**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**ý****   ****Annual Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934**

**For the fiscal year ended January 1, 2005**

**OR**

**o****   ****Transition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**For the transition period from               to               **

 

**Commission File Number:  1-14725**

 

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**MONACO COACH CORPORATION**

(Exact Name of Registrant as specified in its charter)

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

 

**91320 Industrial WayCoburg, Oregon 97408**(Address of principal executive offices)

 

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

 

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** **

Securities registered pursuant to Section 12(b) of theAct:

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

 

Securities registered pursuant to Section 12(g) of theAct:

**None**

 

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Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast ninety days.   YES ý   NOo

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of theRegistrant’s knowledge, in definite proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

The aggregatemarket value of the Common Stock held by non-affiliates of the Registrant onJanuary 1, 2005, based upon the closing sale price of the Common Stock on June30, 2004 as reported on the New York Stock Exchange, was approximately $485.3million.  Shares of Common Stock held byofficers and directors and their affiliated entities have been excluded in thatsuch persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive forother purposes.

 

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

 

As of March 1,2005, the Registrant had 29,468,660 shares of Common Stock outstanding.

 

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DOCUMENTS INCORPORATED BY REFERENCE

 

The Registrant’sdefinitive Proxy Statement for its Annual Meeting of Stockholders to be held onMay 18, 2005 (the “Proxy Statement”) is incorporated by reference in Part IIIof this Form 10-K to the extent stated therein.

 

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This documentconsists of 68 pages.  The Exhibit Indexappears at page 59 and 60.

 

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**INDEX**

 
| PART  I        |
|----------------|
|           |   |   |
| ITEM 1.        | BUSINESS |   |
| ITEM 2.        | PROPERTIES |   |
| ITEM 3.        | LEGAL PROCEEDINGS |   |
| ITEM 4.        | SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS |   |
|           |   |   |
| PART II        |
|           |   |   |
| ITEM 5.        | MARKET FOR THE  REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS |   |
| ITEM 6.        | SELECTED FINANCIAL  DATA |   |
| ITEM 7.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| ITEM  7A.      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |   |
| ITEM  8.       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |   |
| ITEM 9.        | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE |   |
| 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 |   |

 

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PART I

 

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include without limitation those below marked with an asterisk(*).  In addition, the Company may fromtime to time make oral forward-looking statements through statements thatinclude the words “believes,” “expects,” “anticipates,” or similarexpressions.  Such forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause actual results, performance or achievements of the Company todiffer materially from those expressed or implied by such forward-lookingstatements, including those set forth below under “Factors That May AffectFuture Operating Results” within Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. The Company cautions the reader, however, that these factors may not beexhaustive.

 

**ITEM 1. BUSINESS**

 

Monaco CoachCorporation (the “Company”) is a leading manufacturer of premium recreationalvehicles including Class A motor coaches, Class C motor coaches and towablerecreational vehicles.  The Company’sproduct line consists of 29 models of motor coaches and 17 models of towables(fifth wheel trailers and travel trailers) under the “Monaco,” “HolidayRambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  The Company’s products, which are typicallypriced at the high end of their respective product categories, range insuggested retail price from $75,000 to $1.4 million for motor coaches and from$20,000 to $65,000 for towables.  Basedupon retail registrations in 2004, the Company believes it had a 25.1% share ofthe market for diesel Class A motor coaches, a 9.0% share of the market for gasClass A motor coaches, a 16.5% share of the market for all Class A motorcoaches, a 3.6% share of the market for fifth wheel towables and a 0.4% shareof the market for travel trailers.  AtJanuary 1, 2005, the Company’s products were sold through an extensive networkof 333 dealer lots located primarily in the United States and Canada.

 

The Company is thesuccessor to a company formed in 1968 (the “Predecessor”) and commencedoperations on March 5, 1993 by acquiring all the assets and liabilities of itspredecessor company (the “Predecessor Acquisition”).  Prior to March 1996, the Company’s productline consisted exclusively of High-Line Class A motor coaches.  In March 1996, the Company acquired theHoliday Rambler Division of Harley-Davidson, Inc. (“Holiday Rambler”), amanufacturer of a full line of Class A motor coaches and towables (the “HolidayAcquisition”).  Additionally, on August2, 2001, the Company acquired SMC Corporation (“SMC”), a manufacturer of a fullline of Class A diesel motor coaches (the “SMC Acquisition”).  The Company believes that developing relationshipswith a broad base of first-time buyers, coupled with the Company’s strongemphasis on quality, customer service and design innovation, will foster brandloyalty and increase the likelihood that, over time, more customers willtrade-up through the Company’s line of products.  Attracting larger numbers of first-timebuyers is important to the Company because of the Company’s belief that manyrecreational vehicle customers purchase multiple recreational vehicles duringtheir lifetime.

 

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

 

The Las Vegas,Nevada and Indio, California resorts have been designed to be built in multiplephases.  In both locations, the firstphase of construction is complete.  TheCompany anticipates completing future phases as market conditions continue toimprove.*  The Naples, Florida propertywas sold by the Company in September 2003, for cash proceeds in the amount of$6.7 million.

 

The Company’swebsite 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 

 

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Current Reports onForm 8-K, as well as amendments to those reports, as soon as reasonablypracticable after the reports are electronically filed with, or furnished to,the Securities and Exchange Commission.

 

PRODUCTS

 

The Companycurrently manufactures 29 motor coach and 17 towable models, each of which hasdistinct features and attributes designed to target the model to a particularsuggested retail price range.  TheCompany’s product offerings currently target four product types within therecreational vehicle market: Class A motor coaches, Class C motor coaches,fifth wheel trailers, and travel trailers. The Company does not currently compete in any other product categoriesof the recreational vehicle industry.

 

The followingtable highlights the Company’s product offerings as of January 1, 2005:

 

COMPANY MOTOR COACH PRODUCTS

 
| **MODEL**        | ** ** | **CURRENT  SUGGESTED RETAIL  PRICE RANGE** | ** ** | **BRAND**       |
|------------------|------------|--------------------------------------------|------------|-----------------|
| Class A          |       |                                       |       |            |
| Royale Coach     |       | $950,000-$1.4 million                      |       | Monaco          |
| Signature Series |       | $525,000-$555,000                          |       | Monaco          |
| Marquis          |       | $500,000-$570,000                          |       | Beaver          |
| Executive        |       | $425,000-$465,000                          |       | Monaco          |
| Navigator        |       | $400,000-$440,000                          |       | Holiday Rambler |
| Patriot          |       | $350,000-$410,000                          |       | Beaver          |
| Dynasty          |       | $325,000-$360,000                          |       | Monaco          |
| Imperial         |       | $315,000-$335,000                          |       | Holiday Rambler |
| Windsor          |       | $270,000-$290,000                          |       | Monaco          |
| Scepter          |       | $250,000-$260,000                          |       | Holiday Rambler |
| Camelot          |       | $245,000-$255,000                          |       | Monaco          |
| Gazelle          |       | $245,000-$255,000                          |       | Safari          |
| Monterey         |       | $240,000-$260,000                          |       | Beaver          |
| Endeavor         |       | $190,000-$220,000                          |       | Holiday Rambler |
| Diplomat         |       | $190,000-$215,000                          |       | Monaco          |
| Santiam          |       | $185,000-$215,000                          |       | Beaver          |
| Knight           |       | $165,000-$190,000                          |       | Monaco          |
| Cheetah          |       | $160,000-$185,000                          |       | Safari          |
| Ambassador       |       | $155,000-$195,000                          |       | Holiday Rambler |
| Cayman           |       | $135,000-$155,000                          |       | Monaco          |
| Neptune          |       | $135,000-$155,000                          |       | Holiday Rambler |
| LaPalma          |       | $115,000-$130,000                          |       | Monaco          |
| Vacationer       |       | $110,000-$130,000                          |       | Holiday Rambler |
| Trek             |       | $110,000-$135,000                          |       | Safari          |
| Simba            |       | $  90,000-$120,000               |       | Safari          |
| Monarch          |       | $  85,000-$115,000               |       | Monaco          |
| Admiral          |       | $  85,000-$115,000               |       | Holiday Rambler |
|             |       |                                       |       |            |
| Class C          |       |                                       |       |            |
| Esquire          |       | $  75,000-$ 85,000          |       | Monaco          |
| Atlantis         |       | $  75,000-$ 80,000          |       | Holiday Rambler |

