**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

 

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

 

**For the fiscal year ended December 31, 2005**

 

**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**

 

----

 

**MONACO COACH CORPORATION**

(Exact Name of Registrant as specified in its charter)

 

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

 

**91320 Industrial Way**

**Coburg, Oregon 97408**

(Address of principal executive offices)

 

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

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

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

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

 

----

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO ý

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. YES o NO ý

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past ninety days. YES ý NO o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the Registrant’s knowledge, in definite proxyor information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large accelerated filer o    Acceleratedfiler ý    Non-accelerated filer o

 

Indicate by check mark if the registrant is a shellcompany (as defined in Rule 12b-2 of the Securities Exchange Act of 1934,as amended). YES o NO ý

 

The aggregate market value of the Common Stock held bynon-affiliates of the Registrant on December 31, 2005, based upon theclosing sale price of the Common Stock on July 2, 2005 as reported on theNew York Stock Exchange, was approximately $456.1 million. Shares of CommonStock held by officers and directors and their affiliated entities have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily conclusive for otherpurposes.

 

As of March 1, 2006 the Registrant had 29,681,833shares of Common Stock outstanding.

 

----

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The Registrant’s definitive Proxy Statement for itsAnnual Meeting of Stockholders to be held on May 17, 2006 (the “ProxyStatement”) is incorporated by reference in Part III of this Form 10-Kto the extent stated therein.

 

----

 

This document consists of 75 pages. The Exhibit Indexappears at page 71 and 74.

 

 

----

 

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

 

2

----

 

PART I

 

This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These statements includewithout limitation those below marked with an asterisk (*). In addition, theCompany may from time to time make oral forward-looking statements throughstatements that include the words “believes,” “expects,” “anticipates,” orsimilar expressions. Such forward-looking statements involve known and unknownrisks, 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 Item 1A. Risk Factors.

 

**ITEM 1. BUSINESS**

 

OVERVIEW

 

Monaco Coach Corporation (the “Company”) is a leadingmanufacturer of premium recreational vehicles including Class A, B, and Cmotor coaches, as well as towable recreational vehicles. The Company alsodevelops and sells luxury motorcoach resort facilities. These three operations,while closely tied into the recreational lifestyle, are segmented for reportingpurposes as the Motorized Recreational Vehicle (MRV) segment, the TowableRecreational Vehicle (TRV) segment, and the Motorhome Resort (MR) segment. Thefollowing table represents the net sales by segment for the fiscal years 2003,2004, and 2005. All numbers are in thousands:

 
| ** **                              | ** ** | **2003** | ** ** | **% of  Sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** | **2005** | ** ** | **% of  Sales** | ** ** |
|-----------------------------------------|------------|----------|------------|-----------------|------------|----------|------------|-----------------|------------|----------|------------|-----------------|------------|
| Motorized  Recreational Vehicle Segment |       | $        | 1,059,347  |            | 91.5       | %        | $          | 1,234,233       |       | 89.1     | %          | $               | 1,017,766  |   | 82.3 | % |
| Towable  Recreational Vehicle Segment   |       | 87,980   |       | 7.6             | %          | 129,331  |       | 9.3             | %          | 185,433  |       | 15.0            | %          |
| Motorhome Resort  Segment               |       | 10,756   |       | 0.9             | %          | 22,705   |       | 1.6             | %          | 33,039   |       | 2.7             | %          |
| Total Sales                             |       | $        | 1,158,083  |            | 100.0      | %        | $          | 1,386,269       |       | 100.0    | %          | $               | 1,236,238  |   | 100.0 | % |

 

RECENT BUSINESS CHANGES

 

On November 18, 2005the Company acquired R-Vision, Inc., R-Vision Motorized, LLC, BisonManufacturing, LLC, and Roadmaster, LLC (“R-Vision”), which manufacturestowable and motorized products.  TheCompany believes that developing relationships with a broad base of first-timebuyers, coupled with the Company’s strong emphasis on quality, customer serviceand design innovation, will foster brand loyalty and increase the likelihoodthat, over time, more customers will trade-up through the Company’s line ofproducts.  Attracting larger numbers offirst-time buyers is important to the Company because of the Company’s beliefthat many recreational vehicle customers purchase multiple recreationalvehicles during their lifetime.

 

During the third quarter of 2005, the Companyannounced that it was closing its Royale Coach operations in Elkhart,Indiana.  Royale Coach produced Prevostbus conversion motor coaches with price points in excess of $1.4 million.  Royale Coach sold approximately 20 coachesper year and was not a significant portion of the Company’s overallbusiness.  As of the end of 2005, allclosure costs have been accrued for in the Company’s financial statements.

 

MOTORIZED RECREATIONALVEHICLE SEGMENT

 

The Company is a leading manufacturer of motorizedrecreational vehicles.  The Company’smotorized product line consists of 37 models under the “Monaco,” “HolidayRambler,” “Beaver,” “Safari,” “McKenzie”, 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 $575,000.  Based upon retail registrations in 2005, theCompany believes it had a 26.0% share of the market for diesel Class Amotor coaches, a 10.3% share of the market for gas Class A motor coaches,a 18.1% share of the market for all Class A motor

 

3

----

 

coaches, and a 3.2% share for all Class C motor coaches.  At December 31, 2005, the Company’sproducts were sold through an extensive network of approximately 580 dealerlots located primarily in the United States and Canada.

 

TOWABLE RECREATIONALVEHICLE SEGMENT

 

The Company manufactures34 models of towable recreational vehicles under the “Holiday Rambler,” “McKenzie”,and “R-Vision” brand names.  The Company’stowable products, range in suggested retail price from $1,000 to $70,000.  Based upon retail registrations in 2005, theCompany believes it had a 4.5% share of the market for fifth wheel towables anda 5.1% share of the market for travel trailers. At December 31, 2005, the Company’s products were sold through anextensive network of approximately 580 dealer lots located primarily in theUnited States and Canada.

 

MOTORHOME RESORTS SEGMENT

 

The Company’s motorhomeresorts are located in Indio, California, and Las Vegas, Nevada.  The resorts provide high-end luxurydestination locations for owners of Class A motorhomes, that includeamenities such as golf courses, swimming pools, tennis courts, and fullrecreational vehicle hookups for utilities. The Company sells individual lots through independent real estate agents,and the owner shares a common interest in the resort amenities.  As of December 31, 2005, the Company hadsold 534 of the 564 lots that have been developed.  Both the Las Vegas and Indio resorts havefuture phases to develop, and will continue to provide resort lot sales activitythrough the second quarter of 2007. In addition to these two resorts, theCompany is actively seeking new properties to acquire, with the intent ofdeveloping new resorts for selling seasons in late 2007 and 2008.

 

The resort development business is regulated by various governmentalauthorities for site planning, environmental impact studies, and land usage. Tocomply with the requirements imposed by these various authorities the Companyemploys technical staff, and utilizes outside legal counsel.

 

The motorhome resort industry is highly fragmented, with no singledevelopment company occupying a dominant position.    While there are nosingle large competitors in the motorhome resort development segment, theCompany nonetheless competes with state, county, and national parks andcampgrounds, privately owned campgrounds such as KOA, and independentdevelopers.    The geographic markets that the Company has targeted arelocated in the southeast (Florida), and the southwest (California and Nevada).    Theseareas provide destination locations that have major cities or resortdestinations that provide attractions outside of the motorhome resorts themselves.

 

*TheCompany’s website is located 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 amendmentsto those reports, as soon as reasonably practicable after the reports areelectronically filed with, or furnished to, the Securities and ExchangeCommission.*

 

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 215 to 415 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 mobileaccommodations. The five areas are the living room, kitchen, dining room,bathroom, and bedroom. For each model, the Company offers a variety of interiorlayouts.

 

Each of the Company’s recreational vehicles comesfully equipped with a wide range of kitchen and bathroom appliances, audioand visual electronics, communication devices, and other amenities, including couches,dining tables, closets, and storage spaces. All of the Company’s recreationalvehicles incorporate products from well-recognized suppliers, including:stereos, CD and cassette players, VCR’s, DVD’s, and televisions from Sharp,RCA, Sony; microwave ovens from Sharp, Magic Chef, and General Electric; stovesand ranges from KitchenAid

 

4

----

 

and Modern Maid; enginesfrom Cummins and Caterpillar; transmissions from Allison; and chassis fromFord, Workhorse, and our own Roadmaster brand. The Company’s high end productsoffer top-of-the-line amenities, including 37” Sharp LCD televisions, GPSsystems from Kenwood and Pioneer, fully automatic DSS (satellite) systems,Corian solid surface kitchen and bath countertops, imported ceramic tile,leather furniture, and Ralph Lauren fabrics.

 

The following tables illustrate our motorized andtowable recreational vehicle segment offerings as of December 31, 2005:

 

MOTORIZED VEHICLES

 

COMPANY PRODUCTS

 

| ** **           | ** ** | **CURRENT  SUGGESTED**        | ** ** |
|----------------------|------------|-------------------------------|------------|
| **TYPE**             | ** ** | **RETAIL  PRICE RANGE**       | ** ** |
| Class A  Diesel |       |                          |       |
| Monaco               |       | $134,000 - $565,000           |       |
| Holiday Rambler      |       | $134,000 - $445,000           |       |
| Beaver               |       | $240,000 - $575,000           |       |
| Safari               |       | $185,000 - $215,000           |       |
|                 |       |                          |       |
| Class A Gas     |       |                          |       |
| Monaco               |       | $ 80,000 - $150,000      |       |
| Holiday Rambler      |       | $ 80,000 - $150,000      |       |
| Safari               |       | $ 80,000 - $130,000      |       |
| R-Vision             |       | $ 80,000 - $130,000      |       |
|                 |       |                          |       |
| Class C         |       |                          |       |
| Monaco               |       | $ 80,000 - $ 86,000 |       |
| Holiday Rambler      |       | $ 65,000 - $ 85,000 |       |
| Safari               |       | $ 65,000 - $ 75,000 |       |
| R-Vision             |       | $ 45,000 - $ 65,000 |       |

 

TOWABLE VEHICLES

 

COMPANY PRODUCTS

 

| ** **      | ** ** | **CURRENT  SUGGESTED**        | ** ** |
|-----------------|------------|-------------------------------|------------|
| **TYPE**        | ** ** | **RETAIL  PRICE RANGE**       | ** ** |
| Fifth Wheels    |       |                          |       |
| McKenzie        |       | $ 28,000 - $ 65,000 |       |
| Holiday Rambler |       | $ 28,000 - $ 63,000 |       |
| R-Vision        |       | $ 8,200 - $ 70,000  |       |
|            |       |                          |       |
| Travel Trailers |       |                          |       |
| McKenzie        |       | $ 25,000 - $ 32,000 |       |
| Holiday Rambler |       | $ 25,000 - $ 45,000 |       |
| R-Vision        |       | $ 1,000 - $ 40,000  |       |

 

5

----

 

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 itscompetitors. By working with manufacturing personnel, the Company’s productdesigners engineer the recreational vehicles so that they can be builtefficiently and with high quality. Service personnel suggest ideas to improvethe serviceability and reliability of the Company’s products and give thedesigners feedback on the Company’s past designs.

 

The exteriors of the Company’s recreational vehiclesare designed to be aesthetically appealing to consumers, aerodynamic in shapefor fuel efficiency, and practical to manufacture. The Company has anexperienced team of computer-aided design personnel to complete the productdesign and produce prints from which the products will be manufactured.

 

The Company expensed $1.2 million, $1.3 million, and$1.5 million for research and development in the fiscal years 2003, 2004, and2005, respectively.

 

SALES AND MARKETING FOR MOTORIZED AND TOWABLERECREATIONAL VEHICLES

 

DEALERS

 

The Company expanded its dealer network over the pastyear to approximately 580 dealership lots primarily located in the UnitedStates and Canada at December 31, 2005. Revenues generated from shipmentsto dealerships located outside the United States were approximately 3.6%, 3.4%,and 5.6% of total sales for the fiscal years 2003, 2004, and 2005, respectively.Sales to the Company’s dealerships are subject to concentrations. Sales to thetop dealer in the recreational vehicle segments accounted for 12.6%, 10.9%, and10.9% of total sales for the years ended 2003, 2004, and 2005 respectively. TheCompany intends to continue to expand its dealer network, primarily bytargeting key geographic regions where the Company’s products are not wellrepresented.*  The Company maintains aninternal sales organization consisting of 40 account executives who service theCompany’s dealer network.

 

The Company analyzes and selects new dealers on thebasis of such criteria as location, marketing ability, sales history, financialstrength, and the capability of the dealer’s repair services. The Companyprovides its dealers with a wide variety of support services, includingadvertising subsidies and technical training, and offers certain model pricingdiscounts to dealers who exceed wholesale purchase volume milestones. TheCompany’s sales staff is also available to educate dealers about thecharacteristics and advantages of the Company’s recreational vehicles comparedwith competing products. The Company offers dealers geographic exclusivity tocarry a particular model. While the Company’s dealership contracts haverenewable one or two-year terms, historically the Company’s dealer turnoverrate has been low.

 

Dealers typically finance their inventory throughrevolving credit facilities established with asset-based lending institutions,including specialized finance companies and banks. It is industry practice thatsuch “floor plan” lenders require recreational vehicle manufacturers to agreeto repurchase (for a period of 12 to 18 months from the date of the dealer’spurchase) motor coaches and towables previously sold to the dealer in the eventthe dealer defaults on its financing agreements. The Company’s contingentobligations under these repurchase agreements are reduced by the proceedsreceived upon the sale of any repurchased units. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Liquidity andCapital Resources,” and Note 19 of Notes to the Company’s ConsolidatedFinancial Statements.

 

6

----

 

ADVERTISING AND PROMOTIONS

 

The Company advertises regularly in trade journals andmagazines, participates in cooperative advertising programs with its dealers,and produces color brochures depicting its models’ performance features andamenities. The Company also promotes its products with direct incentiveprograms to dealer sales personnel linked to sales of particular models.

 

An important marketing activity for the Company is itsparticipation with its dealers in the more than 250 recreational vehicle tradeshows and rallies each year. National trade shows and rallies, which canattract as many as 30,000 attendees, are an integral part of the Company’smarketing process because they enable potential retail customers to compare andcontrast all the products offered by the major recreational vehiclemanufacturers. Setting up attractive display areas at major trade shows tohighlight the newest design innovations and features of its products iscritical to the Company’s success in attracting and maintaining its dealernetwork and in generating enthusiasm at the retail customer level. The Companyalso provides complimentary service for minor repairs to its customers atseveral rallies.

 

The Company attempts to encourage and reinforcecustomer loyalty through support of owners’ clubs of its products so that they may shareexperiences and communicate with each other. The clubs of the Company’sproducts currently have more than 30,000 members. The Company publishesmagazines to enhance its relations with these clubs and holds rallies for clubsto meet periodically to view the Company’s new models and obtain maintenanceand service guidance. Attendance at Company-sponsored rallies can be as high as2,100 recreational vehicles per year. The Company receives support from itsdealers and suppliers to host these rallies.

 

The Company’s web sites also offer an extensivelisting of the Company’s models, floor plans, and features, including “virtualtours” of some models. A dealer locator feature identifies for customers theclosest dealers to their location for the model(s) they are interested inpurchasing. The Company’s web site also provides information for upcomingrallies and club functions as well as links to other RV lifestyle web sites ofinterest to existing or potential customers.

 

CUSTOMER SERVICE

 

The Company believes that customer satisfaction isvitally important in the recreational vehicle market because of the largenumber of repeat customers and the rapid communication of business reputationsamong recreational vehicle enthusiasts. The Company also believes that serviceis an integral part of the total product the Company delivers and thatresponsive and professional customer service is consistent with the premiumimage the Company strives to convey in the marketplace.

 

****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),Allison Transmission Division of General Motors Corporation (“Allison”)(transmissions), Workhorse (chassis), Onan (generators), and Ford Motor Company(“Ford”) (chassis). The Company’s limited warranty covers allmanufacturing-related problems and parts and system failures, regardless ofwhether the repair is made at a Company facility or by one of the Company’sdealers or authorized service centers. As of December 31, 2005, theCompany had approximately 580 dealerships providing service to owners of theCompany’s products. In addition, owners of the Company’s diesel products haveaccess to the entire Cummins and Caterpillar dealer networks, which includeover 2,000 repair centers.****

 

The Company operates service centers in Harrisburg,Oregon; Elkhart, Indiana; and in Wildwood, Florida. The Company hadapproximately 673 employees in customer service at December 31, 2005. TheCompany maintains individualized production records and a computerized warrantytracking system which enable the Company’s service personnel to identifyproblems quickly and to provide individualized customer service. While manyproblems can be resolved on the telephone, the customer may be referred toa nearby dealer or service center.

 

7

----

 

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

 

The Company’s motor coach production capacity at theend of 2005 based on a single shift five-day work week, was 54 motorizedproducts per day, and 125 towable units per day. The Company is currentlyutilizing approximately 55% of total capacity and therefore believes it ispositioned to take advantage of future growth potential of the Company’sproducts within the RV market.*

 

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 market dynamics.

 

Each facility has several stations for manufacturing,organized into four broad categories: chassis manufacturing, bodymanufacturing, painting, and finishing. It takes from two weeks to two monthsto build each unit, depending on the product. The Company keeps a detailed logbook during the manufacture of each product and inputs key information into itscomputerized service tracking system. Each unit is given an inspection duringwhich its appliances and plumbing systems are thoroughly tested. As a finalquality control check, each motor coach is given a road test.

 

The Company purchases raw materials, parts,subcomponents, electronic systems, and appliances from approximately 1,000vendors. These items are either directly mounted in the vehicle or are utilizedin subassemblies which the Company assembles before installation in the vehicle.The Company attempts to minimize its level of inventory by ordering most partsas it needs them. Certain key components that require longer purchasing leadtimes are ordered based on planned needs. Examples of these components arediesel engines, axles, transmissions, chassis, and interior designer fabrics. TheCompany has a variety of major suppliers, including Allison, Workhorse,Cummins, Caterpillar, Dana, Onan, Industrial Finishes, and Ford. The Companydoes not have any long-term supply contracts with these suppliers or theirdistributors, but believes it has good relationships with them. To minimize therisks associated with reliance on a single-source supplier, the Companytypically keeps a 60-day supply of axles, engines, chassis, and transmissionsin stock or available at the suppliers’ facilities and believes that, in anemergency, other suppliers could fill the Company’s needs on an interimbasis.*  The Company presently believesthat its allocation by suppliers of all components is sufficient to meetplanned production volumes, and the Company does not foresee any operatingdifficulties as a result of vendor supply issues.*  Nevertheless, there can be no assurance thatAllison, Ford, or any of the Company’s other suppliers will be able to meet theCompany’s future requirements for transmissions, chassis, or other keycomponents. An extended delay or interruption in the supply of any componentsobtained from a single or limited source supplier could have a material adverseeffect on the Company’s business, results of operations, and financialcondition.

 

8

----

 

BACKLOG

 

The Company’s products are generally manufacturedagainst orders from the Company’s dealers. As of December 31, 2005, theCompany’s backlog of orders was $297.6 million, compared to $256.4 million at January 1,2005. 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 for recreational vehicles is highlycompetitive. The Company currently encounters significant competition at eachprice point for its recreational vehicle products. The Company believes thatthe principal competitive factors that affect the market for the Company’sproducts include product quality, product features, reliability, performance,quality of support and customer service, loyalty of customers, brandrecognition, and price. The Company believes that it competes favorably againstits competitors with respect to each of these factors. The Company’scompetitors in the motorized recreational vehicle segment include, amongothers: Coachmen Industries, Inc., Fleetwood Enterprises, Inc.,National R.V. Holdings, Inc., and Winnebago Industries, Inc. TheCompany’s competitors in the towable recreational vehicle segment include, amongothers: Fleetwood Enterprises, Inc. and Thor Industries, Inc. Many of theCompany’s competitors have significant financial resources and extensivemarketing capabilities. There can be no assurance that either existing or newcompetitors will not develop products that are superior to or that achievebetter consumer acceptance than the Company’s products, or that the Companywill continue to remain competitive.

 

GOVERNMENT REGULATION

 

The manufacture and operation of recreational vehiclesare subject to a variety of federal, state, and local regulations, includingthe National Traffic and Motor Vehicle Safety Act and safety standards forrecreational vehicles and their components that have been promulgated by theDepartment of Transportation. These standards permit the National HighwayTraffic Safety Administration to require a manufacturer to repair or recallvehicles with safety defects or vehicles that fail to conform toapplicable safety standards. Because of its sales in Canada, the Company isalso governed by similar laws and regulations promulgated by the Canadiangovernment. The Company has on occasion voluntarily recalled certain products. TheCompany’s operating results could be adversely affected by a major productrecall or if warranty claims in any period exceed warranty reserves.

 

The Company is a member of the Recreation VehicleIndustry Association (the “RVIA”), a voluntary association of recreationalvehicle manufacturers and suppliers, which promulgates recreational vehiclesafety standards. Each of the products manufactured by the Company has an RVIAseal affixed to it to certify that such standards have been met.

 

Many states regulate the sale, transportation, andmarketing of recreational vehicles. The Company is also subject to state consumerprotection laws and regulations, which in many cases require manufacturers torepurchase or replace chronically malfunctioning recreational vehicles. Somestates also legislate additional safety and construction standards forrecreational vehicles.

 

The Company is subject to regulations promulgated bythe Occupational Safety and Health Administration (“OSHA”). The Company’splants are periodically inspected by federal or state agencies, such as OSHA,concerned with workplace health and safety.

 

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 is subject to product liability andwarranty claims arising in the ordinary course of business. To date, theCompany has been successful in obtaining product liability insurance on termsthe Company considers

 

9

----

 

acceptable. The terms ofthe policy contain a self-insured retention amount of $500,000 per occurrence,with a 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. There can be no assurance that the Company will be able to obtaininsurance coverage in the future at acceptable levels or that the costs ofinsurance will be reasonable. Furthermore, successful assertion against theCompany of one or a series of large uninsured claims, or of one or a series ofclaims exceeding any insurance coverage, could have a material adverse effecton the Company’s business, operating results, and financial condition.

