon plant.We believe this relocation will ultimately result in improved margins for theOregon operations.*

Operating loss increasedas both a percent of sales and in total dollars due to lower gross margins,which was offset by a decrease in S,G,&A and corporate overhead allocationas a percent of sales.

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*2006 versus 2005 for the Towable Recreational VehicleSegment*

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

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 185,433    |              |       | 100.0      | %          |              | $          | 324,342    |       |       | 100.0      | % |   | $ | 138,909 |   | 74.9 | % |
| Cost of sales                                  |       | 174,242    |       |              | 94.0       | %          |       | 292,876           |       |       | 90.3       | %          |       | (118,634 | ) | (68.1 | )% |
| Gross profit                                   |       | 11,191     |       |              | 6.0        | %          |       | 31,466            |       |       | 9.7        | %          |       | 20,275 |   | 181.2 | % |
| Selling, general,  and administrative expenses |       | 5,603      |       |              | 3.0        | %          |       | 15,323            |       |       | 4.7        | %          |       | (9,720 | ) | (173.5 | )% |
| Corporate  overhead allocation                 |       | 7,588      |       |              | 4.1        | %          |       | 14,737            |       |       | 4.5        | %          |       | (7,149 | ) | (94.2 | )% |
| Operating income (loss)              |       | $          | (2,000     | )                 |       | (1.1       | )%         |              | $          | 1,406      |       |       | 0.5        | % |   | $ | 3,406 |   | 170.3 | % |

 

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

Grossprofit for 2006 increased to $31.5 million, up from $11.2 million in 2005, andgross margin increased to 9.7% in 2006, up from 6.0% in 2005. Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

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

 

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

·       Directlabor decreases in 2006, as a percent of sales, were $3.2 million. The decreasein labor was the result of the improvements in our facilities from integratingthe R-Vision acquisition, and using some of their production processes in ourlegacy plants. The overall increase in total dollars associated with directlabor of $13.9 million is the result of the increase of sales volumes in 2006compared to 2005.

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

26

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·       Decreasesin other direct costs in 2006, as a percent of sales, were $3.9 million. Thisdecrease was the result of the inclusion of a full year’s sales of R-Visionproducts which have a lower direct cost structure than our legacy products. Theoverall increase in total dollars associated with other direct costs of $9.2million is the result of the increase of sales volumes in 2006 compared to2005.

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

S,G,&A expenses forthe TRV segment increased as both a percent of sales and in total dollars dueto increases in selling expenses. In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocatedcertain costs on an activity basis. These costs are now classified in S,G,&Aexpense versus corporate overhead allocation. Prior periods are shown aspreviously reported as reclassification is impractical. Corporate overheadallocation is comprised of certain shared services such as executive,financial, information systems, legal, and investor relations expenses.

Operating income changedfrom a loss in 2005 to a profit in 2006 due to higher revenues coupled withimproved gross margins that were only partially offset by increases inS,G,&A expenses as a percentage of sales.

*2006 versus 2005for the Motorhome Resorts Segment*

The following table sets forth the results of the MRsegment for the fiscal years ended December 31, 2005, and December 30,2006 (dollars in thousands):

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **2006**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 33,039     |              |       | 100.0      | %          |              | $          | 31,987     |       |       | 100.0      | % |   | $ | (1,052 | ) |   | (3.2 | )% |   |
| Cost of sales                                  |       | 12,212     |       |              | 37.0       | %          |       | 11,457            |       |       | 35.8       | %          |       | 755 |   |   | 6.2 | % |   |
| Gross profit                                   |       | 20,827     |       |              | 63.0       | %          |       | 20,530            |       |       | 64.2       | %          |       | (297 | ) |   | (1.4 | )% |   |
| Selling, general,  and administrative expenses |       | 7,606      |       |              | 23.0       | %          |       | 8,236             |       |       | 25.8       | %          |       | (630 | ) |   | (8.3 | )% |   |
| Corporate  overhead allocation                 |       | 2,903      |       |              | 8.8        | %          |       | 3,691             |       |       | 11.5       | %          |       | (788 | ) |   | (27.1 | )% |   |
| Operating income                               |       | $          | 10,318     |              |       | 31.2       | %          |              | $          | 8,603      |       |       | 26.9       | % |   | $ | (1,715 | ) |   | (16.6 | )% |   |

 

Net sales decreased 3.2% to $32.0 million compared to$33.0 million for 2005. Sales of lots in 2006 were impacted by newly developedlots not being available until the second half of the year as well as accessissues at our Las Vegas location due to nearby construction.

Gross profit for the MR segment increased to 64.2% ofsales in 2006, compared to 63.0% of sales in 2005. This was the result of thesales of higher margined lots in the final phases of the development.

S,G,&A expenses increased due to increases inspending associated with marketing costs. In addition, in the fourth quarter of2006 we completed a study on the allocation of corporate overhead, andallocated certain costs on an activity basis. These costs are now located inS,G,&A expense. Prior periods are shown as previously reported asreclassification is impractical. Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

Operating income decreaseddue to lower sales levels and higher S,G,&A and corporate overhead costs*.*

27

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*2005 Compared With2004*

The following table setsforth our results of operations for the fiscal years ended January 1,2005, and December 31, 2005 (dollars in thousands):

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 1,386,269  |              |       | 100.0      | %          |              | $          | 1,236,238  |       |       | 100.0      | % |   | $ | (150,031 | ) |   | (10.8 | )% |   |
| Cost of sales                                  |       | 1,217,457  |       |              | 87.8       | %          |       | 1,111,468         |       |       | 89.9       | %          |       | 105,989 |   |   | 8.7 | % |   |
| Gross profit                                   |       | 168,812    |       |              | 12.2       | %          |       | 124,770           |       |       | 10.1       | %          |       | (44,042 | ) |   | (26.1 | )% |   |
| Selling, general, and administrative  expenses |       | 109,145    |       |              | 7.9        | %          |       | 113,179           |       |       | 9.2        | %          |       | (4,034 | ) |   | (3.7 | )% |   |
| Plant relocation costs                         |       | 0          |       |              | 0.0        | %          |       | 4,370             |       |       | 0.3        | %          |       | (4,370 | ) |   | 0.0 | % |   |
| Operating income                               |       | $          | 59,667     |              |       | 4.3        | %          |              | $          | 7,221      |       |       | 0.6        | % |   | $ | (52,446 | ) |   | (87.9 | )% |   |

 

Net sales decreased 10.8%from $1.386 billion in 2004 to $1.236 billion in 2005. Gross diesel motorizedrevenues were down 12.7%, gas motorized revenues were down 36.3%, and towablerevenues were up 38.5%. For 2005, gross diesel motorized sales accounted for72.7% of sales, gas motorized sales accounted for 11.6% of sales, and towablesaccounted for 15.7% of sales. For 2004, gross diesel motorized sales accountedfor 73.8% of sales, gas motorized sales accounted for 16.1% sales, and towablesaccounted for 10.0% of sales. The Company’s overall average unit selling pricedecreased from $107,000 in 2004, to $78,000 in 2005. The reduction in averageselling price resulted from a combination of increased sales of the Company’stowable products, the acquisition of R-Vision (which sells predominantly lowerpriced towables) and the sale of lower priced towable products to the FederalEmergency Management Association (FEMA). FEMA orders added approximately 3,275sales of units to our towable production in the third and fourth quarters of2005 combined.

Grossprofit decreased by $44.0 million from $168.8 million in 2004 to $124.8 millionin 2005 and gross margin decreased from 12.2% in 2004 to 10.1% in 2005. Changesin the components of cost of sales are set forth in the following table(dollars in thousands):

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 865,822    |              |       | 62.4       | %          |              | $          | 769,823                  |       |   | 62.3 | % |   |   | (0.1 | )% |   |
| Direct labor         |       | 139,205    |       |              | 10.0       | %          |       | 125,943           |       |                     | 10.2       | % |   |   | 0.2 | % |   |
| Warranty             |       | 34,126     |       |              | 2.5        | %          |       | 28,861            |       |                     | 2.3        | % |   |   | (0.2 | )% |   |
| Other direct         |       | 66,456     |       |              | 4.8        | %          |       | 71,525            |       |                     | 5.8        | % |   |   | 1.0 | % |   |
| Indirect             |       | 111,848    |       |              | 8.1        | %          |       | 115,316           |       |                     | 9.3        | % |   |   | 1.2 | % |   |
| Total cost of  sales |       | $          | 1,217,457  |              |       | 87.8       | %          |              | $          | 1,111,468                |       |   | 89.9 | % |   |   | 2.1 | % |   |

 

·       Directmaterial decreases in 2005, as a percent of sales, were due in part topurchasing initiatives, increases in products that have a lower material costas a percentage of sales (such as for FEMA travel trailers, and our resortproperty lots), as well as increases in the sale of motorcoach resortproperties which have a lower cost of sale related to direct materials.

·       Directlabor increases in 2005, as a percent of sales, were predominantly due to plantinefficiencies caused by lower production run rates in 2005 versus 2004.

·       Decreasesin warranty expense in 2005, as a percent of sales, were due mostly to qualityimprovement projects, and improvements in recoveries from vendors for warrantyclaims.

28

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·       Increasesin combined other direct and indirect costs in 2005, as a percent of sales,were due mostly to inefficiencies within the plants as a result of reducedplant utilization. In addition, due to higher fuel costs, delivery expense forrecreational vehicles also increased.

Selling,general, and administrative expenses (S,G,&A) increased by $4.1 millionfrom $109.1 million in 2004 to $113.2 million in 2005 and increased as apercentage of sales from 7.9% in 2004 to 9.2% in 2005. Increases in spending overthe prior year, as a percentage of sales, are set forth in the following table(dollars in thousands):

| ** **                             | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $          | 24,348     |              |       | 1.8        | %          |              | $          | 18,521                   |       |   | 1.5 | % |   |   | (0.3 | )% |   |
| Selling expenses                       |       | 35,896     |       |              | 2.6        | %          |       | 42,849            |       |                     | 3.4        | % |   |   | 0.8 | % |   |
| Settlement  expense                    |       | 11,045     |       |              | 0.8        | %          |       | 9,635             |       |                     | 0.8        | % |   |   | 0.0 | % |   |
| Marketing  expenses                    |       | 12,447     |       |              | 0.9        | %          |       | 11,679            |       |                     | 1.0        | % |   |   | 0.1 | % |   |
| Other                                  |       | 25,409     |       |              | 1.8        | %          |       | 30,495            |       |                     | 2.5        | % |   |   | 0.7 | % |   |
| Total S,G,&A  expenses             |       | $          | 109,145    |              |       | 7.9        | %          |              | $          | 113,179                  |       |   | 9.2 | % |   |   | 1.3 | % |   |

 

·       Decreasesin salaries, bonus, and benefit expenses in 2005 were mostly the result oflower management bonus due to reduced profitability of the Company.

·       Increasesin selling expenses in 2005, as a percent of sales, were due to a weaker marketin 2005 versus 2004, and the implementation of the Company’s “Franchise For TheFuture” (FFTF) program. As a result the Company increased spending to maintainmarket share, and to maximize available sales.

·       Decreasesin settlement expense (litigation settlement expense) in 2005 was due to aslight decrease in the amount of new cases added, as well as favorableresolutions of cases during the 2005 year.

·       Decreasesin marketing expenses in 2005 were the result of management reducing spendingin this area to contain costs.

·       Increasesin other expenses were a combination of expenses related to the implementationof the Company’s enterprise resource planning (ERP) system, as well as certainfees for consulting services related to the launch of the FFTF program.

Operating income decreased$52.4 million from $59.7 million in 2004 to $7.2 million in 2005. The Company’shigher level of S,G,&A expense as a percentage of sales combined with the decreasesin the Company’s gross margin, partially offset by improved results from ourmotorhome resort property segment, resulted in a decrease in operating marginfrom 4.3% in 2004 to 0.6% in 2005.

Net interest expenseincreased from $1.5 million in 2004 to $1.8 million in 2005. This increase wasrelated to higher debt levels during 2005. Increases in debt were mostly due todebt incurred with the acquisition of R-Vision in the fourth quarter of 2005.The Company’s interest expense included $430,000 in 2004 and $173,000 in 2005related to the amortization of debt issuance costs recorded in conjunction withthe Company’s credit facilities.

The Company reported aprovision for income taxes from continuing operations of $1.7 million, or an effectivetax rate of 29.8%, for 2005, compared to $22.0 million, or an effective taxrate of 37.5% for 2004. The decrease in the effective tax rate was primarilyattributable to the impact of lower income levels in 2005, including lowerfederal and state statutory rates and a larger percentage impact from stateincome tax credits and other tax benefit items. The provision also includes atax benefit of $277,000 associated with the reversal of federal and state taxreserves no longer required.

29

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Net income for 2005 was$2.6 million (including losses from discontinued operations of $1.3 million,net of taxes, related to the closure of the Royale Coach facility, and pre-taxcharges of $4.4 million for the relocation of the Beaver facility) compared tonet income of $36.7 million in 2004 due to a decrease in sales combined with alower operating margin, and increases in S,G,&A expenses. This waspartially offset by a decrease in the effective tax rate. The Company did notexpense stock option grants in 2005 and earlier periods, however, if optionexpensing had been required, the effect on net income for 2005 for allpreviously granted options would have been a decrease of $3.2 million. *See Note 16 of the Company’s consolidated financial statements forinformation regarding the calculation of the impact of expensing stock options.The Company has reflected the cost of stock-based awards in its results ofoperations beginning in 2006.*

*2005 versus 2004 for the Motorized RecreationalVehicle Segment*

Thefollowing table sets forth the results of the MRV segment for the fiscal yearsended January 1, 2005, and December 31, 2005 (dollars in thousands):

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 1,234,233  |              |       | 100.0      | %          |              | $          | 1,017,766  |       |       | 100.0      | % |   | $ | (216,467 | ) | (17.5 | )% |
| Cost of sales                                  |       | 1,080,972  |       |              | 87.6       | %          |       | 925,014           |       |       | 90.9       | %          |       | 155,958 |   | 14.4 | % |
| Gross profit                                   |       | 153,261    |       |              | 12.4       | %          |       | 92,752            |       |       | 9.1        | %          |       | (60,509 | ) | (39.5 | )% |
| Selling, general,  and administrative expenses |       | 38,566     |       |              | 3.1        | %          |       | 46,331            |       |       | 4.6        | %          |       | (7,765 | ) | (20.1 | )% |
| Corporate  overhead allocation                 |       | 51,470     |       |              | 4.2        | %          |       | 43,148            |       |       | 4.2        | %          |       | 8,322 |   | 16.2 | % |
| Plant relocation  costs                        |       | 0          |       |              | 0.0        | %          |       | 4,370             |       |       | 0.4        | %          |       | (4,370 | ) | 0.0 | % |
| Operating income  (loss)                       |       | $          | 63,225     |              |       | 5.1        | %          |              | $          | (1,097     | )          |       | (0.1       | )% |   | $ | (64,322 | ) | (101.7 | )% |

 

Total net sales for theMRV segment were down from $1.234 billion in 2004, to $1.018 billion in 2005.Gross diesel motorized revenues were down 12.7% and gas motorized revenues weredown 36.3%. Diesel products accounted for 86.2% of the MRV segment’s 2005 grossrevenues while gas products were 13.8%. The overall decrease in revenuesreflected continuing challenges in the marketplace as dealers sought to lowertheir current inventories because of softened retail demand and higher interestcosts associated with their floorplan borrowings. Our MRV segment unit saleswere down 24.1% year over year from 8,178 units in 2004 to 6,211 units in 2005.Diesel motorized unit sales were down 16.9% to 4,470 units and gas motorizedunit sales were down 37.9% to 1,741 units. Total average MRV segment unit sellingprices increased to $165,000 for 2005, up from $151,000 in 2004. Increases inaverage selling prices are mostly the result of changes in product mix betweendiesel and gas motorized coaches.

Grossprofit for 2005 decreased to $92.8 million, down from $153.3 million in 2004,and gross margin decreased from 12.4% in 2004 to 9.1% in 2005. Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 766,924    |              |       | 62.1       | %          |              | $          | 638,188                  |       |   | 62.7 | % |   |   | 0.6 | % |   |
| Direct labor         |       | 122,298    |       |              | 9.9        | %          |       | 102,903           |       |                     | 10.1       | % |   |   | 0.2 | % |   |
| Warranty             |       | 30,058     |       |              | 2.4        | %          |       | 24,737            |       |                     | 2.4        | % |   |   | 0.0 | % |   |
| Other direct         |       | 56,232     |       |              | 4.6        | %          |       | 53,944            |       |                     | 5.3        | % |   |   | 0.7 | % |   |
| Indirect             |       | 105,460    |       |              | 8.6        | %          |       | 105,242           |       |                     | 10.4       | % |   |   | 1.8 | % |   |
| Total cost of  sales |       | $          | 1,080,972  |              |       | 87.6       | %          |              | $          | 925,014                  |       |   | 90.9 | % |   |   | 3.3 | % |   |

 

30

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·       Directmaterial increases in 2005, as a percent of sales, were mostly due to increasesin commodities pricing during 2005 for key items such as metals, petroleumproducts, and lumber materials.

·       Directlabor increases in 2005, as a percent of sales, were predominantly due toinefficiencies in the production lines related to plant consolidations andlower production run rates.

·       Increasesin other direct costs in 2005, as a percent of sales, were due mostly toincreases in employee health benefits, and delivery expense for the Company’sproducts.

·       Increasesin indirect costs, as a percent of sales, were due mostly to increased overheadcosts per unit within the production facilities due to lower run rates in 2005versus 2004. In addition, employee benefits (related to worker’s compensation)and factory supplies increased, causing an overall increase in total dollarsspent.