 

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COMPANY TOWABLE PRODUCTS

 
| **MODEL**                   | ** ** | **CURRENT  SUGGESTED RETAIL  PRICE RANGE** | ** ** | **BRAND**       |
|-----------------------------|------------|--------------------------------------------|------------|-----------------|
| Medallion Fifth Wheel       |       | $  55,000-$  65,000    |       | McKenzie        |
| Presidential Fifth Wheel    |       | $  50,000-$  60,000    |       | Holiday Rambler |
| Presidential Travel Trailer |       | $  40,000-$  45,000    |       | Holiday Rambler |
| Lakota Fifth Wheel          |       | $  35,000-$  50,000    |       | McKenzie        |
| Alumascape Fifth Wheel      |       | $  35,000-$  45,000    |       | Holiday Rambler |
| Next Level Fifth Wheel      |       | $  35,000-$  40,000    |       | Holiday Rambler |
| Dune Chaser Fifth Wheel     |       | $  35,000-$  40,000    |       | McKenzie        |
| Next Level Travel Trailer   |       | $  30,000-$  35,000    |       | Holiday Rambler |
| Dune Chaser Travel Trailer  |       | $  30,000-$  35,000    |       | McKenzie        |
| Alumascape Travel Trailer   |       | $  30,000-$  35,000    |       | Holiday Rambler |
| Lakota Travel Trailer       |       | $  25,000-$  35,000    |       | McKenzie        |
| Savoy Fifth Wheel           |       | $  25,000-$  30,000    |       | Holiday Rambler |
| Savoy Fifth Wheel SL        |       | $  25,000-$  30,000    |       | Holiday Rambler |
| Starwood Fifth Wheel        |       | $  25,000-$  30,000    |       | McKenzie        |
| Starwood Fifth Wheel SL     |       | $  25,000-$  30,000    |       | McKenzie        |
| Savoy SL Travel Trailer     |       | $  20,000-$  25,000    |       | Holiday Rambler |
| Starwood SL Travel Trailer  |       | $  20,000-$  25,000    |       | McKenzie        |

 

In 2004, theaverage unit wholesale selling prices of the Company’s motor coaches, fifthwheel trailers and travel trailers, were approximately $152,000, $30,600, and$26,000, respectively.  The Company’smotor coach products generated 91.9%, 92.2%, and 90.0% of total revenues forthe fiscal years 2002, 2003, and 2004, respectively.  Other revenues for the respective years werederived from a combination of towable and resort lot sales.

 

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

 

Each of theCompany’s recreational vehicles comes fully equipped with a wide range ofkitchen and bathroom appliances, audio and visual electronics, communicationdevices, and other amenities, including couches, dining tables, closets, andstorage spaces.  All of the Company’srecreational vehicles incorporate products from well-recognized suppliers,including: stereos, CD and cassette players, VCR’s, DVD’s, and televisions fromSharp, RCA, Sony; microwave ovens from Sharp, Magic Chef, and General Electric;stoves and ranges from KitchenAid and Modern Maid; engines from Cummins andCaterpillar; transmissions from Allison; and chassis from Ford, Workhorse, andour own Roadmaster brand.  The Company’shigh end products offer top-of-the-line amenities, including 37” Sharp LCDtelevisions, GPS systems 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.

 

PRODUCT DESIGN

 

To addresschanging consumer preferences, the Company modifies and improves its productseach model year and typically redesigns each model every three or fouryears.  The Company’s designers work withthe Company’s marketing, manufacturing, and service departments to design aproduct that is appealing to consumers, practical to manufacture, and easy toservice.  The designers try to maximizethe quality and value of each model at the strategic retail price point forthat model.  The marketing and salesstaff suggest features or characteristics that they believe could be integratedinto the various models to differentiate the Company’s products from those ofits 

 

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competitors.  By working with manufacturing personnel, theCompany’s product designers engineer the recreational vehicles so that they canbe built efficiently and with high quality. Service personnel suggest ideas to improve the serviceability andreliability of the Company’s products and give the designers feedback on theCompany’s past designs.

 

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

 

The Companyexpensed $1.2 million, $1.2 million, and $1.4 million for research anddevelopment in the fiscal years 2002, 2003, and 2004, respectively.

 

SALES AND MARKETING

 

DEALERS

 

The Companyexpanded its dealer network over the past year to 333 dealership lots primarilylocated in the United States and Canada at January 1, 2005.  Revenues generated from shipments todealerships located outside the United States were approximately 3.0%, 3.6%,and 3.4% of total sales for the fiscal years 2002, 2003, and 2004,respectively.  The Company intends tocontinue to expand its dealer network, primarily by targeting key geographicregions where the Company’s products are not well represented.*  The Company maintains an internal salesorganization consisting of 40 account executives who service the Company’sdealer network.

 

The Companyanalyzes and selects new dealers on the basis of such criteria as location,marketing ability, sales history, financial strength, and the capability of thedealer’s repair services.  The 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.  The Company’s sales staff is also availableto educate dealers about the characteristics and advantages of the Company’srecreational vehicles compared with competing products.  The Company offers dealers geographicexclusivity to carry a particular model. While the Company’s dealership contracts have renewable one or two-yearterms, historically the Company’s dealer turnover rate has been low.

 

Dealers typicallyfinance their inventory through revolving credit facilities established withasset-based lending institutions, including specialized finance companies andbanks.  It is industry practice that such“floor plan” lenders require recreational vehicle manufacturers to agree torepurchase (for a period of 12 to 18 months from the date of the dealer’spurchase) motor coaches and towables previously sold to the dealer in the eventthe dealer defaults on its financing agreements.  The Company’s contingent obligations underthese repurchase agreements are reduced by the proceeds received upon the saleof any repurchased units. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and CapitalResources,” and Note 16 of Notes to the Company’s Consolidated FinancialStatements.

 

ADVERTISING AND PROMOTION

 

The Companyadvertises regularly in trade journals and magazines, participates incooperative advertising programs with its dealers, and produces color brochuresdepicting its models’ performance features and amenities.  The Company also promotes its products withdirect incentive programs to dealer sales personnel linked to sales ofparticular models.

 

An importantmarketing activity for the Company is its participation with its dealers in themore than 250 recreational vehicle trade shows and rallies each year.  National trade shows and rallies, which canattract as many as 40,000 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 attractivedisplay areas at major trade shows to highlight the newest design innovationsand features of its 

 

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products iscritical to the Company’s success in attracting and maintaining its dealernetwork and in generating enthusiasm at the retail customer level.  The Company also provides complimentaryservice for minor repairs to its customers at several rallies and trade shows.

 

The Companyattempts to encourage and reinforce customer loyalty through support of owners’clubs of its products so that they may share experiences and communicate witheach other.  The clubs of the Company’sproducts currently have more than 40,000 members.  The Company publishes magazines to enhanceits relations with these clubs and holds rallies for clubs to meet periodicallyto view the Company’s new models and obtain maintenance and serviceguidance.  Attendance at Company-sponsoredrallies can be as high as 2,100 recreational vehicles per year.  The Company receives support from its dealersand suppliers to host these rallies.

 

The Company’s websites also offer an extensive listing of the Company’s models, floor plans, andfeatures, including “virtual tours” of some models.  A dealer locator feature identifies forcustomers the closest dealers to their location for the model(s) they areinterested in purchasing.  The Company’sweb site also provides information for upcoming rallies and club functions aswell as links to other RV lifestyle web sites of interest to existing orpotential customers.

 

CUSTOMER SERVICE

 

The Companybelieves that customer satisfaction is vitally important in the recreationalvehicle market because of the large number of repeat customers and the rapidcommunication of business reputations among recreational vehicleenthusiasts.  The Company also believesthat service is an integral part of the total product the Company delivers andthat responsive and professional customer service is consistent with thepremium image the Company strives to convey in the marketplace.