 

In 2002, the National Highway Traffic Safety Administration(NHTSA), enacted new vehicle safety legislation referred to as the TREAD Actthat imposes significant early warning reporting (“EWR”) requirements onvehicle manufacturers, including the Company. The Company believes that it hasmet the EWR requirements of the TREAD Act 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  TheCompany’s recreational vehicle manufacturing operations are subject to avariety of federal and state environmental regulations relating to the use,generation, storage, treatment, and disposal of hazardous materials. These lawsare often revised and made more stringent, and it is likely that futureamendments to these laws will impact the Company’s operations.

 

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

 

The Company is planning to add a new paintreciprocator system in Wakarusa, Indiana. The Company has submitted allrequired permit applications and does not anticipate any permit delays or thatadditional air pollution control equipment will be required as a condition ofthese construction approvals. The Company is aware that Elkhart County,Indiana, has been designated as a non-attainment area under the Clean AirStandards for Ozone and PM2.5. Regardless, the Company does not anticipate anynew conditions that will require additional air pollution control equipment atoperations located in Elkhart or at any of our other existing operations,although new regulations and their interpretation may change over time,and there can be no assurance that additional expenditures will not berequired.*

 

During 2004, additionalfederal Maximum Achievable Control Technology (“MACT”) regulations were adopted.The Company is in compliance with the new MACT regulations, and will notrequire any material capital expenditures at its facilities beyond those whichhave already been incurred.*  However,the ongoing interpretation of these regulations is uncertain and there can beno assurance that additional capital 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 completed a voluntary remediation activity at one of its facilitiesacquired in the SMC acquisition. The remediation project was associated withold abandoned fuel storage tanks. The Company is currently unaware of any othersites owned or facilities operated by the Company that require environmentalremediation. However, the failure of the Company to comply with present orfuture regulations could subject the Company to: (i) fines; (ii) potentialcivil and criminal liability; (iii) suspension of production or cessationof

 

10

----

 

operations; (iv) alterationsto the manufacturing process; or (v) costly cleanup or capitalexpenditures, any of which could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

EMPLOYEES

 

As of December 31, 2005, the Company had 6,040full-time employees, including 4,607 in production, 109 in sales, 673 inservice, and 651 in management and administration. The Company’s employees arenot represented by any collective bargaining organization, and the Company hasnever experienced a work stoppage resulting from labor issues. The Companybelieves its relations with its employees are good.

 

EXECUTIVE OFFICERS OF THE COMPANY

 

The following sets forth certain information withrespect to the executive officers of the Company as of December 31, 2005:

 
| **Name**                  | ** ** | **Age** | ** ** | **Position with the  Company**                                      |
|---------------------------|------------|---------|------------|---------------------------------------------------------------------|
| Kay L. Toolson            |       | 62      |       | Chairman and Chief Executive Officer                                |
| John W. Nepute            |       | 54      |       | President                                                           |
| Richard E. Bond           |       | 52      |       | Senior Vice President, Secretary, and Chief  Administrative Officer |
| Martin W. Garriott        |       | 50      |       | Vice President and Director of Oregon Manufacturing                 |
| Irvin M. Yoder            |       | 58      |       | Vice President and Director of Indiana Manufacturing                |
| Patrick F. Carroll        |       | 48      |       | Vice President of Product Development                               |
| P. Martin Daley           |       | 41      |       | Vice President and Chief Financial Officer                          |
| Michael P. Snell          |       | 37      |       | Vice President of Sales and Marketing                               |
| John B. Healey, Jr.  |       | 40      |       | Vice President of Corporate Purchasing                              |
| Richard G. Kangail        |       | 50      |       | Vice President of Human Resources                                   |
| Michael F. Greene         |       | 57      |       | Vice President Engineering                                          |
| Garth R. Herring          |       | 50      |       | Vice President Service Operations                                   |
| April A. Lynch-Klein |       | 35      |       | Vice President Customer Support Services                            |
| Ronald J. Stone           |       | 46      |       | Director of Information Services                                    |
| Durwood P. Robertson      |       | 67      |       | Special Assistant to CEO                                            |
| Charles J. Kimball        |       | 40      |       | Corporate Controller                                                |

 

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

 

Mr. Nepute has served the Company as Presidentsince October 2000. He served as Executive Vice President, Treasurer andChief Financial Officer from September 1999 to October 2000. Prior tothat and from 1991, he served the Company and its predecessor in the capacityof Vice President of Finance, Treasurer and Chief Financial Officer. From January 1988until 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

 

11

----

 

1998. Prior to that andfrom February 1997, he served the Company as Vice President, Secretary,and General Counsel, having joined the Company in January 1997. From 1987to December 1996, he held the position of Vice President, Secretary, andGeneral Counsel of Holiday Rambler, which was acquired by the Company in 1996,and originally joined Holiday Rambler as Vice President and Assistant GeneralCounsel in 1984.

 

Mr. Garriott has served the Company as VicePresident and Director of Oregon Manufacturing since January 1997. He hasbeen continuously employed by the Company or its predecessor since November 1975in various capacities, including Vice President of Corporate Purchasing from October 1994until December 1996.

 

Mr. Yoder has served the Company as VicePresident and Director of Indiana Manufacturing since August 1998. Joiningthe Company upon the acquisition of Holiday Rambler in March 1996 asDirector of Indiana Motorized Manufacturing, he served in that capacity throughJuly 1998. Mr. Yoder began his employment with Holiday Rambler in1969 and held a variety of production-related positions, serving as AreaManager of Motorized Production from 1980 until March 1996.

 

Mr. Carroll has served as Vice President ofProduct Development since August 1998 and prior to that as Director ofProduct Development since joining the Company in October 1995. He has helda variety of marketing and product development positions with variousrecreational vehicle manufacturers since 1979.

 

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 Salesand Marketing since November 2004. Prior to that and since joining theCompany in October 1994, he held various positions including VicePresident of Sales and National Sales Manager of Monaco Motorized Sales.

 

Mr. Healey has served as Vice President ofCorporate Purchasing since October 2000 and as Director of Purchasing forIndiana Operations beginning in August 1998. Prior to that and sincejoining the Company in March of 1991, he held a variety of positions inthe purchasing department.

 

Mr. Kangail has served as the Vice President ofHuman Resources since joining the Company in October 2004. Prior tojoining the Company, Mr. Kangail served in several human resourcesexecutive roles with Unocal Corporation (1996-2004), and with Atlantic RichfieldCorp. (1989-1996).

 

Mr. Greene has served as Vice President of MonacoEngineering since May 2005. Previously, Mr. Greene served as Vice President ofOperations at Workhouse Custom Chassis Company from March 2004 until May 2005.From 1974 through March 2004 Mr. Greene served in various senior operation andtechnology positions at Dana Corporation and Workhorse Custom Chassis. BothWorkhorse Custom Chassis Company and Dana Corporation manufacture componentssuch as chassis and drive train components for the transportation industry.

 

Mr. Herring has served as Vice President ofService Operations since October 2001. Prior to that, and during his 12year employment with the Company, Mr. Herring served as Vice President ofCustomer Service and Director of Oregon Service.

 

Ms. Lynch-Klein has served as Vice PresidentCustomer Support Services since 2003, and is responsible for warranty, parts,customer service call centers, technical publications and dealer training.Prior to 2003 and since she began working for the Company in 1988, she has heldvarious supervisory and management positions of increasing levels of authoritywithin the Company.

 

Mr. Stone has served as the Director ofInformation Services since December 2003. Prior to that and since joiningthe Company in October 2001, he held a variety of increasingly responsiblepositions within the information systems department.

 

Mr. Robertson has been with Monaco CoachCorporation since January 1988 and has been serving as the SpecialAssistant to the CEO since 1999. Previous to this, he served as President ofthe Company from 1995 to 1998. From 1991 to 1995, Mr. Robertson served asthe Vice President of Sales and Marketing. From 1988 to 1990, he was a NationalSales Manager for the Company.

 

Mr. Kimball has served 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.

 

12

----

 

**ITEM 1A. RISK FACTORS**

 

We have listed below various risks and uncertainties relating to ourbusinesses. This list is not inclusive of all the risks and uncertainties weface, but any of these could cause our actual results to differ materially fromthe results contemplated by the forward-looking statements contained in thisreport or that we may issue from time to time in the future.

 

THE EXPECTED BENEFITS OF OUR RECENT ACQUISITION OFR-VISION AND AFFILIATES MAY NOT BE REALIZED  On November 18, 2005 we acquired Indianabased towable and motorhome manufacturer R-Vision, Inc., R-VisionMotorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC (collectively “R-Vision”)to acquire all of the outstanding shares of R-Vision. The process ofintegrating R-Vision into our company operations may result in unforeseenoperating difficulties and expenditures and may absorb significantmanagement attention that would otherwise be available for the ongoingdevelopment of our business. This may cause an interruption or a loss ofmomentum in our operating activities, which in turn, could have a materialadverse affect on our operating results and financial condition. Moreover, theacquisition involves a number of additional risks, such as the loss of keyemployees of R-Vision as a result of the acquisition, the incorporation ofacquired products into our existing product line, the amortization of debtissuance costs, and the difficulty of integrating disparate corporate cultures.Accordingly, the anticipated benefits may not be realized or theacquisition may have a material adverse affect on our operating resultsand financial condition.

 

WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONS INOUR OPERATING RESULTS FOR A VARIETY OF REASONS Our net sales, gross margin, and operating results may fluctuatesignificantly from period to period due to a number of factors, many of whichare not readily predictable. These factors include the following:

 

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

 

•                  Weship 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 our products.

 

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

 

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

 

•      Fluctuations in demand for our resort lotsdue to changing economic and other conditions.

 

Our overall gross margin may decline in futureperiods to the extent that we increase the percentage of sales of lower grossmargin towable products or if the mix of motor coaches we sell shifts to lowergross margin 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,seasonal

 

13

----

 

factors could have asignificant impact on our operating results in the future. Additionally,unusually severe weather conditions in certain markets could delay the timingof shipments from one quarter to another.

 

We attempt to forecast orders for our productsaccurately and commence purchasing and manufacturing prior to receipt of suchorders. However, it is highly unlikely that we will consistently accuratelyforecast the timing, rate, and mix of orders. This aspect of our business makesour 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 The recreational vehicle industry has been characterized by cycles ofgrowth and contraction in consumer demand, reflecting prevailing economic,demographic, and political conditions that affect disposable income forleisure-time activities. For example, unit shipments of recreational vehicles(excluding conversion vehicles) peaked at approximately 259,000 units in 1994and declined to approximately 247,000 units in 1996. The industry peaked againin 1999 at approximately 321,000 units and declined in 2001 to 257,000 units. Theindustry continued to climb to approximately 321,000 units in 2003, 370,000units in 2004, and 384,000 in 2005. Our business is subject to the cyclicalnature of this industry. Some of the factors that contribute to thiscyclicality include fuel availability and costs, interest rate levels, thelevel of discretionary spending, and availability of credit and overallconsumer confidence. The recent decline in consumer confidence and slowing ofthe overall economy has adversely affected the recreational vehicle market. Anextended continuation of these conditions would materially affect our business,results of operations, and financial condition.

 

WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR ASIGNIFICANT PERCENTAGE OF OUR SALES Although our products were offered by approximately 580 dealershipslocated primarily in the United States and Canada as of December 31, 2005,a significant percentage of our sales are concentrated among a relatively smallnumber of independent dealers. For fiscal years 2004 and 2005, sales to onedealer, Lazy Days RV Center, accounted for 10.9% of total sales. For fiscalyears 2004 and 2005, sales to our 10 largest dealers, including Lazy Days RVCenter, accounted for a total of 39.0% and 38.7% of total sales, respectively. Theloss of a significant dealer or a substantial decrease in sales by any of thesedealers could have a material impact on our business, results of operations,and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OFOUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITS LENDER  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 does not repay its lender. Obligations under these agreements varyfrom period to period, but totaled approximately $607.3 million as of December 31,2005, with approximately 5.9% concentrated with one dealer. If we wereobligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could beadversely affected.

 

OUR ACCOUNTS RECEIVABLEBALANCE IS SUBJECT TO RISK  We sell ourproduct to dealers who are predominantly located in the United States andCanada. 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 31, 2005, total tradereceivables were $102.7 million, with approximately $72.6 million, or 70.7% ofthe outstanding accounts receivable balance concentrated among floor planlenders. The remaining $30.1 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 OFFUEL  An interruption in the supply, or asignificant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect ourbusiness. Diesel fuel and gasoline have, at various times in the past, beeneither expensive or difficult to obtain.

 

14

----

 

WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE USWITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS  A number of importantcomponents for our products are purchased from a single or a limited number ofsources. These include turbo diesel engines (Cummins and Caterpillar),substantially all of our transmissions (Allison), axles (Dana) for all dieselmotor coaches, and chassis (Workhorse and Ford) for gas motor coaches. We haveno long-term supply contracts with these suppliers or their distributors, andwe cannot be certain that these suppliers will be able to meet our futurerequirements. Consequently, the Company has periodically been placed onallocation of these and other key components. The last significant allocationoccurred in 1997 from Allison, and in 1999 from Ford. An extended delay orinterruption in the supply of any components that we obtain from a singlesupplier or from a limited number of suppliers could adversely affect ourbusiness, results of operations, and financial condition.

 

OUR INDUSTRY IS VERYCOMPETITIVE. WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TOREMAIN COMPETITIVE  The market for ourproducts is very competitive. We currently compete with a number ofmanufacturers 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, may developproducts that customers in the industry prefer over our products.

 

We believe that theintroduction of new products and new features is critical to our success. Delaysin the introduction of new models or product features, quality problemsassociated with these introductions, or a lack of market acceptance of newmodels or features could affect us adversely. For example, unexpected costsassociated with model changes have affected our gross margin in the past. Further,new product introductions can divert revenues from existing models and resultin fewer sales of existing products.

 

OUR PRODUCTS COULD FAILTO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSINGDAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSSOF SALES  Our customers require demandingspecifications for product performance and reliability. Because our productsare complex and often use advanced components, processes and techniques,undetected errors and design flaws may occur. Product defects result inhigher product service, warranty and replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich will negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECTTO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  We are subject to litigation arising in theordinary course of our business, typically for product liability and warrantyclaims that are common in the recreational vehicle industry. While we do notbelieve that the outcome of any pending litigation, net of insurance coverage,will materially adversely affect our business, results of operations, orfinancial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

To date, we have beensuccessful in obtaining product liability insurance on terms that we consideracceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $3.0 million. Overall product liability insurance, including umbrellacoverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. We cannot be certain we will be ableto obtain insurance coverage in the future at acceptable levels or that thecosts of such insurance will be reasonable. Further, successful assertionagainst us of one or a series of large uninsured claims, or of a series ofclaims exceeding our insurance coverage, could have a material adverse effecton our business, results of operations, and financial condition.

 

IN ORDER TO BESUCCESSFUL, WE MUST ATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL AND OTHERKEY EMPLOYEES, AND OUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ON OURRESULTS OF OPERATIONS  The Company’s futureprospects depend upon retaining and motivating key management personnel,including Kay L. Toolson, the Company’s Chief Executive Officer, and John W.Nepute, the Company’s President.  Theloss of one or more of these key management personnel could adversely affectthe Company’s business.  The prospects ofthe Company also depend in part on its ability to attract and retain highlyskilled engineers and other qualified technical, manufacturing, financial,managerial, and marketing personnel. Competition for such personnel is intense, and there can be no assurancethat the Company will be successful in attracting and retaining such personnel.

 

OUR RECENT GROWTH HAS PUTPRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENTINFORMATION SYSTEMS  In the past fewyears, we have significantly

 

15

----

 

expanded the size andscope of our business, which has required us to hire additional employees. Someof these new employees include new management personnel. In addition, ourcurrent management personnel have assumed additional responsibilities. Theincrease in our size over a relatively short period of time has put pressure onour operating, financial, and management information systems. If we continue toexpand, such growth would put additional pressure on these systems and may causesuch systems to malfunction or to experience significant delays.

 

WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENTAUTOMATION PLAN  As we continue to worktowards involving automated machinery and equipment to improve efficiencies andquality, we will be subject to certain risks involving implementing newtechnologies into our facilities.

 

The expansion into newmachinery and equipment technologies involves risks, including the following:

 

•                  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.

 

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

 

•                  Wemay be unable to complete a planned machinery and equipment implementationin a timely manner, which could result in lower production levels and aninability to satisfy customer demand for our products.

 

WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCEPLANNING SYSTEM (ERP) IMPLEMENTATION  Wehave recently begun to implement a new ERP system and will be subject tocertain 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.

 

•                  Itcould require us to restructure or develop our internal processes to adapt tothe new system.

 

•                  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 to 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 STOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TOFLUCTUATE  The market price of our CommonStock is subject to wide fluctuations in response to quarter-to-quartervariations in operating results, changes in earnings estimates by analysts,announcements of new products by us or our competitors, general conditions inthe recreational vehicle market, and other events or factors.  In addition, the stocks of many recreationalvehicle companies have experienced price and volume fluctuations which have notnecessarily been directly related to the companies’ operating performance, andthe market price of our Common Stock could experience similar fluctuations.

 

**ITEM 1B. UNRESOLVED STAFFCOMMENTS**

 

(Not Applicable)

 

16

----

 

**ITEM 2. PROPERTIES**

 

The Company is headquartered in Coburg, Oregon,approximately 100 miles from Portland, Oregon. The following table summarizesthe Company’s current facilities:

 
| **FACILITY**         | ** ** | **OWNED/  LEASED** | ** ** | **APPROXIMATE  SQ FOOTAGE** | ** ** | **ACTIVITY**                                    |
|----------------------|------------|--------------------|------------|-----------------------------|------------|-------------------------------------------------|
|                 |       |               |       |                        |       |                                            |
| Coburg,  Oregon      |       | Owned              |       | 816,000                     |       | Motor  Coaches/Chassis production               |
| Burns,  Oregon       |       | Owned              |       | 176,000                     |       | Fiberglass  components production               |
| Springfield,  Oregon |       | Leased             |       | 100,000                     |       | Fiberglass  components production               |
| Bend, Oregon         |       | Leased             |       | 187,800                     |       | Service and Motor Coaches production            |
| Harrisburg, Oregon   |       | Owned              |       | 274,500                     |       | Service, Chassis, and Wood component production |
| Elkhart,  Indiana    |       | Leased             |       | 30,000                      |       | Bus  Conversions production                     |
| Wakarusa,  Indiana   |       | Owned              |       | 1,239,200                   |       | 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              |       | 420,000                     |       | Motor/Towable production                        |
| Milford, Indiana     |       | Owned              |       | 62,800                      |       | 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 foreseeablefuture.*  Should the Company requireincreased production capacity in the future, the Company believes thatadditional or alternative space adequate to serve the Company’s foreseeableneeds would be available on commercially reasonable terms.*

 

In addition to the properties noted above related tobuilding and servicing recreational vehicles, the Company owns two luxury motorcoach resorts under development as follows at December 31, 2005:

 
| **RESORT  LOCATION** |   | **DEVELOPED  ACREAGE** | ** ** | **NUMBER  OF  DEVELOPED LOTS** | ** ** | **NUMBER  OF  LOTS SOLD** | ** ** | **UNDEVELOPED  ACREAGE** | ** ** | **NUMBER  OF  POTENTIAL NEW  LOTS** | ** ** |
|----------------------|--------|------------------------|------------|--------------------------------|------------|---------------------------|------------|--------------------------|------------|-------------------------------------|------------|
|                 |   |                   |       |                           |       |                      |       |                     |       |                                |       |
| Las Vegas, Nevada    |   | 32                     |       | 301                            |       | 301                       |       | 10                       |       | 99                                  |       |
| Indio, California    |   | 56                     |       | 263                            |       | 233                       |       | 24                       |       | 137                                 |       |

 

**ITEM 3. LEGAL PROCEEDINGS**

 

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

 

17

----

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

18

----

 

**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’SCOMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

The Company’s Common Stock is traded on the New YorkStock Exchange under the symbol “MNC.” The following table sets forth for the periods indicated the high andlow closing sale prices for the Common Stock (rounded to the nearest $.01 pershare).

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2005**       |       |     |       |    |       |
| First Quarter  |       | $        | 20.04      |    | $          | 15.97 |   |
| Second Quarter |       | $        | 17.19      |    | $          | 14.02 |   |
| Third Quarter  |       | $        | 18.44      |    | $          | 14.20 |   |
| Fourth Quarter |       | $        | 15.45      |    | $          | 11.99 |   |
|           |       |     |       |    |       |
| **2004**       |       |     |       |    |       |
| First Quarter  |       | $        | 29.04      |    | $          | 22.25 |   |
| Second Quarter |       | $        | 30.68      |    | $          | 23.80 |   |
| Third Quarter  |       | $        | 26.76      |    | $          | 19.96 |   |
| Fourth Quarter |       | $        | 22.01      |    | $          | 17.33 |   |

 

As of March 13, 2006, there were approximately 907holders of record of the Company’s Common Stock.

 

The Company began paying quarterly dividends at therate of $.05 per share on its common stock in March 2004. In February 2005,the Company declared an increased dividend of $.06 per share on all commonstock owned by holders of record as of March 1, 2005. The Company has paidcash dividends at this rate since March 2005 and currently expects thatcomparable cash dividends will be paid on a quarterly basis going forward,however, the Company reserves the right to alter or discontinue this practiceat any time depending on its economic performance and financial condition.