S,G,&A expenses for the MRV segment increased bothas a percent of sales and in total dollars due in part to lower sales levelsand increases in selling expenses. Corporate overhead allocation decreased dueto lower management bonus levels allocated to the MRV segment as a result oflower profits. Corporate overhead allocation is comprised of certain sharedservices such as executive, financial, information systems, legal, and investorrelations expenses.

Plant relocation costs reflect the costs incurred torelocate the Bend, Oregon manufacturing operations to the Coburg, Oregon plant.We believe this relocation will ultimately result in improved margins for theOregon operations.*

Operating income (loss)decreased as both a percent of sales and in total dollars due to lower grossmargins, increases in S,G,&A expenses and costs of the relocation of theBend, Oregon operations to the Coburg, Oregon facility.

*2005 versus 2004for the Towable Recreational Vehicle Segment*

Thefollowing table sets forth the results of the TRV segment for the fiscal yearsended January 1, 2005, and December 31, 2005 (dollars in thousands):

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 129,331    |              |       | 100.0      | %          |              | $          | 185,433    |       |       | 100.0      | % |   | $ | 56,102 |   |   | 43.4 | % |   |
| Cost of sales                                  |       | 123,314    |       |              | 95.4       | %          |       | 174,242           |       |       | 94.0       | %          |       | (50,928 | ) |   | (41.3 | )% |   |
| Gross profit                                   |       | 6,017      |       |              | 4.6        | %          |       | 11,191            |       |       | 6.0        | %          |       | 5,174 |   |   | 86.0 | % |   |
| Selling, general,  and administrative expenses |       | 4,827      |       |              | 3.7        | %          |       | 5,603             |       |       | 3.0        | %          |       | (776 | ) |   | (16.1 | )% |   |
| Corporate  overhead allocation                 |       | 5,393      |       |              | 4.2        | %          |       | 7,588             |       |       | 4.1        | %          |       | (2,195 | ) |   | (40.7 | )% |   |
| Operating loss                                 |       | $          | (4,203     | )                 |       | (3.3       | )%         |              | $          | (2,000     | )          |       | (1.1       | )% |   | $ | 2,203 |   |   | 52.4 | % |   |

 

Total net sales for the TRV segment were up from$129.3 million in 2004, to $185.4 million in 2005. The overall increase inrevenues reflected both the impact of the R-Vision acquisition inNovember 2005 as well as strong sales to FEMA related to hurricaneKatrina. Our unit sales were up 102.1% in 2005 to 9,337 units. Average unitselling prices declined from $30,000 in 2004 to $20,000 in 2005. The decreasein average selling price was mostly due to sales of lower priced products toFEMA.

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Grossprofit for 2005 increased to $11.2 million, up from $6.0 million in 2004, andgross margin increased to 6.0% in 2005, up from 4.6% in 2004. Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

| ** **           | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $          | 85,727     |              |       | 66.3       | %          |              | $          | 119,424                  |       |   | 64.4 | % |   |   | (1.9 | )% |   |
| Direct labor         |       | 16,908     |       |              | 13.1       | %          |       | 23,039            |       |                     | 12.4       | % |   |   | (0.7 | )% |   |
| Warranty             |       | 4,067      |       |              | 3.2        | %          |       | 4,124             |       |                     | 2.2        | % |   |   | (1.0 | )% |   |
| Other direct         |       | 10,225     |       |              | 7.9        | %          |       | 17,581            |       |                     | 9.5        | % |   |   | 1.6 | % |   |
| Indirect             |       | 6,387      |       |              | 4.9        | %          |       | 10,074            |       |                     | 5.5        | % |   |   | 0.6 | % |   |
| Total cost of  sales |       | $          | 123,314    |              |       | 95.4       | %          |              | $          | 174,242                  |       |   | 94.0 | % |   |   | (1.4 | )% |   |

 

·       Directmaterial decreases in 2005, as a percent of sales, were mostly due to increasedsales of products with lower material cost as a percentage of sales (such asfor FEMA travel trailers). This improvement was offset by higher commodity pricingfor metals, petroleum products, and lumber materials.

·       Directlabor decreases in 2005, as a percent of sales, were predominantly due tohigher production run rates in our plants in part due to FEMA orders.

·       Decreasesin warranty expense in 2005, as a percent of sales, were due mostly to animprovement in the warranty experience on current year models.

·       Increasesin other direct costs in 2005, as a percent of sales, were due mostly toincreases in employee health benefits and delivery expense for the Company’sproducts.

·       Increasesin indirect costs in 2005, as a percent of sales, were due mostly to increasedoverhead costs per unit related to FEMA production. In addition, costs ofemployee benefits (related to worker’s compensation) and factory suppliesincreased, causing an overall increase in total dollars spent.

S,G,&A expenses for the TRV segment decreased as apercent of sales due in part to higher sales levels for which additionaladministrative costs were not incurred. Corporate overhead allocation increasedslightly due to higher levels allocated to the TRV segment as a result of thegrowth in this segment. Corporate overhead allocation is comprised of certainshared services such as executive, financial, information systems, legal, andinvestor relations expenses.

Operating loss decreasedas both a percent of sales and in total dollars due to improved gross marginsand decreases in S,G,&A expenses as a percentage of sales.

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*2005 versus 2004 for the Motorhome Resorts Segment*

Thefollowing table sets forth the results of the MR segment for the fiscal yearsended January 1, 2005, and December 31, 2005 (dollars in thousands):

| ** **                                     | ** ** | ** ** | ** ** | **%**             | ** ** | ** ** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **2004**   | ** ** | **of Sales** | ** ** | **2005**   | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $          | 22,705     |              |       | 100.0      | %          |              | $          | 33,039     |       |       | 100.0      | % |   | $ | 10,334 |   | 45.5 | % |
| Cost of sales                                  |       | 13,171     |       |              | 58.0       | %          |       | 12,212            |       |       | 37.0       | %          |       | 959 |   | 7.3 | % |
| Gross profit                                   |       | 9,534      |       |              | 42.0       | %          |       | 20,827            |       |       | 63.0       | %          |       | 11,293 |   | 118.4 | % |
| Selling, general,  and administrative expenses |       | 4,194      |       |              | 18.5       | %          |       | 7,606             |       |       | 23.0       | %          |       | (3,412 | ) | (81.4 | )% |
| Corporate overhead  allocation                 |       | 4,695      |       |              | 20.7       | %          |       | 2,903             |       |       | 8.8        | %          |       | 1,792 |   | 38.2 | % |
| Operating income                               |       | $          | 645        |              |       | 2.8        | %          |              | $          | 10,318     |       |       | 31.2       | % |   | $ | 9,673 |   | 1,499.7 | % |

 

Net sales increased 45.5%to $33.0 million compared to $22.7 million for 2004. This increase was mostlythe result of continued strong demand for our resort properties and the needwithin the industry for quality destination locations for RV owners.

Gross profit for the MRsegment increased to 63.0% of sales in 2005, compared to 42.0% of sales in 2004.This was due to a heavier absorption of infrastructure costs in earlier phasessold in 2004. These costs were expensed in earlier phases due to uncertaintiesas to the ultimate completion and sale of the entire projects. The result wasan improvement in the gross margins in the later phases of the developments,and most particularly in 2005.

S,G,&A expensesincreased due to real estate commissions paid on the sales of lots. Additionalincreases were due to accruals for profit-sharing payments which will be madeto Outdoor Resorts of America upon completion of the project. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

Operating income increaseddue to improvements in sales and gross margins that were only slightly offsetby higher S,G,&A costs*.*

**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities. During 2006, the Companygenerated cash of $45.3 million from operating activities and had a net cashbalance of $5.0 million at December 30, 2006. The Company recognized $17.9million from net income and non-cash expenses such as depreciation, amortization,and stock based compensation. Major sources of cash flows from operatingactivities include a decrease in accounts receivable of $21.1 million, adecrease in inventories of $27.4 million, a decrease in resort lot inventoriesof $1.1 million, an increase in the warranty reserve of $902,000, an increasein deferred revenue of $883,000, an increase in accrued expenses and otherliabilities of $7.2 million, and a decrease in assets from discontinuedoperations of $4.9 million. The uses of cash in 2006 included an increase of$1.9 million in net deferred income tax assets, an increase of $16.3 million inland held for development, an increase of $1.3 million in prepaid expenses, adecrease of $5.7 million in trade accounts payable, a decrease of $3.7 millionin product liability reserves, and an increase in income tax receivables of$6.7 million. Decreases in accounts receivable are mostly the result of lowershipments of products near the end of 2006 versus the same period in 2005. Decreasesin inventory levels were the result of the Company reducing production outputin the fourth quarter of 2006, and actively seeking to draw down finished goodsinventories. 

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Decreasesin resort lot inventories are the result of the continued sell through of theCompany’s resort properties. Increases in warranty reserves were the result ofincreases in experience for warranty costs on some of our current model yearproducts. Increases in deferred revenues are related to revenue associated withMonaco Financial Services that the Company accrued during the year and willamortize over the length of the contract with GECDF and GECF. Increases in accruedexpenses and other liabilities are associated with increases for accruals forpromotions and advertising. Decreases in assets related to discontinuedoperations are for the sales of all remaining Royale Coach discontinuedproducts. Increases in net deferred tax assets are due to the reversal ofcertain tax reserves. Increases in land held for sale are related to thepurchase of a piece of property in La Quinta, California for a future resortproperty development. Increases in prepaid expenses include increases inprepaid insurance as well as deposits on properties under contract related tothe resort property projects. Decreases in trade accounts payable relate to thereductions in purchases for raw materials near the end of 2006 versus 2005. In2006, material was brought into the plants prior to the regularly scheduledshutdown and was paid for before the end of the year.

On November 18, 2005the Company amended its credit facilities to borrow $40.0 million of term debt(the “Term Debt”) to complete the acquisition of R-Vision. The revolving lineof credit remains at $105.0 million. At the end of the 2006 year, borrowingsoutstanding on the revolving line of credit (the “Revolving Loan”) were $2.0million, and Term Debt borrowings were $34.8 million. At the election of theCompany, the Revolving Loan and the Term Debt bear interest at varying ratesthat fluctuate based on the Prime rate or LIBOR, and are determined based onthe Company’s leverage ratio. The Company also pays interest quarterly on theunused available portion of the Revolving Loan at varying rates, determined bythe Company’s leverage ratio. The Revolving Loan is due and payable in full on November 17,2009 and requires interest payments quarterly. The Term Debt requires quarterlyinterest payments and quarterly principal payments of $1.4 million, with afinal balloon payment of $12.9 million due on November 18, 2010. Both theRevolving Loan and Term Debt are collateralized by all the assets of theCompany and the credit facilities include various restrictions and financialcovenants. The Company was in compliance with these covenants at December 30,2006. The Company utilizes “zero balance” bank disbursement accounts in whichan advance on the line of credit is automatically made for checks clearing eachday. Since the balance of the disbursement account at the bank returns to zeroat the end of each day, the outstanding checks of the Company are reflected asa liability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. The cash balance at December 30, 2006 isthe cash maintained in the R-Vision bank accounts held with a differentfinancial institution and thus not combined with the Company’s net bookoverdraft balance.

In November 2005, theCompany obtained a term loan of $500,000 from the State of Oregon in connectionwith the relocation of jobs to the Coburg, Oregon production facilities fromthe Bend, Oregon facility. The principal and interest is due on April 30,2009. The loan bears a 5% annual interest rate.

The Company’s principalworking capital requirements are for purchases of inventory and financing oftrade receivables. Many of the Company’s dealers finance product purchasesunder wholesale floor plan arrangements with third parties as described below. AtDecember 30, 2006, the Company had working capital of approximately $109.8million, a decrease of $17.4 million from working capital of $127.2 million at December31, 2005. The Company has been using short-term credit facilities and operatingcash flow to finance its capital expenditures.

The Company believes thatcash flow from operations and funds available under its anticipated creditfacilities will be sufficient to meet the Company’s liquidity requirements forthe next 12 months.* The Company’s capital expenditures were $9.3 million in2006, which included costs related to additions of 

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automatedmachinery in many of its production facilities, upgrades to its informationsystems infrastructure, and other various capitalized upgrades to existingfacilities. The Company anticipates that capital expenditures for all of 2007will be approximately $10 to $12 million, which includes expenditures topurchase additional machinery and equipment in both the Company’s Coburg,Oregon and Wakarusa, Indiana facilities, as well as upgrades to existinginformation systems infrastructures.* The Company may require additional equityor debt 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 alsofrom time to time seek to acquire businesses that would complement the Company’scurrent business, and any such acquisition could require additional financing. Therecan be no assurance that additional financing will be available if required oron terms deemed favorable by the Company.

As is typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lending institutionsto finance their purchases of the Company’s products. Under the terms of thesefloor plan arrangements, institutional lenders customarily require therecreational vehicle manufacturer to agree to repurchase any unsold units ifthe dealer defaults on its credit facility from the lender, subject to certainconditions. The Company has agreements with several institutional lenders underwhich the Company currently has repurchase obligations. The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units. The Company’sobligations under these repurchase agreements vary from period to period up to15 months. At December 30, 2006, approximately $566.7 million of productssold by the Company to independent dealers were subject to potential repurchaseunder existing floor plan financing agreements with approximately 6.6%concentrated with one dealer. Historically, the Company has been successful inmitigating losses associated with repurchase obligations. During 2006, thelosses associated with the exercise of repurchase agreements were approximately$232,000, ($79,000, and $600,000 in 2005 and 2004, respectively). Grossrepurchase amounts for 2006, 2005, and 2004, were $4.5 million, $2.7 million,and $6.5 million, respectively. Dealers for the Company undergo credit reviewprior to becoming a dealer and periodically thereafter. Financial institutionsthat provide floor plan financing also perform credit reviews and floor checkson an ongoing basis. We closely monitor sales to dealers that are a highercredit risk. The repurchase period is limited, usually to a maximum of 15months. We believe these activities help to minimize the number of requiredrepurchases. Additionally, the repurchase agreement specifies that the dealeris required to make principal payments during the repurchase period. Since theCompany repurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount. Thislower repurchase amount helps mitigate our loss when we offer the inventory toanother dealer at an amount lower than the original invoice as incentive forthe dealer to take the repurchased inventory. This helps minimize the losses weincur on repurchased inventory.

**OFF-BALANCE SHEET ARRANGEMENTS**

As of December 30,2006, the Company did not have any off-balance sheet arrangements that have, orare reasonably likely to have, a current or future material effect on theCompany’s consolidated financial condition, results of operations, liquidity,capital expenditures or capital resources.

**CONTRACTUAL OBLIGATIONS**

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.

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**PAYMENTS DUE BY PERIOD**

| **Contractual Obligations ** | ** ** | ** ** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| ** **                             | ** ** | ** ** | ** ** | **(in thousands)**           | ** ** |
| Lines of  Credit(1)                    |       |       | $          | 0                                 |       |                            |       | $                               | 2,036      |           |       |      | $          | 0 |   |   |   | $ | 0 |   |   | $ | 2,036 |   |
| Long-Term Debt(2)                      |       |       | 5,714      |                              |       |                            | 11,928     |                            |       |           | 17,143     |      |       |   | 0 |   |   | 34,785 |   |
| Operating Leases(3)                    |       |       | 1,839      |                              |       |                            | 1,629      |                            |       |           | 1,402      |      |       |   | 1,768 |   |   | 6,638 |   |
| Total Contractual  Cash Obligations    |       |       | $          | 7,553                             |       |                            |       | $                               | 15,593     |           |       |      | $          | 18,545 |   |   |   | $ | 1,768 |   |   | $ | 43,459 |   |

 

**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(4)         |       |                    | $          | 0                                 |       |                            |       | $                               | 102,964    |           |       |      | $          | 0 |   |   |   | $ | 0 |   |   | $ | 102,964 |   |
| Guarantees(3)              |       |                    | 14,302     |                              |       |                            | 0          |                            |       |           | 0          |      |       |   | 0 |   |   | 14,302 |   |
| Repurchase  Obligations(5) |       |                    | 0          |                              |       |                            | 566,749    |                            |       |           | 0          |      |       |   | 0 |   |   | 566,749 |   |
| Purchase  Commitment(6)    |       |                    | 0          |                              |       |                            | 19,945     |                            |       |           | 0          |      |       |   | 0 |   |   | 19,945 |   |
| Total Commitments          |       |                    | $          | 14,302                            |       |                            |       | $                               | 689,658    |           |       |      | $          | 0 |   |   |   | $ | 0 |   |   | $ | 703,960 |   |

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(1)          See Note 8 of Notes tothe Consolidated Financial Statements. The amount listed represents theoutstanding balance at December 30, 2006.

(2)          See Note 9 of Notes tothe Consolidated Financial Statements.

(3)          See Note 14 of Notes tothe Consolidated Financial Statements.

(4)          See Note 8 of Notes tothe Consolidated Financial Statements. The amount listed represents availableborrowings on the line of credit at December 30, 2006.

(5)          Reflects obligationsunder manufacturer repurchase commitments. See Note 19 of Notes to theConsolidated Financial Statements.

(6)          SeeNote 20 of Notes to the Consolidated Financial Statements.