 

The Company offersa limited warranty to all new vehicle purchasers.  The Company’s current limited warranty coversits products for up to one year (or 24,000 miles, whichever occurs first) fromthe date of retail sale (a limited structural warranty has a duration of fiveyears for the front and sidewall frame structure, and a limited three yearwarranty for the Roadmaster chassis).  Inaddition, customers are protected by the limited warranties of major componentsuppliers such as those of Cummins Engine Company, Inc. (“Cummins”) (dieselengines), Caterpillar Inc. (“Caterpillar”) (diesel engines), Spicer Heavy Axle& Brake Division of Dana Corporation (“Dana”) (axles), Allison TransmissionDivision of General Motors Corporation (“Allison”) (transmissions), Workhorse(chassis), Onan (generators), and Ford Motor Company (“Ford”) (chassis). TheCompany’s limited warranty covers all manufacturing-related problems and partsand system failures, regardless of whether the repair is made at a Companyfacility or by one of the Company’s dealers or authorized service centers. Asof January 1, 2005, the Company had 333 dealerships providing service to ownersof the Company’s products. In addition, owners of the Company’s diesel productshave access to the entire Cummins and Caterpillar dealer networks, whichinclude over 2,000 repair centers.

 

The Companyoperates service centers in Harrisburg, Oregon; Bend, Oregon; Elkhart, Indiana;and in Wildwood, Florida.  The Companyhad approximately 800 employees in customer service at January 1, 2005.  The Company maintains individualizedproduction records and a computerized warranty tracking system which enable theCompany’s service personnel to identify problems quickly and to provideindividualized customer service.  Whilemany problems can be resolved on the telephone, the customer may be referred toa nearby dealer or service center.  TheCompany believes that dedicated customer service phone lines are an ideal wayto interact directly with the Company’s customers and to quickly address theirtechnical problems.

 

The Company hasexpanded its on-line dealer support network to assist its service personnel anddealers in providing better service to 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 partsorders.  The Company’s on-line dealersupport network gives service personnel at dealerships the ability to orderparts through an electronic parts catalog.

 

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MANUFACTURING

 

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

 

The Company’smotor coach production capacity at the end of 2004 based on a single shiftfive-day work week, was 27 units per day at its Coburg facility, 3 units perday at its Bend Facility, and 30 units per day at its Wakarusa facility. TheCompany’s current towables production capacity is 32 units per day at itsElkhart facility. The Company is currently utilizing approximately 58% of totalcapacity and therefore believes it is positioned to take advantage of futuregrowth potential of the Company’s products within the RV market.*

 

The Companybelieves that its manufacturing process is one of the most verticallyintegrated in the recreational vehicle industry.  By manufacturing a variety of items,including the Roadmaster semi-monocoque diesel chassis, plastic components,some of its cabinetry and fiberglass parts, as well as many subcomponents, theCompany maintains increased control over scheduling, component production, andoverall product quality.  In addition,vertical integration enables the Company to be more responsive to marketdynamics.

 

Each facility hasseveral stations for manufacturing, organized into four broad categories:chassis manufacturing, body manufacturing, painting, and finishing.  It takes from two weeks to two months tobuild each unit, depending on the product. The Company keeps a detailed log book during the manufacture of eachproduct and inputs key information into its computerized service trackingsystem.  Each unit is given an inspectionduring which its appliances and plumbing systems are thoroughly tested.  As a final quality control check, each motorcoach is given a road test.

 

The Companypurchases raw materials, parts, subcomponents, electronic systems, andappliances from approximately 1,000 vendors. These items are either directly mounted in the vehicle or are utilizedin subassemblies which the Company assembles before installation in thevehicle.  The Company attempts tominimize its level of inventory by ordering most parts as it needs them.  Certain key components that require longerpurchasing lead times are ordered based on planned needs.  Examples of these components are dieselengines, axles, transmissions, chassis, and interior designer fabrics.  The Company has a variety of major suppliers,including Allison, Workhorse, Cummins, Caterpillar, Dana, Onan, IndustrialFinish, and Ford.  The Company does nothave any long-term supply contracts with these suppliers or their distributors,but believes it has good relationships with them.  To minimize the risks associated withreliance on a single-source supplier, the Company typically keeps a 60-daysupply of axles, engines, chassis, and transmissions in stock or available atthe suppliers’ facilities and believes that, in an emergency, other supplierscould fill the Company’s needs on an interim basis.*  The Company presently believes that itsallocation by suppliers of all components is sufficient to meet plannedproduction volumes, and the Company does not foresee any operating difficultiesas a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any ofthe Company’s other suppliers will be able to meet the Company’s futurerequirements for transmissions, chassis, or other key components.  An extended delay or interruption in thesupply of any components obtained from a single or limited source suppliercould have a material adverse effect on the Company’s business, results ofoperations, and financial condition.

 

BACKLOG

 

The Company’sproducts are generally manufactured against orders from the Company’s dealers.As of January 1, 2005, the Company’s backlog of orders was $256.4 million,compared to $410.2 million at January 3, 2004. The Company includes in its backlog all accepted purchase orders fromdealers shippable within the next six months. Orders in backlog can be canceled at the option of the purchaser at anytime without penalty and, therefore, backlog should not be used as a measure offuture sales.

 

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COMPETITION

 

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

 

GOVERNMENTREGULATION

 

The manufactureand operation of recreational vehicles are subject to a variety of federal,state, and local regulations, including the National Traffic and Motor VehicleSafety Act and safety standards for recreational vehicles and their componentsthat have been promulgated by the Department of Transportation.  These standards permit the National HighwayTraffic Safety Administration to require a manufacturer to repair or recallvehicles with safety defects or vehicles that fail to conform to applicablesafety standards. Because of its sales in Canada, the Company is also governedby similar laws and regulations promulgated by the Canadian government.  The Company has on occasion voluntarilyrecalled certain products.  The Company’soperating results could be adversely affected by a major product recall or ifwarranty claims in any period exceed warranty reserves.

 

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

 

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

 

The Companybelieves that its products and facilities comply in all material respects withthe applicable vehicle safety, consumer protection, RVIA, and OSHA regulationsand 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 comply with present or future regulationscould result in fines being imposed on the Company, potential civil andcriminal liability, suspension of production or cessation of operations.

 

The Company issubject to product liability and warranty claims arising in the ordinary courseof business.  To date, the Company hasbeen successful in obtaining product liability insurance on terms the Companyconsiders acceptable.  The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  There can be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the costs of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance 

 

10

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coverage, couldhave a material adverse effect on the Company’s business, operating results,and financial condition.

 

In 2002, the National Highway Traffic SafetyAdministration (NHTSA), enacted new vehicle safety legislation referred to asthe TREAD Act that imposes significant early warning reporting (“EWR”)requirements on vehicle manufacturers, including the Company.  The Company believes that it has met the EWRrequirements 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 and regulations have historicallybeen amended frequently, and it is likely that further amendments andadditional laws and regulations will be applicable to the Company and itsproducts in the future.  Furthermore, noassurance can be given that any increase in personal income tax rates will nothave a material adverse effect on the Company’s business, operating results,and financial condition by reducing demand for the Company’s products.

 

ENVIRONMENTALREGULATION AND REMEDIATION

 

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

 

The Company has submitted applications for “Title V”air permits for all of its existing and new operations.  The air permits have either been issued orare in the process of being issued by the relevant state agency.

 

The Company is planning to expand the paintingcapacities at its production facilities in Bend, Oregon, and adding a new paintreciprocator system in Wakarusa, Indiana. The Company has submitted all required permit applications and does notanticipate any permit delays or that additional air pollution control equipmentwill be required as a condition of these construction approvals.  The Company is aware that Elkhart County,Indiana, has been designated as non-attainment area under the Clean AirStandards for Ozone and PM2.5. Regardless the Company does not anticipate any new conditions that willrequire additional air pollution control equipment at operations located inElkhart or at any of our other existing operations, although new regulationsand their interpretation may change over time, and there can be no assurancethat additional expenditures will not be required.*

 

During 2004 additional federal Maximum AchievableControl Technology (“MACT”) regulations were adopted.  The Company is in compliance with the newMACT regulations, and will not require any material capital expenditures at itsfacilities beyond those which have already been incurred.*  However, the ongoing interpretation of theseregulations is uncertain and there can be no assurance that additional capitalexpenditures 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 theCompany to comply with present or future regulations could subject the Companyto: (i) fines; (ii) potential civil and criminal liability; (iii) suspension ofproduction or cessation of operations; (iv) alterations to the manufacturingprocess; or (v) costly cleanup or capital expenditures, any of which could havea material adverse effect on the Company’s business, results of operations, andfinancial condition.