 

The information required by this item regarding equitycompensation plans is incorporated by reference in the information set forth inItem 12 of the Annual Report on Form 10-K.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The Consolidated Statements of Income Data set forthbelow with respect to fiscal years 2003, 2004, and 2005, and the ConsolidatedBalance Sheet Data at January 1, 2005 and December 31, 2005, 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 set forthbelow with respect to fiscal years 2001 and 2002 and the Consolidated BalanceSheet Data at December 29, 2001, December 28, 2002, and January 3,2004 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 the following table should beread in conjunction with, and are qualified in their entirety by, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, theCompany’s Consolidated Financial Statements and the Notes thereto appearingelsewhere in this Annual Report on Form 10-K.

 

19

----

 

**Five-Year Selected Financial 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** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **2001**         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Consolidated  Statements of Income Data:**                      |       |             |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                | 927,228    |   | $ | 1,212,385 |   | $ | 1,158,083 |   | $ | 1,386,269 |   | $ | 1,236,238 |   |
| Cost of sales                                                     |       | 813,826          |       | 1,050,270 |   | 1,019,423 |   | 1,217,457 |   | 1,111,468 |   |
| Gross profit                                                      |       | 113,402          |       | 162,115 |   | 138,660 |   | 168,812 |   | 124,770 |   |
| Selling,  general, and administrative expenses                    |       | 69,770           |       | 86,115 |   | 100,709 |   | 109,145 |   | 113,179 |   |
| Plant relocation  costs                                           |       | 0                |       | 0 |   | 0 |   | 0 |   | 4,370 |   |
| Amortization of  goodwill                                         |       | 645              |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Operating income                                                  |       | 42,987           |       | 76,000 |   | 37,951 |   | 59,667 |   | 7,221 |   |
| Other income,  net                                                |       | 334              |       | 105 |   | 260 |   | 343 |   | 255 |   |
| Interest expense                                                  |       | (2,357           | )          | (2,752 | ) | (2,968 | ) | (1,547 | ) | (1,820 | ) |
| Income before  income taxes and discontinued operations           |       | 40,964           |       | 73,353 |   | 35,243 |   | 58,463 |   | 5,656 |   |
| Provision for  income taxes                                       |       | 15,844           |       | 28,794 |   | 13,220 |   | 21,914 |   | 1,687 |   |
| Net income from  continuing operations                            |       | 25,120           |       | 44,559 |   | 22,023 |   | 36,549 |   | 3,969 |   |
| Income (loss)  from discontinued operations, net of tax provision |       | (201             | )          | (44 | ) | 177 |   | 156 |   | (1,321 | ) |
| Net income                                                        |       | $                | 24,919     |   | $ | 44,515 |   | $ | 22,200 |   | $ | 36,705 |   | $ | 2,648 |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  per common share:                                |       |             |       |   |   |   |   |   |   |   |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Basic from  continuing operations                                 |       | $                | 0.88       |   | $ | 1.55 |   | $ | 0.75 |   | $ | 1.24 |   | $ | 0.13 |   |
| Basic from  discontinued operations                               |       | $                | (0.01      | ) | $ | 0.00 |   | $ | 0.01 |   | $ | 0.01 |   | $ | (0.04 | ) |
| Basic                                                             |       | $                | 0.87       |   | $ | 1.55 |   | $ | 0.76 |   | $ | 1.25 |   | $ | 0.09 |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Diluted from  continuing operations                               |       | $                | 0.86       |   | $ | 1.51 |   | $ | 0.74 |   | $ | 1.22 |   | $ | 0.13 |   |
| Diluted from  discontinued operations                             |       | $                | (0.01      | ) | $ | 0.00 |   | $ | 0.01 |   | $ | 0.01 |   | $ | (0.04 | ) |
| Diluted                                                           |       | $                | 0.85       |   | $ | 1.51 |   | $ | 0.75 |   | $ | 1.23 |   | $ | 0.09 |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding:                      |       |             |       |   |   |   |   |   |   |   |   |
| Basic                                                             |       | 28,531,593       |       | 28,812,473 |   | 29,062,649 |   | 29,370,455 |   | 29,516,794 |   |
| Diluted                                                           |       | 29,288,688       |       | 29,573,420 |   | 29,567,012 |   | 29,958,646 |   | 29,858,036 |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Cash dividends  per common share                                  |       | $                | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.20 |   | $ | 0.24 |   |
|                                                              |       |             |       |   |   |   |   |   |   |   |   |
| **Consolidated  Operating Data:**                                 |       |             |       |   |   |   |   |   |   |   |   |
| Units sold  (includes discontinued operations):                   |       |             |       |   |   |   |   |   |   |   |   |
| Motor coaches                                                     |       | 6,228            |       | 8,005 |   | 7,051 |   | 8,199 |   | 6,221 |   |
| Towables                                                          |       | 3,261            |       | 3,206 |   | 2,593 |   | 4,621 |   | 9,337 |   |

 
| **Consolidated  Balance Sheet Data:**       | ** ** | **December 29,  2001** | ** ** | **December 28,  2002** | ** ** | **January  3,  2004** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------|------------|---------------------------|------------|-----------------------------|------------|
| Working capital                             |       | $                           | 63,694     |                        | $          | 114,241               |       | $                         | 121,231    |                        | $          | 141,907 |   | $ | 127,191 |   |
| Total assets                                |       | $                           | 427,098    |                        | $          | 547,417               |       | $                         | 478,669    |                        | $          | 540,238 |   | $ | 587,467 |   |
| Long-term  borrowings, less current portion |       | $                           | 30,000     |                        | $          | 30,333                |       | $                         | 15,000     |                        | $          | — |   | $ | 34,786 |   |
| Total  stockholders’ equity            |       | $                           | 213,130    |                        | $          | 260,627               |       | $                         | 286,248    |                        | $          | 319,616 |   | $ | 316,732 |   |

 

20

----

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

 

The following discussion should be read in conjunctionwith the Consolidated Financial Statements and the related notes that appearelsewhere in this Annual Report on Form 10-K. The various sections of thefollowing discussion contain a number of forward-looking statements, all ofwhich are based on current expectations and could be affected by theuncertainties and risk factors described throughout this report andparticularly in Part I, “Item 1A. Risk Factors” and in Part I, “Item1. 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 resort facilities.These three operations, while closely tied into the recreational lifestyle, aresegmented for reporting purposes as the Motorized Recreational Vehicle (MRV)segment, the Towable Recreational Vehicle (TRV) segment, and the MotorhomeResort (MR) segment.

 

*Motorized and Towable RecreationalVehicle Segment Products*

 

Our products range insuggested retail price from $45,000 to $575,000 for motor coaches and from$1,000 to $70,000 for towables. Based upon retail registrations in 2005, webelieve we had 26.0% share of the market for diesel Class A motor coaches,a 10.3% share of the market for gas Class A motor coaches, a 18.1% shareof the market for all Class A motor coaches, a 3.2% market for all Class Cmotor coaches, a 4.5% share of the market for fifth wheel towables and a 5.1%share of the market for travel trailers.

 

*Motorhome Resort Segment*

 

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California. The Resorts offer sales of individual lots toowners, and also offer a common interest in the amenities at the resort. Lotprices at the two resorts range from $79,900 to $319,900. Amenities at theResorts include club house facilities, tennis, swimming, and golf. The Resortsprovide destination locations for premium Class A recreational vehicleowners, and help to promote the recreational lifestyle.

 

*Business Changes*

 

We have conducted a series ofacquisitions during our history. beginning in March 1993 when we commencedoperations by acquiring substantially all of the assets and liabilities of apredecessor company that had been formed in 1968. In March 1996, weacquired the Holiday Rambler Division of Harley-Davidson, Inc., amanufacturer of a full line of Class A motor coaches and towables. In August 2001,we acquired SMC Corporation, manufacturer of the Beaver and Safari brand Class Amotorhomes. In November 2002, we acquired from Outdoor Resorts of America(“ORA”) three luxury motorcoach resort properties being developed by ORA in LasVegas, Nevada, Indio, California, and Naples, Florida. In September 2003,we sold the property in Naples, Florida. And, in November of 2005, weacquired R-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing,LLC, and Roadmaster, LLC, (referred to as “R-Vision”), manufacturers ofR-Vision, Bison, and Roadmaster motorized and towable products. The R-Vision acquisitionwas accounted for using the purchase method of accounting, through a cash offeron November 18, 2005. All operations of R-Vision have been incorporatedfor the period of November 18, 2005 through December 31, 2005 in theconsolidated annual financial statements of the Company.

 

During the third quarterof 2005, the Company announced that it was closing its Royale Coach operationsin Elkhart, Indiana.  Royale Coachproduced Prevost bus conversion motor coaches with price points in excess of$1.4 million.  Royale Coach soldapproximately 20 coaches per year and was not a significant portion of theCompany’s overall business.  As of theend of 2005, all closure costs have been accrued for in the Company’s financialstatements.

 

In accordance withStatements of Financial Accounting Standards No. 142, “Accounting forGoodwill and Other Intangible Assets” (“SFAS 142”), no goodwill amortizationhas been recorded for any of the Company’s acquisitions for the years of 2003,2004, or 2005. Instead, SFAS 142 requires annual testing of goodwill forimpairment. We completed our annual testing of goodwill during the thirdquarter of 2005 as required by SFAS 142 and determined that there has been noimpairment requiring a write down.

 

21

----

 

RESULTS OF OPERATIONS

 

The following table setsforth our results of continuing 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        | )     | —        |       |
|                                           |       |      |       |            |       |      |       |            |       |          |       |          |       |
| Operating income                               |       | $         | 59,667     |            | 4.3        | %         | $          | 7,221           |       | 0.6           | %          | $             | (52,446    | ) | -87.9 | % |

 

*Performance in 2005*

 

*Motorized and TowableRecreational Vehicle Segments*

In the third and fourthquarters of 2004, the recreational vehicle industry began to show signs ofslowing down from its previously heated pace. This trend continued through thefirst half of 2005, and worsened during the second half of the year, resultingin net operating losses for both recreational vehicle segments. Accordingly,the Company took steps to reduce production run rates within its variousfacilities and also shifted production output to reflect changes in productdemand mix. In addition, the Company also relocated its Bend, Oregonmanufacturing operations to its Coburg, Oregon facility, and ceased operatingits Royale Coach bus conversion manufacturing business in Elkhart, Indiana. Whileboth of these decisions were difficult to make, they were positive steps towardmaximizing utilization of manufacturing capacity at the various productionplants. Costs associated with relocation of the Bend, Oregon operations arereflected as plant relocation costs, and represent actual costs incurred aswell as estimates for future costs. Closure costs for the Royale Coach facilityare shown after income from continuing operations, and are classified net ofrespective income taxes as discontinued operations. Closure costs reflectactual costs incurred as well as estimates for future costs.

 

While 2005 waschallenging on several fronts, we worked aggressively to introduce new andinnovative products such as our full slide options on several models, and a newlower priced front-end diesel motorized coach. We also acquired R-Vision tocomplement our higher line towable product offerings with R-Vision’slower-priced models, thereby filling out our towable price points, andstrengthening our position within the towable marketplace.

 

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 programwas designed to introduce the concept to our dealer partners that our specificbrands have intrinsic values as a selling tool. To support this, and toencourage our dealers to participate in FFTF, we worked with outside marketingconsultants to develop brand signage, informational computer kiosks, and brandspecific displays that are placed within our various independent dealerlocations. We believe that this concept, along with other features designed toentice our dealers to focus selling efforts on our various product offerings,will assist them in their sales efforts through the strength of improved brandidentity.

 

*Motorhome Resorts Segment*

While 2005 was difficultfor the recreational vehicle industry, our motorhome resort properties salesand profits were significantly improved over 2004 results. Both our propertiesin Las Vegas, Nevada and Indio, California experienced better than expectedresults of operations, with combined operating profits of $10.3 million in 2005versus operating profits of $645,000 in 2004. We believe that these resortproperties will continue to sell through their respective remaining availableinventories of lots in 2006 and in the first quarter of 2007.*  During 2006 we expect to evaluateopportunities for new property developments, with the intent of bringing newdevelopments to the market in 2007.*

 

22

----

 

*2005 Compared With 2004*

 

Net sales decreased 10.8% from $1.386 billion in 2004to $1.236 billion in 2005. Gross diesel motorized revenues were down 12.7%, gasmotorized revenues were down 36.3%, and towable revenues were up 38.5%. For2005, gross diesel motorized sales accounted for 72.7% of sales, gas motorizedsales accounted for 11.6% of sales, and towables accounted for 15.7% of sales. For2004, gross diesel motorized sales accounted for 73.8% of sales, gas motorizedsales accounted for 16.1% sales, and towables accounted for 10.0% of sales. TheCompany’s overall average unit selling price decreased from $107,000 in 2004,to $78,000 in 2005. The reduction in average selling price resulted from a combinationof increased sales of the Company’s towable products, the acquisition ofR-Vision (which sells predominantly lower priced towables) and the sale oflower priced towable products to the Federal Emergency Management Association(FEMA). FEMA orders added approximately 3,275 sales of units to our towableproduction in the third and fourth quarters of 2005 combined.

 

Gross profit decreased by $44.0 million from $168.8million in 2004 to $124.8 million in 2005 and gross margin decreased from 12.2%in 2004 to 10.1% in 2005. The decrease in gross margin in 2005 is set forth inthe following table (dollars in thousands):

 
| ** **           | ** ** | **2004** | ** ** | **% of  Sales** | ** ** | **2005** | ** ** | **% of  Sales** | ** ** | **Change  in % 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.

•                  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 which further dampened margins.

 

Selling, general, and administrative expenses(S,G,&A) increased by $4.0 million from $109.1 million in 2004 to $113.2million in 2005 and increased as a percentage of sales from 7.9% in 2004 to9.2% in 2005. Increases in spending over the prior year, as a percentage ofsales, are set forth in the following table (dollars in thousands):

 
| ** **                | ** ** | **2004** | ** ** | **% of  Sales** | ** ** | **2005** | ** ** | **% of  Sales** | ** ** | **Change  in % of  Sales** | ** ** |
|---------------------------|------------|----------|------------|-----------------|------------|----------|------------|-----------------|------------|----------------------------|------------|
| Wages and  salaries       |       | $        | 24,348     |            | 1.8        | %        | $          | 18,420          |       | 1.5                        | %          | -0.3 | % |
| Selling expenses          |       | 35,896   |       | 2.6             | %          | 42,377   |       | 3.4             | %          | 0.8                        | %          |
| Settlement  expense       |       | 11,045   |       | 0.8             | %          | 9,635    |       | 0.8             | %          | 0.0                        | %          |
| Advertising and  print    |       | 12,447   |       | 0.9             | %          | 11,635   |       | 1.0             | %          | 0.1                        | %          |
| Other                     |       | 25,409   |       | 1.8             | %          | 31,112   |       | 2.5             | %          | 0.7                        | %          |
| Total S,G&A  Expenses |       | $        | 109,145    |            | 7.9        | %        | $          | 113,179         |       | 9.2                        | %          | 1.3 | % |
|                           |            |          |            |                 |            |          |            |                 |            |                            |            |  |  |  |

 

•              Decreasesin wages and salaries in 2005 were mostly the result of lower management bonusdue 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.

 

23

----

 

•              Decreasesin settlement expense (litigation settlement expense) in 2005, as a percent ofsales, was due to a slight decrease in the amount of new cases added, as wellas favorable resolutions of cases during the 2005 year.

•              Decreasesin advertising and print costs in 2005, as a percent of sales, were the resultof management reducing spending in 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 $59.7million in 2004 to $7.2 million in 2005. The Company’s higher level of selling,general, and administrative expense as a percentage of sales combined with thedecreases in the Company’s gross margin, resulted in a decrease in operatingmargin from 4.3% in 2004 to 0.6% in 2005 that was only partially offset byimproved results from our motorhome resort property segment.

 

Net interest expense increased from $1.5 million in2004 to $1.8 million in 2005. This increase was related to higher debt levelsduring 2005. Increases in debt were mostly due to debt incurred with theacquisition of R-Vision. Capitalized interest was zero in both 2004 and 2005. TheCompany’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 a provision for income taxes fromcontinuing operations of $1.7 million, or an effective tax rate of 29.8%, for2005, compared to $22.0 million, or an effective tax rate of 37.5% for 2004. Thedecrease in the effective tax rate was primarily attributable to the impact oflower income levels in 2005, including lower federal and state statutory ratesand a larger percentage impact from state income tax credits and other taxbenefit items. The provision also includes a tax benefit of $277,000 associatedwith the reversal of federal and state tax reserves no longer required.

 

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 was partiallyoffset by a decrease in the effective tax rate. The Company did not expensestock options grants in 2005 and earlier periods, however, if option expensinghad been required, the effect on net income for 2005 for all previously grantedoptions would have been a decrease of $3.2 million. See Note 16 of theCompany’s consolidated financial statements for information regarding thecalculation of the impact of expensing stock options.  The Company will reflect the cost of stockoptions in its results of operations beginning in 2006.

 

24

----

 

*2005 versus 2004 for the MotorizedRecreational Vehicle Segment*

 

The followingtable sets forth the results of the MRV segment 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                                      |       | $         | 1,234,233  |                 | 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                        |       | —    |       | —               |       | 4,370    |       | 0.4                  | %          | (4,370        | )          | —        |       |
| Operating  income (loss)                       |       | $         | 63,225     |                 | 5.1        | %        | $          | (1,097               | )          | -0.1          | %          | $             | (64,322    | ) | -101.7 | % |

 

Total net sales for the MRV segment were downfrom $1.2 billion in 2004, to $1.0 billion in 2005. Gross diesel motorizedrevenues were down 12.7% and gas motorized revenues were down 36.3%. Dieselproducts accounted for 86.2% of the MRV segment’s 2005 gross revenues while gasproducts were 13.8%. The overall decrease in revenues reflected continuingchallenges in the marketplace as dealers sought to lower their currentinventories because of softened retail demand and higher interest costsassociated with their floorplan borrowings. Our MRV segment unit sales weredown 24.1% year over year from 8,178 units in 2004 to 6,211 units in 2005. Dieselmotorized unit sales were down 16.9% to 4,470 units and gas motorized unit saleswere down 37.9% to 1,741 units. Total average MRV segment unit selling pricesincreased to $165,000 for 2005, up from $151,000 in 2004. Increases in averageselling prices are mostly the result of changes in product mix between dieseland gas motorized coaches.

 

Gross profit for 2005 decreased to $92.8million, down from $153.3 million in 2004, and gross margin decreased from12.4% in 2004 to 9.1% in 2005. Changes in the components of cost of sales areset forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **2005** | ** ** | **% of Sales** | ** ** | **Change in  % 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 | % |
|                      |            |          |            |                |            |          |            |                |            |                           |            |  |  |  |  |

 

•         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.

 

25

----

 

S,G,&A expenses, for the MRV segmentincreased both as a percent of sales and in total dollars due in part tolower sales levels and increases in selling expenses. Corporate overheadallocation decreased due to lower management bonus levels allocated to the MRVsegment as a result of lower profits. Corporate overhead allocation iscomprised of certain shared services such as executive, financial, informationsystems, legal, and investor relations expenses.

 

Plant relocation costs reflect the costsincurred to relocate the Bend, Oregon manufacturing operations to the Coburg,Oregon plant. We believe this relocation will ultimately result in improvedmargins for the Oregon operations.*

 

Operating income (loss) decreased as both apercent of sales and in total dollars due to lower gross margins, increases inS,G,&A expenses and costs of the relocation of the Bend, Oregon operationsto the Coburg, Oregon facility.

 

*2005 versus 2004 for the Towable RecreationalVehicle Segment*

 

The followingtable sets forth the results of the TRV segment 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                                      |       | $        | 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 upfrom $129.3 million in 2004, to $185.4 million in 2005. The overall increase inrevenues reflected both the impact of the R-Vision acquisition in November 2005as well as strong sales to FEMA related to hurricane Katrina. Our unit saleswere up 102.1% in 2005 to 9,337 units. Average unit selling prices declinedfrom $30,000 in 2004 to $20,000 in 2005. The decrease in average selling pricewas mostly due to sales of lower priced products to FEMA.

 

Gross profit for 2005 increased to $11.2million, up from $6.0 million in 2004, and gross margin increased to 6.0% in2005, up from 4.6% in 2004. Changes in the components of cost of sales are setforth in the following table (dollars in thousands):

 
| ** **           | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **2005** | ** ** | **% of Sales** | ** ** | **Change in  % 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 somewhat dampened by highercommodity pricing for metals, petroleum products, and lumber materials.

 

26

----

 

•         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 segmentdecreased as a percent of sales due in part to higher sales levels forwhich additional administrative costs were not incurred. Corporate overheadallocation increased slightly due to higher levels allocated to the TRV segmentas a result of the growth in this segment. Corporate overhead allocation iscomprised of certain shared services such as executive, financial, informationsystems, legal, and investor relations expenses.

 

Operating loss decreased as both a percent ofsales and in total dollars due to improved gross margins and decreases inS,G,&A expenses as a percentage of sales.

 

*2005 versus 2004 for the Motorhome ResortsSegment*

 

The followingtable sets forth the results of the MR segment 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                                      |       | $        | 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      |   | 1499.7 | % |

 

Net sales increased 45.5% to $33.0 millioncompared to $22.7 million for 2004. This increase was mostly the result ofcontinued strong demand for our resort properties and the need within theindustry for quality destination locations for RV owners.

 

Gross profit for the Resorts segmentincreased to 63.0% of sales in 2005, compared to 42.0% of sales in 2004. Thiswas due to a heavier absorption of infrastructure costs in earlier phases soldin 2004. These costs were expensed in earlier phases due to uncertainties as tothe ultimate completion and sale of the entire projects. The result was animprovement in the gross margins in the later phases of the developments, andmost particularly in 2005.

 

S,G,&A expenses increased due to realestate commissions paid on the sales of lots. Additional increases were due toaccruals for profit-sharing payments which will be made to Outdoor Resorts ofAmerica upon completion of the project. Corporate overhead allocation iscomprised of certain shared services such as executive, financial, informationsystems, legal and investor relations expenses.