**INFLATION**

During 2005 and to alesser extent in 2006, we experienced increases in the prices of certaincommodity items that we use in the manufacturing of our products. Theseinclude, but are not limited to, steel, copper, aluminum, petroleum, and wood. Whilethese raw materials are not necessarily indicative of widespread inflationarytrends, they had an impact on our production costs. Accordingly, in the secondhalf of 2006 we adjusted selling prices to compensate for increases incommodity pricing. Also, due to increases in fuel prices, particularly in 2006,our cost of delivering coaches to our dealers has risen. Accordingly, we haveincreased our delivery charges subsequent to the end of 2006 to offset theserising costs. While we do not anticipate additional price increases, we mayfrom time to time increase our prices to maintain gross profit margins. If weshould continue to experience adverse trends in these prices it could have amaterial adverse impact on our business going forward. See “Results of Operations2006 Compared with 2005.”

**CRITICAL ACCOUNTINGPOLICIES**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate our 

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estimates, including thoserelated to warranty costs, product liability, and impairment of goodwill. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies and related judgments andestimates affect the preparation of our consolidated financial statements.

**WARRANTY COSTS**   Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis). These estimates are based on historical average repaircosts, as well as other reasonable assumptions as have been deemed appropriateby management.

**PRODUCT LIABILITY**   TheCompany provides an estimate for accrued product liability based on currentpending cases, as well as for those cases which are incurred but not reported. Thisestimate is developed by legal counsel based on professional judgment, as wellas historical experience.

**IMPAIRMENT OF GOODWILL**   TheCompany assesses the potential impairment of goodwill in accordance withFinancial Accounting Standards Board (FASB) Statement No. 142. This annualtest involves management comparing the fair value of each of the Company’sreporting units, to the respective carrying amounts, including goodwill, of thenet book value of the reporting unit, to determine if goodwill has beenimpaired. The Company uses an estimate of discounted future cash flows todetermine fair value for each reporting unit.

**INVENTORY ALLOWANCE**   TheCompany writes down its inventory for obsolescence, and the difference betweenthe cost of inventory and its estimated fair market value. These write-downsare based on assumptions about future sales demand and market conditions. Ifactual sales demand or market conditions change from those projected bymanagement, additional inventory write-downs may be required.

**INCOME TAXES**   Inconjunction with preparing its consolidated financial statements, the Companymust estimate its income taxes in each of the jurisdictions in which itoperates. This process involves estimating actual current tax expense togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the consolidated balance sheets.The Company must then assess the likelihood that the deferred tax assets willbe recovered from future taxable income, and to the extent management believesthat recovery is not likely, a valuation allowance must be established.Significant management judgment is required in determining the Company’sprovision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets. A discussion ofthe income tax provision and the components of the deferred tax assets andliabilities can be found in Note 12 to the Company’s consolidated financialstatements.

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

**NEW ACCOUNTINGPRONOUNCEMENTS**

*FIN 48*

In June 2006, the Board issued FIN 48, “Accountingfor Uncertainty in Income Taxes” (the “Interpretation”). The Interpretationclarifies the accounting for uncertainty in income taxes recognized in 

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accordance with FASB 109, “Accountingfor Income Taxes” by defining a criterion that an individual tax position mustbe met for any part of the benefit to be recognized in the financial statements.The Interpretation is effective for fiscal years beginning after December 15,2006.

We have reviewed theprovisions of FIN 48, and believe there will be no significant impact to thefinancial statements. We will adopt the Interpretation for the fiscal yearbeginning 2007.

*FAS 157*

In September 2006, the Board issued FAS 157, “FairValue Measurements.” The Statement defines fair value, establishes a frameworkfor measuring fair value, and expands disclosure requirements regarding fairvalue measurements.

FAS 157 is effective forfiscal years beginning after November 15, 2007. We are reviewing the provisionsof the Statement and will adopt it for the fiscal year beginning 2008.

*FAS 159*

In February 2007, the Board issued FAS 159, “FairValue Option for Financial Assets and Financial Liabilities.” This statementpermits entities to choose to measure many financial instruments and certainother items at fair value that are not currently required to be measured atfair value.

FAS 159 is effective forfiscal years beginning after November 15, 2007. We are reviewing theprovisions of this statement and will adopt it for the fiscal year beginning2008.

*SAB 108*

On September 13, 2006the SEC staff issued SAB 108 which provides guidance for companies with respectto quantifying financial statement misstatements. Specifically, SAB 108addresses immaterial differences and how they relate to the balance sheet aswell as the income statement. We adopted SAB 108 without any impact to thefinancial statements.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks related to fluctuationsin interest rates on our borrowings. We do not currently use rate swaps, futurescontracts or options on futures, or other types of derivative financialinstruments. Our line of credit permits a combination of fixed and variableinterest rate options which allows us to minimize the effect of rising interestrates by locking in fixed rates for periods of up to 6 months. We believe thesefeatures of our credit facilities help us reduce the risk associated withinterest rate fluctuations.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEXTO FINANCIAL STATEMENTS**
|                                                                                                                                                     | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Monaco Coach  Corporation—Consolidated Financial Statements:                                                                                   |       |       |
| Report  of Independent Registered Public Accounting Firm                                                                                            |       |       |   |
| Consolidated  Balance Sheets as of December 31, 2005 and December 30, 2006                                                                |       |       |   |
| Consolidated  Statements of Income for the Years Ended January 1, 2005,  December 31, 2005, and December 30, 2006                    |       |       |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended January 1, 2005,  December 31, 2005, and December 30, 2006 |       |       |   |
| Consolidated  Statements of Cash Flows for the Years Ended January 1, 2005,  December 31, 2005, and December 30, 2006                |       |       |   |
| Notes to Consolidated  Financial Statements                                                                                                         |       |       |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

**To the Stockholders and Board ofDirectors of Monaco Coach Corporation:**

We have completedintegrated audits of Monaco Coach Corporation’s consolidated financialstatements and of its internal control over financial reporting as of December 30,2006, in accordance with the standards of the Public Company AccountingOversight Board (United States). Our opinions, based on our audits, arepresented below.

*Consolidated financial statements*

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of Monaco Coach Corporation and its subsidiaries****at December 30, 2006 and December 31, 2005, andthe results of their operations and their cash flows for each of the threeyears in the period ended December 30, 2006 in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. Anaudit of financial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

As described in Note 1 to the consolidated financialstatements, the Company changed the manner in which it accounts for share-basedcompensation in 2006.

*Internal control over financialreporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reporting appearingunder Item 9A, that the Company maintained effective internal control overfinancial reporting as of December 30, 2006 based on criteria establishedin *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO),is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 30, 2006, basedon criteria established in *Internal Control - IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

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

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.
| /s/ PricewaterhouseCoopers LLP |   |   |
|--------------------------------|--------|--------|
| Portland, Oregon               |
| March 14,  2007           |

 

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

| ** **                                                                                                                   | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Cash                                                                                                                         |       |                        | $          | 586                         |       |   |   | $ | 4,984 |   |   |
| Trade receivables, net                                                                                                       |       |                        | 102,666    |                        |       |   | 81,588 |   |   |
| Inventories, net                                                                                                             |       |                        | 183,292    |                        |       |   | 155,871 |   |   |
| Resort lot inventory                                                                                                         |       |                        | 9,135      |                        |       |   | 7,997 |   |   |
| Prepaid expenses                                                                                                             |       |                        | 4,364      |                        |       |   | 5,624 |   |   |
| Income taxes receivable                                                                                                      |       |                        | 206        |                        |       |   | 6,901 |   |   |
| Deferred income taxes                                                                                                        |       |                        | 36,345     |                        |       |   | 38,038 |   |   |
| Discontinued operations                                                                                                      |       |                        | 4,922      |                        |       |   | 0 |   |   |
| Total current assets                                                                                                         |       |                        | 341,516    |                        |       |   | 301,003 |   |   |
| Property, plant, and  equipment, net                                                                                         |       |                        | 159,304    |                        |       |   | 153,895 |   |   |
| Land held for  development                                                                                                   |       |                        | 0          |                        |       |   | 16,300 |   |   |
| Debt issuance costs net  of accumulated amortization of $678, and $912, respectively                                         |       |                        | 695        |                        |       |   | 540 |   |   |
| Goodwill                                                                                                                     |       |                        | 85,952     |                        |       |   | 86,412 |   |   |
| Total assets                                                                                                                 |       |                        | $          | 587,467                     |       |   |   | $ | 558,150 |   |   |
| **LIABILITIES**                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                         |       |                        |       |                        |       |   |   |   |   |
| Book overdraft                                                                                                               |       |                        | $          | 14,550                      |       |   |   | $ | 16,626 |   |   |
| Current portion of long  term debt                                                                                           |       |                        | 5,714      |                        |       |   | 5,714 |   |   |
| Line of credit                                                                                                               |       |                        | 25,000     |                        |       |   | 2,036 |   |   |
| Accounts payable                                                                                                             |       |                        | 78,299     |                        |       |   | 72,591 |   |   |
| Product liability  reserve                                                                                                   |       |                        | 19,275     |                        |       |   | 15,764 |   |   |
| Product warranty reserve                                                                                                     |       |                        | 32,902     |                        |       |   | 33,804 |   |   |
| Accrued expenses and  other liabilities                                                                                      |       |                        | 37,732     |                        |       |   | 44,364 |   |   |
| Discontinued operations                                                                                                      |       |                        | 853        |                        |       |   | 298 |   |   |
| Total current  liabilities                                                                                                   |       |                        | 214,325    |                        |       |   | 191,197 |   |   |
| Long-term debt, less  current portion                                                                                        |       |                        | 34,786     |                        |       |   | 29,071 |   |   |
| Deferred income taxes                                                                                                        |       |                        | 21,624     |                        |       |   | 21,678 |   |   |
| Other long-term  liabilities                                                                                                 |       |                        | 0          |                        |       |   | 883 |   |   |
| Total liabilities                                                                                                            |       |                        | 270,735    |                        |       |   | 242,829 |   |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                |       |                        |       |                        |       |   |   |   |   |
| Preferred stock, $.01  par value; 1,934,783 shares authorized, no shares outstanding                                         |       |                        |       |                        |       |   |   |   |   |
| Common stock, $.01 par  value; 50,000,000 shares authorized, 29,561,766 and 29,769,356 issued and  outstanding, respectively |       |                        | 296        |                        |       |   | 298 |   |   |
| Additional paid-in  capital                                                                                                  |       |                        | 59,005     |                        |       |   | 63,722 |   |   |
| Retained earnings                                                                                                            |       |                        | 257,431    |                        |       |   | 251,301 |   |   |
| Total stockholders’  equity                                                                                             |       |                        | 316,732    |                        |       |   | 315,321 |   |   |
| Total liabilities and  stockholders’ equity                                                                             |       |                        | $          | 587,467                     |       |   |   | $ | 558,150 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF INCOMEfor the years ended January 1, 2005, December 31, 2005, and December 30, 2006(in thousands of dollars, except share and per share data)**

| ** **                                                                  | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales                                                                   |       | $          | 1,386,269  |       | $          | 1,236,238  |       | $ | 1,297,986 |   |
| Cost of sales                                                               |       | 1,217,457  |       | 1,111,468  |       | 1,173,443  |       |
| Gross profit                                                                |       | 168,812    |       | 124,770    |       | 124,543    |       |
| Selling, general, and administrative expenses                               |       | 109,145    |       | 113,179    |       | 120,465    |       |
| Plant relocation  costs                                                     |       | 0          |       | 4,370      |       | 269        |       |
| Operating income                                                            |       | 59,667     |       | 7,221      |       | 3,809      |       |
| Other income, net                                                           |       | 343        |       | 255        |       | 615        |       |
| Interest expense                                                            |       | (1,547     | )          | (1,820     | )          | (4,430     | )          |
| Income (loss) before income taxes and discontinued  operations              |       | 58,463     |       | 5,656      |       | (6         | )          |
| Provision for (benefit from) income taxes from  continuing operations       |       | 21,914     |       | 1,687      |       | (992       | )          |
| Income from continuing operations                                           |       | 36,549     |       | 3,969      |       | 986        |       |
| Income (loss) from discontinued operations, net of  tax provision (benefit) |       | 156        |       | (1,321     | )          | 18         |       |
| Net income                                                                  |       | $          | 36,705     |       | $          | 2,648      |       | $ | 1,004 |   |
| Earnings (loss) per common share:                                           |       |       |       |       |       |       |       |
| Basic from continuing operations                                            |       | $          | 1.24       |       | $          | 0.13       |       | $ | 0.03 |   |
| Basic from discontinued operations                                          |       | 0.01       |       | (0.04      | )          | 0.00       |       |
| Basic                                                                       |       | $          | 1.25       |       | $          | 0.09       |       | $ | 0.03 |   |
| Diluted from continuing operations                                          |       | $          | 1.22       |       | $          | 0.13       |       | $ | 0.03 |   |
| Diluted from discontinued operations                                        |       | 0.01       |       | (0.04      | )          | 0.00       |       |
| Diluted                                                                     |       | $          | 1.23       |       | $          | 0.09       |       | $ | 0.03 |   |
| Weighted average common shares outstanding:                                 |       |       |       |       |       |       |       |
| Basic                                                                       |       | 29,370,455 |       | 29,516,794 |       | 29,712,957 |       |
| Diluted                                                                     |       | 29,958,646 |       | 29,858,036 |       | 29,902,830 |       |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYfor the years ended January 1, 2005, December 31, 2005, and December 30,2006(in thousands of dollars, except share data)**

| ** **                              | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                              | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balances,  January 3, 2004         |       | 29,246,143            |       |        | $          | 292            |       |         |       | $          | 54,919     |   |   | $ | 231,037 |   | $ | 286,248 |   |
| Issuance of  common stock               |       | 179,644               |       |        | 2          |           |       |         | 2,045      |       |       |   |   | 2,047 |   |
| Tax benefit of  stock options exercised |       |                  |       |        |       |           |       |         | 490        |       |       |   |   | 490 |   |
| Dividends paid                          |       |                  |       |        |       |           |       |         |       |       |       | (5,874 | ) | (5,874 | ) |
| Net income                              |       |                  |       |        |       |           |       |         |       |       |       | 36,705 |   | 36,705 |   |
| Balances,  January 1, 2005         |       | 29,425,787            |       |        | 294        |           |       |         | 57,454     |       |       | 261,868 |   | 319,616 |   |
| Issuance of  common stock               |       | 135,979               |       |        | 2          |           |       |         | 1,420      |       |       |   |   | 1,422 |   |
| Stock-based compensation  expense       |       |                  |       |        |       |           |       |         | 16         |       |       |   |   | 16 |   |
| Tax benefit of  stock options exercised |       |                  |       |        |       |           |       |         | 115        |       |       |   |   | 115 |   |
| Dividends paid                          |       |                  |       |        |       |           |       |         |       |       |       | (7,085 | ) | (7,085 | ) |
| Net income                              |       |                  |       |        |       |           |       |         |       |       |       | 2,648 |   | 2,648 |   |
| Balances,  December 31, 2005       |       | 29,561,766            |       |        | 296        |           |       |         | 59,005     |       |       | 257,431 |   | 316,732 |   |
| Issuance of  common stock               |       | 207,590               |       |        | 2          |           |       |         | 1,797      |       |       |   |   | 1,799 |   |
| Stock-based  compensation expense       |       |                  |       |        |       |           |       |         | 2,759      |       |       |   |   | 2,759 |   |
| Tax benefit of  stock options exercised |       |                  |       |        |       |           |       |         | 161        |       |       |   |   | 161 |   |
| Dividends paid                          |       |                  |       |        |       |           |       |         |       |       |       | (7,134 | ) | (7,134 | ) |
| Net income                              |       |                  |       |        |       |           |       |         |       |       |       | 1,004 |   | 1,004 |   |
| Balances,  December 30, 2006       |       | 29,769,356            |       |        | $          | 298            |       |         |       | $          | 63,722     |   |   | $ | 251,301 |   | $ | 315,321 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**MONACO COACH CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSfor the years ended January 1, 2005, December 31, 2005, and December 30,2006(in thousands of dollars)**

| ** **                                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Increase (Decrease) in Cash:**                                                                  |       |     |       |     |       |     |       |
| Cash flows from operating activities:                                                             |       |     |       |     |       |     |       |
| Net income                                                                                        |       | $        | 36,705     |     | $          | 2,648    |       | $ | 1,004 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities: |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                    |       | 10,670   |       | 10,678   |       | 14,177   |       |
| Loss on disposal of  assets                                                                       |       | 229      |       | 276      |       | 14       |       |
| Deferred income taxes                                                                             |       | 2,833    |       | (2,943   | )          | (1,900   | )          |
| Stock-based compensation  expense                                                                 |       |     |       | 16       |       | 2,759    |       |
| Change in assets and liabilities:                                                                 |       |     |       |     |       |     |       |
| Trade receivables, net                                                                            |       | (38,231  | )          | 39,203   |       | 21,078   |       |
| Inventories                                                                                       |       | (42,743  | )          | (2,916   | )          | 27,421   |       |
| Resort lot inventory                                                                              |       | 6,663    |       | 145      |       | 1,138    |       |
| Land held for  development                                                                        |       | 0        |       | 0        |       | (16,300  | )          |
| Prepaid expenses                                                                                  |       | (2,172   | )          | 1,422    |       | (1,270   | )          |
| Accounts payable                                                                                  |       | 14,737   |       | (5,947   | )          | (5,708   | )          |
| Product liability  reserve                                                                        |       | (489     | )          | (1,619   | )          | (3,762   | )          |
| Product warranty reserve                                                                          |       | 2,631    |       | (4,486   | )          | 902      |       |
| Income taxes receivable                                                                           |       | (1,308   | )          | (2,293   | )          | (6,664   | )          |
| Deferred revenue                                                                                  |       | 0        |       | 0        |       | 883      |       |
| Accrued expenses and  other liabilities                                                           |       | 5,242    |       | 805      |       | 7,224    |       |
| Discontinued operations                                                                           |       | 317      |       | (662     | )          | 4,271    |       |
| Net cash provided by  (used in) operating activities                                              |       | (4,916   | )          | 34,327   |       | 45,267   |       |
| Cash flows from investing activities:                                                             |       |     |       |     |       |     |       |
| Additions to property,  plant, and equipment                                                      |       | (12,305  | )          | (17,718  | )          | (9,324   | )          |
| Proceeds from sale of  assets                                                                     |       | 1,936    |       | 123      |       | 215      |       |
| Payment for business  acquisition, net of cash acquired                                           |       | 0        |       | (54,601  | )          | 0        |       |
| Discontinued operations                                                                           |       | (9       | )          | (4       | )          | 0        |       |
| Net cash used in  investing activities                                                            |       | (10,378  | )          | (72,200  | )          | (9,109   | )          |
| Cash flows from financing activities:                                                             |       |     |       |     |       |     |       |
| Book overdraft                                                                                    |       | 1,432    |       | 12,475   |       | 2,076    |       |
| Borrowings (payments) on  line of credit, net                                                     |       | 34,062   |       | (9,062   | )          | (22,964  | )          |
| Borrowings (payments) on  long-term notes payable                                                 |       | (30,000  | )          | 40,500   |       | (5,715   | )          |
| Dividends paid                                                                                    |       | (5,874   | )          | (7,085   | )          | (7,134   | )          |
| Issuance of common stock                                                                          |       | 2,536    |       | 1,537    |       | 1,799    |       |
| Tax benefit of stock  options exercised                                                           |       | 0        |       | 0        |       | 161      |       |
| Debt issuance costs                                                                               |       | (416     | )          | (298     | )          | (79      | )          |
| Discontinued operations                                                                           |       | 156      |       | 392      |       | 96       |       |
| Net cash provided by  (used in) financing activities                                              |       | 1,896    |       | 38,459   |       | (31,760  | )          |
| Net change in cash                                                                                |       | (13,398  | )          | 586      |       | 4,398    |       |
| Cash at beginning of  period                                                                      |       | 13,398   |       | 0        |       | 586      |       |
| Cash at end of period                                                                             |       | $        | 0          |     | $          | 586      |       | $ | 4,984 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**MONACO COACH CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**        BUSINESS AND SIGNIFICANT ACCOUNTINGPOLICIES:

**Business**

Monaco Coach Corporation and its subsidiaries (the “Company”)manufacture premium motor coaches and towable recreational vehicles atmanufacturing facilities in Oregon and Indiana. These products are sold to independentdealers primarily throughout the United States and Canada. In addition, theCompany owns two motor coach resort properties, the developed lots are sold toretail customers, and one parcel of land that will be developed into a resort.