 

REMEDIATION TheCompany completed a voluntary remediation activity at one of its facilitiesacquired in the SMC acquisition.  Theremediation project was associated with old 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 theCompany to comply with present or future regulations could subject the Companyto: (i) fines; (ii) potential civil and criminal liability; (iii) suspension ofproduction or cessation of operations; (iv) alterations to the manufacturingprocess; or (v) costly cleanup or capital expenditures, any of which could havea material adverse effect on the Company’s business, results of operations, andfinancial condition.

 

11

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EMPLOYEES

 

As of January 1, 2005, the Company had 5,934 full-timeemployees, including 4,479 in production, 83 in sales, 781 in service, and591in management and administration.  TheCompany’s employees are not represented by any collective bargainingorganization, and the Company has never experienced a work stoppage resultingfrom labor issues.  The Company believesits relations with its employees are good.

 

The Company’s future prospects depend upon its keymanagement personnel, including Kay L. Toolson, the Company’s Chief ExecutiveOfficer and John W. Nepute, the Company’s President.  The loss of one or more of these keymanagement personnel could adversely affect the Company’s business.  The prospects of the Company also depend inpart on its ability to attract and retain qualified technical, manufacturing,managerial, and marketing personnel. Competition for such personnel is intense, and there can be no assurancethat the Company will be successful in attracting and retaining such personnel.

 

EXECUTIVE OFFICERSOF THE COMPANY

 

The following setsforth certain information with respect to the executive officers of the Companyas of March 4, 2005:

 
| **Name**            | ** ** | **Age** | ** ** | **Position with the Company**                                       |
|---------------------|------------|---------|------------|---------------------------------------------------------------------|
| Kay L. Toolson      |       | 61      |       | Chairman and Chief Executive Officer                                |
| John W. Nepute      |       | 53      |       | President                                                           |
| Richard E. Bond     |       | 51      |       | Senior Vice President, Secretary, and Chief  Administrative Officer |
| Martin W. Garriott  |       | 49      |       | Vice President and Director of Oregon Manufacturing                 |
| Irvin M. Yoder      |       | 57      |       | Vice President and Director of Indiana Manufacturing                |
| Patrick F. Carroll  |       | 47      |       | Vice President of Product Development                               |
| P. Martin Daley     |       | 40      |       | Vice President and Chief Financial Officer                          |
| Michael P. Snell    |       | 36      |       | Vice President of Sales and Marketing                               |
| John B. Healey, Jr. |       | 39      |       | Vice President of Corporate Purchasing                              |

 

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

 

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

 

Mr. Bond hasserved as Senior Vice President, Secretary, and Chief Administrative Officer ofthe Company since September 1999 and as Vice President, Secretary, and ChiefAdministrative Officer beginning in August of 1998.  Prior to that and from February 1997, heserved the Company as Vice President, Secretary, and General Counsel, havingjoined the Company in January 1997.  From1987 to 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 hasserved the Company as Vice President and Director of Oregon Manufacturing sinceJanuary 1997.  He has been continuouslyemployed by the Company or the Predecessor since November 1975 in variouscapacities, including Vice President of Corporate Purchasing from October 1994until December 1996.

 

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Mr. Yoder hasserved the Company as Vice President and Director of Indiana Manufacturingsince August 1998.  Joining the Companyupon the acquisition of Holiday Rambler in March 1996 as Director of IndianaMotorized Manufacturing, he served in that capacity through July 1998.  Mr. Yoder began his employment with HolidayRambler in 1969 and held a variety of production-related positions, serving asArea Manager of Motorized Production from 1980 until March 1996.

 

Mr. Carroll has served as Vice President of ProductDevelopment since August 1998 and prior to that as Director of Product Developmentsince joining the Company in October 1995. He has held a variety of marketing and product development positionswith various recreational vehicle manufacturers since 1979.

 

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

 

Mr. Snell has served as Vice President of Sales andMarketing since November 2004.  Prior tothat and since joining the Company in October 1994, he held different positionsincluding Vice President of Sales and National Sales Manager of MonacoMotorized Sales.

 

Mr. Healey has served as Vice President of CorporatePurchasing since October 2000 and as Director of Purchasing for IndianaOperations beginning in August 1998. Prior to that and since joining the Company in March of 1991, he held avariety of positions in the purchasing department.

 

**ITEM 2.  PROPERTIES**

 

The Company isheadquartered in Coburg, Oregon, approximately 100 miles from Portland, Oregon.The following table summarizes the 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             |       | 152,800                     |       | 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              |       | 1,154,000                   |       | Motor Coaches production                        |
| Nappanee, Indiana   |       | Owned              |       | 130,000                     |       | Wood Components production                      |
| Elkhart, Indiana    |       | Owned              |       | 382,000                     |       | Service and Towables/Chassis production         |
| Wildwood, Florida   |       | Owned              |       | 75,000                      |       | Service                                         |

 

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

 

In addition to theproperties noted above related to building and servicing recreational vehicles,the Company owns two luxury motor coach resorts under development as follows atJanuary 1, 2005:

 
| **RESORT LOCATION** | ** ** | **DEVELOPED  ACREAGE** | ** ** | **NUMBER OF  DEVELOPED LOTS** | ** ** | **NUMBER OF  LOTS SOLD** | ** ** | **UNDEVELOPED  ACREAGE** | ** ** | **NUMBER OF  POTENTIAL NEW  LOTS** | ** ** |
|---------------------|------------|------------------------|------------|-------------------------------|------------|--------------------------|------------|--------------------------|------------|------------------------------------|------------|
|                |       |                   |       |                          |       |                     |       |                     |       |                               |       |
| Las Vegas, Nevada   |       | 21                     |       | 202                           |       | 198                      |       | 21                       |       | 199                                |       |
| Indio, California   |       | 27                     |       | 163                           |       | 118                      |       | 53                       |       | 237                                |       |

 

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**ITEM3.  LEGAL PROCEEDINGS**

 

The Company isinvolved in legal proceedings arising in the ordinary course of its business,including a variety of product liability and warranty claims typical in therecreational 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.*

 

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

 

None.

 

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**PART II**

 

**ITEM5.  MARKET FOR THE REGISTRANT’S****COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

The Company’sCommon Stock is traded on the New York Stock Exchange under the symbol “MNC.”  The following table sets forth for theperiods indicated the high and low closing sale prices for the Common Stock(rounded to the nearest $.01 per share).

 

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **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 |   |
|           |       |     |       |    |       |
| **2003**       |       |     |       |    |       |
| First Quarter  |       | $        | 17.39      |    | $          | 9.06 |   |
| Second Quarter |       | $        | 16.73      |    | $          | 10.00 |   |
| Third Quarter  |       | $        | 20.41      |    | $          | 13.97 |   |
| Fourth Quarter |       | $        | 24.96      |    | $          | 16.55 |   |

 

As of March 4,2005, there were approximately 884 holders of record of the Company’s CommonStock.

 

The Company beganpaying quarterly dividends at the rate of $.05 per share on its common stock inMarch 2004.  In February 2005, theCompany declared an increased dividend of $.06 per share on all common stockowned by holders of record as of March 1, 2005. The Company currently expects that comparable cash dividends will bepaid on a quarterly basis going forward, however, the Company reserves theright to alter or discontinue this practice at any time depending on itseconomic performance and financial condition.

 

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

 

The informationrequired by this item regarding equity compensation plans is incorporated byreference in the information set forth in Item 12 of the Annual Report on Form10-K.

 

**ITEM6.  SELECTED FINANCIAL DATA**

 

SELECTEDHISTORICAL CONSOLIDATED FINANCIAL DATA

 

The ConsolidatedStatements of Income Data set forth below with respect to fiscal years 2002,2003, and 2004, and the Consolidated Balance Sheet Data at January 3, 2004 andJanuary 1, 2005, are derived from, and should be read in conjunction with, theaudited Consolidated Financial Statements and Notes thereto of the Companyincluded in this Annual Report on Form 10-K. The Consolidated Statements of Income Data set forth below with respectto fiscal years 2000 and 2001 and the Consolidated Balance Sheet Data atDecember 30, 2000, December 29, 2001, and December 28, 2002 are derived fromaudited consolidated financial statements of the Company which are not includedin this Annual Report on Form 10-K.