 

Operatingincome increased due to improvements in sales and gross margins that were onlyslightly offset by higher S,G,&A costs*.*

27

----

 

*2004Compared With 2003*

 

The followingtable sets forth our results of operations for the fiscal years ended January 3,2004, and January 1, 2005 (dollars in thousands):

 
| ** **                                     | ** ** | **2003**  | ** ** | **%  of Sales** | ** ** | **2004**  | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|-----------|------------|----------------------|------------|-----------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $         | 1,158,083  |                 | 100.0      | %         | $          | 1,386,269            |       | 100.0         | %          | $             | 228,186    |   | 19.7 | % |
| Cost of  sales                                 |       | 1,019,423 |       | 88.0                 | %          | 1,217,457 |       | 87.8                 | %          | (198,034      | )          | -19.4         | %          |
| Gross profit                                   |       | 138,660   |       | 12.0                 | %          | 168,812   |       | 12.2                 | %          | 30,152        |       | 21.7          | %          |
| Selling,  general, and administrative expenses |       | 100,709   |       | 8.7                  | %          | 109,145   |       | 7.9                  | %          | (8,436        | )          | -8.4          | %          |
| Operating  income                              |       | $         | 37,951     |                 | 3.3        | %         | $          | 59,667               |       | 4.3           | %          | $             | 21,716     |   | 57.2 | % |

 

Net sales increased 19.7% from $1.2 billionin 2003 to $1.4 billion in 2004. Gross diesel motorized revenues were up 15.6%,while gas motorized were up 21.1%, and towables were up 51.7%. For 2004, grossdiesel motorized sales accounted for 76.2% of sales, gas motorized salesaccounted for 13.8% of sales, and towables accounted for 10.1% of sales. For2003, gross diesel motorized sales accounted for 78.6% of sales, gas motorizedaccounted for 13.5% of sales, and towables accounted for 7.9% of sales. Thedecrease in diesel motorized sales, as a percentage of sales, reflects theimprovement in gas motorized market share. Accordingly, as diesel motorizedproduct shrunk as a percentage of sales, the Company’s overall average unitselling price decreased from $120,000 in 2003, to $107,000 in 2004.

 

Gross profit increased by $30.2 million from$138.7 million in 2003 to $168.8 million in 2004 and gross margin increasedfrom 12.0% in 2003 to 12.2% in 2004. Changes in the components of cost of salesare set forth in the following table (dollars in thousands, percentages aspercent of sales):

 
| ** **           | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|----------------------|------------|----------|------------|---------------------|------------|----------|------------|---------------------|------------|-------------------------------------|------------|
| Direct materials     |       | $        | 709,603    |                | 61.2       | %        | $          | 865,822             |       | 62.4                                | %          | 1.2 | % |
| Direct labor         |       | 120,308  |       | 10.4                | %          | 139,205  |       | 10.0                | %          | -0.4                                | %          |
| Warranty             |       | 34,796   |       | 3.0                 | %          | 34,126   |       | 2.5                 | %          | -0.5                                | %          |
| Other direct         |       | 55,434   |       | 4.8                 | %          | 66,456   |       | 4.8                 | %          | 0.0                                 | %          |
| Indirect             |       | 99,282   |       | 8.6                 | %          | 111,848  |       | 8.1                 | %          | -0.5                                | %          |
| Total cost  of sales |       | $        | 1,019,423  |                | 88.0       | %        | $          | 1,217,457           |       | 87.8                                | %          | -0.2 | % |

 

•         Directmaterial increases in 2004, as a percent of sales, were due to both a shift inproduct mixes and increases in commodity prices such as steel, aluminum, andpetroleum-based materials.

•         Directlabor decreases in 2004, as a percent of sales, were predominantly due toimprovements in automation of certain plant operations.

•         Decreasesin warranty expense in 2004, as a percent of sales, were due mostly to qualityimprovement projects, and improvements in recoveries from vendors for warrantyclaims.

•         Decreasesin indirect costs in 2004, as a percent of sales, were due mostly toefficiencies within the plants as a result of improved plant utilization.

 

28

----

 

S,G,&A expenses increased by $8.4 millionfrom $100.7 million in 2003 to $109.1 million in 2004 and decreased as apercentage of sales from 8.7% in 2003 to 7.9% in 2004. Decreases in spendingover the prior year, as a percentage of sales, set forth in the following table(dollars in thousands):

 
| ** **                | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|---------------------------|------------|----------|------------|--------------------------|------------|----------|------------|--------------------------|------------|-------------------------------------|------------|
| Wages and  salaries       |       | $        | 19,260     |                     | 1.7        | %        | $          | 24,348                   |       | 1.8                                 | %          | 0.1 | % |
| Selling  expenses         |       | 35,040   |       | 3.0                      | %          | 35,896   |       | 2.6                      | %          | -0.4                                | %          |
| Settlement  expense       |       | 12,678   |       | 1.1                      | %          | 11,045   |       | 0.8                      | %          | -0.3                                | %          |
| Advertising  and print    |       | 11,664   |       | 1.0                      | %          | 12,447   |       | 0.9                      | %          | -0.1                                | %          |
| Other                     |       | 22,067   |       | 1.9                      | %          | 25,409   |       | 1.8                      | %          | -0.1                                | %          |
| Total  S,G&A Expenses |       | $        | 100,709    |                     | 8.7        | %        | $          | 109,145                  |       | 7.9                                 | %          | -0.8 | % |

 

•                  Increasesin wages and salaries as a percent of sales and in total dollars were due tohigher levels of management bonus due to increased profits in 2004 versus 2003.

•                  Decreasesin selling expenses, as a percent of sales, were due to stronger demand forproduct in 2004 versus 2003.

•                  Decreasesin settlement expense (litigation settlement expense), as a percent of sales, wasdue to a slight decrease in the amount of new cases added, as well as favorableresolutions of cases during the 2004 year.

•                  Decreasesin advertising and print costs, as a percent of sales, were a function ofhigher sales during the year for which the Company did not increase totaldollars spent.

•                  Increasesin other expenses were a combination of increases in audit and related expensesfor compliance with the internal control requirements of the Sarbanes-OxleyAct, as well as employee benefits such as health care costs.

 

Operating income increased $21.7 million from$38.0 million in 2003 to $59.7 million in 2004. The Company’s lower level ofselling, general, and administrative expense as a percentage of sales combinedwith the increase in the Company’s gross margin, resulted in an increase inoperating margin from 3.3% in 2003 to 4.3% in 2004.

 

Net interest expense decreased from $3.0million in 2003 to $1.5 million in 2004. This decrease was related to lowerdebt levels during 2004 as the Company continued to pay down long-term debt. Capitalizedinterest was $285,000 in 2003 and zero in 2004. The Company’s interest expenseincluded $426,000 in 2003 and $430,000 in 2004 related to the amortization ofdebt issuance costs recorded in conjunction with the Company’s creditfacilities.

 

The Company reported a provision for incometaxes from continuing operations of $22.0 million, or an effective tax rate of37.5%, for 2004, compared to $13.3 million, or an effective tax rate of 37.5%for 2003. The effective rate remained consistent as the Company has continuedto receive the benefits associated with multi-state tax filings, as well asfavorable federal tax rates associated with foreign sales.

 

Net income increased by $14.5 million from$22.2 million in 2003 to $36.7 million in 2004, due to the combination ofincreases in net sales, increases in gross margins, and increases in operatingmargins. The Company did not expense stock option grants in 2004 and earlierperiods, however, if option expensing had been required, the impact on netincome for 2004 for all previously granted options would have been a decreaseof $1.6 million. See Note 16 of the Company’s consolidated financialstatements for information regarding the calculation of the impact of expensingstock options.

 

29

----

 

*2004 versus 2003 for the MotorizedRecreational Vehicle Segment*

 

The followingtable sets forth the results of the MRV segment for the fiscal years ended January 3,2004, and January 1, 2005 (dollars in thousands):

 
| ** **                                     | ** ** | **2003** | ** ** | **%  of Sales** | ** ** | **2004**  | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------|------------|----------------------|------------|-----------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $        | 1,059,347  |                 | 100.0      | %         | $          | 1,234,233            |       | 100.0         | %          | $             | 174,886    |   | 16.5 | % |
| Cost of  sales                                 |       | 930,902  |       | 87.9                 | %          | 1,080,972 |       | 87.6                 | %          | (150,070      | )          | -16.1         | %          |
| Gross profit                                   |       | 128,445  |       | 12.1                 | %          | 153,261   |       | 12.4                 | %          | 24,816        |       | 19.3          | %          |
| Selling,  general, and administrative expenses |       | 37,652   |       | 3.5                  | %          | 38,566    |       | 3.1                  | %          | (914          | )          | -2.4          | %          |
| Corporate  overhead allocation                 |       | 50,295   |       | 4.8                  | %          | 51,470    |       | 4.2                  | %          | (1,175        | )          | -2.3          | %          |
| Operating  income                              |       | $        | 40,498     |                 | 3.8        | %         | $          | 63,225               |       | 5.1           | %          | $             | 22,727     |   | 56.1 | % |

 

Total net sales for the MRV segment were upfrom $1.1 billion in 2003, to $1.2 billion in 2004. Gross diesel motorizedrevenues were up 15.6% and gas motorized revenues were up 21.1%. Dieselproducts accounted for 84.7% of 2004 MRV segment gross revenues while gasproducts were 15.3%. The overall increase in revenues reflected a resurgence inthe motorized market in 2004. Our overall unit sales were up 16.3% year overyear from 7,029 units in 2003 to 8,178 units in 2004. Diesel motorized unitsales were up 13.7% to 5,744 units and gas motorized unit sales were up 23.1%to 2,434 units. Total average unit selling prices remained consistent from yearto year at $151,000.

 

Gross profit for 2004 increased to $153.3million, up from $128.4 million in 2003, and gross margin increased from 12.1%in 2003 to 12.4% in 2004. Changes in the components of cost of sales are setforth in the following table (dollars in thousands):

 
| ** **           | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------|------------|----------|------------|--------------------------|------------|----------|------------|--------------------------|------------|------------------------------------------|------------|
| Direct  materials    |       | $        | 647,023    |                     | 61.1       | %        | $          | 766,924                  |       | 62.1                                     | %          | 1.0 | % |
| Direct labor         |       | 108,280  |       | 10.2                     | %          | 122,298  |       | 9.9                      | %          | -0.3                                     | %          |
| Warranty             |       | 31,675   |       | 3.0                      | %          | 30,058   |       | 2.4                      | %          | -0.6                                     | %          |
| Other direct         |       | 49,475   |       | 4.7                      | %          | 56,232   |       | 4.7                      | %          | 0.0                                      | %          |
| Indirect             |       | 94,449   |       | 8.9                      | %          | 105,460  |       | 8.5                      | %          | -0.4                                     | %          |
| Total cost  of sales |       | $        | 930,902    |                     | 87.9       | %        | $          | 1,080,972                |       | 87.6                                     | %          | -0.3 | % |

 

•         Directmaterial increases in 2004, as a percent of sales, were mostly due to increasesin commodities pricing during 2004 for key items such as metals, petroleumproducts, and lumber as well as increases in sales of gas motorized products,which typically have a higher cost of direct materials as a percent of sales.

•         Directlabor decreases in 2004, as a percent of sales, were predominantly due toefficiencies in the production lines related to higher production run rates.

•         Decreasesin warranty expense in 2004, as a percent of sales, were due mostly to thecontinued focus on quality improvement programs in 2004.

•         Decreasesin indirect costs in 2004, as a percent of sales, were due mostly to decreasedoverhead costs per unit within the production facilities due to higher runrates in 2004 versus 2003.

 

S,G,&A expenses for the MRV segmentdecreased as a percent of sales due in part to higher sales levels in 2004.Corporate overhead allocation, as a percent of sales, also decreased due tohigher sales levels in 2004. Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

 

30

----

 

Operating income increased as both a percentof sales and in total dollars due to higher gross margins and decreases inS,G,&A expenses.

 

*2004 versus 2003 for the Towable RecreationalVehicle Segment*

 

The followingtable sets forth the results of the TRV segment for the fiscal years ended January 3,2004, and January 1, 2005 (dollars in thousands):

 
| ** **                                     | ** ** | **2003** | ** ** | **%  of Sales** | ** ** | **2004** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $        | 87,980     |                 | 100.0      | %        | $          | 129,331              |       | 100.0         | %          | $             | 41,351     |   | 47.0 | % |
| Cost of  sales                                 |       | 80,816   |       | 91.9                 | %          | 123,314  |       | 95.4                 | %          | (42,498       | )          | -52.6         | %          |
| Gross profit                                   |       | 7,164    |       | 8.1                  | %          | 6,017    |       | 4.6                  | %          | (1,147        | )          | -16.0         | %          |
| Selling,  general, and administrative expenses |       | 3,321    |       | 3.8                  | %          | 4,827    |       | 3.7                  | %          | (1,506        | )          | -45.3         | %          |
| Corporate  overhead allocation                 |       | 4,348    |       | 4.9                  | %          | 5,393    |       | 4.2                  | %          | (1,045        | )          | -24.0         | %          |
| Operating  loss                                |       | $        | (505       | )                    | -0.6       | %        | $          | (4,203               | )          | -3.3          | %          | $             | (3,698     | ) | -732.3 | % |

 

Total net sales for the TRV segment were upfrom $88.0 million in 2003, to $129.3 million in 2004. The overall increase inrevenues reflected an increase in the overall towable market as well as marketshare gains we made during 2004. Our unit sales were up 78.2% in 2004 to 4,621units. Average unit selling prices declined from $35,000 in 2003 to $30,000 in2004. The decrease in average selling price was mostly due to increases insales of lower priced travel trailers in 2004.

 

Gross profit for 2004 decreased to $6.0million, down from $7.2 million in 2003, and gross margin decreased to 4.6% in2004, down from 8.1% in 2003. Changes in the components of cost of sales areset forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------|------------|----------|------------|--------------------------|------------|----------|------------|--------------------------|------------|------------------------------------------|------------|
| Direct  materials    |       | $        | 54,874     |                     | 62.4       | %        | $          | 85,727                   |       | 66.3                                     | %          | 3.9 | % |
| Direct labor         |       | 12,028   |       | 13.7                     | %          | 16,908   |       | 13.1                     | %          | -0.6                                     | %          |
| Warranty             |       | 3,121    |       | 3.5                      | %          | 4,067    |       | 3.2                      | %          | -0.3                                     | %          |
| Other direct         |       | 5,960    |       | 6.8                      | %          | 10,225   |       | 7.9                      | %          | 1.1                                      | %          |
| Indirect             |       | 4,833    |       | 5.5                      | %          | 6,387    |       | 4.9                      | %          | -0.6                                     | %          |
| Total cost  of sales |       | $        | 80,816     |                     | 91.9       | %        | $          | 123,314                  |       | 95.4                                     | %          | 3.5 | % |

 

•         Directmaterial increases in 2004, as a percent of sales, were mostly due to increasesin sales of products that have a higher material cost as a percentage of sales(such as for lower priced travel trailers). Higher commodity pricing formetals, petroleum products, and lumber also contributed to the increase.

•         Directlabor decreases in 2004, as a percent of sales, were predominantly due tohigher production run rates in our plants.

•         Decreasesin warranty expense in 2004, as a percent of sales, were due mostly to animprovement in the warranty experience on current year models.

•         Increasesin other direct costs in 2004, as a percent of sales, were due mostly toincreases in employee health benefits and delivery expense for the Company’sproducts.

•         Decreasesin indirect costs in 2004, as a percent of sales, were due mostly to higher runrates in our plants which improved factory overhead allocations.

 

31

----

 

S,G,&A expenses, for the TRV segmentincreased in total dollars in part to increases in marketing and sales topromote market share gains. Corporate overhead allocation decreased slightlydue to lower levels allocated to the TRV segment. Corporate overhead allocationis comprised of certain shared services such as executive, financial, informationsystems, legal, and investor relations expenses.

 

Operating loss increased both as a percent ofsales and in total dollars due to decreased gross margins and increases inS,G,&A expenses.

 

*2004 versus 2003 for the Motorhome ResortsSegment*

 

The followingtable sets forth the results of the Motorhome Resorts (Resorts) segment for thefiscal years ended January 3, 2004, and January 1, 2005 (dollars inthousands):

 
| ** **                                     | ** ** | **2003** | ** ** | **%  of Sales** | ** ** | **2004** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $        | 10,756     |                 | 100.0      | %        | $          | 22,705               |       | 100.0         | %          | $             | 11,949     |   | 111.1 | % |
| Cost of  sales                                 |       | 7,705    |       | 71.6                 |       | 13,171   |       | 58.0                 | %          | (5,466        | )          | -70.9         | %          |
| Gross profit                                   |       | 3,051    |       | 28.4                 | %          | 9,534    |       | 42.0                 | %          | 6,483         |       | 212.5         | %          |
| Selling,  general, and administrative expenses |       | 914      |       | 8.5                  | %          | 4,194    |       | 18.5                 | %          | (3,280        | )          | -358.9        | %          |
| Corporate  overhead allocation                 |       | 4,179    |       | 38.9                 | %          | 4,695    |       | 20.7                 | %          | (516          | )          | -12.3         | %          |
| Operating  income (loss)                       |       | $        | (2,042     | )                    | -19.0      | %        | $          | 645                  |       | 2.8           | %          | $             | 2,687      |   | 131.6 | % |

 

 

Net sales increased 111.1% to $22.7 millionin 2004 compared to $10.8 million in 2003. This increase was mostly the resultof continued strong demand for our resort properties and the need within theindustry for quality destination locations for RV owners.

 

Gross profit for the Resorts segmentincreased to 42.0% of sales in 2004 compared to 28.4% of sales in 2003. Thiswas due to a heavier absorption of infrastructure costs in earlier phases soldin 2003. These costs were expensed in earlier phases, due to uncertainties asto the ultimate completion and sale of the entire projects. The result was animprovement in the gross margins in the later phases of the developments, andmost particularly in 2004.

 

S,G,&A expenses in 2004 increased due toreal estate commissions paid on the sales of lots. Corporate overheadallocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

 

Operating income increased due toimprovements in sales and gross margins that were only slightly offset byhigher S,G,&A costs*.*

 

32

----

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of liquidityare internally generated cash from operations and available borrowings underits credit facilities. During 2005, the Company generated cash of $34.3 millionfrom operating activities and had a net cash balance of $586,000 at December 31,2005. The Company generated $13.3 million from net income and non-cash expensessuch as depreciation and amortization. Adjusted for the non-cash activity dueto the R-Vision acquisition, the other major sources of cash included adecrease in accounts receivable of $39.2 million. The uses of cash in 2005(adjusted for the non-cash activity due to the R-Vision acquisition) includedan increase of $2.9 million in inventories, a decrease of $5.9 million in tradeaccounts payables, a decrease of $1.6 million in product liability reserves, adecrease of $4.5 million in product warranty reserves, and a decrease of $2.3million in income taxes payable. Decreases in accounts receivable were due tothe timing of shipments of our products at the end of 2005 versus 2004.  Increases in inventories were mostly theresult of higher finished goods at the end of 2005 versus 2004. Decreases inaccounts payable were mostly due to payments made in the fourth quarter of 2005for our Franchise For The Future (FFTF) program. These payments to our dealersfor sales incentives earned were accrued for and paid out later in the year for2004. Decreases in product liability reserves, as well as for product warrantyreserves were the result of continuing improvements in the quality of ourproducts and lower sales volumes. Decreases in income taxes payable are theresult of lower income for the 2005 year versus 2004.

 

On November 18, 2005 the Company amendedits credit facilities to borrow $40.0 million of term debt (the “Term Debt”) tocomplete the acquisition of R-Vision. The revolving line of credit remains at$105.0 million. At the end of the 2005 year, borrowings outstanding on therevolving line of credit (the “Revolving Loan”) were $25.0 million, and TermDebt borrowings were $40.0 million. At the election of the Company, theRevolving Loan and the Term Debt bear interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’sleverage ratio. The Company also pays interest quarterly on the unusedavailable portion of the Revolving Loan at varying rates, determined by theCompany’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 31,2005. 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 31, 2005 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, the Company obtained a term loan of$500,000 from the State of Oregon in connection with the relocation of jobs tothe Coburg, Oregon production facilities from the Bend, Oregon facility. Theprincipal and interest is due on April 30, 2009. The loan bears a 5%annual interest rate.

 

TheCompany’s principal working capital requirements are for purchases of inventoryand financing of trade receivables. Many of the Company’s dealers financeproduct purchases under wholesale floor plan arrangements with third parties asdescribed below. At December 31,2005, the Company had working capital of approximately $127.2 million, adecrease of $14.7 million from working capital of $141.9 million at January 1,2005. The Company has been using short-term credit facilities and cash flow tofinance its capital expenditures.