The Company’s corebusiness activities are comprised of three distinct operations. The first isthe design, manufacture, and sale of motorized recreational vehicles. Thesecond is the design, manufacture, and sale of towable recreational vehicles. Thethird is the development and sale of motor coach recreation resort lots. Accordingly,the Company has presented segmented financial information for these threesegments at Note 11 of the Company’s Notes to Consolidated FinancialStatements.

**ConsolidationPolicy**

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

**Fiscal Period**

The Company follows a52/53 week fiscal year period ending on the Saturday closest to December 31.Interim periods also end on the Saturday closest to the calendar quarter end. Thefiscal periods were 52 weeks long for 2004, 2005, and 2006. All references toyears in the consolidated financial statements relate to fiscal years ratherthan calendar years.

**Estimates andIndustry Factors**

*Estimates*—The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The Company bases estimates on various assumptions that arebelieved to be reasonable under the circumstances. Management is continuallyevaluating and updating these estimates, and it is possible that theseestimates will change in the near future.

*Credit Risk*—TheCompany distributes its motorized and towable recreational vehicles through anindependent dealer network for recreational vehicles. Sales to one customerwere approximately 11% of net revenues for fiscal year 2004, 11% for 2005, and9% for 2006. The net revenues generated from this customer are reported in themotorized and towable segments. No other individual dealers represented over10% of net revenues in 2004, 2005, or 2006. The loss of a significant dealer ora substantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations, and financialcondition. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions.**For resort lot customers, funds are required at the time ofclosing. For our RV dealers, terms are net 

46

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30 days for units that arefinanced by a third party lender. For open receivables, terms vary from net 30days to net 180 days, depending on the specific agreement. Terms beyond 30 daysgenerally require additional collateral, as well as security interest in theinventory sold.

As of December 30,2006, total trade receivables were $81.6 million, net of $708,000 for allowancefor doubtful accounts ($102.7 million, net of $781,000 at December 31,2005). At December 30, 2006 approximately $49.5 million, or 60.7% of theoutstanding accounts receivable balance is concentrated among floor plan lenders.The remaining open $32.1 million of secured trade receivables were concentratedsubstantially all with one dealer. Terms of open trade receivables are grantedby the Company, on a very limited basis, to dealers who have been subjected toevaluative credit processes conducted by the Company. These processes includeevaluating the strength of the dealership’s balance sheet, how long thedealership has been in existence, reputation within the industry, and creditreferences.

Concentrations of creditrisk exist for accounts receivable and repurchase agreements (see Note 19),primarily for the Company’s largest dealers. As of December 30, 2006, theCompany had one dealer that comprised 35% of the outstanding trade receivables.The Company generally sells to dealers throughout the United States and thereis no geographic concentration of credit risk.

*Product WarrantyReserve*—Estimated warranty costs are provided for atthe time of sale of products with warranties covering the products for up toone year from the date of retail sale (five years for the front and sidewallframe structure, and three years on the Roadmaster chassis). These estimatesare based on historical average repair costs, as well as other reasonableassumptions deemed appropriate by management. The adjustments are related tothe R-Vision acquisition. The following table discloses significant changes inthe product warranty reserve:

| ** **        | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Beginning balance |       | $                       | 29,252     |     | $          | 31,884   |       | $ | 32,902 |   |
| Expense           |       | 34,126                  |       | 28,861   |       | 38,884   |       |
| Payments          |       | (31,494                 | )          | (33,348  | )          | (37,982  | )          |
| Adjustments       |       | 0                       |       | 5,505    |       | 0        |       |
| Ending balance    |       | $                       | 31,884     |     | $          | 32,902   |       | $ | 33,804 |   |

 

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

| ** **        | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Beginning balance |       | $                       | 20,723     |     | $          | 20,233   |       | $ | 19,275 |   |
| Expense           |       | 11,044                  |       | 9,635    |       | 10,000   |       |
| Payments          |       | (11,534                 | )          | (11,254  | )          | (13,689  | )          |
| Adjustments       |       | 0                       |       | 661      |       | 178      |       |
| Ending balance    |       | $                       | 20,233     |     | $          | 19,275   |       | $ | 15,764 |   |

 

**Inventories**

Inventories consist of rawmaterials, work-in-process, and finished recreational vehicles and are stated atthe lower of cost (first-in, first-out) or market. Cost of work-in-process andfinished recreational vehicles includes material, labor, and manufacturingoverhead costs.

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**Inventory Allowance**

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

**Resort Lot Inventory**

Resort lot inventoriesconsist of construction-in-progress on motor coach properties, as well as fullydeveloped motor coach properties. These properties are stated at the lower ofcost (specific identification) or market. Costs of land, construction, andinterest incurred during construction are capitalized as the cost basis forlots available for sale. The cost of land is allocated to each phase of thetotal project based on acreage used. Allocated land cost plus all other costsof construction for each phase have been allocated to each developed lot on apro rata basis, using individual lot selling prices as a percent of total salesfor the total development.

**Land Held for Development**

In June 2006, theCompany acquired undeveloped land near La Quinta, California for $16.3 million.The 80 acre parcel will be developed into a motorhome resort with approximately400 lots available for sale beginning late 2007 or early 2008.

**Property, Plant, and Equipment**

Property, plant, andequipment, including significant improvements thereto, are stated at cost lessaccumulated depreciation and amortization. Cost includes expenditures for majorimprovements, replacements and renewals and the net amount of interest costassociated with significant capital additions during periods of construction. Maintenanceand repairs are charged to expense as incurred. Replacements and renewals arecapitalized. When assets are sold, retired or otherwise disposed of, the costand accumulated depreciation are removed from the accounts and any resultinggain or loss is reflected in income.

The cost of plant andequipment is depreciated using the straight-line method over the estimateduseful lives of the related assets. Buildings are generally depreciated over 39years and equipment is depreciated over 3 to 10 years. Leasehold improvementsare amortized under the straight-line method based on the shorter of the leaseperiods or the estimated useful lives.

At each balance sheet date,management assesses whether there has been any triggering events that might indicatepermanent impairment in the value of property, plant, and equipment assets. Theamount of any such impairment is determined by comparing anticipatedundiscounted future cash flows from operating activities with the associatedcarrying value. The factors considered by management in performing thisassessment include current operating results, trends and prospects, as well asthe effects of obsolescence, demand, competition, and other economic factors.

**Brand Elements and Signage**

As part of its franchiseprogram for dealers, the Company places certain fixed assets at independentdealerships. These assets are comprised of informational computer kiosks, brandisland displays, furniture and fixtures, as well as outdoor storefront signage.These assets are leased to dealers over 10 years through an operating lease,and the Company depreciates the assets over their respective economic usefullives, generally 3 years. As of December 31, 2005 and December 30,2006 the brand elements and signage assets have a balance of approximately $3.1million and $4.9 million, respectively (net of accumulated depreciation ofapproximately $95,000 and $1.7 million, respectively). These assets areclassified with property, plant, and equipment.

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**Debt Issuance Costs**

Unamortized debt issuancecosts of $695,000, and $540,000 (at December 31, 2005, and December 30,2006, respectively), are being amortized on a straight-line basis over theterms of the related loans.

**Goodwill**

Goodwill represents the excess of the cost ofacquisition over the fair value of net assets acquired. Total goodwill of $86.4million as of December 30, 2006, included $55.3 million of goodwillarising from the various acquisitions of assets and operations prior to January 1,2005. The Company recorded $30.7 million of goodwill associated with the November 18,2005 acquisition of R-Vision. In 2006, the Company recorded additional goodwillof $490,000 related to adjustments to the allocation of the purchase price ofR-Vision. In 2006, the Company also recorded a reduction of $30,000 for the taxbenefit realized in 2006 on the excess of tax-deductible goodwill over goodwillfor financial reporting purposes related to R-Vision.

During2006, the Company reorganized its reporting structure which resulted in thesplitting of the RV segment information of the Motorized Recreational Vehiclereporting segment and the Towable Recreational Vehicle reporting segment. Theallocation of goodwill to the reporting segments was based on relative fairvalues in each segment. The amount of goodwill assigned to each reportablesegment and changes in carrying amounts of such is as follows (all dollarsrepresented are in thousands):

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

 

SFAS 142 requires thatmanagement assess at least annually whether there has been permanent impairmentin the value of goodwill at the individual reporting unit basis. To assesswhether or not there has been impairment, the Company’s management compares thefair value of each reporting unit to its carrying amount, including goodwill,of net book value to determine if goodwill has been impaired. The Companydetermines the fair value of each reporting unit using an estimate ofdiscounted future cash flows. As required by SFAS 142, management completed itsannual testing during 2004, 2005, and 2006 and has determined that there was noimpairment of goodwill.

**Deferred Revenue**

Deferred revenue of $883,000 as of December 30,2006 is related to the $1 million received from GE Commercial DistributionFinance Corporation (GECDFC) related to the Monaco Financial Services agreement.The deferred earnings are a nonrefundable incentive payment received fromGECDFC for use of the Company’s name in branding and are being recognized overthe term of the agreement, which is five years.

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**Stock-Based AwardPlans**

At December 30, 2006, the Company had threestock-based award plans (see Note 16). As of January 1, 2006, the Companyadopted the provisions of FAS 123R, “Share-Based Payments” (the “Statement”).The Statement replaces FAS 123, “Accounting for Stock-Based Compensation,” andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”The Statement establishes fair value as the measurement objective in accountingfor share-based payment arrangements and requires a fair-value-basedmeasurement method in accounting for share-based payments to employees, exceptfor equity instruments held by employee share ownership plans. We elected toadopt the modified prospective application method of the Statement.

Prior to the adoption, theCompany accounted for stock-based employee compensation plans under the recognitionand measurement principles of APB Opinion No. 25. No stock-based employeecompensation cost related to these options were reflected in net income ofprior periods, as all options granted under those plans had an exercise priceequal to the market value of the underlying Common Stock on the date of grant.

**Income Taxes**

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

The Company has elected toutilize the practical transition option provided by FAS 123R to determine itspool of windfall tax benefits that are available to absorb tax deficienciesrecognized subsequent to the Company’s adoption of FAS 123R.

**Revenue Recognition**

The Company recognizes revenue from the sale ofrecreational vehicles upon shipment and recognizes revenue from resort lotsales upon closing. The title and risk of loss pass to the dealers uponshipment of recreational vehicles. The Company does not offer any rights ofreturn to our dealers, or resort lot customers.

In December 2003, theSecurities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition in Financial Statements. SAB No. 104 provides guidancefor revenue recognition under certain circumstances. The Company has compliedwith the guidance provided by SAB No. 104 for fiscal years 2004, 2005, and2006.

**RepurchaseObligations**

Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany may execute a repurchase agreement. The Company has recorded aliability associated with the disposition of repurchased inventory. Todetermine the appropriate liability, the Company calculates a reserve based onan estimate of potential net losses and qualitative and quantitative factors, includingdealer inventory turn rates and the financial strength of individual dealers.

**Advertising andPrinting Costs**

The Company expensesadvertising and printing costs as incurred, except for prepaid show costs,which are expensed when the event takes place. Advertising and printing costs,including retail programs, are recorded as selling, general and administrativeexpenses, while discounts off of invoice, 

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or sales allowances(including wholesale volume incentives), are recorded as adjustments to netsales. During 2006, approximately $9.8 million ($12.4 million in 2004 and $11.6million in 2005) of advertising and printing costs were expensed.

**Research andDevelopment Costs**

Research and developmentcosts consist of salaries and employee benefits, contract services fees, utilities,materials and operating supplies and are charged to expense as incurred andwere $1.9 million in 2006 ($1.3 million in 2004 and $1.5 million in 2005).

**New AccountingPronouncements**

*FIN 48*

In June 2006, the Board issued FIN 48, “Accountingfor Uncertainty in Income Taxes” (the “Interpretation”). The Interpretationclarifies the accounting for uncertainty in income taxes recognized in accordancewith FASB 109, “Accounting for Income Taxes” by defining a criterion that anindividual tax position must be met for any part of the benefit to berecognized in the financial statements. The Interpretation is effective forfiscal years beginning after December 15, 2006.

We have reviewed theprovisions of FIN 48, and believe there will be no significant impact to thefinancial statements. We will adopt the Interpretation for the fiscal yearbeginning 2007.

*FAS 157*

In September 2006, the Board issued FAS 157, “FairValue Measurements.” The Statement defines fair value, establishes a frameworkfor measuring fair value, and expands disclosure requirements regarding fairvalue measurements.

FAS 157 is effective forfiscal years beginning after November 15, 2007. We are reviewing theprovisions of the Statement and will adopt it for the fiscal year beginning2008.

*FAS 159*

In February 2007, theBoard issued FAS 159, “Fair Value Option for Financial Assets and FinancialLiabilities.” This statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.

FAS 159 is effective forfiscal years beginning after November 15, 2007. We are reviewing theprovisions of this statement and will adopt it for the fiscal year beginning2008.

*SAB 108*

On September 13, 2006the SEC staff issued SAB 108 which provides guidance for companies with respectto quantifying financial statement misstatements. Specifically, SAB 108addresses immaterial differences and how they relate to the balance sheet aswell as the income statement. We adopted SAB 108 without any impact to thefinancial statements.

**Supplemental CashFlow Disclosures:**

| ** **                        | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Cash paid during  the period for: |       |                    |       |     |       |     |       |
| Interest                          |       | $                       | 964        |     | $          | 1,355    |       | $ | 4,099 |   |
| Income taxes                      |       | 19,531                  |       | 6,160    |       | 7,708    |       |
|                                   |            |                         |            |          |            |          |            |  |  |  |

 

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**2.      ACQUISITION:**

**R-Vision**

The Company announced on November 9, 2005 that ithad reached an agreement to acquire the Indiana-based R-Vision companies andaffiliates in an all cash transaction. The acquisition was completed on November 18,2005. The R-Vision companies and affiliates consist of R-Vision, Inc., R-VisionMotorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC collectivelyknown as “R-Vision.” R-Vision manufactures towable and motorizedrecreational vehicle products, and the acquisition was primarily to strengthenthe Company’s towable recreational vehicle segment. R-Vision’s results ofoperations for the period November 18, 2005 to December 31, 2005 areincluded in the consolidated financial statements of the Company.

Thecash paid for R-Vision, including transaction costs of $584,985, totaled$54,623,512, net of cash acquired. All the goodwill associated with theR-Vision acquisition was allocated to the towable recreational vehicle segment.This was based on the conclusion that the purchase price allocated to themotorized portion of R-Vision, based on relative fair values, did not exceedits carrying amount of net book value. Of the total goodwill acquired, $32.7million is expected to be deductible for tax purposes as of December 30,2006. The total R-Vision assets acquired and liabilities assumed of R-Visionbased on estimated fair values at November 18, 2005, is as follows:

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

 

The purchase price was derived from a calculation of amultiple of earnings before interest, taxes, depreciation and amortization fora trailing 12-month period (adjusted for certain non-recurring expenseitems), which exceeded the book value of R-Vision and generated goodwill of$30.7 million. The allocation of the purchase price and the related goodwillhas been adjusted in 2006 for the resolution of pre-acquisition contingenciesof $490,000 for estimates for reserve amounts related to product litigation anddeferred taxes established to account for certain book to tax basis differencesas of the acquisition date.