 

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

 

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Five-Year Selected Financial Data

 

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

 
| ** **                                    | ** ** | **Fiscal Year**         | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2000**                | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Consolidated Statements of Income Data:**   |       |                    |       |   |   |   |   |   |   |   |   |
| Net sales                                     |       | $                       | 901,890    |   | $ | 937,073 |   | $ | 1,222,689 |   | $ | 1,168,311 |   | $ | 1,397,243 |   |
| Cost of sales                                 |       | 772,240                 |       | 823,083 |   | 1,059,560 |   | 1,028,377 |   | 1,227,117 |   |
| Gross profit                                  |       | 129,650                 |       | 113,990 |   | 163,129 |   | 139,934 |   | 170,126 |   |
| Selling, general, and administrative expenses |       | 59,175                  |       | 70,687 |   | 87,202 |   | 101,700 |   | 110,209 |   |
| Amortization of goodwill                      |       | 645                     |       | 645 |   | 0 |   | 0 |   | 0 |   |
| Operating income                              |       | 69,830                  |       | 42,658 |   | 75,927 |   | 38,234 |   | 59,917 |   |
| Other income, net                             |       | 182                     |       | 334 |   | 105 |   | 260 |   | 343 |   |
| Interest expense                              |       | (632                    | )          | (2,357 | ) | (2,752 | ) | (2,968 | ) | (1,547 | ) |
| Income before provision for income taxes      |       | 69,380                  |       | 40,635 |   | 73,280 |   | 35,526 |   | 58,713 |   |
| Provision for income taxes                    |       | 26,859                  |       | 15,716 |   | 28,765 |   | 13,326 |   | 22,008 |   |
| Net income                                    |       | $                       | 42,521     |   | $ | 24,919 |   | $ | 44,515 |   | $ | 22,200 |   | $ | 36,705 |   |
|                                          |       |                    |       |   |   |   |   |   |   |   |   |
| Earnings per common share:                    |       |                    |       |   |   |   |   |   |   |   |   |
| Basic                                         |       | $                       | 1.50       |   | $ | 0.87 |   | $ | 1.55 |   | $ | 0.76 |   | $ | 1.25 |   |
| Diluted                                       |       | $                       | 1.47       |   | $ | 0.85 |   | $ | 1.51 |   | $ | 0.75 |   | $ | 1.23 |   |
| Weighted average shares outstanding:          |       |                    |       |   |   |   |   |   |   |   |   |
| Basic                                         |       | 28,377,123              |       | 28,531,593 |   | 28,812,473 |   | 29,062,649 |   | 29,370,455 |   |
| Diluted                                       |       | 28,978,264              |       | 29,288,688 |   | 29,573,420 |   | 29,567,012 |   | 29,958,646 |   |
|                                          |       |                    |       |   |   |   |   |   |   |   |   |
| Cash dividends per common share               |       | $                       | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.20 |   |
|                                          |       |                    |       |   |   |   |   |   |   |   |   |
| **Consolidated Operating Data:**              |       |                    |       |   |   |   |   |   |   |   |   |
| Units sold:                                   |       |                    |       |   |   |   |   |   |   |   |   |
| Motor coaches                                 |       | 6,632                   |       | 6,228 |   | 8,005 |   | 7,051 |   | 8,199 |   |
| Towables                                      |       | 3,377                   |       | 3,261 |   | 3,206 |   | 2,593 |   | 4,621 |   |
|                                          |       |                    |       |   |   |   |   |   |   |   |   |
| ** **                                    | ** ** | **December  30,  2000** | ** ** | **December  29,  2001** | ** ** | **December  28,  2002** | ** ** | **January  3,  2004** | ** ** | **January  1,  2005** | ** ** |
| **Consolidated Balance Sheet Data:**          |       |                    |       |   |   |   |   |   |   |   |   |
| Working capital                               |       | $                       | 69,299     |   | $ | 63,694 |   | $ | 114,241 |   | $ | 121,231 |   | $ | 141,907 |   |
| Total assets                                  |       | 321,610                 |       | 427,098 |   | 547,417 |   | 478,669 |   | 540,238 |   |
| Long-term borrowings, less current portion    |       | —                  |       | 30,000 |   | 30,333 |   | 15,000 |   | — |   |
| Total stockholders’ equity               |       | $                       | 186,625    |   | $ | 213,130 |   | $ | 260,627 |   | $ | 286,248 |   | $ | 319,616 |   |

 

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

**RESULTS OF OPERATIONS**

 

OVERVIEW

 

*Background*

 

We are a leadingmanufacturer of premium Class A motor coaches, Class C motor coaches andtowable recreation vehicles.  Our productline consists of 29 models of motor coaches and 17 models of towables (fifthwheel trailers and travel trailers) under the “Monaco,” “Holiday Rambler,” “RoyaleCoach,” “Beaver,” “Safari,” and “McKenzie” brand names.  Our products, which are typically priced atthe high end of their respective product categories, range in suggested retailprice from $75,000 to $1.4 million for motor coaches and from $20,000 to$65,000 for towables.  Based upon retailregistrations in 2004, we believe we had 25.1% share of the market for dieselClass A motor coaches, a 9.0% share of the market for gas Class A motorcoaches, a 16.5% share of the market for all Class A motor coaches, a 3.6%share of the market for fifth wheel towables and a 0.4% share of the market fortravel trailers.

 

We have conducteda series of acquisitions during our history, beginning in March 1993 when wecommenced operations by acquiring substantially all of the assets andliabilities of a predecessor company that had been formed in 1968.  In March 1996, we acquired the HolidayRambler Division of Harley-Davidson, Inc., a manufacturer of a full line ofClass A motor coaches and towables.  InAugust 2001, we acquired SMC Corporation, manufacturer of the Beaver and Safaribrand Class A motorhomes.  In November2002, we acquired from Outdoor Resorts of America (“ORA”) three luxurymotorcoach resort properties being developed by ORA in Las Vegas, Nevada,Indio, California, and Naples, Florida. In September 2003, we sold the property in Naples, Florida.  Each of these acquisitions was accounted forusing the purchase method of accounting.

 

In accordance withStatements of Financial Accounting Standards No. 142, “Accounting for Goodwilland Other Intangible Assets” (“SFAS 142”), no goodwill amortization has beenrecorded for any of the Company’s acquisitions for the years of 2002, 2003, or2004.  Instead, SFAS 142 requires annualtesting of goodwill for impairment.  Wecompleted our annual testing of goodwill during the third quarter of 2004 asrequired by SFAS 142 and determined that there has been no impairment requiringa write down.

 

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**RESULTSOF OPERATIONS**

 

The followingtable sets forth our results of operations for the fiscal years ended January3, 2004, and January 1, 2005.  Alldollars represented are in thousands.

 
| ** **                                   | ** ** | **2003**  | ** ** | **%  of Sales** | ** ** | **2004**  | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------------|------------|-----------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                    |       | $         | 1,168,311  |            | 100.0      | %         | $          | 1,397,243       |       | 100.0         | %          | $             | 228,932    |   | 19.6 | % |
| Cost of Sales                                |       | 1,028,377 |       | 88.0            | %          | 1,227,117 |       | 87.8            | %          | -198,740      |       | -19.3         | %          |
| Gross Profit                                 |       | 139,934   |       | 12.0            | %          | 170,126   |       | 12.2            | %          | 30,192        |       | 21.6          | %          |
| Selling, general and administrative expenses |       | 101,700   |       | 8.7             | %          | 110,209   |       | 7.9             | %          | -8,509        |       | -8.4          | %          |
|                                         |       |      |       |            |       |      |       |            |       |          |       |          |       |
| Operating income                             |       | $         | 38,234     |            | 3.3        | %         | $          | 59,917          |       | 4.3           | %          | $             | 21,683     |   | 56.7 | % |

 

*Performancein 2004*

 

In 2004, theindustry, as well as our own business, experienced a rebound compared to theresults of 2003.  The first half of 2004was very strong, and despite cooling off in the second half of the year,results for the year as a whole were markedly better. During the cooling off ofthe market in the third and fourth quarters of 2004, the Company respondedproactively in managing production run rates, and dealer incentive programs toensure continued low levels of inventories. This has helped position us positively as we move forward into 2005.*

 

During 2004 wecontinued to offer retail marketing promotions programs to our retailcustomers.  These programs have beensuccessful in furthering our goal of assisting our dealer body in maintainingappropriate levels of inventories on their lots.  In particular, retail marketing promotionswere important in the third and fourth quarter as the recreational vehiclemarket experienced a retraction compared to the first and second quarter of2004.