 

33

----

 

The Company believes that cash flow fromoperations and funds available under its anticipated credit facilities will besufficient to meet the Company’s liquidity requirements for the next 12months.* The Company’s capital expenditures were $17.7 million in 2005, whichincluded costs related to additions of automated machinery in many of itsproduction facilities, upgrades to its information systems infrastructure, andother various capitalized upgrades to existing facilities. The Company anticipatesthat capital expenditures for all of 2006 will be approximately $15 to $18million, which includes expenditures to purchase additional machinery andequipment in both the Company’s Coburg, Oregon and Wakarusa, Indianafacilities, as well as upgrades to existing information systemsinfrastructures.* The Company may require additional equity or debtfinancing 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 the recreational vehicleindustry, many of the Company’s retail dealers utilize wholesale floor planfinancing arrangements with third party lending institutions to finance theirpurchases of the Company’s products. Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certain conditions. TheCompany has agreements with several institutional lenders under which theCompany currently has repurchase obligations. The Company’s contingentobligations under these repurchase agreements are reduced by the proceedsreceived upon the sale of any repurchased units. The Company’s obligationsunder these repurchase agreements vary from period to period up to 18 months. AtDecember 31, 2005, approximately $607.3 million of products sold by theCompany to independent dealers were subject to potential repurchase underexisting floor plan financing agreements with approximately 5.9% concentratedwith one dealer. Historically, the Company has been successful in mitigatinglosses associated with repurchase obligations. During 2005, the lossesassociated with the exercise of repurchase agreements were approximately$79,000, ($600,000, and $897,000 in 2004 and 2003, respectively). Grossrepurchase amounts for 2005, 2004, and 2003, were $2.7 million, $6.5 million,and $4.9 million, respectively. We have been successful at mitigating thelosses associated with repurchase obligations. Dealers for the Company undergocredit review prior to becoming a dealer and periodically thereafter. Financialinstitutions that provide floor plan financing also perform credit reviewsand floor checks on an ongoing basis. We closely monitor sales to dealers thatare a higher credit risk. The repurchase period is limited, usually to amaximum of 18 months. We believe these activities help to minimize the numberof required repurchases. Additionally, the repurchase agreement specifies thatthe dealer is required to make principal payments during the repurchase period.Since the Company repurchases the units based on the schedule of principalpayments, the repurchase amount is typically less than the original invoiceamount. This lower repurchase amount helps mitigate our loss when we offer theinventory to another dealer at an amount lower than the original invoice asincentive for the dealer to take the repurchased inventory. This helps minimizethe losses we incur on repurchased inventory.

 

34

----

 

As part of the normal course ofbusiness, the Company incurs certain contractual obligations and commitmentswhich will require future cash payments. The following tables summarize thesignificant obligations and commitments.

 

PAYMENTS DUE BY PERIOD

 
| **Contractual Obligations (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Lines of  Credit (1)                                      |       | $                                 | 0          |                            | $          | 0                               |       | $              | 25,000     |      | $          | 0 |   | $ | 25,000 |   |
| Long-Term  Debt (2)                                       |       | 5,714                             |       | 11,429                          |       | 23,357                          |       | 0              |       | 40,500    |       |
| Operating  Leases (3)                                     |       | 3,617                             |       | 2,816                           |       | 2,106                           |       | 3,588          |       | 12,127    |       |
| Total  Contractual Cash Obligations                       |       | $                                 | 9,331      |                            | $          | 14,245                          |       | $              | 50,463     |      | $          | 3,588 |   | $ | 77,627 |   |

 

AMOUNT OF COMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Lines of  Credit (4)                                |       | $                                 | 0          |                            | $          | 0                               |       | $              | 80,000     |      | $          | 0 |   | $ | 80,000 |   |
| Guarantees  (3)                                     |       | 0                                 |       | 14,302                          |       | 0                               |       | 0              |       | 14,302    |       |
| Repurchase  Obligations (5)                         |       | 0                                 |       | 607,321                         |       | 0                               |       | 0              |       | 607,321   |       |
| Total  Commitments                                  |       | $                                 | 0          |                            | $          | 621,623                         |       | $              | 80,000     |      | $          | 0 |   | $ | 701,623 |   |

 

----

(1) See Note 8 of Notes to the Consolidated Financial Statements. Theamount listed represents the outstanding balance at December 31, 2005.

(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 31, 2005.

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

 

INFLATION

 

During 2004 and to a lesser extent in 2005,we experienced increases in the prices of certain commodity items that we usein the manufacturing of our products. These include, but are not limited to,steel, copper, aluminum, petroleum, and wood. While these raw materials are notnecessarily indicative of widespread inflationary trends, they had an impact onour production costs. Accordingly, in 2004 we adjusted selling prices tocompensate for increases in commodity pricing. Also, due to increases in fuelprices, particularly in 2005, our cost of delivering coaches to our dealers hasrisen. Accordingly, we have increased our delivery charges for the fourthquarter of 2005 to offset these rising costs. While we do not anticipateadditional price increases, we may from time to time increase our pricesto maintain gross profit margins. If we should continue to experience adversetrends in these prices it could have a material adverse impact on our businessgoing forward. See “Results of Operations 2005 Compared with 2004.”

 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an on-going basis, weevaluate our estimates, including those related to warranty costs, productliability, and impairment of goodwill. We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances. Actual results may differ from these estimatesunder different assumptions or conditions. We believe the following criticalaccounting policies and related judgments and estimates affect the preparationof our consolidated financial statements.

 

WARRANTY COSTS Estimated warranty costs areprovided for at the time of sale of products with warranties covering theproducts for up to one year from the date of retail sale (five years for thefront and sidewall

 

35

----

 

frame structure, and three years on the Roadmaster chassis). Theseestimates are based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate by management.

 

PRODUCT LIABILITY The Company provides anestimate for accrued product liability based on current pending cases, as wellas for those cases which are incurred but not reported. This estimate isdeveloped by legal counsel based on professional judgment, as well ashistorical experience.

 

IMPAIRMENT OF GOODWILL The Company assessesthe potential impairment of goodwill in accordance with Financial AccountingStandards Board (FASB) Statement No. 142. This initial test involvesmanagement comparing the market capitalization of the Company, to the carryingamount, including goodwill, of the net book value of the Company, to determineif goodwill has been impaired. If the Company determines that the marketcapitalization is not representative of the fair value of the reporting unit asa whole, then the Company will use an estimate of discounted future cash flowsto determine fair value.

 

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

 

BRAND ELEMENTS AND SIGNAGE As part ofits franchise program for dealers, the Company places certain fixed assets atindependent dealerships. These assets are comprised of informational computerkiosks, brand island displays, furniture and fixtures, as well as outdoorstorefront signage. These assets are leased to dealers over 10 years through anoperating lease, and the Company depreciates the assets over their respectiveuseful lives.

 

INCOME TAXES In conjunction with preparingits consolidated financial statements, the Company must estimate its incometaxes in each of the jurisdictions in which it operates. This process involvesestimating actual current tax expense together with assessing temporarydifferences resulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in the consolidated balance sheets. The Company must then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent management believes that recovery is not likely, avaluation allowance must be established. Significant management judgment isrequired in determining the Company’s provision for income taxes, deferred taxassets and liabilities, and any valuation allowance recorded against netdeferred tax assets. A discussion of the income tax provision and thecomponents of the deferred tax assets and liabilities can be found in Note 12to the Company’s consolidated financial statements.

 

REPURCHASE OBLIGATIONS Upon request of alending institution financing a dealer’s purchases of the Company’s product,the Company will 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, along with qualitative and quantitativefactors, including dealer inventory turn rates, and the financial strength ofindividual dealers.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

EITF04-10

 

In September of2004, the Financial Accounting Standards Board (the Board) issued EITF 04-10, “DeterminingWhether to Aggregate Operating Segments That Do Not Meet the QuantitativeThresholds.” FASB Statement No. 131, “Disclosures about Segments of anEnterprise and Related Information,” requires public companies to reportfinancial and descriptive information about its reportable operating segments. EITFaddresses how to determine if operating segments that do not meet the quantitativethresholds of FASB No. 131 are to be reported as separate segments.

 

EITF04-10 is effective for fiscal years ending after September 15, 2005.

 

We haveimplemented the necessary disclosures within the financial statements to complywith EITF 04-10.

 

36

----

 

FAS 151

 

In November 2004, theBoard issued FAS 151, “Inventory Costs An Amendment of ARM No. 43, Chapter4,” to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material. The standard is effective forinventory costs incurred during fiscal years beginning after June 15,2005.

 

We have reviewed theprovisions of FAS 151, and believe there will be no significant changes to ourinventory accounting. We will adopt the provisions of FAS 151 for the fiscalyear beginning 2006.

 

FAS123R

 

In December 2004, theBoard issued FAS 123R, “Share-Based Payment.” The Statement replaces FAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” FAS 123R establishes fair value as themeasurement objective in accounting for share-based payment arrangements andrequires a fair-value-based measurement method in accounting for share-basedpayments to employees except for equity instruments held by employee shareownership plans. FAS 123R is effective for public entities as of the beginningof the first annual reporting period that begins after June 15, 2005.

 

We will adopt the provisionsof the FAS 123R for the fiscal year beginning 2006. If we had included the costof the employee stock option compensation using the fair value method in ourfinancial statements, our net income for 2003, 2004 and 2005 would havedecreased by approximately $1.4 million, $1.6 million and $3.2 million,respectively.

 

37

----

 

**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risks related tofluctuations in interest rates on our borrowings. We do not currently use rateswaps, futures contracts or options on futures, or other types of derivativefinancial instruments. Our line of credit permits a combination of fixed andvariable interest rate options which allows us to minimize the effect of risinginterest rates by locking in fixed rates for periods of up to 6 months. Webelieve these features of our credit facilities help us reduce the riskassociated with interest rate fluctuations.

 

38

----

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

INDEX TO FINANCIAL STATEMENTS

 
| Monaco Coach Corporation—Consolidated  Financial Statements:                                                                                 |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                              |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                                          |   |   |
|                                                                                                                                              |   |   |
| Consolidated Balance Sheets as of January 1,  2005 and December 31, 2005                                                                |   |   |
|                                                                                                                                              |   |   |
| Consolidated Statements of Income for the  Years Ended January 3, 2004, January 1, 2005, and December 31,  2005                    |   |   |
|                                                                                                                                              |   |   |
| Consolidated Statements of Stockholders’  Equity for the Years Ended January 3, 2004, January 1, 2005, and  December 31, 2005 |   |   |
|                                                                                                                                              |   |   |
| Consolidated Statements of Cash Flows for  the Years Ended January 3, 2004, January 1, 2005, and  December 31, 2005                |   |   |
|                                                                                                                                              |   |   |
| Notes to Consolidated Financial Statements                                                                                                        |   |   |

 

39

----

 

**Report of Independent Registered PublicAccounting Firm**

 

To the Stockholders and Board of Directors of Monaco Coach Corporation

 

We have completed integrated audits of Monaco Coach Corporation’s (the“Company”) December 31, 2005 and January 1, 2005 consolidatedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2005, and an audit of its January 3, 2004 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below.

 

Consolidated Financial Statements

 

In our opinion, the consolidated financial statements listed in theindex appearing under Item 15(a)(1) present fairly, in all materialrespects, the financial position of the Company and its subsidiaries****at December 31, 2005 and January 1, 2005, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005 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 reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Management’sReport on Internal Control Over Financial Reporting appearing under Item 9A,that the Company maintained effective internal control over financial reportingas of December 31, 2005 based on criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”), isfairly 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 31, 2005, basedon criteria established in *Internal Control –Integrated Framework* 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.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

40

----

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| March 15, 2006                 |

 

41

----

 

**MONACOCOACH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

*(in thousandsof dollars, except share and per share data)*

 
| ** **                                                                                                                   | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                   |       |                      |       |                        |       |
| Current  assets:                                                                                                             |       |                      |       |                        |       |
| Cash                                                                                                                         |       | $                         | 0          |                        | $          | 586 |   |
| Trade  receivables, net of allowance of $482, and $778, respectively                                                         |       | 127,298                   |       | 102,666                     |       |
| Inventories,  net                                                                                                            |       | 162,217                   |       | 183,292                     |       |
| Resort lot  inventory                                                                                                        |       | 7,315                     |       | 9,135                       |       |
| Prepaid  expenses                                                                                                            |       | 5,177                     |       | 4,364                       |       |
| Income taxes  receivable                                                                                                     |       | 0                         |       | 206                         |       |
| Deferred  income taxes                                                                                                       |       | 33,188                    |       | 36,345                      |       |
| Discontinued  operations                                                                                                     |       | 7,655                     |       | 4,922                       |       |
| Total  current assets                                                                                                        |       | 342,850                   |       | 341,516                     |       |
|                                                                                                                         |       |                      |       |                        |       |
| Property,  plant, and equipment, net                                                                                         |       | 141,462                   |       | 159,304                     |       |
| Debt  issuance costs net of accumulated amortization of $572, and $678,  respectively                                        |       | 571                       |       | 695                         |       |
| Goodwill                                                                                                                     |       | 55,254                    |       | 85,952                      |       |
| Discontinued  operations                                                                                                     |       | 101                       |       | 0                           |       |
| Total assets                                                                                                                 |       | $                         | 540,238    |                        | $          | 587,467 |   |
|                                                                                                                         |       |                      |       |                        |       |
| **LIABILITIES**                                                                                                              |       |                      |       |                        |       |
| Current  liabilities:                                                                                                        |       |                      |       |                        |       |
| Book  overdraft                                                                                                              |       | $                         | 2,075      |                        | $          | 14,550 |   |
| Current  portion of long-term debt                                                                                           |       | 0                         |       | 5,714                       |       |
| Line of  credit                                                                                                              |       | 34,062                    |       | 25,000                      |       |
| Accounts  payable                                                                                                            |       | 75,476                    |       | 78,299                      |       |
| Product  liability reserve                                                                                                   |       | 20,233                    |       | 19,275                      |       |
| Product  warranty reserve                                                                                                    |       | 31,884                    |       | 32,902                      |       |
| Income taxes  payable                                                                                                        |       | 2,087                     |       | 0                           |       |
| Accrued  expenses and other liabilities                                                                                      |       | 31,202                    |       | 37,732                      |       |
| Discontinued  operations                                                                                                     |       | 3,924                     |       | 853                         |       |
| Total  current liabilities                                                                                                   |       | 200,943                   |       | 214,325                     |       |
|                                                                                                                         |       |                      |       |                        |       |
| Long-term  debt, less current portion                                                                                        |       | 0                         |       | 34,786                      |       |
| Deferred  income taxes                                                                                                       |       | 19,679                    |       | 21,624                      |       |
| Total  liabilities                                                                                                           |       | 220,622                   |       | 270,735                     |       |
|                                                                                                                         |       |                      |       |                        |       |
| Commitments  and contingencies (Note 19)                                                                                     |       |                      |       |                        |       |
|                                                                                                                         |       |                      |       |                        |       |
| **STOCKHOLDERS’  EQUITY**                                                                                               |       |                      |       |                        |       |
| Preferred  stock, $.01 par value; 1,934,783 shares authorized, no shares outstanding                                         |       | 0                         |       | 0                           |       |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 29,425,787 and  29,561,766 issued and outstanding, respectively |       | 294                       |       | 296                         |       |
| Additional  paid-in capital                                                                                                  |       | 57,454                    |       | 59,005                      |       |
| Retained  earnings                                                                                                           |       | 261,868                   |       | 257,431                     |       |
| Total  stockholders’ equity                                                                                             |       | 319,616                   |       | 316,732                     |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                         | 540,238    |                        | $          | 587,467 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

42

----

 

**MONACOCOACH CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**for theyears ended January 3, 2004, January 1, 2005, and December 31,2005**

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

 
| ** **                                                        | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                              |       |       |       |       |       |       |       |
| Net sales                                                         |       | $          | 1,158,083  |       | $          | 1,386,269  |       | $ | 1,236,238 |   |
| Cost of  sales                                                    |       | 1,019,423  |       | 1,217,457  |       | 1,111,468  |       |
| Gross profit                                                      |       | 138,660    |       | 168,812    |       | 124,770    |       |
|                                                              |       |       |       |       |       |       |       |
| Selling,  general, and administrative expenses                    |       | 100,709    |       | 109,145    |       | 113,179    |       |
| Plant  relocation costs                                           |       | 0          |       | 0          |       | 4,370      |       |
| Operating  income                                                 |       | 37,951     |       | 59,667     |       | 7,221      |       |
|                                                              |       |       |       |       |       |       |       |
| Other  income, net                                                |       | 260        |       | 343        |       | 255        |       |
| Interest  expense                                                 |       | (2,968     | )          | (1,547     | )          | (1,820     | )          |
| Income  before income taxes and discontinued operations           |       | 35,243     |       | 58,463     |       | 5,656      |       |
|                                                              |       |       |       |       |       |       |       |
| Provision  for income taxes, continuing operations                |       | 13,220     |       | 21,914     |       | 1,687      |       |
|                                                              |       |       |       |       |       |       |       |
| Net income  from continuing operations                            |       | 22,023     |       | 36,549     |       | 3,969      |       |
|                                                              |       |       |       |       |       |       |       |
| Income  (loss) from discontinued operations, net of tax provision |       | 177        |       | 156        |       | (1,321     | )          |
|                                                              |       |       |       |       |       |       |       |
| Net income                                                        |       | $          | 22,200     |       | $          | 36,705     |       | $ | 2,648 |   |
|                                                              |       |       |       |       |       |       |       |
| Earnings  (loss) per common share:                                |       |       |       |       |       |       |       |
| Basic from  continued operations                                  |       | $          | 0.75       |       | $          | 1.24       |       | $ | 0.13 |   |
| Basic from  discontinued operations                               |       | 0.01       |       | 0.01       |       | (0.04      | )          |
| Basic                                                             |       | $          | 0.76       |       | $          | 1.25       |       | $ | 0.09 |   |
|                                                              |       |       |       |       |       |       |       |
| Diluted from  continued operations                                |       | $          | 0.74       |       | $          | 1.22       |       | $ | 0.13 |   |
| Diluted from  discontinued operations                             |       | 0.01       |       | 0.01       |       | (0.04      | )          |
| Diluted                                                           |       | $          | 0.75       |       | $          | 1.23       |       | $ | 0.09 |   |
|                                                              |       |       |       |       |       |       |       |
| Weighted  average common shares outstanding:                      |       |       |       |       |       |       |       |
| Basic                                                             |       | 29,062,649 |       | 29,370,455 |       | 29,516,794 |       |
| Diluted                                                           |       | 29,567,012 |       | 29,958,646 |       | 29,858,036 |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

43

----

 

**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**for theyears ended January 3, 2004, January 1, 2005, and December 31,2005**

*(inthousands of dollars, except share data)*

 
| ** **                              | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                    |       |                  |       |                    |       |         |       |         |       |   |   |
| Balances, December 29,  2002       |       | 28,871,144            |       | $                       | 289        |         | $          | 51,501       |       | $ | 208,837 |   | $ | 260,627 |   |
| Issuance of  common stock               |       | 374,999               |       | 3                       |       | 2,406        |       |         |       | 2,409 |   |
| Tax benefit  of stock options exercised |       |                  |       |                    |       | 1,012        |       |         |       | 1,012 |   |
| Net income                              |       |                  |       |                    |       |         |       | 22,200       |       | 22,200 |   |
| Balances, January 3,  2004         |       | 29,246,143            |       | 292                     |       | 54,919       |       | 231,037      |       | 286,248 |   |
| 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 |   |
| Restricted  stock granted               |       |                  |       |                    |       | 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 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

44

----

 

**MONACOCOACH CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**for theyears ended January 3, 2004, January 1, 2005, and December 31,2005**

*(inthousands of dollars)*

 
| ** **                                                                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                      |       |     |       |     |       |     |       |
| **Increase  (Decrease) in Cash:**                                                         |       |     |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |     |       |
| Cash flows  from operating activities:                                                    |       |     |       |     |       |     |       |
| Net income                                                                                |       | $        | 22,200     |     | $          | 36,705   |       | $ | 2,648 |   |
| Adjustments  to reconcile net income to net cash provided (used) by operating activities: |       |     |       |     |       |     |       |
| Depreciation  and amortization                                                            |       | 9,737    |       | 10,670   |       | 10,678   |       |
| Loss on  disposal of assets                                                               |       | 44       |       | 229      |       | 276      |       |
| Deferred  income taxes                                                                    |       | 3,850    |       | 2,833    |       | (2,943   | )          |
| Restricted  stock expense                                                                 |       |     |       |     |       | 16       |       |
| Change in  assets and liabilities:                                                        |       |     |       |     |       |     |       |
| Trade  receivables, net                                                                   |       | 28,655   |       | (38,231  | )          | 39,203   |       |
| Inventories                                                                               |       | 47,392   |       | (42,743  | )          | (2,916   | )          |
| Resort lot  inventory                                                                     |       | 5,869    |       | 6,663    |       | 145      |       |
| Prepaid  expenses                                                                         |       | 573      |       | (2,172   | )          | 1,422    |       |
| Accounts  payable                                                                         |       | (13,395  | )          | 14,737   |       | (5,947   | )          |
| Product liability  reserve                                                                |       | (599     | )          | (489     | )          | (1,619   | )          |
| Product  warranty reserve                                                                 |       | (2,265   | )          | 2,631    |       | (4,486   | )          |
| Income taxes  payable                                                                     |       | (1,141   | )          | (1,308   | )          | (2,293   | )          |
| Accrued  expenses and other liabilities                                                   |       | (2,880   | )          | 5,242    |       | 805      |       |
| Discontinued  operations                                                                  |       | (130     | )          | 317      |       | (662     | )          |
| Net cash  provided by (used in) operating activities                                      |       | 97,910   |       | (4,916   | )          | 34,327   |       |
| Cash flows  from investing activities:                                                    |       |     |       |     |       |     |       |
| Additions to  property, plant, and equipment                                              |       | (19,498  | )          | (12,305  | )          | (17,718  | )          |
| Proceeds  from sale of assets                                                             |       | 2,197    |       | 1,936    |       | 123      |       |
| Proceeds  from the sale of Naples property                                                |       | 6,650    |       | 0        |       | 0        |       |
| Payment for  business acquisition, net of cash acquired                                   |       | 0        |       | 0        |       | (54,601  | )          |
| Discontinued  operations                                                                  |       | (12      | )          | (9       | )          | (4       | )          |
| Net cash  used in investing activities                                                    |       | (10,663  | )          | (10,378  | )          | (72,200  | )          |
| Cash flows  from financing activities:                                                    |       |     |       |     |       |     |       |
| Book  overdraft                                                                           |       | (3,636   | )          | 1,432    |       | 12,475   |       |
| Borrowings  (payments) on line of credit, net                                             |       | (51,413  | )          | 34,062   |       | (9,062   | )          |
| Borrowings  on long-term notes payable                                                    |       | 0        |       | 0        |       | 40,500   |       |
| Payments on  long-term notes payable                                                      |       | (22,000  | )          | (30,000  | )          | 0        |       |
| Dividends  paid                                                                           |       | 0        |       | (5,874   | )          | (7,085   | )          |
| Issuance of  common stock                                                                 |       | 3,421    |       | 2,536    |       | 1,537    |       |
| Debt  issuance costs                                                                      |       | (339     | )          | (416     | )          | (298     | )          |
| Discontinued  operations                                                                  |       | 118      |       | 156      |       | 392      |       |
| Net cash  provided by (used in) financing activities                                      |       | (73,849  | )          | 1,896    |       | 38,459   |       |
| Net change  in cash                                                                       |       | 13,398   |       | (13,398  | )          | 586      |       |
| Cash at  beginning of period                                                              |       | 0        |       | 13,398   |       | 0        |       |
| Cash at end  of period                                                                    |       | $        | 13,398     |     | $          | 0        |       | $ | 586 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

** **

**45**

----

** **

**MONACOCOACH CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.      BUSINESS ANDSIGNIFICANT ACCOUNTING POLICIES:**

 

**Business**

 

MonacoCoach Corporation and its subsidiaries (the “Company”) manufacture premiummotor coaches, and towable recreational vehicles at manufacturing facilities inOregon and Indiana. These products are sold to independent dealers primarilythroughout the United States and Canada. In addition, the Company owns twomotor coach resort properties, the developed lots are sold to retail customers.