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

| ** **                         | ** ** | **2004 Unaudited**                                        | ** ** | **2005 Unaudited** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **(in thousands, except  per share data)** | ** ** |
| Net sales                          |       |                                                           | $          | 1,599,030               |       |   |   | $ | 1,455,189 |   |   |
| Net income                         |       |                                                           | 38,743     |                    |       |   | 12,079 |   |   |
| Diluted earnings  per common share |       |                                                           | $          | 1.29                    |       |   |   | $ | 0.40 |   |   |

 

**3.      DISCONTINUED OPERATIONS:**

During the third quarter of 2005, the Companyannounced that it planned to close its Royale Coach operations in Elkhart,Indiana. Royale Coach produces Prevost bus conversion motor coaches with pricepoints in excess of $1.4 million. Royale Coach sold approximately 20 coachesper year and was not a significant portion of the Company’s overall business.Plant closure costs of approximately $1.3 million (net of tax) wererecognized in 2005. The net income (loss) from discontinued operations for thefiscal years ended January 1, 2005, December 31, 2005 and December 30,2006 is net of a tax expense of $94,000, tax benefit of $868,000, and tax expenseof $28,000, respectively.

Theoperating results of Royale Coach are presented in the Company’s ConsolidatedStatements of Income as discontinued operations, net of income tax, and allprior periods have been reclassified. The components of discontinued operationsfor the periods presented are as follows.

| ** **                                                           | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                           | ** ** | **(in thousands)** | ** ** |
| Net sales                                                            |       | $                       | 10,974     |     | $          | 5,452    |       | $ | 4,835 |   |
| Cost of sales                                                        |       | 9,660                   |       | 5,923    |       | 4,916    |       |
| Gross profit (loss)                                                  |       | 1,314                   |       | (471     | )          | (81      | )          |
| Selling, general and administrative expenses                         |       | 1,064                   |       | 1,718    |       | (127     | )          |
| Income (loss) from discontinued operations before  income taxes |       | 250                     |       | (2,189   | )          | 46       |       |
| Income tax  expense (benefit)                                        |       | 94                      |       | (868     | )          | 28       |       |
| Income (loss)  from discontinued operations                          |       | $                       | 156        |     | $          | (1,321   | )          | $ | 18 |   |

 

**4.      PLANT RELOCATION**

During the second quarter of 2005, the Companyannounced plans to close the Bend, Oregon production operations and relocatethem to the Coburg, Oregon facility. The Bend, Oregon operations ceased as of June 15,2005. The Company recognized pre-tax charges in 2005 and 2006 of $4.4 millionand $269,000, respectively. The charges were primarily for the impairment ofproperty, plant and equipment and future rental expense related to thefacility.

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The accruedliability for restructuring reserves consists of the following:

| ** **                                   | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **(in thousands)**     | ** ** |
| Lease commitment                             |       |                        | $          | 753                         |       |   |   | $ | 29 |   |   |
| Impairment of  property, plant and equipment |       |                        | 510        |                        |       |   | 0 |   |   |
| Other                                        |       |                        | 155        |                        |       |   | 107 |   |   |
|                                         |       |                        | $          | 1,418                       |       |   |   | $ | 136 |   |   |

 

**5       INVENTORIES, NET:**

Inventoriesconsist of the following:

| ** **             | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **(in thousands)**     | ** ** |
| Raw materials          |       |                        | $          | 91,028                      |       |   |   | $ | 84,069 |   |   |
| Work-in-process        |       |                        | 61,393     |                        |       |   | 55,473 |   |   |
| Finished units         |       |                        | 43,134     |                        |       |   | 26,773 |   |   |
| Raw material  reserves |       |                        | (12,263    | )                           |       |   | (10,444 | ) |   |
|                   |       |                        | $          | 183,292                     |       |   |   | $ | 155,871 |   |   |

 

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

Property,plant, and equipment consist of the following:

| ** **                                      | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**     | ** ** |
| Land                                            |       |                        | $          | 15,146                      |       |   |   | $ | 15,226 |   |   |
| Buildings                                       |       |                        | 127,974    |                        |       |   | 128,073 |   |   |
| Equipment                                       |       |                        | 42,837     |                        |       |   | 45,341 |   |   |
| Furniture and  fixtures                         |       |                        | 18,529     |                        |       |   | 22,397 |   |   |
| Vehicles                                        |       |                        | 3,510      |                        |       |   | 3,473 |   |   |
| Leasehold  improvements                         |       |                        | 2,504      |                        |       |   | 2,002 |   |   |
| Brand elements  and signage                     |       |                        | 3,147      |                        |       |   | 6,617 |   |   |
| Construction in  progress                       |       |                        | 6,675      |                        |       |   | 3,398 |   |   |
| ** **                                      |       |                        | 220,322    |                        |       |   | 226,527 |   |   |
| Less accumulated  depreciation and amortization |       |                        | 61,018     |                        |       |   | 72,632 |   |   |
| ** **                                      |       |                        | $          | 159,304                     |       |   |   | $ | 153,895 |   |   |

 

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

Accruedexpenses and other liabilities consist of the following:

| ** **                                             | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
| Payroll,  vacation, payroll taxes and related accruals |       |                        | $          | 15,363                      |       |   |   | $ | 15,997 |   |   |
| Promotional and  advertising                           |       |                        | 7,693      |                        |       |   | 13,594 |   |   |
| Health insurance  reserves and premiums payable        |       |                        | 5,943      |                        |       |   | 5,997 |   |   |
| Resorts profit  sharing accruals                       |       |                        | 1,865      |                        |       |   | 3,700 |   |   |
| Other                                                  |       |                        | 6,868      |                        |       |   | 5,076 |   |   |
|                                                   |       |                        | $          | 37,732                      |       |   |   | $ | 44,364 |   |   |

 

**8.      LINE OF CREDIT:**

The Company’s credit facilities consist of a revolvingline of credit of up to $105.0 million. At the end of the 2006 fiscal year,borrowings outstanding on the revolving line of credit (the “Revolving Loan”)were $2.0 million. At the election of the Company, the Revolving Loan bearsinterest at varying rates that fluctuate based on the prime rate or LIBOR andare determined based on the Company’s leverage ratio. The Company also paysinterest quarterly on the unused available portion of the Revolving Loan atvarying rates, determined by the Company’s leverage ratio. The Revolving Loanis due and payable in full on November 17, 2009 and requires monthlyinterest payments. The Company also has an unused letter of credit of$2.8 million outstanding as of December 30, 2006.

The weighted-averageinterest rate on the outstanding borrowings under the Revolving Loan was 5.4%and 6.8% for 2005 and 2006, respectively. Interest expense on the unusedavailable portion of the line was $178,000 or 1.0% and $229,000 or 1.3% ofweighted average outstanding borrowings for 2005 and 2006, respectively. TheRevolving Loan is collateralized by substantially all the assets of the Company.The agreement contains restrictive covenants as to the Company’s leverageratio, current ratio, fixed charge coverage ratio, and tangible net worth. Asof December 30, 2006, the Company was in compliance with these covenants.

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

In November 2005, the Company amended its creditfacilities to borrow $40.0 million of term debt (the “Term Debt”) to effect theacquisition of R-Vision (see Note 2). In January 2007, the Company amendedits credit facilities agreement to modify certain restrictive covenants. At theend of the 2006 year, borrowings outstanding were $34.3 million. At theelection of the Company, the Term Debt bears interest at varying rates thatfluctuate based on the prime rate or LIBOR and are determined based on theCompany’s leverage ratio. The Term Debt requires quarterly interest paymentsand quarterly principal payments of $1.4 million, with a final balloon paymentof $12.9 million due on November 18, 2010. As of year end 2006, the weighted-averageinterest rate on the Term Debt was 7.1%. The Term Debt is collateralized by allthe assets of the Company. The agreement contains restrictive covenants as tothe Company’s leverage ratio, current ratio, fixed charge coverage ratio, andtangible net worth. As of December 30, 2006, the Company was in compliancewith these covenants.

In November 2005, the Company obtained a termloan of $500,000 from the State of Oregon in connection with the relocation ofjobs to the Coburg, Oregon production facilities from the Bend, Oregon facility.The principal and interest is due on April 30, 2009. The loan bears a 5%annual interest rate.

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Thefollowing table displays the scheduled principal payments by year that will bedue in thousands on the term loans.

| **Year** | ** ** | ** ** | ** ** | **Amount of  payment due** | ** ** |
|----------|------------|------------|------------|--------------------------------------|------------|
| 2007     |       |       | $          | 5,714                                |       |   |
| 2008     |       |       | 5,714      |                                 |       |
| 2009     |       |       | 6,214      |                                 |       |
| 2010     |       |       | 17,143     |                                 |       |
|     |       |       | $          | 34,785                               |       |   |

 

**10.**  PREFERRED STOCK:

The Company has authorized“blank check” preferred stock (1,934,783 shares authorized, $.01 par value)(“Preferred Stock”), which may be issued from time to time in one or moreseries upon authorization by the Company’s Board of Directors. The Board ofDirectors, without further approval of the stockholders, is authorized to fixthe dividend rights and terms, conversion rights, voting rights, redemptionrights and terms, liquidation preferences, and any other rights, preferences,privileges, and restrictions applicable to each series of the Preferred Stock.There were no shares of Preferred Stock outstanding as of December 31,2005 or December 30, 2006.

**11.   SEGMENT REPORTING:**

The Company is a leading manufacturer of premiumClass A, B and C motor coaches (Motorized Recreational Vehicle Segment)and towable recreational vehicles (Towable Recreational Vehicle Segment). Ourproduct line currently consists of a broad line of motor coaches, fifth wheeltrailers, travel trailers, and specialty trailers under the “Monaco,” “HolidayRambler,” “Beaver,” “Safari,” “McKenzie,” “R-Vision,” “Bison,” and “Roadmaster”brand names.

In addition to the manufacturing of premiumrecreational vehicles, the Company also owns and operates two motorhome resortproperties (Motorhome Resort Segment) located in Las Vegas, Nevada, and Indio,California. In addition to these two resorts, the Company has also acquired apiece of property in southern California, and has two pieces of property undercontract in southern Florida. These properties are planned to be developed andsold over the next two to five years. The resorts offer sales of individuallots to recreational vehicle owners and also offer a common interest in theamenities at the resort. The resorts provide destination locations for premiumClass A recreational vehicle owners and help to promote the recreationalvehicle lifestyle.

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Thefollowing table provides the results of operations of the three segments of theCompany for the years 2004, 2005, and 2006, respectively.

| ** **                                    | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006**  | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------|------------|-----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| **Motorized Recreational Vehicle  Segment**   |       |                    |       |     |       |      |       |
| Net sales                                     |       | $                       | 1,234,233  |     | $          | 1,017,766 |       | $ | 941,657 |   |
| Cost of sales                                 |       | 1,080,972               |       | 925,014  |       | 869,110   |       |
| Gross profit                                  |       | 153,261                 |       | 92,752   |       | 72,547    |       |
| Selling, general and administrative expenses  |       | 38,566                  |       | 46,331   |       | 44,306    |       |
| Corporate  overhead allocation                |       | 51,470                  |       | 43,148   |       | 34,172    |       |
| Plant relocation costs                        |       | 0                       |       | 4,370    |       | 269       |       |
| Operating income (loss)                       |       | $                       | 63,225     |     | $          | (1,097    | )          | $ | (6,200 | ) |
| **Towable  Recreational Vehicle Segment**     |       |                    |       |     |       |      |       |
| Net sales                                     |       | $                       | 129,331    |     | $          | 185,433   |       | $ | 324,342 |   |
| Cost of sales                                 |       | 123,314                 |       | 174,242  |       | 292,876   |       |
| Gross profit                                  |       | 6,017                   |       | 11,191   |       | 31,466    |       |
| Selling, general and administrative expenses  |       | 4,827                   |       | 5,603    |       | 15,323    |       |
| Corporate  overhead allocation                |       | 5,393                   |       | 7,588    |       | 14,737    |       |
| Operating income (loss)                       |       | $                       | (4,203     | )        | $          | (2,000    | )          | $ | 1,406 |   |
| **Motorhome  Resorts Segment**                |       |                    |       |     |       |      |       |
| Net sales                                     |       | $                       | 22,705     |     | $          | 33,039    |       | $ | 31,987 |   |
| Cost of sales                                 |       | 13,171                  |       | 12,212   |       | 11,457    |       |
| Gross profit                                  |       | 9,534                   |       | 20,827   |       | 20,530    |       |
| Selling, general, and administrative expenses |       | 4,194                   |       | 7,606    |       | 8,236     |       |
| Corporate  overhead allocation                |       | 4,695                   |       | 2,903    |       | 3,691     |       |
| Operating income                              |       | $                       | 645        |     | $          | 10,318    |       | $ | 8,603 |   |

 

| ** **                                                                  | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                  | ** ** | **(in thousands)** | ** ** |
| **Reconciliation  to Net Income**                                           |       |                    |       |     |       |     |       |
| Operating income  (loss):                                                   |       |                    |       |     |       |     |       |
| Motorized recreational vehicle segment                                      |       | $                       | 63,225     |     | $          | (1,097   | )          | $ | (6,200 | ) |
| Towable recreational vehicle segment                                        |       | (4,203                  | )          | (2,000   | )          | 1,406    |       |
| Motorhome resorts segment                                                   |       | 645                     |       | 10,318   |       | 8,603    |       |
| Total operating income                                                      |       | 59,667                  |       | 7,221    |       | 3,809    |       |
| Other income, net                                                           |       | 343                     |       | 255      |       | 615      |       |
| Interest expense                                                            |       | (1,547                  | )          | (1,820   | )          | (4,430   | )          |
| Income (loss) before income taxes and discontinued  operations              |       | 58,463                  |       | 5,656    |       | (6       | )          |
| Provision for (benefit from) income taxes from continuing  operations       |       | 21,914                  |       | 1,687    |       | (992     | )          |
| Income from continuing operations                                           |       | 36,549                  |       | 3,969    |       | 986      |       |
| Income (loss) from discontinued operations,  net of tax provision (benefit) |       | 156                     |       | (1,321   | )          | 18       |       |
| Net income                                                                  |       | $                       | 36,705     |     | $          | 2,648    |       | $ | 1,004 |   |

 

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Thefollowing table provides information for the respective segments related toassets:

| ** **                              | **Assets of the Recreational Vehicle  and Motorhome Resorts Segments** | ** **              | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                              | ** **                                                                                                | **(in thousands)** | ** ** |
| Motorized  recreational vehicle segment |                                                                                                      |                    | $          | 342,790                     |       |                        |       | $ | 306,196 |   |   |
| Towable  recreational vehicle segment   |                                                                                                      |                    | 83,754     |                        |       |                        | 87,153     |   |   |
| Motorhome resorts  segment              |                                                                                                      |                    | 9,826      |                        |       |                        | 25,954     |   |   |
| Total segment  assets                   |                                                                                                      |                    | $          | 436,370                     |       |                        |       | $ | 419,303 |   |   |

 

The Company includes the total of inventories andresort lot inventory in the measure of the segments’ assets that are used fordecision making purposes. Property, plant, and equipment specific to thesegments are also included in the measure of the segments’ assets for decisionmaking purposes. Remaining assets are accounted for at the corporate level andare not allocated out to the business segments. Total depreciation expense isallocated among the segments either based on the associated assets beingallocated to the segment or through the corporate overhead allocation ofexpenses. Corporate overhead is comprised of certain shared services, and isallocated to the respective segments based on a combination of activitiesperformed for the segment as well as the relative segment’s percentage of salesfor the Company in total.