 

The recreationalvehicle industry is extremely competitive. Retail customers have many choices available to them, and we haveresponded with innovations in our products to secure our position in theindustry.  During 2004 we expanded ourofferings to include more models that incorporate full body paint, hardwoodcabinets, more powerful engines, raised ceilings, and aesthetic changes to thebodies of our motorhomes.  We believethat these changes have been well received by our customers, and we will continueto focus on producing high quality, innovative products based on feedback fromboth our dealer and retail customer bodies.

 

*2004 Compared With 2003*

 

Net salesincreased 19.6% from $1.168 billion in 2003 to $1.397 billion in 2004.  Gross diesel motorized revenues were up12.0%, gas motorized revenues were up 41.6%, and towable revenues were up51.7%.  For 2004, gross diesel motorizedsales accounted for 74.0% of sales, gas motorized sales accounted for 16.0% ofsales, and towables accounted for 10.0% of sales.  For 2003, gross diesel motorized salesaccounted for 78.8% of sales, gas motorized sales accounted for 13.4% of sales,and towables accounted for 7.8% of sales. Increases in all lines of product reflect a stronger market compared to2003.  The Company’s overall average unitselling price decreased from  $121,000 in2003, to $108,000 in 2004.  This decreasein average selling price is related to strong growth in lower priced productsin gas motorized coaches, and in towable products.

 

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Gross profitincreased by $30.2 million from $139.9 million in 2003 to $170.1 million in2004 and gross margin increased from 12.0% in 2003 to 12.2% in 2004.  The increase in gross margin in 2004 isillustrated below in the following table. All numbers are expressed in thousands, percentages are expressed aspercent of net sales:

 
| ** **          | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|---------------------|------------|----------|------------|----------------|------------|----------|------------|----------------|------------|---------------------------|------------|
| Direct Materials    |       | $        | 713,971    |           | 61.1       | %        | $          | 870,693        |       | 62.3                      | %          | 1.2 | % |
| Direct Labor        |       | 122,798  |       | 10.5           | %          | 141,607  |       | 10.1           | %          | -0.4                      | %          |
| Warranty            |       | 35,188   |       | 3.0            | %          | 34,426   |       | 2.5            | %          | -0.5                      | %          |
| Other Direct        |       | 55,824   |       | 4.8            | %          | 66,901   |       | 4.8            | %          | 0.0                       | %          |
| Indirect            |       | 100,596  |       | 8.6            | %          | 113,490  |       | 8.1            | %          | -0.5                      | %          |
| Total Cost of Sales |       | $        | 1,028,377  |           | 88.0       | %        | $          | 1,227,117      |       | 87.8                      | %          | -0.2 | % |

 

The changes notedabove, comparing 2003 to 2004, are discussed below.

 

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

•      Directlabor decreases, as a percent of sales, were predominantly due to improvementsin automation of certain plant operations.

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

•      Decreasesin combined other direct and indirect costs, as a percent of sales, were duemostly to efficiencies within the plants as a result of improved plantutilization.

 

Selling, general,and administrative expenses (S,G,&A) increased by $8.5 million from $101.7million in 2003 to $110.2 million in 2004 and decreased as a percentage ofsales from 8.7% in 2003 to 7.9% in 2004. Decreases in spending over the prioryear, as a percentage of sales, are shown below in the following table.  All numbers are expressed in thousands,percentages are expressed as percent of net sales:

 
| ** **               | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **2004** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|--------------------------|------------|----------|------------|----------------|------------|----------|------------|----------------|------------|---------------------------|------------|
| Wages and  Salaries      |       | $        | 18,409     |           | 1.6        | %        | $          | 19,422         |       | 1.4                       | %          | -0.2 | % |
| Selling Expenses         |       | 27,319   |       | 2.3            | %          | 26,386   |       | 1.9            | %          | -0.4                      | %          |
| Settlement  Expense      |       | 12,678   |       | 1.1            | %          | 11,045   |       | 0.8            | %          | -0.3                      | %          |
| Advertising and  Print   |       | 11,747   |       | 1.0            | %          | 12,544   |       | 0.9            | %          | -0.1                      | %          |
| Other                    |       | 31,547   |       | 2.7            | %          | 40,812   |       | 2.9            | %          | 0.2                       | %          |
| Total S,G&A Expenses |       | $        | 101,700    |           | 8.7        | %        | $          | 110,209        |       | 7.9                       | %          | -0.8 | % |

 

The changes notedabove, comparing 2003 to 2004, are discussed below.

 

•      Decreasesin wages and salaries, as a percent of sales, were due primarily to increasedsales volumes without additions to staff to support the increase in sales.

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

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

•      Decreasesin advertising and print, as a percent of sales, were a function of highersales during the year for which the Company did not increase total dollarsspent.

•      Increasesin other expenses were a combination of increases in management bonus due toimproved profits, increases in audit and related expenses for compliance withSarbanes-Oxley 404 Certification, as well as employee benefits such as health carecosts.

 

Operating incomeincreased $21.7 million from $38.2 million in 2003 to $59.9 million in2004.  The Company’s lower level ofselling, general, and administrative expense as a percentage of sales combinedwith the 

 

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increase in the Company’s gross margin, resulted in an increase inoperating margin from 3.3% in 2003 to 4.3% in 2004.

 

Net interestexpense decreased from $3.0 million in 2003 to $1.5 million in 2004.  This decrease was related to lower debtlevels during 2004 as the Company continued to pay down long term debt.  Capitalized interest was $285,000 in 2003 andzero in 2004.  The Company’s interestexpense included $426,000 in 2003 and $430,000 in 2004 related to theamortization of debt issuance costs recorded in conjunction with the Company’scredit facilities. The Company is expecting decreased interest expense for 2005based on anticipated lower debt levels.*

 

The Companyreported a provision for income taxes of $22.0 million, or an effective taxrate of 37.5%, for 2004, compared to $13.3 million, or an effective tax rate of37.5% for 2003.  The effective rateremained consistent as the Company has continued to receive the benefitsassociated with multi-state tax filings, as well as favorable federal tax ratesassociated with foreign sales.

 

Net incomeincreased by $14.5 million from $22.2 million in 2003 to $36.7 million in 2004,due to the combination of increases in net sales, increases in gross margins,and increases in operating margins.  TheCompany does not currently expense stock options granted, however, if optionexpensing were required, the impact on net income for 2004 for all previouslygranted options would have been a decrease of $1.6 million.  See Note 13 of the Company’s consolidatedfinancial statements for information regarding the calculation of the impact ofexpensing stock options.

 

*2003 Compared With 2002*

 

Net salesdecreased 4.5% from $1.223 billion in 2002 to $1.168 billion in 2003.  Gross diesel motorized revenues were down5.6%, while gas motorized were up 0.6%, and towables were down 8.6%.  For 2003, gross diesel motorized salesaccounted for 78.8% of sales, gas motorized sales accounted for 13.4% of sales,and towables accounted for 7.8% of sales. For 2002, gross diesel motorized sales accounted for 78.5% of sales, gasmotorized accounted for 13.4% of sales, and towables accounted for 8.1% ofsales.  The increase in diesel motorizedsales as a percentage of sales reflects the continued strong diesel market,while the decrease in towables as a percentage of sales was due primarily to asmall decrease in market share from increased towable competition.  Accordingly, as diesel motorized product grewas a percentage of sales, the Company’s overall average unit selling priceincreased from  $110,000 in  2002, to $121,000 in 2003.