 

TheCompany’s core business activities are comprised of three distinct operations.The first is the design, manufacture, and sale of motorized recreationalvehicles. The second is the design, manufacture, and sale of towablerecreational vehicles. The third is the development and sale of motor coachrecreation resort lots. Accordingly, the Company has presented segmentedfinancial information for these three segments at Note 11 of the Company’s Notesto Consolidated Financial Statements.

 

**Consolidation Policy**

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries. All material intercompanytransactions and balances have been eliminated. The Company has no variableinterest entities.

 

**Fiscal Period**

 

The Company follows a 52/53 week fiscal year period ending onthe Saturday closest to December 31. Interim periods also end on theSaturday closest to the calendar quarter end. The fiscal periods were 53 weekslong for 2003, 52 weeks for 2004, and 52 weeks for 2005. All references toyears in the consolidated financial statements relate to fiscal years ratherthan calendar years.

 

**Estimatesand Industry Factors**

 

Estimates - The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. The Company basesestimates on various assumptions that are believed to be reasonable under thecircumstances. Management is continually evaluating and updating theseestimates, and it is possible that these estimates will change in the nearfuture.

 

CreditRisk - TheCompany distributes its motorized and towable recreational vehicles through anindependent dealer network for recreational vehicles. Sales to one customerwere approximately 12% of net revenues for fiscal year 2003, 11% for 2004, and11% for 2005. No other individual dealers represented over 10% of net revenuesin 2003, 2004, or 2005. The loss of a significant dealer or a substantialdecrease in sales by such a dealer could have a material adverse effect on theCompany’s business, results of operations, and financial condition. The termsand conditions of payment are a combination of open trade receivables, andcommitments from dealer floor plan lending institutions. For resort lotcustomers, funds are required at the time of closing. For our RV dealers, termsare net 30 days for units that are financed by a third party lender. For openreceivables, terms vary from net 30 days to net 180 days, depending on thespecific agreement. Terms beyond 30 days generally require additionalcollateral, as well as security interest in the inventory sold.

 

46

----

 

Asof December 31, 2005, total trade receivables were $102.7 million, withapproximately $72.6 million, or 70.7% of the outstanding accounts receivablebalance, concentrated among floor plan lenders. The remaining open $30.1million of secured trade receivables were concentrated substantially all withone dealer. Terms of open trade receivables are granted by the Company, on avery limited basis, to dealers who have been subjected to evaluative creditprocesses conducted by the Company. These processes include evaluating thestrength of the dealership’s balance sheet, how long the dealership has been inexistence, reputation within the industry, and credit references.

 

Concentrationsof credit risk exist for accounts receivable and repurchase agreements (see Note19), primarily for the Company’s largest dealers. As of December 31, 2005,the Company had one dealer that comprised 24.7% of the outstanding tradereceivables. The Company generally sells to dealers throughout the UnitedStates and there is no geographic concentration of credit risk.

 

Product Warranty Reserve - Estimated warranty costs are provided for at thetime of sale of products with warranties covering the products for up to oneyear from the date of retail sale (five years for the front and sidewall framestructure, and three years on the Roadmaster chassis). These estimates arebased on historical average repair costs, as well as other reasonableassumptions deemed appropriate by management. The following table disclosessignificant changes in the product warranty reserve:

 
| ** **           | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| Beginning  balance   |       | $                       | 31,518     |     | $          | 29,252   |       | $ | 31,884 |   |
| Expense              |       | 34,796                  |       | 34,126   |       | 28,861   |       |
| Payments/adjustments |       | (37,062                 | )          | (31,494  | )          | (27,843  | )          |
| Ending  balance      |       | $                       | 29,252     |     | $          | 31,884   |       | $ | 32,902 |   |

 

ProductLiability Reserve- Estimated litigation costs are provided for at the time of sale of productsor at the time a determination is made that an estimable loss has occurred. Theseestimates are developed by legal counsel based on professional judgment, andhistorical experience. The following table discloses significant changes in theproduct liability reserve:

 
| ** **           | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| Beginning  balance   |       | $                       | 21,322     |     | $          | 20,723   |       | $ | 20,233 |   |
| Expense              |       | 12,670                  |       | 11,044   |       | 9,635    |       |
| Payments/adjustments |       | (13,269                 | )          | (11,534  | )          | (10,593  | )          |
| Ending  balance      |       | $                       | 20,723     |     | $          | 20,233   |       | $ | 19,275 |   |

 

47

----

 

**Inventories**

 

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

 

**Inventory Allowance**

 

The Company writes down its inventory for obsolescence, and thedifference between the cost of inventory and its estimated market value. Thesewrite-downs are based on assumptions about future sales demand and marketconditions. If actual sales demand or market conditions change from thoseprojected by management, additional inventory write-downs may be required.

 

**ResortLot Inventory**

 

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

 

**Property,Plant, and Equipment**

 

Property, plant, and equipment, including significantimprovements thereto, are stated at cost less accumulated depreciation andamortization. Cost includes expenditures for major improvements, replacementsand renewals and the net amount of interest cost associated with significantcapital additions during periods of construction. Capitalized interest was$285,000 in 2003, and zero in 2004 and 2005. Maintenance and repairs arecharged to expense as incurred. Replacements and renewals are capitalized. Whenassets are sold, retired or otherwise disposed of, the cost and accumulateddepreciation are removed from the accounts and any resulting gain or loss isreflected in income.

 

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

 

Ateach balance sheet date, management assesses whether there has been permanentimpairment in the value of property, plant, and equipment assets. The amount ofany such impairment is determined by comparing anticipated undiscounted futurecash flows from operating activities with the associated carrying value. Thefactors considered by management in performing this assessment include currentoperating results, trends and prospects, as well as the effects ofobsolescence, demand, competition, and other economic factors.

 

48

----

 

**Goodwill**

 

Goodwillrepresents the excess of the cost of acquisition over the fair value of netassets acquired. The Company is the successor to a company formed in 1968 (the “Predecessor”)and commenced operations on March 5, 1993 by acquiring substantially allof the assets and liabilities of the Predecessor. As of December 31, 2005,the goodwill arising from the acquisition of the assets and operations of theCompany’s Predecessor in March 1993 was $16.1 million. In March 1996,the Company acquired the Holiday Rambler Division of Harley-Davidson, Inc.(“Holiday Rambler”). As of December 31, 2005, the goodwill arising fromthe acquisition of Holiday Rambler was $1.8 million. The Company recorded $37.3million of goodwill associated with the August 2, 2001 acquisition of SMCCorporation (SMC). The Company also recorded $30.7 million of goodwillassociated with the November 18, 2005 acquisition of R-Vision. Inaccordance with Statements of Financial Accounting Standards No. 142 (SFAS142) “Accounting for Goodwill and Other Intangible Assets,” no amortization wasrecorded for any of the acquisitions that have occurred since 2001.

 

SFAS142 requires that management assess annually whether there has been permanentimpairment in the value of goodwill. To assess whether or not there has beenimpairment, the Company’s management compares the market capitalization of theCompany to the carrying amount, including goodwill, of the net book value ofthe Company to determine if goodwill has been impaired. If the Companydetermines that the market capitalization is not representative of the fairvalue of the reporting unit as a whole, then the Company will use an estimateof discounted future cash flows to determine fair value. As required by SFAS142, management completed its annual testing during 2003, 2004, and 2005 andhas determined that there was no impairment of goodwill requiring a write-down.

 

**DebtIssuance Costs**

 

Unamortizeddebt issuance costs of $571,000, and $695,000 (at January 1, 2005, and December 31,2005, respectively), are being amortized over the terms of the related loans.

 

**Stock-BasedEmployee Compensation Plans**

 

AtDecember 31, 2005, the Company had three stock-based employee compensationplans (see Note 16). The Company accounts for those plans under the recognitionand measurement principles of APB Opinion No. 25, Accounting for StockIssued to Employees, and related Interpretations. No stock-based employeecompensation cost is reflected in net income for stock options granted, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. At December 31,2005, the Company had granted restricted stock units totaling $16,000. Thisgrant has been appropriately expensed through the income statement ascompensation expense.

 

**IncomeTaxes**

 

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

 

49

----

 

**Revenue Recognition**

 

TheCompany recognizes revenue from the sale of recreational vehicles upon shipmentand recognizes revenue from resort lot sales upon closing. The Company does notoffer any rights of return to our dealers, or resort lot customers.

 

In December 2003, the Securitiesand 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 2003, 2004, and2005.

 

**RepurchaseObligations**

 

Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement.****TheCompany has recorded a liability associated with the disposition of repurchasedinventory. To determine the appropriate liability, the Company calculates areserve based on an estimate of potential net losses and qualitative andquantitative factors, including dealer inventory turn rates and the financialstrength of individual dealers.

 

**Advertisingand Printing Costs**

 

TheCompany expenses advertising and printing costs as incurred, except for prepaidshow costs, which are expensed when the event takes place. Advertising andprinting costs, including retail programs, are recorded as selling, general andadministrative expenses, while discounts off of invoice, or sales allowances(including wholesale volume incentives), are recorded as adjustments to netsales. During 2005, approximately $11.6 million ($11.6 million in 2003 and$12.4 million in 2004) of advertising and printing costs were expensed.

 

**Researchand Development Costs**

 

Researchand development costs are charged to expense as incurred and were $1.5 millionin 2005 ($1.2 million in 2003 and $1.3 million in 2004).

 

**Brand Elements and Signage**

 

Aspart of its franchise program for dealers, the Company places certainfixed assets at independent dealerships. These assets are comprised ofinformational computer kiosks, brand island displays, furniture and fixtures,as well as outdoor storefront signage. These assets are leased to dealers over10 years through an operating lease, and the Company depreciates the assetsover their respective useful lives.

 

**New AccountingPronouncements**

 

EITF 04-10

 

In September of 2004, theFinancial Accounting Standards Board (the Board) issued EITF 04-10, “DeterminingWhether to Aggregate Operating Segments That Do Not Meet the QuantitativeThresholds.” FASB Statement No. 131, “Disclosures about Segments of anEnterprise and Related Information,” requires public companies to reportfinancial and descriptive information about its reportable operating segments. EITF04-10 addresses how to determine if operating segments that do not meet thequantitative thresholds of FASB No. 131 are to be reported as separatesegments.

 

50

----

 

EITF 04-10 is effective for fiscalyears ending after September 15, 2005.

 

We have implemented thenecessary disclosures within the financial statements to comply with EITF04-10.

 

FAS 151

 

In November 2004, the Boardissued FAS 151, “Inventory Costs An Amendment of ARM No. 43, Chapter 4,”to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material. The standard is effective forinventory costs incurred during fiscal years beginning after June 15,2005.

 

We have reviewed the provisions of FAS151, and believe there will be no significant changes to our inventoryaccounting. We will adopt the provisions of the Statement for the fiscal yearbeginning 2006.

 

FAS 123R

 

In December 2004, the Boardissued FAS 123R, “Share-Based Payment.” The Statement replaces FAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” The Statement establishes fair value as themeasurement objective in accounting for share-based payment arrangements andrequires a fair-value-based measurement method in accounting for share-basedpayments to employees except for equity instruments held by employee shareownership plans. The Statement is effective for public entities as of thebeginning of the first annual reporting period that begins after June 15,2005.

 

In the fourth quarter of 2005, the Company elected to accelerate allnon-vested stock options outstanding with an exercise price greater than $16per share.  The purpose of theacceleration is to enable the Company to avoid recognizing compensation expenseassociated with these options in future periods in its consolidated statementsof operations pursuant to Financial Accounting Standards Board Statement No. 123R.Under FAS No. 123R, the Company will apply the expense recognitionprovisions relating to stock options beginning in the first quarter of fiscal2006. In approving the acceleration, the Company considered its impact onfuture financial results, stockholder value and employee retention. The Companybelieves that the acceleration is in the best interest of stockholders as itwill reduce the Company’s reported compensation expense in future periods inlight of these accounting regulations. The compensation expense to be recordedin future periods that is eliminated as a result of the acceleration of the vestingof these options is approximately $3.7 million. This acceleration will notresult in a charge to the Company’s expenses in the consolidated statements ofoperations in fiscal 2005.

 

We will adopt the provisions of theStatement for the fiscal year beginning 2006. If we had included the cost ofthe employee stock option compensation using the fair value method in ourfinancial statements, our net income for 2003, 2004 and 2005 would havedecreased by approximately $1.4 million, $1.6 million and $3.2 million,respectively.

 

**SupplementalCash Flow Disclosures:**

 
| ** **                                                                       | ** **   | **2003**             | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------|--------------|----------------------|------------|----------|------------|----------|------------|
| *** ***                                                                     | *** *** | ***(in thousands)*** | ** ** |
| Cash paid  during the period for:                                                |         |                 |       |     |       |     |       |
| Interest,  net of amount capitalized of $285 in 2003, $0 in 2004, and $0 in 2005 |         | $                    | 2,552      |     | $          | 964      |       | $ | 1,355 |   |
| Income taxes                                                                     |         | 9,604                |       | 19,531   |       | 6,160    |       |
|                                                                                  |              |                      |            |          |            |          |            |  |  |  |

 

51

----

 

**2.      ACQUISITION:**

** **

**R-Vision**

** **

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

 

Thecash paid for R-Vision, including transaction costs of $607,016, totaled$54,601,481, net of cash acquired. The totalR-Vision assets acquired and liabilities assumed of R-Vision based on estimatedfair 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                                       |       | 30,698                  |       |
| Total assets  acquired                         |       | 76,992                  |       |
|                                           |       |                    |       |
| Accounts  payable                              |       | 8,769                   |       |
| Accrued  liabilities                           |       | 11,891                  |       |
| Current  deferred tax liability                |       | 868                     |       |
| Long-term  deferred tax liability              |       | 863                     |       |
| Total  liabilities assumed                     |       | 22,391                  |       |
|                                           |       |                    |       |
| Total assets  acquired and liabilities assumed |       | $                       | 54,601     |   |

 

Thepurchase price was derived from a calculation of a multiple of earningsbefore interest, taxes, depreciation and amortization for a trailing 12-monthperiod (adjusted for certain non-recurring expense items), which exceeded thebook value of R-Vision and generated goodwill of $30.7 million. The allocationof the purchase price and the related goodwill is subject to adjustment uponresolution of pre-R-Vision acquisition contingencies that may arise (suchas certain estimates for reserve amounts related to warranty, productlitigation, and inventory obsolescence). The effects of resolution ofpre-R-Vision Acquisition contingencies occurring: within one year of theacquisition date will be reflected as an adjustment of the allocation of thepurchase price and of goodwill. After one year they will be recognized in thedetermination of net income.

 

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 or is it necessarilyindicative of future operating results.

 

52

----

 
| ** **                         | ** ** | **(in thousands,  except per share  data)** | ** ** | **(in thousands,  except per share  data)** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                                   | ** ** | **2005**                                                   | ** ** |
| ** **                         | ** ** | **Unaudited**                                              | ** ** | **Unaudited**                                              | ** ** |
| 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:**

 

Duringthe third quarter of 2005, the Company announced that it planned to close itsRoyale Coach operations in Elkhart, Indiana. Royale Coach produces Prevost busconversion motor coaches with price points in excess of $1.4 million. RoyaleCoach sells approximately 20 coaches per year and was not a significant portionof the Company’s overall business. Plant closure costs of approximately $1.3million (net of tax) have been recognized in 2005. The net loss fromdiscontinued operations for the fiscal years ending January 3, 2004, January 1,2005 and December 31, 2005 is net of a tax expense of $106,000, $94,000,and net of a tax benefit of $868,000, respectively.

 

The operating results of Royale Coach are presented in theCompany’s Consolidated Statements of Income as discontinued operations, net ofincome tax, and all prior periods have been reclassified. The components ofdiscontinued operations for the periods presented are as follows. All dollarsrepresented are in thousands.

 
| ** **                                                          | ** ** | **2003**           | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Net sales                                                           |       | $                  | 10,229     |     | $          | 10,974   |       | $ | 5,452 |   |
| Cost of  sales                                                      |       | 8,956              |       | 9,660    |       | 5,923    |       |
| Gross profit  (loss)                                                |       | 1,273              |       | 1,314    |       | (471     | )          |
|                                                                |       |               |       |     |       |     |       |
| Selling,  general and administrative expenses                       |       | 990                |       | 1,064    |       | 1,718    |       |
|                                                                |       |               |       |     |       |     |       |
| Net income  (loss) from discontinued operations before income taxes |       | 283                |       | 250      |       | (2,189   | )          |
| Income tax  expense (benefit)                                       |       | 106                |       | 94       |       | (868     | )          |
| Net income  (loss) from discontinued operations                     |       | $                  | 177        |     | $          | 156      |       | $ | (1,321 | ) |

 

53

----

 

**MONACO COACHCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**4.      PLANT RELOCATION**

** **

OnApril 15, 2005, the Company announced plans to close the Bend, Oregonproduction operations and relocate them to the Coburg, Oregon facility. TheBend, Oregon operations ceased as of June 15, 2005. The Company recognizedpre-tax charges in 2005 of $4.4 million. The charges were primarily for theimpairment of property, plant and equipment and future rental expense relatedto the facility.

 

Theaccrued liability for restructuring reserves consists of the following:

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

 

** 5.    INVENTORIES, NET:**

 

Inventoriesconsist of the following:

 
| ** **             | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **(in thousands)**   | ** ** |
| Raw  materials         |       | $                         | 85,932     |                        | $          | 91,028 |   |
| Work-in-process        |       | 65,094                    |       | 61,393                      |       |
| Finished  units        |       | 22,537                    |       | 43,134                      |       |
| Raw material  reserves |       | (11,346                   | )          | (12,263                     | )          |
|                   |       | $                         | 162,217    |                        | $          | 183,292 |   |

 

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

 

Property, plant, and equipment consist of the following:

 
| ** **                                      | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**   | ** ** |
| ** **                                      | ** ** | ** **                | ** ** | ** **                  | ** ** |
| Land                                            |       | $                         | 14,547     |                        | $          | 15,146 |   |
| Buildings                                       |       | 115,799                   |       | 127,974                     |       |
| Equipment                                       |       | 36,330                    |       | 42,837                      |       |
| Furniture  and fixtures                         |       | 13,991                    |       | 18,529                      |       |
| Vehicles                                        |       | 2,936                     |       | 3,510                       |       |
| Leasehold  improvements                         |       | 2,626                     |       | 2,504                       |       |
| Brand  elements and signage                     |       | 0                         |       | 3,147                       |       |
| Construction  in progress                       |       | 7,230                     |       | 6,675                       |       |
|                                            |       | 193,459                   |       | 220,322                     | ** ** |
| Less  accumulated depreciation and amortization |       | 51,997                    |       | 61,018                      |       |
|                                            |       | $                         | 141,462    |                        | $          | 159,304 | ** ** |

 

54

----

 

** 7.    ACCRUED EXPENSES ANDOTHER LIABILITIES:**

 

Accrued expenses and other liabilities consist of the following:

 
| ** **                                             | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(in thousands)**   |
|                                                   |       |                      |       |                        |       |
| Payroll,  vacation, payroll taxes and related accruals |       | $                         | 16,974     |                        | $          | 15,363 |   |
| Promotional  and advertising                           |       | 5,140                     |       | 7,693                       |       |
| Health insurance  reserves and premiums payable        |       | 4,789                     |       | 5,943                       |       |
| Resorts  profit sharing accruals                       |       | 0                         |       | 1,865                       |       |
| Other                                                  |       | 4,299                     |       | 6,868                       |       |
|                                                   |       | $                         | 31,202     |                        | $          | 37,732 |   |

 

** 8.    LINE OF CREDIT:**

 

TheCompany’s credit facilities consists of a revolving line of credit of up to$105.0 million. At the end of the 2005 fiscal year, borrowings outstanding onthe revolving line of credit (the “Revolving Loan”) were $25.0 million. At theelection of the Company, the Revolving Loan bears interest at varying ratesthat fluctuate based on the prime rate or LIBOR and are determined based on theCompany’s leverage ratio. The Company also pays interest quarterly on theunused available portion of the Revolving Loan at varying rates, determined bythe Company’s leverage ratio. The Revolving Loan is due and payable in full on November 17,2009 and requires monthly interest payments.