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

| ** **                          | **Reconciliation of Segment Assets to Total Assets** | ** **              | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|-------------------------------------|------------------------------------------------------------------------------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                          | ** **                                                                         | **(in thousands)** | ** ** |
| Total assets  allocated to segments |                                                                               |                    | $          | 436,370                     |       |                        |       | $ | 419,303 |   |   |
| Assets not allocated to segments:   |                                                                               |                    |       |                        |       |                        |       |   |   |
| Cash                                |                                                                               |                    | 586        |                        |       |                        | 4,984      |   |   |
| Trade receivables, net              |                                                                               |                    | 102,666    |                        |       |                        | 81,588     |   |   |
| Prepaid expenses                    |                                                                               |                    | 4,364      |                        |       |                        | 5,624      |   |   |
| Income taxes receivable             |                                                                               |                    | 206        |                        |       |                        | 6,901      |   |   |
| Deferred income taxes               |                                                                               |                    | 36,345     |                        |       |                        | 38,038     |   |   |
| Discontinued operations             |                                                                               |                    | 4,922      |                        |       |                        | 0          |   |   |
| Property, plant, and equipment, net |                                                                               |                    | 1,313      |                        |       |                        | 1,172      |   |   |
| Debt issuance costs, net            |                                                                               |                    | 695        |                        |       |                        | 540        |   |   |
| Total assets                        |                                                                               |                    | $          | 587,467                     |       |                        |       | $ | 558,150 |   |   |

 

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

| ** **                              | **Capital Expenditures of the Recreational  Vehicle and Motorhome Resort Segments** | ** **              | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                              | ** **                                                                                                             | **(in thousands)** | ** ** |
| Motorized  recreational vehicle segment |                                                                                                                   |                    | $          | 17,470                      |       |                        |       | $ | 7,589 |   |   |
| Towable  recreational vehicle segment   |                                                                                                                   |                    | 159        |                        |       |                        | 736        |   |   |
| Motorhome resorts  segment              |                                                                                                                   |                    | 89         |                        |       |                        | 999        |   |   |
| Total capital  expenditures             |                                                                                                                   |                    | $          | 17,718                      |       |                        |       | $ | 9,324 |   |   |

 

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

| ** **                              | **Depreciation Expense for the Recreational  Vehicle and Motorhome Resort Segments** | ** **              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                              | ** **                                                                                                              | **(in thousands)** | ** ** |
| Motorized  recreational vehicle segment |                                                                                                                    |                    | $          | 9,592    |       |     |       | $        | 9,603      |   |   |   | $ | 11,871 |   |   |
| Towable  recreational vehicle segment   |                                                                                                                    |                    | 585        |     |       |     | 818        |     |       |   | 1,951 |   |   |
| Motorhome resorts  segment              |                                                                                                                    |                    | 42         |     |       |     | 74         |     |       |   | 111 |   |   |
| Total  depreciation expense             |                                                                                                                    |                    | $          | 10,219   |       |     |       | $        | 10,495     |   |   |   | $ | 13,933 |   |   |

 

**12.**          INCOME TAXES:

Theprovision for income taxes for continuing operations is as follows:

| ** **                                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Current:                                   |       |                    |       |     |       |     |       |
| Federal                                    |       | $                       | 17,116     |     | $          | 4,729    |       | $ | 970 |   |
| State                                      |       | 1,908                   |       | (169     | )          | 258      |       |
|                                       |       | 19,024                  |       | 4,560    |       | 1,228    |       |
| Deferred:                                  |       |                    |       |     |       |     |       |
| Federal                                    |       | 2,414                   |       | (2,573   | )          | (1,249   | )          |
| State                                      |       | 476                     |       | (300     | )          | (971     | )          |
| Provision for  (benefit from) income taxes |       | $                       | 21,914     |     | $          | 1,687    |       | $ | (992 | ) |

 

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

| ** **                                                          | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Expected U.S.  federal income taxes at statutory rates              |       | $                       | 20,462     |     | $          | 1,923    |       | $ | (2 | ) |
| State and local  income taxes, net of federal benefit               |       | 1,982                   |       | (305     | )          | (788     | )          |
| Change in  valuation allowance                                      |       | (433                    | )          | 0        |       | 284      |       |
| Meals expense  disallowance                                         |       | 217                     |       | 204      |       | 152      |       |
| Subsidiary stock  basis adjustment                                  |       | 0                       |       | 634      |       | 625      |       |
| Stock-based  compensation                                           |       | 0                       |       | 0        |       | 130      |       |
| Domestic  manufacturing deduction                                   |       | 0                       |       | (90      | )          | (51      | )          |
| Export sales  benefit                                               |       | (356                    | )          | (495     | )          | (807     | )          |
| Reversal of  federal and state tax reserves no longer required |       | 0                       |       | (277     | )          | (445     | )          |
| Other                                                               |       | 42                      |       | 93       |       | (90      | )          |
| Provision for  (benefit from) income taxes                          |       | $                       | 21,914     |     | $          | 1,687    |       | $ | (992 | ) |

 

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Thecomponents of the current net deferred tax asset and long-term net deferred taxliability are:

| ** **                                           | ** ** | **December 31,  2005** | ** ** | **December 30,  2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(in thousands)**     | ** ** |
| Current deferred  income tax assets:                 |       |                        |       |                        |       |   |   |   |   |
| Warranty liability                                   |       |                        | $          | 10,342                      |       |   |   | $ | 11,308 |   |   |
| Product liability                                    |       |                        | 7,725      |                        |       |   | 6,244 |   |   |
| Inventory allowances                                 |       |                        | 4,784      |                        |       |   | 3,902 |   |   |
| Franchise and other incentive accruals               |       |                        | 6,943      |                        |       |   | 10,532 |   |   |
| Compensation and related accruals                    |       |                        | 2,342      |                        |       |   | 2,030 |   |   |
| Insurance accruals                                   |       |                        | 3,024      |                        |       |   | 2,637 |   |   |
| Resort lot inventory                                 |       |                        | 1,316      |                        |       |   | 602 |   |   |
| Other accruals                                       |       |                        | (269       | )                           |       |   | 490 |   |   |
| Net operating loss carryforward                      |       |                        | 138        |                        |       |   | 293 |   |   |
|                                                 |       |                        | $          | 36,345                      |       |   |   | $ | 38,038 |   |   |
| Long-term  deferred income tax liabilities:          |       |                        |       |                        |       |   |   |   |   |
| Depreciation                                         |       |                        | $          | 16,306                      |       |   |   | $ | 15,835 |   |   |
| Amortization                                         |       |                        | 5,584      |                        |       |   | 6,859 |   |   |
| Compensation and related accruals                    |       |                        | 0          |                        |       |   | (734 | ) |   |
| Net operating loss (NOL) carryforward                |       |                        | (143       | )                           |       |   | (263 | ) |   |
| State tax credit carryfoward                         |       |                        | (123       | )                           |       |   | (303 | ) |   |
| Valuation allowance on state tax credit carryforward |       |                        | 0          |                        |       |   | 284 |   |   |
|                                                 |       |                        | $          | 21,624                      |       |   |   | $ | 21,678 |   |   |

 

Management believes that the temporary differenceswhich gave rise to the deferred income tax assets will be realized in theforeseeable future, except for a portion of the benefits arising from the statetax credit carryforward. Accordingly, management has provided a valuationallowance for the portion of the state tax credit carryforward that may not befully realized. Net operating loss carryforwards expire between 2015 and 2026and state tax credits expire between 2008 and 2014.

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**13.**          EARNINGS PER SHARE:

Basicearnings per common share is based on the weighted-average number of sharesoutstanding during the period. Diluted earnings per common share is based onthe weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of outstanding stock-based awards. For thefiscal year ending 2006, there were 819,500 anti-dilutive options excluded fromthe diluted earnings per share calculation (zero and 385,890 for the fiscalyears ending 2004 and 2005, respectively). The weighted-average number ofcommon shares used in the computation of earnings per common share for theyears ended January 1, 2005, December 31, 2005, and December 30,2006 are as follows:

| ** **                                        | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Basic**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issued and  outstanding shares (weighted average) |       | 29,370,455 |       | 29,516,794 |       | 29,712,957 |       |
| **Effect of Dilutive Securities**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  awards                               |       | 588,191    |       | 341,242    |       | 189,873    |       |
| **Diluted**                                       |       | 29,958,646 |       | 29,858,036 |       | 29,902,830 |       |

 

| ** **                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash dividends per common share      |       | $        | 0.20       |     | $          | 0.24     |       | $ | 0.24 |   |
| Cash dividends**paid*(in thousands)* |       | $        | 5,874      |     | $          | 7,085    |       | $ | 7,134 |   |

 

**14.**          LEASES:

The Company has commitments under certainnoncancelable operating leases. Total rental expense for the fiscal years endedJanuary 1, 2005, December 31, 2005, and December 30, 2006related to operating leases amounting to approximately $3.6 million, $3.6million, and $3.4 million, respectively. The Company’s most significant leaseis an operating lease for an aircraft that expired in February 2006. TheCompany has signed an extension of the lease through May 14, 2007 and isnegotiating a new lease. The future minimum rental commitments under theextension of this lease is $740,000 in 2007. The Company has guaranteed up to$14.3 million of any deficiency in the event that the lessor’s net salesproceeds from the aircraft are less than $15.7 million. The Company hascommitments under certain noncancelable subleases. As of December 30,2006, the total minimum sublease rental income to be received in the future is$2.4 million. Sublease rental income will be recognized ratably over the nexteight years.

Approximatefuture minimum rental commitments under these leases at December 30, 2006are summarized as follows:

| **Fiscal Year** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|
| 2007                 |       |       | $          | 1,839                   |       |   |
| 2008                 |       |       | 888        |                    |       |
| 2009                 |       |       | 741        |                    |       |
| 2010                 |       |       | 701        |                    |       |
| 2011                 |       |       | 701        |                    |       |
| 2012 and thereafter  |       |       | 1,768      |                    |       |

 

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**15.**          BONUS PLAN:

The Company has adiscretionary bonus plan for certain key employees. Bonus expense included inselling, general, and administrative expenses for the years ended January 1,2005, December 31, 2005, and December 30, 2006 was $8.9 million,$607,000, and $2.2 million, respectively.

**16.**          STOCK-BASEDAWARD PLANS:

The Company has anEmployee Stock Purchase Plan (the “Purchase Plan”) - 1993, a non-employee 1993Director Stock Plan (the “Director Plan”), and an amended and restated 1993Stock Plan (the “Stock Plan”). The compensation expense recognized in 2006 forthe plans was $2.8 million with an income tax benefit of $1.1 million. Theamount of cash received from the exercise of stock options, stock issued underthe Stock Purchase Plan, and stock issued in lieu of some directors’ cashretainer was $1.8 million. The tax benefit realized from stock optionsexercised in 2006 was $161,000.

**Stock Purchase Plan**

The Purchase Plan qualifies under Section 423 ofthe Internal Revenue Code. The Company has 683,438 shares of Common Stockreserved for issuance under the Purchase Plan, of which 592,878 shares were issuedas of December 30, 2006. During the years ended December 31, 2005 andDecember 30, 2006, 57,989 shares and 69,644 shares, respectively, wereissued under the Purchase Plan. The weighted-average fair value of purchaserights granted in 2005 and 2006 was $18.24 and $11.28, respectively. Under thePurchase Plan, an eligible employee may purchase shares of Common Stock fromthe Company through payroll deductions of up to 10% of base compensation, at aprice per share 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 of Directors. Any employeewho is customarily employed for at least 20 hours per week and more than fivemonths in a calendar year by the Company, or by any majority-owned subsidiarydesignated from time to time by the Board of Directors, and who does not own 5%or more of the total combined voting power or value of all classes of theCompany’s outstanding capital stock, is eligible to participate in the PurchasePlan.

**Director Plan**

Effective May 17, 2006, no further awards will bemade under the Director Plan, but it will continue to govern awards previouslygranted thereunder. Subsequent equity awards to directors are being made underthe Stock Plan. The Board of Directors and the stockholders had authorized atotal of 352,500 shares of Common Stock for issuance pursuant to the DirectorPlan. On May 17, 2006 authorization for 76,924 shares were transferredfrom the Director Plan to the Stock Plan, which represented the number ofshares reserved under the Director Plan that had not been issued pursuant toawards granted under the plan plus the number of shares reserved that were notsubject to any outstanding awards granted under the plan.

Options granted under theDirector Plan to non-employee directors on the date the optionee first became adirector vest ratably over a five-year period, while subsequent annual grantsvest in full on the fifth anniversary of their grant date. The exercise priceof all options granted under the Director Plan was equal to the fair marketvalue of a share of the Company’s Common Stock on the date of grant. Themaximum term of these options is 10 years. As of December 30, 2006, 112,950options had been exercised, and options to purchase 146,550 shares of CommonStock were outstanding. As of 

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December 30, 2006,5,265 shares of Common Stock had been issued in lieu of some directors’ cashretainer as allowed by the Director Plan up to May 17, 2006.

**Stock Plan**

The Stock Plan, as amended on May 17, 2006,provides for the grant of stock-based awards to employees, directors andconsultants who provide services to the Company and its affiliates. Allowedawards include stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares, performance units, dividendequivalents and other stock awards. A total of 5,534,737 shares of Common Stockhave been reserved for issuance under the Stock Plan, which includes thetransfer of unused share authorizations under the Director Plan on May 17,2006.

The stock options issuedsubsequent to May 16, 2002, the restricted stock units and the performanceshare awards include a retirement eligible provision. Employees and directorswho reach the retirement age of 62 and have provided five years of service meetthe provision. The recognition of compensation expense associated with theseawards is accelerated based upon this criteria and is derived by the use of thenon-substantive vesting period approach. This approach was followed under APB25 and subsequently with the adoption of FAS 123R.

**Stock Options**

A component of the Stock Plan permits the Company togrant stock options. As of December 30, 2006, 1,589,633 options had beenexercised, and options to purchase 1,160,300 shares of Common Stock were outstanding.These options vest ratably over five years commencing with the date of grant.

The exercise price of all stock options granted underthe Stock Plan must be at least equal to the fair market value of a share ofthe Company’s Common Stock on the date 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 incentive stock optiongranted must equal at least 110% of the fair market value on the grant date,and the maximum term of the option must not exceed five years. The terms of allother options granted under the Stock Plan may not exceed ten years. Optionsoutstanding to participants who meet the retirement eligible provision vestupon actual retirement or the normal vesting period, whichever is earlier.

In the fourth quarter of 2005, the Company elected toaccelerate all non-vested stock options outstanding with an exercise pricegreater than $16 per share. The purpose of the acceleration was to enable theCompany to avoid recognizing compensation expense associated with these optionsin future periods in its consolidated statements of income pursuant toFinancial Accounting Standards Board Statement No. 123R. Under FASNo. 123R, the Company began applying the expense recognition provisionsrelating to stock options beginning in the first quarter of fiscal 2006. Inapproving the acceleration, the Company considered its impact on futurefinancial results, stockholder value and employee retention. The Companybelieves that the acceleration was in the best interest of stockholders as itreduces the Company’s reported compensation expense in periods subsequent tofiscal 2005 in light of these accounting regulations. The compensation expensein future periods that is eliminated as a result of the acceleration of thevesting of these options is approximately $3.7 million. This acceleration didnot result in a charge to the Company’s expenses in the consolidated statementsof income in fiscal 2005.

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Option transactionsinvolving the Director Plan and the Stock Plan are summarized with thecorresponding weighted-average exercise prices as follows:

| ** **                             | ** ** | **Shares** | ** **   | **Weighted-  Average  Exercise  Price** | ** **   | **Weighted-  Average  Remaining  Contractual  Term** | ** **   | **Aggregate  Intrinsic  Value** | ** **   |
|----------------------------------------|------------|------------|--------------|-----------------------------------------|--------------|------------------------------------------------------|--------------|---------------------------------|--------------|
| ** **                             | ** ** | ** ** | *** *** | *** ***                            | *** *** | *** ***                                         | *** *** | **(in thousands)**         | *** *** |
| Outstanding at  January 3, 2004   |       | 1,237,171  |         |                                    | $            | 11.63                                                |         |                            |         |   |   |   |   |   |   |   |
| Granted                                |       | 197,800    |         |                                    | 26.28        |                                                 |         |                            |         |   |   |   |   |   |   |
| Exercised                              |       | (120,398   | )            |                                    | 8.95         |                                                 |         |                            |         |   |   |   |   |   |   |
| Outstanding at  January 1, 2005   |       | 1,314,573  |         |                                    | 14.08        |                                                 |         |                            |         |   |   |   |   |   |   |
| Granted                                |       | 292,020    |         |                                    | 16.13        |                                                 |         |                            |         |   |   |   |   |   |   |
| Exercised                              |       | (72,078    | )            |                                    | 5.87         |                                                 |         |                            |         |   |   |   |   |   |   |
| Forfeited                              |       | (65,240    | )            |                                    | 18.14        |                                                 |         |                            |         |   |   |   |   |   |   |
| Outstanding at  December 31, 2005 |       | 1,469,275  |         |                                    | 14.71        |                                                 |         |                            |         |   |   |   |   |   |   |
| Granted                                |       | 0          |         |                                    | 0            |                                                 |         |                            |         |   |   |   |   |   |   |
| Exercised                              |       | (128,475   | )            |                                    | 7.44         |                                                 |         |                            |         |   |   |   |   |   |   |
| Forfeited                              |       | (33,950    | )            |                                    | 20.01        |                                                 |         |                            |         |   |   |   |   |   |   |
| Outstanding at  December 30, 2006 |       | 1,306,850  |         |                                    | $            | 15.28                                                |         |                            |         | 5.2 |   |   |   | $ | 19,974 |   |   |
| Exercisable at  December 30, 2006 |       | 1,215,430  |         |                                    | $            | 15.54                                                |         |                            |         | 5.0 |   |   |   | $ | 18,884 |   |   |

 

The total intrinsic value of options exercised duringfiscal years 2004, 2005 and 2006 was approximately $2.1 million, $739,000, and$819,000, respectively. The proforma weighted-average grant-date fairvalue of options granted in 2004 and 2005 was $7.20 and $5.41, respectively.

There was $441,089 ofstock option related compensation expense recognized from the combination ofthe Stock Plan, the Stock Purchase Plan and the Director Plan during the fiscalyear ended December 30, 2006. The total remaining expense to be recognizedin future periods for outstanding non-vested stock options is approximately$297,000. The expense is expected to be recognized over a weighted-averageperiod of 2.2 years.

**Restricted StockUnit Grant**

A component of the Stock Plan permits the Company togrant shares of restricted stock units (RSU’s). These grants are compensationexpense under the rules of FAS 123R, and are required to be recognized inthe Company’s consolidated statements of income. The valuation of the RSU’s isbased on the closing market price of the Common Stock on the date of grant. TheRSU’s vest ratably over four years or cliff vest at four years foremployees and cliff vest at three years for directors. RSU’s outstanding toparticipants who meet the retirement eligible provision vest upon actualretirement or the normal vesting period, whichever is earlier. Under Section 162(m) ofthe Internal Revenue Code of 1986, as amended, RSU’s granted to certainemployees require performance criteria to be met in order for the units tocliff vest at three years. The performance criteria is based on the return onequity. As of December 30, 2006, there are 72,695 RSU’s outstanding thatrequire the attainment of the performance criteria.