 

Gross profitdecreased by $23.2 million from $163.1 million in 2002 to $139.9 million in2003 and gross margin decreased from 13.3% in 2002 to 12.0% in 2003.  The decrease in gross margin in 2003 isillustrated below in the following table. All numbers are expressed in thousands, percentages are expressed aspercent of net sales:

 
| ** **          | ** ** | **2002** | ** ** | **% of Sales** | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|---------------------|------------|----------|------------|----------------|------------|----------|------------|----------------|------------|---------------------------|------------|
| Direct Materials    |       | $        | 769,203    |           | 62.9       | %        | $          | 713,971        |       | 61.1                      | %          | -1.8 | % |
| Direct Labor        |       | 128,402  |       | 10.5           | %          | 122,798  |       | 10.5           | %          | 0                         | %          |
| Warranty            |       | 34,237   |       | 2.8            | %          | 35,188   |       | 3.0            | %          | 0.2                       | %          |
| Other Direct        |       | 38,640   |       | 3.2            | %          | 55,824   |       | 4.8            | %          | 1.6                       | %          |
| Indirect            |       | 89,078   |       | 7.3            | %          | 100,596  |       | 8.6            | %          | 1.3                       | %          |
| Total Cost of Sales |       | $        | 1,059,560  |           | 86.7       | %        | $          | 1,028,377      |       | 88.0                      | %          | 1.3 | % |

 

The changes noted above, as comparing the 2002 year versus the 2003year, are highlighted below.

 

•      Directmaterial decreases, as a percent of sales, were due to continued verticalintegration of component manufacturing facilities.

•      Directlabor remained consistent, as a percent of sales, for both 2002 and 2003.

•      Increasesin warranty expense, as a percent of sales, were due mostly to challengesassociated with model changes.

 

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•      Increasesin combined other direct and indirect costs, as a percent of sales, were duemostly to inefficiencies within the plants due to lower production run rates,as well as increased costs associated with delivery of products to the Company’sdealers.

 

Selling,general, and administrative expenses increased by $14.5 million from $87.2million in 2002 to $101.7 million in 2003 and increased as a percentage ofsales from 7.1% in 2002 to 8.7% in 2003. Increases in spending over the prior year, as a percentage of sales, areshown below in the following table.  Allnumbers are expressed in thousands, percentages are expressed as percent of netsales:

 
| ** **               | ** ** | **2002** | ** ** | **% of Sales** | ** ** | **2003** | ** ** | **% of Sales** | ** ** | **Change in % of Sales** | ** ** |
|--------------------------|------------|----------|------------|----------------|------------|----------|------------|----------------|------------|--------------------------|------------|
| Wages and Salaries       |       | $        | 17,663     |           | 1.4        | %        | $          | 18,409         |       | 1.6                      | %          | 0.2 | % |
| Selling Expenses         |       | 11,587   |       | 0.9            | %          | 27,319   |       | 2.3            | %          | 1.4                      | %          |
| Settlement Expense       |       | 8,020    |       | 0.7            | %          | 12,678   |       | 1.1            | %          | 0.4                      | %          |
| Advertising and Print    |       | 12,924   |       | 1.1            | %          | 11,747   |       | 1.0            | %          | -0.1                     | %          |
| Other                    |       | 37,008   |       | 3.0            | %          | 31,547   |       | 2.7            | %          | -0.3                     | %          |
| Total S,G&A Expenses |       | $        | 87,202     |           | 7.1        | %        | $          | 101,700        |       | 8.7                      | %          | 1.6 | % |

 

The changes noted above, as comparing the 2002 year versus the 2003year, are highlighted below.

 

•      Increasesin wages and salaries, as a percent of sales, were due primarily to increasedstaffing to address administrative needs in the information systems area.

•      Increasesin selling expenses, as a percent of sales, were due to increased competitionin the marketplace, and an aggressive program to maintain market share.

•      Increasesin settlement expense (litigation settlement expense), as a percent of sales,were due to a slight increase in the amount of new cases added.

•      Decreasesin advertising and print, as a percent of sales, were a function of the Company’splan of maintaining similar advertising spending patterns year to year.

•      Decreasesin other expenses were predominantly due to a decrease in management bonuswhich was a result of lower profits.

 

Operatingincome decreased $37.7 million from $75.9 million in 2002 to $38.2 million in2003.  The Company’s higher level ofselling, general, and administrative expense as a percentage of sales combinedwith the decrease in the Company’s gross margin, resulted in a decrease inoperating margin from 6.2% in 2002 to 3.3% in 2003.

 

Net interestexpense increased from $2.8 million in 2002 to $3.0 million in 2003.  This increase was related to increased debtlevels during 2003 due to higher levels of inventory compared to the prioryear, combined with increased capital requirements after the purchase of theOutdoor Resorts of America properties in November of 2002.  Capitalized interest was zero in 2002 and$285,000 in 2003.  The Company’s interestexpense included $314,000 in 2002 and $426,000 in 2003 related to theamortization of debt issuance costs recorded in conjunction with the Company’scredit facilities.

 

The Companyreported a provision for income taxes of $13.3 million, or an effective taxrate of 37.5%, for 2003, compared to $28.8 million, or an effective tax rate of39.3% for 2002.  The change in effectivetax rate was due mainly to benefits from sales to customers in foreigncountries, and certain state tax benefits the Company received.

 

Net incomedecreased by $22.3 million from $44.5 million in 2002 to $22.2 million in 2003,due to the combination of a decrease in net sales and a decrease in operatingmargin.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

The Company’sprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During 2004, the Company used cash of $4.9million from operating activities and had a net cash balance of zero at January1, 2005.  The Company generated $47.4million from net income and non-cash expenses such as depreciation andamortization.  Other sources of cashincluded a decrease in deferred income taxes of $2.8 million, a decrease inresort lot inventory of $6.7 million, an increase in accounts payables of $14.3million, an increase in product warranty reserves of $2.7 million, and an increasein accrued expenses and other liabilities of $5.2 million. The uses of cashincluded an increase of $38.2 million in trade receivables, an increase of$42.0 million in inventories, an increase of $2.2 million in prepaid expenses,and a decrease in income taxes payable of $1.3 million.  Changes in deferred income taxes are a resultof changes in certain tax legislation that provided a favorable tax adjustment,decreases in resort lot inventories are a result of strong sales performancefrom the resort operations, increases in payables were a result of a buildup inraw materials related to shipments received near year end, increases inwarranty reserves were due to higher sales volume, and increases in accruedexpenses and other liabilities were due to combinations of increases inaccruals for employee benefits, management bonus, and general insurance.  Trade receivables increased due to the timingof shipment patterns at year end compared to 2003.  Inventories increased due to a buildup of rawmaterial primarily related to purchased chassis which will be consumed in thefirst quarter of 2005, an increase in work in process, and a more normalizedlevel of finished goods inventory at the end of 2004.  In 2003, finished goods inventories were muchlower than normal at year end.  Prepaidexpenses increased due to prepayments of certain information systemrequirements as well as prepayments for general insurance coverage.  Income taxes payable decreased due to a loweraccrual necessary at the end of  2004which was a result of lower taxable income in the fourth quarter of 2004 versusthe fourth quarter of 2003.

 

On November17, 2004 the Company amended its credit facilities, increasing its revolvingline of credit from $95.0 million to $105.0 million and extending the term ofthe facility for five years. As part of the amendment process, the Companymoved amounts of $15.0 million in term loans to its revolving line ofcredit.  At the end of the 2004 year,borrowings outstanding on the revolving line of credit (the “Revolving Loan”)were $34.1 million.  At the election ofthe Company, the Revolving Loan bears interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’sleverage ratio.  The Company also paysinterest monthly on the unused available portion of the Revolving Loan atvarying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable in fullon November 17, 2009 and requires monthly interest payments.  The Revolving Loan is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.  The Company was in compliancewith these covenants at January 1, 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 thedisbursement account at the bank returns to zero at the end of each day, theoutstanding checks of the Company are reflected as a liability.  The outstanding check liability is combinedwith the Company’s positive cash balance accounts to reflect a net bookoverdraft or a net cash balance for financial reporting.

 

The Company’sprincipal working capital requirements are for purchases of inventory andfinancing of trade receivables.  Many ofthe Company’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below.  At January 1, 2005, the Company had workingcapital of approximately $141.9 million, an increase of $20.7 million fromworking capital of $121.2 million at January 3, 2004.  The Company has been using short-term creditfacilities and cash flow to finance its capital expenditures.