 

Theweighted average interest rate on the outstanding borrowings under theRevolving Loan was 4.3% and 5.4% for 2004 and 2005, respectively. Interestexpense on the unused available portion of the line was $188,000 or 1.1% and$178,000 or 1.0% of weighted average outstanding borrowings for 2004 and 2005,respectively. The Revolving Loan is collateralized by all the assets of theCompany. The agreement contains restrictive covenants as to the Company’sleverage ratio, current ratio, fixed charge coverage ratio, and tangible networth. As of December 31, 2005, the Company was in compliance with thesecovenants.

 

** 9.    LONG-TERMNOTE PAYABLE:**

** **

InNovember 2005, the Company amended its credit facilities to borrow $40.0million of term debt (the “Term Debt”) to effect the acquisition of R-Vision(see Note 2). At the end of the 2005 year, borrowings outstanding were $40.0million. At the election of the Company, the Term Debt bears interest atvarying rates that fluctuate based on the prime rate or LIBOR and aredetermined based on the Company’s leverage ratio. The Term Debt requiresquarterly interest payments and quarterly principal payments of $1.4 million,with a final balloon payment of $12.9 million due on November 18, 2010. Asof year end 2005, the interest rate on the Term Debt was 6.1%. The Term Debt iscollateralized by all the assets of the Company. The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. As of December 31, 2005,the Company was in compliance with these covenants.

 

55

----

** **

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

 

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

 

| **Year** | ** ** | **Amount of payment due** | ** ** |
|----------|------------|------------------------------------------|------------|
| 2006     |       | $                                        | 5,714      |   |
| 2007     |       | $                                        | 5,714      |   |
| 2008     |       | $                                        | 5,714      |   |
| 2009     |       | $                                        | 6,214      |   |
| 2010     |       | $                                        | 17,144     |   |
|     |       | $                                        | 40,500     |   |
|          |            |                                          |            |  |  |

** **

**10.    PREFERRED STOCK:**

** **

TheCompany has authorized “blank check” preferred stock (1,934,783 sharesauthorized, $.01 par value) (“Preferred Stock”), which may be issued fromtime to time in one or more series upon authorization by the Company’sBoard of Directors. The Board of Directors, without further approval of thestockholders, is authorized to fix the dividend rights and terms, conversionrights, voting rights, redemption rights and terms, liquidation preferences,and any other rights, preferences, privileges, and restrictions applicable toeach series of the Preferred Stock. There were no shares of PreferredStock outstanding as of January 1, 2005 or December 31, 2005.

 

**11.    SEGMENT REPORTING:**

** **

MonacoCoach Corporation is a leading manufacturer of premium Class A, B and Cmotor coaches (Motorized Recreational Vehicle Segment) and towable recreationalvehicle (Towable Recreational Vehicle Segment). Our product line currentlyconsists of a broad line of motor coaches, fifth wheel trailers and travel trailersunder the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie,” “R-Vision,”“Bison,” and “Roadmaster” brand names.

 

Inaddition to the manufacturing of premium recreational vehicles, the Companyalso owns and operates two motorhome resort properties (Motorhome ResortSegment) located in Las Vegas, Nevada, and Indio, California. The MotorhomeResorts offer sales of individual lots to owners and also offer a commoninterest in the amenities at the resort. The Motorhome Resorts providedestination locations for premium Class A recreational vehicle owners andhelp to promote the recreational lifestyle.

 

56

----

** **

The followingtable provides the results of operations of the three segments of the Companyfor the years 2003, 2004, and 2005, respectively.

 
| ** **                                     | ** ** | **2003**           | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| **Motorized Recreational Vehicle Segment**     |       |               |       |      |       |      |       |
|                                           |       |               |       |      |       |      |       |
| Net sales                                      |       | $                  | 1,059,347  |      | $          | 1,234,233 |       | $ | 1,017,766 |   |
| Cost of sales                                  |       | 930,902            |       | 1,080,972 |       | 925,014   |       |
| Gross profit                                   |       | 128,445            |       | 153,261   |       | 92,752    |       |
|                                           |       |               |       |      |       |      |       |
| Selling, general and administrative  expenses  |       | 37,652             |       | 38,566    |       | 46,331    |       |
| Corporate overhead allocation                  |       | 50,295             |       | 51,470    |       | 43,148    |       |
| Plant relocation costs                         |       | 0                  |       | 0         |       | 4,370     |       |
| Operating  income (loss)                       |       | $                  | 40,498     |      | $          | 63,225    |       | $ | (1,097 | ) |
|                                           |       |               |       |      |       |      |       |
| **Towable Recreational Vehicle Segment**       |       |               |       |      |       |      |       |
|                                           |       |               |       |      |       |      |       |
| Net sales                                      |       | $                  | 87,980     |      | $          | 129,331   |       | $ | 185,433 |   |
| Cost of sales                                  |       | 80,816             |       | 123,314   |       | 174,242   |       |
| Gross profit                                   |       | 7,164              |       | 6,017     |       | 11,191    |       |
|                                           |       |               |       |      |       |      |       |
| Selling, general and administrative  expenses  |       | 3,321              |       | 4,827     |       | 5,603     |       |
| Corporate overhead allocation                  |       | 4,348              |       | 5,393     |       | 7,588     |       |
| Operating  loss                                |       | $                  | (505       | )         | $          | (4,203    | )          | $ | (2,000 | ) |
|                                           |       |               |       |      |       |      |       |
| **Motorhome Resorts Segment**                  |       |               |       |      |       |      |       |
|                                           |       |               |       |      |       |      |       |
| Net sales                                      |       | $                  | 10,756     |      | $          | 22,705    |       | $ | 33,039 |   |
| Cost of sales                                  |       | 7,705              |       | 13,171    |       | 12,212    |       |
| Gross profit                                   |       | 3,051              |       | 9,534     |       | 20,827    |       |
|                                           |       |               |       |      |       |      |       |
| Selling, general, and administrative  expenses |       | 914                |       | 4,194     |       | 7,606     |       |
| Corporate overhead allocation                  |       | 4,179              |       | 4,695     |       | 2,903     |       |
| Operating  income (loss)                       |       | $                  | (2,042     | )         | $          | 645       |       | $ | 10,318 |   |

** **

**57**

----

 
| ** **                                                        | ** ** | **2003**           | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                        | ** ** | **(in thousands)** | ** ** |
| **Reconciliation  to Net Income**                                 |       |               |       |     |       |     |       |
| ** **                                                        |       |               |       |     |       |     |       |
| Operating  income (loss):                                         |       |               |       |     |       |     |       |
| Motorized  recreational vehicle segment                           |       | $                  | 40,498     |     | $          | 63,225   |       | $ | (1,097 | ) |
| Towable  recreational vehicle segment                             |       | (505               | )          | (4,203   | )          | (2,000   | )          |
| Motorhome  resorts segment                                        |       | (2,042             | )          | 645      |       | 10,318   |       |
| Total  operating income                                           |       | 37,951             |       | 59,667   |       | 7,221    |       |
|                                                              |       |               |       |     |       |     |       |
| Other  income, net                                                |       | 260                |       | 343      |       | 255      |       |
| Interest expense                                                  |       | (2,968             | )          | (1,547   | )          | (1,820   | )          |
| Income  before income taxes and discontinued operations           |       | 35,243             |       | 58,463   |       | 5,656    |       |
|                                                              |       |               |       |     |       |     |       |
| Provision  for income taxes, continuing operations                |       | 13,220             |       | 21,914   |       | 1,687    |       |
|                                                              |       |               |       |     |       |     |       |
| Net income  from continuing operations                            |       | 22,023             |       | 36,549   |       | 3,969    |       |
|                                                              |       |               |       |     |       |     |       |
| Income  (loss) from discontinued operations, net of tax provision |       | 177                |       | 156      |       | (1,321   | )          |
| Net income                                                        |       | $                  | 22,200     |     | $          | 36,705   |       | $ | 2,648 |   |

** **
| **Assets of the Recreational Vehicle  and Motorhome Resorts Segments** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**        | ** ** |
| Motorized  recreational vehicle segment                                                                   |       | $                         | 281,487    |                        | $          | 295,824 |   |
| Towable  recreational vehicle segment                                                                     |       | 17,843                    |       | 44,768                      |       |
| Motorhome  resorts segment                                                                                |       | 10,032                    |       | 9,826                       |       |
| Total assets                                                                                              |       | $                         | 309,362    |                        | $          | 350,418 |   |

 

TheCompany includes the total of inventories and resort lot inventory in themeasure of the segments’ assets that are used for decision making purposes. Property,plant, and equipment specific to the segments are also included in the measureof the segments’ assets for decision making purposes. Remaining assets areaccounted for at the corporate level and are not allocated out to the businesssegments. Corporate overhead is allocated based on the relative segment’spercentage of sales for the Company in total.

 

The following table provides information for the respective segments relatingto depreciation expense:

 
| **Depreciation  Expense for the Recreational Vehicle and  Motorhome Resorts Segments** | ** ** | **January 3,  2004** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(in thousands)**   | ** ** |
| Motorized  recreational vehicle segment                                                |       | $                    | 9,031      |                 | $          | 9,592                  |       | $ | 9,603 |   |
| Towable  recreational vehicle segment                                                  |       | 245                  |       | 585                  |       | 818                    |       |
| Motorhome  resorts segment                                                             |       | 25                   |       | 42                   |       | 74                     |       |
|                                                                                   |       |                 |       |                 |       |                   |       |
| Total  depreciation expense                                                            |       | $                    | 9,301      |                 | $          | 10,219                 |       | $ | 10,495 |   |

 

58

----

** **

**12.    INCOMETAXES:**

 

Theprovision for income taxes for continuing operations is as follows:

 
| ** **                  | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(in thousands)** | ** ** |
| Current:                    |       |                    |       |     |       |     |       |
| Federal                     |       | $                       | 8,570      |     | $          | 17,116   |       | $ | 4,729 |   |
| State                       |       | 1,871                   |       | 1,908    |       | (169     | )          |
|                        |       | 10,441                  |       | 19,024   |       | 4,560    |       |
| Deferred:                   |       |                    |       |     |       |     |       |
| Federal                     |       | 2,244                   |       | 2,414    |       | (2,573   | )          |
| State                       |       | 535                     |       | 476      |       | (300     | )          |
| Provision  for income taxes |       | $                       | 13,220     |     | $          | 21,914   |       | $ | 1,687 |   |

 

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

 
| ** **                                                            | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                            | ** ** | **(in thousands)** | ** ** |
| Expected  U.S. federal income taxes at statutory rates                |       | $                       | 12,335     |     | $          | 20,462   |       | $ | 1,923 |   |
| State and  local income taxes, net of federal benefit                 |       | 1,564                   |       | 1,982    |       | (305     | )          |
| Change in  valuation allowance                                        |       | (280                    | )          | (433     | )          | 0        |       |
| Meals  expense disallowance                                           |       | 170                     |       | 217      |       | 204      |       |
| Subsidiary  stock basis adjustment                                    |       | 0                       |       | 0        |       | 634      |       |
| Export sales  benefit                                                 |       | (321                    | )          | (356     | )          | (495     | )          |
| Reversal of  federal & state tax reserves no longer required |       | 0                       |       | 0        |       | (277     | )          |
| Other                                                                 |       | (248                    | )          | 42       |       | 3        |       |
| Provision  for income taxes                                           |       | $                       | 13,220     |     | $          | 21,914   |       | $ | 1,687 |   |

 

59

----

 

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

 
| ** **                                  | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**   | ** ** |
| Current  deferred income tax assets:        |       |                      |       |                        |       |
| Warranty  liability                         |       | $                         | 11,527     |                        | $          | 10,342 |   |
| Product  liability                          |       | 8,258                     |       | 7,725                       |       |
| Inventory  allowances                       |       | 4,459                     |       | 4,784                       |       |
| Franchise  and other incentive accruals     |       | 1,808                     |       | 6,943                       |       |
| Payroll and  related accruals               |       | 2,300                     |       | 2,342                       |       |
| Insurance  accruals                         |       | 2,258                     |       | 3,024                       |       |
| Resort lot  inventory                       |       | 864                       |       | 1,316                       |       |
| Other  accruals                             |       | 1,714                     |       | (131                        | )          |
|                                        |       | $                         | 33,188     |                        | $          | 36,345 |   |
| Long-term  deferred income tax liabilities: |       |                      |       |                        |       |
| Depreciation                                |       | $                         | 15,025     |                        | $          | 16,306 |   |
| Amortization                                |       | 4,876                     |       | 5,584                       |       |
| Net  operating loss (NOL) carryforward      |       | (222                      | )          | (143                        | )          |
| State tax  credit carryforward              |       | 0                         |       | (123                        | )          |
|                                        |       | $                         | 19,679     |                        | $          | 21,624 |   |

 

Managementbelieves that the temporary differences which gave rise to the deferred incometax assets will be realized in the foreseeable future, including benefitsarising from the state NOL carryforward associated with the SMC Acquisition andstate tax credits generated, but not utilized in 2005. Net operating lossesexpire in 2015 and state tax credits expire between 2008 and 2013.

 

**13.    EARNINGSPER SHARE:**

 

Basicearnings per common share is based on the weighted average number of sharesoutstanding during the period using net income attributable to common stock asthe numerator. Diluted earnings per common share is based on the weightedaverage number of shares outstanding during the period, after consideration ofthe dilutive effect of stock options and convertible preferred stock, using netincome as the numerator. The weighted average number of common shares used inthe computation of earnings per common share for the years ended January 3,2004, January 1, 2005, and December 31, 2005 are as follows:

 
| ** **                                        | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Basic**                                         |       |       |       |       |       |       |       |
| Issued and  outstanding shares (weighted average) |       | 29,062,649 |       | 29,370,455 |       | 29,516,794 |       |
|                                              |       |       |       |       |       |       |       |
| **Effect  of Dilutive Securities**                |       |       |       |       |       |       |       |
| Stock  options                                    |       | 504,363    |       | 588,191    |       | 341,242    |       |
|                                              |       |       |       |       |       |       |       |
| **Diluted**                                       |       | 29,567,012 |       | 29,958,646 |       | 29,858,036 |       |

 

Anti-dilutive shares outstanding were 155,850, 0, and 384,490 for thefiscal years ending 2003, 2004, and 2005, respectively.

 

60

----

** **

**14.    LEASES:**

 

TheCompany has commitments under certain noncancelable operating leases. Totalrental expense for the fiscal years ended January 3, 2004, January 1,2005, and December 31, 2005 related to operating leases amounted toapproximately $3.6 million, $3.6 million, and $3.6 million, respectively. TheCompany’s most significant lease is an operating lease for an aircraft withannual renewals for up to three additional years. The Company began its thirdyear of renewal in February 2006. The future minimum rental commitmentsunder the renewal term of this lease is $1.8 million in 2006 and $306,000 in2007. The Company has guaranteed up to $14.3 million of any deficiency in theevent that the lessor’s net sales proceeds from the aircraft are less than$15.7 million. The Company has commitments under certain noncancelablesubleases. As of December 31, 2005, the total minimum sublease rentalincome to be received in the future is $1.5 million. Sublease rental incomewill be recognized ratably over the next ten years.

 

Approximatefuture minimum rental commitments under these leases at December 31, 2005are summarized as follows:

 
| **Fiscal Year** | ** ** | **(in thousands)** | ** ** |
|----------------------|------------|-------------------------|------------|
| 2006                 |       | $                       | 3,617      |   |
| 2007                 |       | $                       | 1,634      |   |
| 2008                 |       | $                       | 1,183      |   |
| 2009                 |       | $                       | 1,073      |   |
| 2010                 |       | $                       | 1,033      |   |
| 2011 and thereafter  |       | $                       | 3,587      |   |

 

**15.    BONUSPLAN:**

 

TheCompany has a discretionary bonus plan for certain key employees. Bonus expenseincluded in selling, general, and administrative expenses for the years ended January 3,2004, January 1, 2005, and December 31, 2005 was $5.1 million, $8.9million, and $607,000, respectively.

 

**16.    STOCKOPTION PLANS:**

 

TheCompany has an Employee Stock Purchase Plan (the “Purchase Plan”) - 1993, a Non-employeeDirector Stock Plan (the “Director Plan”) - 1993, and an Incentive Stock OptionPlan (the “Option Plan”) - 1993.

 

**StockPurchase Plan**

 

ThePurchase Plan qualifies under Section 423 of the Internal Revenue Code. TheCompany has reserved 683,438 shares of Common Stock for issuance under thePurchase Plan. During the years ended January 1, 2005 and December 31,2005, 55,322 shares and 57,989 shares, respectively, were purchased under thePurchase Plan. The weighted-average fair value of purchase rights granted in2004 and 2005 was $24.56 and $18.24, respectively. Under the Purchase Plan, aneligible employee may purchase shares of common stock from the Companythrough payroll deductions of up to 10% of base compensation, at a price pershare equal to 85% of the lesser of the fair market value of the Company’sCommon Stock as of the first day (grant date) or the last day (purchase date)of each six-month offering period under the Purchase Plan.

 

ThePurchase Plan is administered by a committee appointed by the Board ofDirectors. Any employee who is customarily employed for at least 20 hours perweek and more than five months in a calendar year by the Company, or by anymajority-owned subsidiary designated from time to time by the Board ofDirectors, and who does not own 5% or more of the total combined voting poweror value of all classes of the Company’s outstanding capital stock, is eligibleto participate in the Purchase Plan.

 

61

----

 

**Directors’Option Plan**

 

Eachnon-employee director of the Company is entitled to participate in the Company’sDirector Plan. The Board of Directors and the stockholders have authorized atotal of 352,500 shares of Common Stock for issuance pursuant to the DirectorPlan. Under the terms of the Director Plan, each eligible non-employee directoris automatically granted an option to purchase 8,000 shares of Common Stock(the “Initial Option”) on which the optionee first becomes a director of theCompany. Thereafter, each optionee is automatically granted an additionaloption to purchase 4,000 shares of Common Stock (a “Subsequent Option”) on September 30of each year if, on such date, the optionee has served as a director of theCompany for at least six months. Each Initial Option vests over five years atthe rate of 20% of the shares subject to the Initial Option at the end of eachanniversary following the date of grant. Each Subsequent Option vests in fullon the fifth anniversary of its date of grant. The exercise price of eachoption is the fair market value of the Common Stock as determined by theclosing price reported by the New York Stock Exchange on the date of grant. Themaximum term of these options are 10 years. As of December 31, 2005,93,900 options had been exercised, and options to purchase 166,150 shares ofcommon stock were outstanding. Under the Director Plan, the directors of theCompany may elect to receive up to 50% of the value of their retainer inthe form of common stock or an option to purchase shares of common stock. Asof December 31, 2005, 11,320 shares of common stock had been issued inlieu of cash retainer under the plan.

 

**OptionPlan**

 

TheOption Plan provides for the grant to employees of incentive stock optionswithin the meaning of Section 422 of the Internal Revenue Code of 1986, asamended, and for the grant to employees and consultants of the Company ofnonstatutory stock options. A total of 3,257,813 shares of Common Stock havebeen reserved for issuance under the Option Plan. As of December 31, 2005,1,469,258 options had been exercised, and options to purchase 1,303,875 sharesof Common Stock were outstanding. These options vest ratably over five yearscommencing with the date of grant.

 

In the fourth quarter of 2005, the Company elected to accelerate allnon-vested stock options outstanding with an exercise price greater than $16per share.  The purpose of theacceleration is to enable the Company to avoid recognizing compensation expenseassociated with these options in future periods in its consolidated statementsof operations pursuant to Financial Accounting Standards Board Statement No. 123R.Under FAS No. 123R, the Company will apply the expense recognitionprovisions relating to stock options beginning in the first quarter of fiscal2006. In approving the acceleration, the Company considered its impact onfuture financial results, stockholder value and employee retention. The Companybelieves that the acceleration is in the best interest of stockholders as itwill reduce the Company’s reported compensation expense in future periods inlight of these accounting regulations. The compensation expense to be recordedin future periods that is eliminated as a result of the acceleration of thevesting of these options is approximately $3.7 million. This acceleration willnot result in a charge to the Company’s expenses in the consolidated statementsof operations in fiscal 2005.