The performance based RSU’s were issued in 2006 andthe associated compensation expense recognized in 2006 was approximately$725,000. During the fiscal years ended 2005 and 2006, $16,341 and $1,336,770was recorded as compensation expense related to all RSU’s. A forfeiture rate isapplied to the majority of the RSU’s granted to employees based on thehistorical forfeiture experience with stock options. The total remainingexpense to be recognized in future periods for 

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outstanding non-vested RSU’s is approximately $2.2million. The expense is expected to be recognized over a weighted-averageperiod of 2.9 years.

Restricted stock unit transactions under the StockPlan are summarized with the weighted-average grant-date fair value as follows:

| ** **                            | ** ** | **Restricted  Stock Units** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2005   |       |                             | 0          |                                                |       |   | $ | 0.00 |   |   |
| Granted                               |       |                             | 53,250     |                                                |       |   | 14.73 |   |   |
| Non-vested at  December 31, 2005 |       |                             | 53,250     |                                                |       |   | 14.73 |   |   |
| Granted                               |       |                             | 254,159    |                                                |       |   | 12.71 |   |   |
| Forfeited                             |       |                             | (27,500    | )                                                   |       |   | 14.67 |   |   |
| Non-vested at  December 30, 2006 |       |                             | 279,909    |                                                |       |   | $ | 12.90 |   |   |

 

**Performance ShareAwards**

A component of the Stock Plan also permits the Companyto grant performance share awards (PSA’s). Grants were effective as of the dateof approval of the Stock Plan by the shareholders on May 17, 2006 andincluded target payouts to participants of a total of 164,909 shares under atwo-year performance plan and 164,909 shares under a three-year performanceplan. Both plans require the achievement of performance based on Return on NetAssets-adjusted (RONA) and Total Shareholder Return (TSR) compared to a groupof peer companies. Depending on the ranking of the Company’s performanceagainst the peer group, the participants could earn from 0% up to 200% of thetarget payout of performance shares. A participant who retires during aperformance period and meets the retirement eligible provision is entitled toreceive 100% of the award that would have otherwise been earned had theparticipant remained employed through the end of the performance period. Theaward to such a participant will be settled at the end of the normalperformance period.

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

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

 

The fair value ofthe share awards requiring achievement of the goal based on RONA is the Common Stockmarket price at grant date, which was $12.73 for the awards granted in 2006. Therecognition of compensation expense is initially based on the probable outcomeof the performance condition and 

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adjusted for subsequent changes in the estimated or actualoutcome. The Company reassesses at each reporting date whether achievement ofthe performance condition is probable. The assessment involves comparing theCompany’s forecasted RONA for the performance period to the historical RONAachieved by a group of peer companies.

The TSR goal is based on the market price of theCompany’s Common Stock as compared to the peer group. This is considered amarket condition under FAS 123R, thus compensation expense recognized is notreversed if the goal is not achieved by the end of the performance period. Thecompensation expense related to share awards that are forfeited is reversed. Ifthe performance goal related to RONA is not met, no compensation expense isrecognized and any recognized compensation expense is reversed as of the end ofthe plan period. A total of $981,346 of compensation expense was recordedduring the fiscal year ended 2006 relating to the performance share awards. Asof December 30, 2006, it was not probable that the RONA goal would be metat the end of the performance periods and thus compensation expense recognizedthroughout 2006 was reversed. The total remaining expense expected to berecognized in future periods for outstanding PSA’s is approximately $883,000. Theexpense is expected to be recognized over a weighted-average period of 1.6years. The total number of PSA’s granted during 2006 and non-vested as December 30,2006 was 329,818 shares at target payout. The weighted-average grant-date fairvalue of these shares is $12.02.

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FAS 123 tostock-based compensation in the fiscal years ended 2004 and 2005 compared tothe fair value recognition provisions of FAS 123R that are applied to thestock-based payment arrangements in the fiscal year ended 2006.

| ** **                                                                                                                                     | ** ** | **     2004    **     | ** ** | **     2005    ** | ** ** | **     2006    ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| Net income before stock-based compensation expense                                                                                             |       |                                                               | $          | 36,705                                                         |       |                                                           |       | $ | 2,648 |   |   |   | $ | 2,690 |   |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       |                                                               | (1,569     | )                                                              |       |                                                           | (3,219     | ) |   |   | (1,686 | ) |   |
| Net income*                                                                                                                                    |       |                                                               | $          | 35,136                                                         |       |                                                           |       | $ | (571 | ) |   |   | $ | 1,004 |   |   |
| Earnings (loss)  per share:                                                                                                                    |       |                                                               |       |                                                           |       |                                                           |       |   |   |   |   |   |   |
| Basic - as reported                                                                                                                            |       |                                                               | $          | 1.25                                                           |       |                                                           |       | $ | 0.09 |   |   |   | $ | 0.03 |   |   |
| Basic - with stock-based compensation                                                                                                          |       |                                                               | $          | 1.20                                                           |       |                                                           |       | $ | (0.02 | ) |   |   | $ | 0.03 |   |   |
| Diluted - as reported                                                                                                                          |       |                                                               | $          | 1.23                                                           |       |                                                           |       | $ | 0.09 |   |   |   | $ | 0.03 |   |   |
| Diluted - with stock-based compensation                                                                                                        |       |                                                               | $          | 1.17                                                           |       |                                                           |       | $ | (0.02 | ) |   |   | $ | 0.03 |   |   |

----

*                   Netincome prior to 2006 are pro-forma for the effect of FAS 123R.

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Forpurposes of the above information, the fair value of each option grant wasestimated at the date of grant using the Black-Scholes option pricing modelbased on the weighted-average assumptions noted in the following table. Therewere no options granted in 2006. Expected volatility’s were based on historicalvolatility of the Company’s Common Stock, and other factors. The Company usedhistorical data to estimate option exercise and employee termination within thevaluation model. The expected term of options granted was derived from theoutput of the option valuation model and represents the period of time thatoptions granted are expected to be outstanding. The risk-free interest rate isbased on interest rates on total constant maturity U.S. Treasury notes withlives consistent with the expected lives of the related option.

| ** **                | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Risk-free interest rate   |       | 3.54     | %          | 4.03     | %          |
| Expected life (in  years) |       | 6.09     |       | 6.69     |       |
| Expected  volatility      |       | 36.31    | %          | 31.25    | %          |
| Expected dividend yield   |       | 1.00     | %          | 1.70     | %          |

 

**17.**          FAIRVALUE OF FINANCIAL INSTRUMENTS:

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

*Line of Credit -**The*carrying amountoutstanding on the revolving line of credit is $25.0 million, and $2.0 millionat December 31, 2005 and December 30, 2006, respectively, whichapproximates the estimated fair value as this instrument requires interestpayments at a market rate of interest plus a margin. 

*Long-Term Notes Payable -*Thecarrying amount outstanding on the long-term notes payable is $34.8 million(including $5.7 million of current payable) at December 30, 2006, whichapproximates the estimated fair value as these instruments require interestpayments at a market value rate of interest plus a margin.

**18.**          401(K) DEFINEDCONTRIBUTION PLAN:

The Company sponsors a 401(k) definedcontribution plan covering substantially all full-time employees. Companycontributions to the plan totaled approximately $879,000 in 2004, $880,000 in2005, and $787,000 in 2006.

**19.**          COMMITMENTSAND CONTINGENCIES:

**RepurchaseAgreements**

Many of the Company’s sales to independent dealers aremade on a “floor plan” basis by a bank or finance company which lends thedealer all or substantially all of the wholesale purchase price and retains asecurity interest in the vehicles. Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company mayexecute a repurchase agreement. These agreements provide that, for up to 15 monthsafter a unit is shipped, the Company will repurchase a dealer’s inventory inthe event a dealer defaults on its floorplan credit arrangement with itslender. It has been the Company’s experience that the chance of default bydealers has been very low.

The Company’s liability under repurchase agreements islimited to the unpaid balance owed to the lending institution by reason of itsextending credit to the dealer to purchase its vehicles, reduced by 

67

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the resale value of vehicles which may be repurchased.The risk of loss is spread over numerous dealers and financial institutions.

Losses of approximately$600,000, $79,000 and $232,000 were incurred in 2004, 2005, and 2006, respectively.The approximate amount subject to contingent repurchase obligations arisingfrom these agreements at December 30, 2006 is $566.7 million, withapproximately 6.6% concentrated with one dealer. The Company has recorded aliability of approximately $462,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers. If theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, its business, operating results, and financial conditioncould be adversely affected.

**Product Liability**

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

The Company has from timeto time been subject to product liability claims. To date, the Company has beensuccessful in obtaining product liability insurance on terms the Companyconsiders acceptable. The terms of the policy contain a self-insured retentionamount of $500,000 per occurrence, with a maximum annual aggregate self-insuredretention of $3.0 million. Overall product liability insurance, includingumbrella coverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. There can be no assurance that theCompany will be able to obtain insurance coverage in the future at acceptablelevels or that the cost of insurance will be reasonable. Furthermore,successful assertion against the Company of one or a series of large uninsuredclaims, or of one or a series of claims exceeding any insurance coverage, couldhave a material adverse effect on the Company’s business, results ofoperations, and financial condition.

**Litigation**

The Company is involved invarious legal proceedings which are incidental to the industry and for which certainmatters are covered in whole or in part by insurance or, otherwise. The Companyhas recorded accruals for probable settlements. Management believes that anyultimate liability which may result from these proceedings will not have amaterial adverse effect on the Company’s consolidated financial statements.

**20.**          SUBSEQUENTEVENTS:

**Joint Venture**

On February 25, 2006,the Company closed a transaction with International Truck and EngineCorporation to form a joint venture to manufacture substantially all of theCompany’s rear diesel chassis. The terms of the agreement grant the Company a49% ownership in the joint venture, known as Custom Chassis Products, LLC(CCP). We contributed $4.7 million of capital consisting of inventories, fixedassets, and cash to CCP.

**Purchase Commitment**

Subsequent to December 30, 2006, the Companyissued purchase orders to Cummins (the Company’s major supplier of diesel engines)in the amount of $19.9 million. The Company will consume these engines duringthe 2007 fiscal year.

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**21.**          QUARTERLYRESULTS (UNAUDITED):

| ** **                                           | ** ** | **1st**                                                            | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Year ended December 31, 2005** | ** ** | ** **                                                         | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Net sales                                            |       | $                                                                  | 328,813    |        | $          | 304,512     |       | $           | 296,953    |   | $ | 305,960 |   |
| Gross profit                                         |       | 35,896                                                             |       | 32,987      |       | 24,619      |       | 31,268      |       |
| Operating income (loss)                              |       | 8,939                                                              |       | 1,655       |       | (7,375      | )          | 4,002       |       |
| Net income (loss):                                   |       |                                                               |       |        |       |        |       |        |       |
| Continuing operations                                |       | 5,364                                                              |       | 965         |       | (4,355      | )          | 1,995       |       |
| Discontinued operations                              |       | (41                                                                | )          | (210        | )          | (1,608      | )          | 538         |       |
|                                                 |       | $                                                                  | 5,323      |        | $          | 755         |       | $           | (5,963     | ) | $ | 2,533 |   |
| Earnings (loss) per share-basic:                     |       |                                                               |       |        |       |        |       |        |       |
| Continuing operations                                |       | $                                                                  | 0.18       |        | $          | 0.03        |       | $           | (0.15      | ) | $ | 0.07 |   |
| Discontinued operations                              |       | 0.00                                                               |       | 0.00        |       | (0.05       | )          | 0.02        |       |
| Basic                                                |       | $                                                                  | 0.18       |        | $          | 0.03        |       | $           | (0.20      | ) | $ | 0.09 |   |
| Earnings (loss) per share-diluted:                   |       |                                                               |       |        |       |        |       |        |       |
| Continuing operations                                |       | $                                                                  | 0.18       |        | $          | 0.03        |       | $           | (0.15      | ) | $ | 0.06 |   |
| Discontinued operations                              |       | 0.00                                                               |       | 0.00        |       | (0.05       | )          | 0.02        |       |
| Diluted                                              |       | $                                                                  | 0.18       |        | $          | 0.03        |       | $           | (0.20      | ) | $ | 0.08 |   |
|                                                      |            |                                                                    |            |             |            |             |            |             |            |  |  |  |  |  |  |

 

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

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(1)         Third quarter 2005amounts have been revised for a reclassification of tax credit from net incomefrom discontinued operations to net income from continuing operations of$49,000.

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**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

**ITEM9A.**        CONTROLS AND PROCEDURES

***Evaluation ofDisclosure Controls and Procedures***

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this Annual Report on Form 10-K. Basedon this evaluation, our Chief Executive Officer and our Chief Financial Officerhave concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management including our principal financial officers, asappropriate to allow timely decisions regarding required disclosure, and thatsuch information is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission rules andforms.

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures will prevent all error and all fraud. Becauseof inherent limitations in any system of disclosure controls and procedures, noevaluation of controls can provide absolute assurance that all instances of erroror fraud, if any, within the Company may be detected. However, our management,including our Chief Executive Officer and our Chief Financial Officer, havedesigned our disclosure controls and procedures to provide reasonable assuranceof achieving their objectives and have, pursuant to the evaluation discussedabove, concluded that our disclosure controls and procedures are, in fact,effective at this reasonable assurance level.

***Changes in InternalControls***

There was no change in ourinternal control over financial reporting that occurred during the periodcovered by this Annual Report on Form 10-K that has materiallyeffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

***Management’s Reporton Internal Control Over Financial Reporting***

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

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

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

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

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Management assessed theeffectiveness of the Company’s internal control over financial reporting as of December 30,2006. In making this assessment, management used the criteria set forth in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

Based on its assessment ofinternal controls over financial reporting, management has concluded that, asof December 30, 2006, the Company’s internal control over financialreporting was effective to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

Management’s assessment ofthe effectiveness of internal control over financial reporting as of December 30,2006 has been audited by PricewaterhouseCoopers, LLP, an independent registeredpublic accounting firm, as stated in their report, see Item 8. “FinancialStatements and Supplemental Data.”

**ITEM9B.**       OTHER INFORMATION

None

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**PART III**

**ITEM10.**         DIRECTORS, EXECUTIVEOFFICERS OF REGISTRANT,AND CORPORATE GOVERNANCE

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

Information required bythis Item regarding directors and compliance with Section 16(a) ofthe Exchange Act is set forth under the captions “Proposal One—Election ofDirectors” and Section 16(a) “Beneficial Ownership ReportingCompliance” in the Company’s definitive 2007 Proxy Statement and isincorporated herein by reference.

Information required bythis Item regarding the Company’s Audit Committee and designated “audit committeefinancial expert” is set forth under the caption “Board of Directors andCommittee Meetings - Audit Committee” in the Company’s definitive 2007 ProxyStatement and is incorporated herein by reference.

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

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

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

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

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

*4.**                Next,click on “Code of Ethics for Executive Officers” (or “Code of Business Conduct,”or any other “Corporate Governance”*   related topic).

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

**ITEM11.**         EXECUTIVE COMPENSATION

Information required by this Item regardingcompensation of the Company’s directors and executive officers is set forthunder the captions “Compensation Discussion and Analysis and ExecutiveCompensation” and “Director Compensation” in the Company’s definitive 2007Proxy Statement and is incorporated herein by reference.

Information required by this Item regarding certainrelationships of the members of the Compensation Committee is set forth underthe caption “Compensation Committee Interlocks and Insider Participation” inthe Company’s definitive 2007 Proxy Statement and is incorporated herein byreference.

Information required by this Item regarding theCompensation Committee Report is set forth under the caption “Report of the CompensationCommittee” in the Company’s definitive 2007 Proxy Statement and is incorporatedherein by reference.

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

Information required bythis Item regarding beneficial ownership of the Company’s Common Stock by certainbeneficial owners and management set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in the Company’sdefinitive 2007 Proxy Statement is incorporated herein by reference.

**Equity Compensation Plan Information**

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

| **Plan Category**                                      | ** ** | **(a)  Number of securities to be  issued upon exercise of  outstanding options,  warrants, and rights** | ** ** | **(b)  Weighted-average exercise price of  outstanding options, warrants, and  rights** | ** ** | **(c)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (a)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |                                                                                                                                                       | 1,916,577  | *                                                                                                                     |       |                                                                                                                                                                                                                 | $          | 15.29 | ** |   |   | 2,017,087 |   |   |
| Equity  compensation plans not approved by security holders |       |                                                                                                                                                       | —     |                                                                                                                  |       |                                                                                                                                                                                                                 | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                                                                                                                       | 1,916,577  |                                                                                                                  |       |                                                                                                                                                                                                                 | $          | 15.29 |   |   |   | 2,017,087 |   |   |
|                                                             |            |                                                                                                                                                            |            |                                                                                                                       |            |                                                                                                                                                                                                                      |            |  |  |  |  |  |  |  |  |

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*                    Includes, asof December 30, 2006, stock options and the target number of shares thatcould be issued under restricted stock units and performance share awardspursuant to the 1993 Stock Plan.

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

**ITEM 13.**         CERTAINRELATIONSHIPS AND TRANSACTIONS,AND DIRECTOR INDEPENDENCE

Information required by this Item regardingtransactions with related persons is set forth under the caption “TransactionsWith Related Persons” in the Company’s definitive 2007 Proxy Statement and isincorporated herein by reference.

Information required bythis Item regarding director independence is set forth under the caption“Director Independence” in the Company’s definitive 2007 Proxy Statement and isincorporated herein by reference.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this item is includedunder the caption “Ratification of Appointment of Independent Registered PublicAccounting Firm” in the Company’s definitive 2007 Proxy Statement and isincorporated herein by reference.