 

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

 

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

 
| ** **                             | ** ** | **Shares** | ** ** | **Price** | ** ** |
|----------------------------------------|------------|------------|------------|-----------|------------|
| Outstanding  at December 28, 2002 |       | 1,341,523  |       | $         | 10.15      |   |
| Granted                                |       | 207,200    |       | 11.48     |       |
| Exercised                              |       | (306,352   | )          | 4.92      |       |
| Forfeited                              |       | (5,200     | )          | 19.61     |       |
| Outstanding  at January 3, 2004   |       | 1,237,171  |       | 11.63     |       |
| 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      |   |

 

62

----

 

Forvarious price ranges, weighted average characteristics of all outstanding stockoptions at December 31, 2005 were as follows:

 
| ** **                    | ** **                                    | **Options Outstanding** | ** ** | **Options Exercisable**      | ** ** |
|-------------------------------|-----------------------------------------------|-------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** **                                    | **Shares**              | ** ** | **Remaining  Life  (years)** | ** ** | **Weighted-  Average  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Price** | ** ** |
| $                             |   2.68 -   5.36 |                    | 111,681    |                         | 0.9        |   | $ | 3.33 |   | 111,681 |   | $ | 3.33 |   |
| $                             |   5.37 -   8.04 |                    | 119,652    |                         | 2.3        |   | $ | 7.72 |   | 119,652 |   | $ | 7.72 |   |
| $                             |   8.05 - 10.72            |                    | 265,729    |                         | 5.3        |   | $ | 10.30 |   | 177,589 |   | $ | 10.28 |   |
| $                             | 10.73 - 13.40                       |                    | 293,273    |                         | 4.8        |   | $ | 12.24 |   | 254,588 |   | $ | 12.28 |   |
| $                             | 13.41 - 16.08                       |                    | 47,000     |                         | 8.7        |   | $ | 15.04 |   | 8,000 |   | $ | 16.08 |   |
| $                             | 16.09 - 18.76                       |                    | 289,970    |                         | 8.5        |   | $ | 16.30 |   | 289,970 |   | $ | 16.30 |   |
| $                             | 18.77 - 21.44                       |                    | 17,500     |                         | 5.5        |   | $ | 20.03 |   | 17,500 |   | $ | 20.03 |   |
| $                             | 21.45 - 24.12                       |                    | 28,000     |                         | 7.6        |   | $ | 21.65 |   | 28,000 |   | $ | 21.65 |   |
| $                             | 24.13 - 26.80                       |                    | 296,470    |                         | 7.2        |   | $ | 25.65 |   | 296,470 |   | $ | 25.63 |   |
|                          |                                          | 1,469,275               |       |                         |       |   |   | 1,303,450 |   |   |   |
|                               |                                               |                         |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

AtDecember 31, 2005, the Company has three stock-based employee compensationplans. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related Interpretations. No stock-based employee compensationcost for incentive stock option grants are reflected in net income, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123, Accounting forStock-based Compensation, to stock-based employee compensation.

 
| ** **                                                                           | ** ** | **2003**                                                           | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                           | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                 |       |                                                               |       |     |       |     |       |
| Net income - as reported                                                             |       | $                                                                  | 22,200     |     | $          | 36,705   |       | $ | 2,648 |   |
| Deduct: Total stock-based employee  compensation expense                             |       |                                                               |       |     |       |     |       |
| Determined under fair value based method  for all awards, net of related tax effects |       | (1,357                                                             | )          | (1,569   | )          | (3,219   | )          |
| Net income - pro forma                                                               |       | $                                                                  | 20,843     |     | $          | 35,136   |       | $ | (571 | ) |
|                                                                                 |       |                                                               |       |     |       |     |       |
| Earnings per share:                                                                  |       |                                                               |       |     |       |     |       |
| Basic - as reported                                                                  |       | $                                                                  | 0.76       |     | $          | 1.25     |       | $ | 0.09 |   |
| Basic - pro forma                                                                    |       | 0.72                                                               |       | 1.20     |       | (0.02    | )          |
|                                                                                 |       |                                                               |       |     |       |     |       |
| Diluted - as reported                                                                |       | $                                                                  | 0.75       |     | $          | 1.23     |       | $ | 0.09 |   |
| Diluted - pro forma                                                                  |       | 0.71                                                               |       | 1.17     |       | (0.02    | )          |
|                                                                                      |            |                                                                    |            |          |            |          |            |  |  |  |  |  |

 

Forpurposes of the above pro forma information, the fair value of each optiongrant was estimated at the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions:

 
| ** **               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Risk-free interest rate  |       | 3.89     | %          | 3.54     | %          | 4.03     | %          |
| Expected life (in years) |       | 5.81     |       | 6.09     |       | 6.69     |       |
| Expected volatility      |       | 54.70    | %          | 36.31    | %          | 31.25    | %          |
| Expected dividend yield  |       | 0.00     | %          | 1.00     | %          | 1.70     | %          |

 

**Restricted Stock Unit Grant**

 

A component of the stock option plan permits the Company togrant shares of restricted stock units. These grants are compensation expenseunder the rules of APB No. 25, and are required to be recognized in theCompany’s income statement. During the year the Company granted restrictedshares of restricted stock units totalling approximately $16,000. These costshave been recorded as compensation expense in the current year’s income statement.

 

63

----

** **

**17.    FAIRVALUE OF FINANCIAL INSTRUMENTS:**

 

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

 

Lineof Credit -The carrying amount outstanding on the revolving line of credit is $34.1million, and $25.0 million at January 1, 2005 and December 31, 2005,respectively, which approximates the estimated fair value as this instrumentrequires interest payments at a market rate of interest plus a margin.

 

Long-TermNotes Payable- The carrying amount outstanding on the long-term notes payable is $40.5million (including $5.7 million of current payable) at December 31, 2005,which approximates the estimated fair value as these instruments requireinterest payments at a market value rate of interest plus a margin.

 

**18.    401(K)DEFINED CONTRIBUTION PLAN:**

 

TheCompany sponsors a 401(k) defined contribution plan covering substantially allfull-time employees. Company contributions to the plan totaled $678,000 in2003, $879,000 in 2004, and $880,000 in 2005.

 

**19.   COMMITMENTSAND CONTINGENCIES:**

 

**RepurchaseAgreements**

 

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in the vehicles. Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement. These agreementsprovide that, for up to 18 months after a unit is shipped, the Company willrepurchase a dealer’s inventory in the event of a default by a dealer to itslender.

 

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

 

Lossesof approximately $897,000, $600,000 and $79,000 were incurred in 2003, 2004,and 2005, respectively. The approximate amount subject to contingent repurchaseobligations arising from these agreements at December 31, 2005 is $607.3million, with approximately 5.9% concentrated with one dealer. The Company hasrecorded a liability of approximately $780,000 for potential losses resultingfrom guarantees on repurchase obligations for products shipped to dealers. Ifthe Company were obligated to repurchase a significant number of units underany repurchase agreement, its business, operating results, and financialcondition could be adversely affected.

 

64

----

 

**ProductLiability**

 

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

 

TheCompany has from time to time been subject to product liability claims. Todate, the Company has been successful in obtaining product liability insuranceon terms the Company considers acceptable. The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million. Overall product liabilityinsurance, including umbrella coverage, is available to a maximum amount of$100.0 million for each occurrence, as well as in the aggregate. There can beno assurance that the Company will be able to obtain insurance coverage in thefuture at acceptable levels or that the cost of insurance will be reasonable. Furthermore,successful assertion against the Company of one or a series of largeuninsured claims, or of one or a series of claims exceeding any insurancecoverage, could have a material adverse effect on the Company’s business,results of operations, and financial condition.

 

**Litigation**

 

TheCompany is involved in various legal proceedings which are incidental to theindustry and for which certain matters are covered in whole or in part byinsurance or, otherwise. The Company has recorded accruals for estimatedsettlements. Management believes that any liability which may result fromthese proceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

65

----

 

**20.   QUARTERLYRESULTS (UNAUDITED):**

 

**Year ended January 1, 2005**

 
| ** **                        | ** ** | **1st  Quarter**                          | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **(in thousands, except per share data)** | ** ** |
| Net sales                         |       | $                                         | 351,890    |             | $          | 355,103          |       | $                | 357,763    |   | $ | 321,513 |   |
| Gross profit                      |       | 44,152                                    |       | 45,347           |       | 43,427           |       | 35,886           |       |
| Operating  income                 |       | 19,666                                    |       | 18,905           |       | 12,622           |       | 8,474            |       |
| Net income  (loss):               |       |                                      |       |             |       |             |       |             |       |
| Continuing  operations            |       | 11,913                                    |       | 11,934           |       | 7,586            |       | 5,116            |       |
| Discontinued  operations          |       | 10                                        |       | 14               |       | (150             | )          | 282              |       |
|                              |       | $                                         | 11,923     |             | $          | 11,948           |       | $                | 7,436      |   | $ | 5,398 |   |
|                              |       |                                      |       |             |       |             |       |             |       |
| Earnings  (loss) per share-basic: |       |                                      |       |             |       |             |       |             |       |
| Continuing  operations            |       | $                                         | 0.41       |             | $          | 0.41             |       | $                | 0.26       |   | $ | 0.17 |   |
| Discontinued  operations          |       | $                                         | 0.00       |             | $          | 0.00             |       | $                | (0.01      | ) | $ | 0.01 |   |
| Basic                             |       | $                                         | 0.41       |             | $          | 0.41             |       | $                | 0.25       |   | $ | 0.18 |   |
|                              |       |                                      |       |             |       |             |       |             |       |
| Earnings per  share-diluted:      |       |                                      |       |             |       |             |       |             |       |
| Continuing  operations            |       | $                                         | 0.40       |             | $          | 0.40             |       | $                | 0.25       |   | $ | 0.17 |   |
| Discontinued  operations          |       | $                                         | 0.00       |             | $          | 0.00             |       | $                | 0.00       |   | $ | 0.01 |   |
| Diluted                           |       | $                                         | 0.40       |             | $          | 0.40             |       | $                | 0.25       |   | $ | 0.18 |   |

 

**Year ended December 31, 2005**

 
| ** **                         | ** ** | **1st  Quarter**                           | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter (1)** | ** ** | **4th  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 |   |
|                                    |            |                                            |            |                  |            |                           |            |                  |            |  |  |  |  |  |  |  |  |

 

----

** **(1) Third quarter 2005 amounts have been revisedfor a reclassification of tax credit from net income from discontinuedoperations to net income from continuing operations of $49,000.

 

66

----

 
| **ITEM 9.** | ** ** | **CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL** |
|-------------|------------|--------------------------------------------------------------------------------|
| ** **  | ** ** | **DISCLOSURE**                                                                 |
| ** **  | ** ** | ** **                                                                     |
| ** **  | ** ** | Not  Applicable.                                                               |

 

**ITEM 9A.    CONTROLSAND PROCEDURES**

 

**Evaluation ofDisclosure Controls and Procedures**

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this AnnualReport on Form 10-K. Based on this evaluation, our Chief Executive Officerand our Chief Financial Officer have concluded that our disclosure controls andprocedures are effective to ensure that information we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isaccumulated and communicated to our management including our principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure, and that such information is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms.

 

Our management, including our Chief Executive Officer and ChiefFinancial Officer, does not expect that our disclosure controls and procedureswill prevent all error and all fraud. Because of inherent limitations in anysystem of disclosure controls and procedures, no evaluation of controls canprovide absolute assurance that all instances of error or fraud, if any, withinthe Company may be detected. However, our management, including our ChiefExecutive Officer and our Chief Financial Officer, have designed our disclosurecontrols and procedures to provide reasonable assurance of achieving theirobjectives and have, pursuant to the evaluation discussed above, concluded thatour disclosure controls and procedures are, in fact, effective at thisreasonable assurance level.

 

**Changes in Internal Controls**

 

There was no change in our internal control over financial reportingthat occurred during the period covered by this Annual Report on Form 10-Kthat has materially effected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Management’s Report on Internal Control OverFinancial Reporting**

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934. The Company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Internal control over financialreporting includes those policies and procedures that:

 

•                              pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the Company;

 

•                              provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and

 

•                              provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

 

Management assessed the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2005. In making thisassessment, management used the criteria set forth in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

67

----

 

Based on its assessment of internal controls over financial reporting,management has concluded that, as of December 31, 2005, the Company’sinternal control over financial reporting was effective to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.

 

Management’sassessment of the effectiveness of internal control over financial reporting asof December 31, 2005 has been audited by PricewaterhouseCoopers, LLP, anindependent registered public accounting firm, as stated in their report, seeItem 8. “Financial Statements and Supplemental Data.”

 

**ITEM 9B.****                                           ****OTHER INFORMATION**

 

None

 

68

----

 

**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT**

 

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

 

Information required by this Item regardingdirectors and compliance with Section 16(a) of the Exchange Act is setforth under the captions “Proposal 1 - Election of Directors” and “Compliancewith Section 16(a) of the Securities Exchange Act” in the Company’sdefinitive 2006 Proxy Statement and is incorporated herein by reference.

 

Information required by this Item regardingthe Company’s Audit Committee and designated “audit committee financial expert”is set forth under the caption “Board of Directors and Committee Meetings -Audit Committee” in the Company’s definitive 2006 Proxy Statement and isincorporated herein by reference.

 

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

 

The Company has certain corporate governanceguidelines, a code of ethics that applies to its senior financial officers, aswell as a code of business conduct. The code of ethics, code of conduct, aswell as other corporate governance information is posted on our Internetweb-site. The Internet address for our website is http://www.monaco-online.com,and the code of ethics, code of conduct, and other corporate governanceinformation may be found as follows:

 

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

 

 *2. Next, select “CorporateGovernance” from the “Investor Relations” Menu*

 

*3. 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 the disclosurerequirement under Item 10 of Form 8-K regarding an amendment to, or waiverfrom, a provision of this Code of Ethics for Senior Financial Officers byposting such information on our website, at the address and location specifiedabove.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

Information required by this Item regardingcompensation of the Company’s directors and executive officers is set forthunder the captions “Corporate Governance - Director Compensation” and “ExecutiveCompensation” in the Company’s definitive 2006 Proxy Statement and isincorporated herein by reference. 

69

----

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

Information required by this Item regardingbeneficial ownership of the Company’s Common Stock by certain beneficial ownersand management set forth under the caption “Security Ownership of CertainBeneficial Owners and Management” in the Company’s definitive 2006 ProxyStatement is incorporated herein by reference.

 

**EquityCompensation Plan Information**

 

The following table sets forth informationwith respect to the Company’s equity compensation plans as of the end of themost 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     |       | 1,469,275                                                                                                |       | $                                                                                       | 14.71      |                                                                                                                                                      | 737,181    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                   |       | —                                                                                  |       | —                                                                                                                                                    |       |
| Total                                                       |       | 1,469,275                                                                                                |       | $                                                                                       | 14.71      |                                                                                                                                                      | 737,181    |   |

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Information required by this Item regardingcertain relationships and related transactions with management is set forthunder the captions “Compensation Committee Interlocks and Insider Participation”and “Certain Relationships and Related Transactions” in the Company’sdefinitive 2006 Proxy Statement and is incorporated herein by reference.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

The information required by this item isincluded under the caption “Ratification of Appointment of IndependentRegistered Public Accounting Firm” in the Company’s definitive 2006 ProxyStatement and is incorporated herein by reference.

 

70

----

 

**PART IV**

 

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

 

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

 

1.                                       FinancialStatements. The Consolidated Financial Statements of Monaco Coach Corporationand the Report of Independent Registered Public Accounting Firm are filed inItem 8 within this Annual Report on Form 10-K.

 

2.                                       FinancialStatement Schedule. None

 

Schedules not listed above have been omittedbecause they are not applicable or are not required or the information requiredto be set forth therein is included in the consolidated financial statements ornotes thereto.

 
| 3.     |   | Exhibits. The  following Exhibits are filed as part of, or incorporated by reference  into, this Report on  Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1    |   | Stock Purchase Agreement by and among  Monaco Coach Corporation, MCC Acquisition Corporation, Outdoor Resorts of  America, Inc., and Outdoor Resorts Motorcoach Country Club, Inc.,  dated November 27, 2002. (Incorporated herein by reference to Exhibit 2.2  to the Registrant’s Annual Report on Form 10-K for the year ended December 28,  2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2    |   | Stock Purchase Agreement by and among  Monaco Coach Corporation, MCC Acquisition Corporation, Outdoor Resorts of  America, Inc., and Outdoor Resorts of Las Vegas, Inc., dated November 27,  2002. (Incorporated herein by reference to Exhibit 2.3 to the Registrant’s  Annual Report on Form 10-K for the year ended December 28, 2002.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.3    |   | Stock and Unit Purchase Agreement dated  November 9, 2005, by and among the Company, R-Vision Holdings LLC, William L.  Warrick, Arlen J. Paul, Dennis Bailey, William Devos, Ruth A. Hollingsworth,  Shannon E. Warrick, Bradford J. Warrick, William Lewis Warrick, Jodie D.  Warrick, Helen L. Krizman, Warrick LP, William L. Warrick as Trustee of the  William Warrick 1998 Irrevocable Trust for the Benefit of Shannon Elizabeth  Warrick, William L. Warrick as Trustee of the William Warrick 1998  Irrevocable Trust for the Benefit of William Lewis Warrick, William L.  Warrick as Trustee of the William Warrick 1998 Irrevocable Trust for the  Benefit of Bradford James Warrick, and William L. Warrick as Trustee of the  William Warrick 1998 Irrevocable Trust for the Benefit of Jodie Dawn Warrick,  R-Vision Inc., R-Vision Motorized LLC, Roadmaster LLC, Bison Manufacturing  LLC and A.J.P. R.V., Inc., and William L. Warrick as Sellers’ Representative  (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current  Report on Form 8-K filed with the SEC on November 23, 2005). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.4    |   | Asset Purchase Agreement dated November 18,  2005, by and among the Company, R-Vision Holdings LLC, A.J.P. R.V., Inc., and  William L. Warrick as Sellers’ Representative (incorporated herein by  reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed  with the SEC on November 23, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1    |   | Amended and Restated Certificate of  Incorporation of the Registrant (Incorporated herein by reference to Exhibit 3.1  to the Registrant’s Annual Report on Form 10-K for the year ended January 1,  1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Certificate of Amendment of Amended and Restated  Certificate of Incorporation dated June 30, 1999 (Incorporated herein by  reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K  for the year ended January 1, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.3    |   | Bylaws of Registrant, as amended 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 Incentive Stock Option Plan as amended through November  9, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

71

----

 
| 10.4+  |   | 1993 Employee Stock Purchase Plan and form of  subscription agreement thereunder (Incorporated herein by reference to Exhibit (10.5)  to the Registrant’s Registration Statement on Form S-1 (Reg. No. 33-67374)  declared effective on September 23, 1993).                                                                                                                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5+  |   | Executive Variable Compensation Plan (Incorporated  herein by reference to Appendix B to the Registrant’s definitive Proxy  Statement filed with the Securities and Exchange Commission on April 5,  2004).                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Third  Amended and Restated Credit Agreement dated November 18, 2005, by and among  the Company, the subsidiaries of the Company party thereto as co-borrowers,  the lenders party thereto from time to time, U.S. Bank National Association,  as Administrative Lender, Swingline Lender and L/C Bank, and Bank of America,  N.A., as Syndication Agent (Incorporated herein by reference to Exhibit 10.1  to the Registrant’s Current Report on Form 8-K filed with the SEC on November  23, 2005). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7+  |   | Form  of 1993 Incentive Stock Option Plan, Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8+  |   | Form  of Director Option Agreement, Initial Grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9+  |   | Form  of Director Option Agreement, Subsequent Grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10+ |   | Form  of 1993 Incentive Stock Option Plan Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11+ |   | Form  of Annual Irrevocable Election Under Director Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 11.1   |   | Computation  of earnings per share (see Note 10 of Notes to Consolidated Financial  Statements included in Item 8 hereto).                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries  of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.1   |   | Consent  of Independent 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.

 

72

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report on Form 10-K to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | March 16, 2006 |                    | MONACO COACH CORPORATION |
|--------|---------------------|-------------------------|--------------------------|
|   |                |
|   |                |
|   | By:                 | /s/ Kay L. Toolson      |                     |
|   |                | Kay L. Toolson          |
|   |                | Chief Executive Officer |

 

**POWER OFATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Kay L.Toolson and P. 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-K andto 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.

 

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

 
| **Signature**                  | ** ** | **Title**                                     | ** **                                  | **Date** |
|--------------------------------|------------|-----------------------------------------------|---------------------------------------------|----------|
|                           |       |                                          |                                        |     |
| /s/  Kay L. Toolson            |       |                                          | Chairman  of the Board and Chief Executive  |     | March 16,  2006 |
| (Kay  L. Toolson)              |       | Officer  (Principal Executive Officer)        |                                        |     |
|                           |       |                                          |                                        |     |
| /s/ P.  Martin Daley           |       |                                          | Vice  President and Chief Financial Officer |     | March 16,  2006 |
| (P.  Martin Daley)             |       | (Principal  Financial and Accounting Officer) |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  John F. Cogan             |       |                                          | Director                                    |     | March 16,  2006 |
| (John  F. Cogan )              |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Robert P. Hanafee, Jr.    |       |                                          | Director                                    |     | March  16, 2006 |
| (Robert  P. Hanafee, Jr.) |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/ L.  Ben Lytle              |       |                                          | Director                                    |     | March 16,  2006 |
| (L.  Ben Lytle)                |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Dennis D. Oklak           |       |                                          | Director                                    |     | March 16,  2006 |
| (Dennis  D. Oklak)             |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Carl E. Ring, Jr.    |       |                                          | Director                                    |     | March 16,  2006 |
| (Carl  E. Ring, Jr.)      |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Richard A. Rouse          |       |                                          | Director                                    |     | March 16,  2006 |
| (Richard  A. Rouse)            |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Daniel C. Ustian          |       |                                          | Director                                    |     | March 16,  2006 |
| (Daniel  C. Ustian)            |       |                                          |                                        |     |
|                           |       |                                          |                                        |     |
| /s/  Roger A. Vandenberg       |       |                                          | Director                                    |     | March 16,  2006 |
| (Roger  A. Vandenberg)         |       |                                          |                                        |     |
|                                |            |                                               |                                             |          |  |  |  |

 

73

----

 

EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                  |       | Stock  Purchase Agreement by and among Monaco Coach Corporation, MCC Acquisition  Corporation, Outdoor Resorts of America, Inc., and Outdoor Resorts  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 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 Incentive Stock Option Plan as amended  through November 9, 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

74

----

 
| 10.7+  |   | Form  of 1993 Incentive Stock Option Plan, Restricted Stock Unit Agreement.                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                               |
| 10.8+  |   | Form  of Director Option Agreement, Initial Grant.                                                                                                 |
|   |   |                                                                                                                                               |
| 10.9+  |   | Form  of Director Option Agreement, Subsequent Grant.                                                                                              |
|   |   |                                                                                                                                               |
| 10.10+ |   | Form  of 1993 Incentive Stock Option Plan Stock Option Agreement.                                                                                  |
|   |   |                                                                                                                                               |
| 10.11+ |   | Form of  Annual Irrevocable Election Under Director Stock Plan.                                                                                    |
|   |   |                                                                                                                                               |
| 11.1   |   | Computation  of earnings per share (see Note 10 of Notes to Consolidated Financial  Statements included in Item 8 hereto).                         |
|   |   |                                                                                                                                               |
| 21.1   |   | Subsidiaries of Registrant.                                                                                                                        |
|   |   |                                                                                                                                               |
| 23.1   |   | Consent of Independent 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.

 

75

----