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**PARTIV**

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

| (a)                                                                                                                                                                                                                            | The following  documents are filed as part of this Report on Form 10-K: | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.                                                                                                                                                                                                                             | ** **                                                                   | *Financial  Statements.***  **The  Consolidated Financial Statements of Monaco Coach Corporation and the Report  of Independent Registered Public Accounting Firm are filed in Item 8 within this Annual Report on  Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** |
| 2.                                                                                                                                                                                                                             | ** **                                                                   | *Financial  Statement**Schedule.*   None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** |
| Schedules not  listed above have been omitted because they are not applicable or are not required  or the information required to be set forth therein is included in the  consolidated financial statements or notes thereto. | ** **                                                                   |
| 3.                                                                                                                                                                                                                             | ** **                                                                   | *Exhibits*.   The  following Exhibits are filed as part of, or incorporated by reference into,  this Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |
| 2.1                                                                                                                                                                                                                            | ** **                                                                   | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts Motorcoach Country  Club, Inc., dated November 27, 2002. (Incorporated herein by reference to  Exhibit 2.2 to the Registrant’s Annual Report on Form 10-K for the year  ended December 28, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** |
| 2.2                                                                                                                                                                                                                            | ** **                                                                   | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts of Las Vegas, Inc.,  dated November 27, 2002. (Incorporated herein by reference to Exhibit 2.3  to the Registrant’s Annual Report on Form 10-K for the year ended December  28, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** |
| 2.3                                                                                                                                                                                                                            | ** **                                                                   | Stock and Unit  Purchase Agreement dated November 9, 2005, by and among the Company, R-Vision  Holdings LLC, William L. Warrick, Arlen J. Paul, Dennis Bailey, William  Devos, Ruth A. Hollingsworth, Shannon E. Warrick, Bradford J.  Warrick, William Lewis Warrick, Jodie D. Warrick, Helen L. Krizman, Warrick  LP, William L. Warrick as Trustee of the William Warrick 1998 Irrevocable  Trust for the Benefit of Shannon Elizabeth Warrick, William L. Warrick as  Trustee of the William Warrick 1998 Irrevocable Trust for the Benefit of  William Lewis Warrick, William L. Warrick as Trustee of the William Warrick  1998 Irrevocable Trust for the Benefit of Bradford James Warrick, and William  L. Warrick as Trustee of the William Warrick 1998 Irrevocable Trust for the  Benefit of Jodie Dawn Warrick, R-Vision Inc., R-Vision Motorized LLC,  Roadmaster LLC, Bison Manufacturing LLC and A.J.P. R.V., Inc., and William L.  Warrick as Sellers’ Representative (incorporated herein by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with  the SEC on November 23, 2005). | ** ** |
| 2.4                                                                                                                                                                                                                            | ** **                                                                   | Asset Purchase  Agreement dated November 18, 2005, by and among the Company, R-Vision  Holdings LLC, A.J.P. R.V., Inc., and William L. Warrick as Sellers’  Representative (incorporated herein by reference to Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K filed with the SEC on November  23, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** |
| 3.1                                                                                                                                                                                                                            | ** **                                                                   | Amended and  Restated Certificate of Incorporation of the Registrant (Incorporated herein  by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form  10-K for the year ended January 1, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |

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| 3.2        | ** ** | Certificate of  Amendment of Amended and Restated Certificate of Incorporation dated June 30,  1999 (Incorporated herein by reference to Exhibit 3.2 to the  Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000).         | ** ** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.3        | ** ** | Bylaws of  Registrant, as amended to date (Incorporated herein by reference to Exhibit 3.1  to the Registrant’s Current Report on Form 8-K filed with the SEC on November  16, 2005).                                                                  | ** ** |
| 10.1       | ** ** | Form of  Indemnification Agreement for directors and executive officers (Incorporated  herein by reference to Exhibit 10.2 to the Registrant's Registration  Statement on Form S-1 (Reg. No. 33-67374) declared effective on  September 23, 1993).     | ** ** |
| 10.2       | ** ** | 1993 Director  Option Plan as Amended Through May 13, 2003. (Incorporated herein by  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 28, 2003).                                                     | ** ** |
| 10.3† | ** ** | 1993 Stock Option  Plan as amended through May 17, 2006. (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the  SEC on May 23, 2006).                                                  | ** ** |
| 10.3.1     | ** ** | Form of 1993  Stock Plan Performance Share Agreement (Incorporated herein by reference to  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the  SEC on May 23, 2006).                                                      | ** ** |
| 10.3.2     | ** ** | Form of 1993  Stock Plan Restricted Stock Units for Kay L. Toolson and John W. Nepute.  (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current  Report on Form 8-K filed with the SEC on May 23, 2006).                         | ** ** |
| 10.3.3     | ** ** | Form of 1993  Stock Plan Restricted Stock Unit Agreement. (Incorporated herein by reference  to Exhibit 10.7 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                    | ** ** |
| 10.3.4     | ** ** | Form of 1993  Stock Plan Restricted Stock units for directors. (Incorporated herein by  reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  filed with the SEC on August 21, 2006).                                                   | ** ** |
| 10.3.5     | ** ** | Form of Director  Option Agreement, Initial Grant. (Incorporated herein by reference to Exhibit  10.8 to the Registrant’s Annual Report on 10-K for the year ended December 31, 2005).                                                            | ** ** |
| 10.3.6     | ** ** | Form of Director  Option Agreement, Subsequent Grant. (Incorporated herein by reference to  Exhibit 10.9 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                        | ** ** |
| 10.3.7     | ** ** | Form of 1993  Stock Plan Stock Option Agreement. (Incorporated herein by reference to  Exhibit 10.10 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                            | ** ** |
| 10.3.8     | ** ** | Form of Annual  Irrevocable Election Under Director Stock Plan. (Incorporated herein by  reference to Exhibit 10.11 to the Registrant’s Annual Report on 10-K for the  year ended December 31, 2005).                                                       | ** ** |
| 10.4† | ** ** | 1993 Employee  Stock Purchase Plan and form of subscription agreement thereunder  (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s  Registration Statement on Form S-1 (Reg. No. 33-67374) declared effective on  September 23, 1993). | ** ** |

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| 10.5† | ** ** | Executive  Variable Compensation Plan (Incorporated herein by reference to Appendix B to  the Registrant’s definitive Proxy Statement filed with the Securities and  Exchange Commission on April 5, 2004).                                                                                                                                                                                                                                                                                                | ** ** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.6       | ** ** | Third Amended and  Restated Credit Agreement dated November 18, 2005, by and among the Company,  the subsidiaries of the Company party thereto as co-borrowers, the lenders  party thereto from time to time, U.S. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to Exhibit 10.1  to the Registrant’s Current Report on Form 8-K filed with the SEC on  November 23, 2005). | ** ** |
| 10.6.1     | ** ** | First Amendment  to Third Amended and Restated Credit January 4, 2007, by and among the  Company, the subsidiaries of the Company party thereto as co-borrowers, the lenders  party thereto from time to time, US. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent.                                                                                                                                                       | ** ** |
| 10.7       | ** ** | Annual Incentive  Plan. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s  Current Report on Form 8-K filed with the SEC on May 23, 2006).                                                                                                                                                                                                                                                                                                                                             | ** ** |
| 10.8       | ** ** | Joint Venture  Agreement dated January 24, 2007 between the Registrant and International  Trust and Engine Corporation.                                                                                                                                                                                                                                                                                                                                                                                         | ** ** |
| 11.1       | ** ** | Computation of  earnings per share (see Note 13 of Notes to Consolidated Financial Statements  included in Item 8 hereto).                                                                                                                                                                                                                                                                                                                                                                                      | ** ** |
| 21.1       | ** ** | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
| 23.1       | ** ** | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** |
| 24.1       | ** ** | Power of Attorney  (included on the signature pages hereof).                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
| 31.1       | ** ** | Certification of  CFO under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                             | ** ** |
| 31.2       | ** ** | Certification of  CEO under the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                             | ** ** |
| 32         | ** ** | Certification of CEO and  CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                        | ** ** |

----

†                     Theitem listed is a compensatory plan.

76

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized.
| March 15, 2007 | MONACO COACH CORPORATION |
|---------------------|--------------------------|
|                | By:                      | /s/ KAY L. TOOLSON |
|                |                     | Kay L. Toolson |
|                |                     | Chief Executive Officer |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Kay L. Toolson andP. Martin Daley, and each of them, jointly and severally, hisattorneys-in-fact, each with the power of substitution, for him in any and allcapacities, to sign any and all amendments to this Report on Form 10-Kand to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

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

|                                  | **Signature** | ** **                                  | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------------|---------------|---------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/  Kay L. Toolson              |          | Chairman of the Board  and Chief Executive  |       | March 15, 2007 |
| (Kay L. Toolson)                 |          | Officer (Principal Executive Officer)       |       |                |
| /s/  P. Martin Daley             |          | Vice President and Chief  Financial Officer |       | March 15, 2007 |
| (P. Martin Daley)                |          | (Principal Financial Officer)               |       |                |
| /s/  Charles J. Kimball          |          | Chief Accounting Officer                    |       | March 15, 2007 |
| (Charles J.  Kimball)            |          | (Principal Accounting Officer)              |       |                |
| /s/  John F. Cogan               |          | Director                                    |       | March 15, 2007 |
| (John F. Cogan)                  |          |                                        |       |                |
| /s/  Richard E. Colliver         |          | Director                                    |       | March 15, 2007 |
| (Richard E.  Colliver)           |          |                                        |       |                |
| /s/  Robert P. Hanafee, Jr. |          | Director                                    |       | March 15, 2007 |
| (Robert P.  Hanafee, Jr.)   |          |                                        |       |                |
| /s/  L. Ben Lytle                |          | Director                                    |       | March 15, 2007 |
| (L. Ben Lytle)                   |          |                                        |       |                |
| /s/  Dennis D. Oklak             |          | Director                                    |       | March 15, 2007 |
| (Dennis D. Oklak)                |          |                                        |       |                |

77

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| /s/ Richard A. Rouse     |   | Director |   | March 15, 2007 |
|--------------------------|--------|----------|--------|---------------------|
| (Richard A.  Rouse)      |   |     |   |                |
| /s/  Daniel C. Ustian    |   | Director |   | March 15, 2007 |
| (Daniel C.  Ustian)      |   |     |   |                |
| /s/  Roger A. Vandenberg |   | Director |   | March 15, 2007 |
| (Roger A.  Vandenberg)   |   |     |   |                |

 

78

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**EXHIBITINDEX**

| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1              |       | Stock Purchase Agreement by and among Monaco Coach  Corporation, MCC Acquisition Corporation, Outdoor Resorts of America, Inc.,  and Outdoor Resorts Motorcoach Country Club, Inc., dated November 27, 2002.  (Incorporated herein by reference to Exhibit 2.2 to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |
| 2.2              |       | Stock Purchase  Agreement by and among Monaco Coach Corporation, MCC Acquisition Corporation,  Outdoor Resorts of America, Inc., and Outdoor Resorts of Las Vegas, Inc.,  dated November 27, 2002. (Incorporated herein by reference to Exhibit 2.3  to the Registrant’s Annual Report on Form 10-K for the year ended December  28, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |
| 2.3              |       | Stock and Unit  Purchase Agreement dated November 9, 2005, by and among the Company, R-Vision  Holdings LLC, William L. Warrick, Arlen J. Paul, Dennis Bailey, William  Devos, Ruth A. Hollingsworth, Shannon E. Warrick, Bradford J. Warrick,  William Lewis Warrick, Jodie D. Warrick, Helen L. Krizman, Warrick LP,  William L. Warrick as Trustee of the William Warrick 1998 Irrevocable Trust  for the Benefit of Shannon Elizabeth Warrick, William L. Warrick as Trustee  of the William Warrick 1998 Irrevocable Trust for the Benefit of William  Lewis Warrick, William L. Warrick as Trustee of the William Warrick 1998  Irrevocable Trust for the Benefit of Bradford James Warrick, and William L.  Warrick as Trustee of the William Warrick 1998 Irrevocable Trust for the  Benefit of Jodie Dawn Warrick, R-Vision Inc., R-Vision Motorized LLC,  Roadmaster LLC, Bison Manufacturing LLC and A.J.P. R.V., Inc., and William L.  Warrick as Sellers’ Representative (incorporated herein by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC  on November 23, 2005). |       |
| 2.4              |       | Asset Purchase  Agreement dated November 18, 2005, by and among the Company, R-Vision  Holdings LLC, A.J.P. R.V., Inc., and William L. Warrick as Sellers’  Representative (incorporated herein by reference to Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K filed with the SEC on November 23,  2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |
| 3.1              |       | Amended and  Restated Certificate of Incorporation of the Registrant (Incorporated herein  by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form  10-K for the year ended January 1, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |
| 3.2              |       | Certificate of  Amendment of Amended and Restated Certificate of Incorporation dated June 30,  1999 (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s  Annual Report on Form 10-K for the year ended January 1, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |
| 3.3              |       | Bylaws of  Registrant, as amended to date (Incorporated herein by reference to Exhibit 3.1  to the Registrant’s Current Report on Form 8-K filed with the SEC on November  16, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |
| 10.1             |       | Form of  Indemnification Agreement for directors and executive officers (Incorporated  herein by reference to Exhibit 10.2 to the Registrant’s Registration  Statement on Form S-1 (Reg. No. 33-67374) declared effective on  September 23, 1993).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |
| 10.2             |       | 1993 Director  Option Plan as Amended Through May 13, 2003. (Incorporated herein by  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |

 

79

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| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.3†       |       | 1993 Stock Option  Plan as amended through May 17, 2006. (Incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the  SEC on May 23, 2006).                                                                                                                                                                                                                                                                                                      |       |
| 10.3.1           |       | Form of 1993  Stock Plan Performance Share Agreement (Incorporated herein by reference to  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the  SEC on May 23, 2006).                                                                                                                                                                                                                                                                                                          |       |
| 10.3.2           |       | Form of 1993  Stock Plan Restricted Stock Units for Kay L. Toolson and John W. Nepute.  (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current  Report on Form 8-K filed with the SEC on May 23, 2006).                                                                                                                                                                                                                                                                        |       |
| 10.3.3           |       | Form of 1993  Stock Plan Restricted Stock Unit Agreement. (Incorporated herein by reference  to Exhibit 10.7 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                                                                                                                                                                                                                                                                        |       |
| 10.3.4           |       | Form of 1993  Stock Plan Restricted Stock units for directors. (Incorporated herein by  reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  filed with the SEC on August 21, 2006).                                                                                                                                                                                                                                                                                             |       |
| 10.3.5           |       | Form of Director  Option Agreement, Initial Grant. (Incorporated herein by reference to Exhibit  10.8 to the Registrant’s Annual Report on 10-K for the year ended December  31, 2005).                                                                                                                                                                                                                                                                                                               |       |
| 10.3.6           |       | Form of Director  Option Agreement, Subsequent Grant. (Incorporated herein by reference to  Exhibit 10.9 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                                                                                                                                                                                                                                                                            |       |
| 10.3.7           |       | Form of 1993  Stock Plan Stock Option Agreement. (Incorporated herein by reference to  Exhibit 10.10 to the Registrant’s Annual Report on 10-K for the year ended  December 31, 2005).                                                                                                                                                                                                                                                                                                           |       |
| 10.3.8           |       | Form of Annual  Irrevocable Election Under Director Stock Plan. (Incorporated herein by  reference to Exhibit 10.11 to the Registrant’s Annual Report on 10-K for the  year ended December 31, 2005).                                                                                                                                                                                                                                                                                                 |       |
| 10.4†       |       | 1993 Employee  Stock Purchase Plan and form of subscription agreement thereunder  (Incorporated herein by reference to Exhibit 10.5 to the Registrant's  Registration Statement on Form S-1 (Reg. No. 33-67374) declared effective on  September 23, 1993).                                                                                                                                                                                                                                                |       |
| 10.5†       |       | Executive  Variable Compensation Plan (Incorporated herein by reference to Appendix B to  the Registrant’s definitive Proxy Statement filed with the Securities and  Exchange Commission on April 5, 2004).                                                                                                                                                                                                                                                                                           |       |
| 10.6             |       | Third Amended and  Restated Credit Agreement dated November 18, 2005, by and among the Company,  the subsidiaries of the Company party thereto as co-borrowers, the lenders  party thereto from time to time, U.S. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to Exhibit 10.1  to the Registrant’s Current Report on Form 8-K filed with the SEC on November  23, 2005). |       |

 

80

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| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.6.1           |       | First Amendment  to Third Amended and Restated Credit January 4, 2007, by and among the  Company, the subsidiaries of the Company party thereto as co-borrowers, the  lenders party thereto from time to time, U.S. Bank National Association, as  Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent. |       |
| 10.7             |       | Annual Incentive  Plan. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s  Current Report on Form 8-K filed with the SEC on May 23, 2006).                                                                                                                                                                                        |       |
| 10.8             |       | Joint Venture  Agreement dated January 24, 2007 between the Registrant and International  Trust and Engine Corporation.                                                                                                                                                                                                                                    |       |
| 11.1             |       | Computation of  earnings per share (see Note 13 of Notes to Consolidated Financial Statements  included in Item 8 hereto).                                                                                                                                                                                                                                 |       |
| 21.1             |       | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                               |       |
| 23.1             |       | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                 |       |
| 24.1             |       | Power of Attorney  (included on the signature pages hereof).                                                                                                                                                                                                                                                                                               |       |
| 31.1             |       | Certification of  CFO under the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                        |       |
| 31.2             |       | Certification of  CEO under the Exchange Act as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                        |       |
| 32               |       | Certification of CEO and  CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   |       |

----

†                     Theitem listed is a compensatory plan.

81

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