 

The Companybelieves that cash flow from operations and funds available under itsanticipated credit facilities will be sufficient to meet the Company’sliquidity requirements for the next 12 months.* The Company’s capital expenditures were $12.3 million in 2004, 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 anticipates that capital expendituresfor all of 2005 will be approximately $15 to $18 million, which includesexpenditures to purchase additional machinery and equipment in both the Company’sCoburg, Oregon and Wakarusa, Indiana facilities, as well as upgrades toexisting information systems infrastructures.* The Company may require additional equity or debt financing to addressworking capital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable.  The Company mayalso from time to time seek to acquire businesses

 

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that would complement theCompany’s current business, and any such acquisition could require additionalfinancing.  There can be no assurancethat additional financing will be available if required or on terms deemedfavorable by the Company.

 

As is typicalin the recreational vehicle industry, many of the Company’s retail dealersutilize wholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  The Company has agreementswith several institutional lenders under which the Company currently hasrepurchase obligations.  The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units.  The Company’s obligations under theserepurchase agreements vary from period to period up to 18 months.  At January 1, 2005, approximately $623.2million of products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 6.7% concentrated with one dealer.  Historically, the Company has been successfulin mitigating losses associated with repurchase obligations.  During 2004, the losses associated with theexercise of repurchase agreements were approximately $600,000, ($897,000, and$252,000 in 2003 and 2002 respectively). Gross repurchase amounts for 2004, 2003, and 2002, were $6.5 million,$4.9 million, and $5.3 million, respectively. We have been successful at mitigating the losses associated withrepurchase obligations.  Dealers for theCompany undergo credit review prior to becoming a dealer and periodicallythereafter.  Financial institutions thatprovide floor-plan financing also perform credit reviews and floor checks on anongoing basis.  We closely monitor salesto dealers that are a higher credit risk. The repurchase period is limited, usually to a maximum of 18months.  We believe these activitiesminimize the number of required repurchases. Additionally, the repurchase agreement specifies that the dealer isrequired to make principal payments during the repurchase period.  Since the Company repurchases the units basedon the schedule of principal payments, the repurchase amount is typically lessthan the original invoice amount. Therefore, there is already some built in discount 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 minimize the losses we incur onrepurchased inventory.

 

As part of thenormal course of business, the Company incurs certain contractual obligationsand commitments which will require future cash payments. The following tablessummarize the significant 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** | ** ** |
|---------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Operating Leases (1)                        |       | $                  | 3,201      |             | $          | 2,960            |       | $              | 2,021      |      | $          | 2,711 |   | $ | 10,893 |   |
| Total Contractual Cash Obligations          |       | $                  | 3,201      |             | $          | 2,960            |       | $              | 2,021      |      | $          | 2,711 |   | $ | 10,893 |   |
|                                             |            |                    |            |                  |            |                  |            |                |            |           |            |  |  |  |  |  |  |  |  |

 

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 (2)                   |       | $                  | 0          |             | $          | 0                |       | $              | 105,000    |      | $          | 0 |   | $ | 105,000 |   |
| Guarantees                            |       | 0                  |       | 16,887           | (1)        | 0                |       | 0              |       | 16,887    |       |
| Repurchase Obligations (3)            |       | 0                  |       | 623,200          |       | 0                |       | 0              |       | 623,200   |       |
| Total Commitments                     |       | $                  | 0          |             | $          | 640,087          |       | $              | 105,000    |      | $          | 0 |   | $ | 745,087 |   |

 

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(1)  See Note 11 of Notes to the ConsolidatedFinancial Statements.

(2)  See Note 6 of Notes to the ConsolidatedFinancial Statements.  The amount listedrepresents available borrowings on the line of credit at January 1, 2005.

(3)  Reflects obligations under manufacturerrepurchase commitments.  See Note 16 ofNotes to the Consolidated Financial Statements.

 

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INFLATION

 

The Companydoes not believe that general inflation has had a material impact on itsresults of operations for the periods presented.  However, increases in the price of somecommodities such as steel, aluminum, and petroleum-based materials did impactthe Company’s material cost during 2004. See “Results of Operations 2004 Compared with 2003.”

 

CRITICAL ACCOUNTING POLICIES

 

The discussionand analysis of our financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof 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, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  We believe the following critical accountingpolicies and related judgments and estimates affect the preparation of ourconsolidated financial statements.

 

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

 

PRODUCTLIABILITY  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 is developed by legal counselbased on professional judgment, as well as historical experience.

 

IMPAIRMENT OFGOODWILL  The Company assesses thepotential impairment of goodwill in accordance with Financial AccountingStandards Board (FASB) Statement No. 142. This initial test involves management comparing the marketcapitalization of the Company, to the carrying amount, including goodwill, ofthe net book value of the Company, to determine if goodwill has beenimpaired.  If the Company determines thatthe market capitalization is not representative of the fair value of the reportingunit as a whole, then the Company will use an estimate of discounted futurecash flows to determine fair value.

 

INVENTORYALLOWANCE  The Company writes down itsinventory for obsolescence, and the difference between the cost of inventoryand its estimated market value. These write-downs are based on assumptionsabout future sales demand and market conditions. If actual sales demand ormarket conditions change from those projected by management, additionalinventory write-downs may be required.

 

INCOMETAXES  In conjunction with preparing itsconsolidated financial statements, the Company must estimate its income taxesin each of the jurisdictions in which it operates. This process involvesestimating actual current tax expense together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included in the consolidated balance sheets. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income, and to the extent management believes that recovery isnot likely, a valuation allowance must be established. Significant managementjudgment is required in determining the Company’s provision for income taxes,deferred tax assets and liabilities, and any valuation allowance recordedagainst net deferred tax assets.  Adiscussion of the income tax provision and the components of the deferred taxassets and liabilities can be found in Note 9 to the Company’s consolidatedfinancial statements.

 

REPURCHASEOBLIGATIONS  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement. The Company has recorded a liability associated with the disposition ofrepurchased inventory.  To determine theappropriate liability, the Company calculates a reserve, based on an estimateof potential net losses, along with qualitative and quantitative factors,including dealer inventory turn rates, and the financial strength of individualdealers.

 

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**FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WE MAYEXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OFREASONS  Our net sales, gross margin, andoperating results may fluctuate significantly from period to period due to anumber of factors, many of which are not readily predictable.  These 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.

 

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

 

•      Ourability to introduce new models that achieve consumer acceptance.

 

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

 

•      Theaddition or loss of our dealers.

 

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

 

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

 

Our overallgross margin may decline in future periods to the extent that we increase thepercentage of sales of lower gross margin towable products or if the mix ofmotor coaches we sell shifts to lower gross margin units.  In addition, a relatively small variation inthe number of recreational vehicles we sell in any quarter can have asignificant impact on total sales and operating results for that quarter.

 

Demand in therecreational vehicle industry generally declines during the winter months,while sales are generally higher during the spring and summer months.  With the broader range of products we nowoffer, seasonal factors could have a significant impact on our operatingresults in the future.  Additionally,unusually severe weather conditions in certain markets could delay the timingof shipments from one quarter to another.

 

We attempt toforecast orders for our products accurately and commence purchasing andmanufacturing prior to receipt of such orders. However, it is highly unlikely that we will consistently accuratelyforecast the timing, rate, and mix of orders. This aspect of our business makes our planning inexact and, in turn,affects our shipments, costs, inventories, operating results, and cash flow forany given quarter.

 

THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY  The recreational vehicleindustry has been characterized by cycles of growth and contraction in consumerdemand, reflecting prevailing economic, demographic, and political conditionsthat affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry climbed toapproximately 321,000 units, but declined to 286,000 units during 2004.  Our business is subject to the cyclicalnature of this industry.  Some of thefactors that contribute to this cyclicality include fuel availability andcosts, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidence andslowing of the overall economy has

 

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adversely affected therecreational vehicle market.  An extendedcontinuation of these conditions would materially affect our business, resultsof operations, and financial condition.

 

WE RELY ON ARELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OURSALES  Although our products were offeredby 333 dealerships located primarily in the United States and Canada as ofJanuary 1, 2005, a significant percentage of our sales are concentrated among arelatively small number of independent dealers. For the year ended January 1, 2005, sales to one dealer, Lazy Days RVCenter, accounted for 10.9% of total sales compared to 12.6% of sales in thesame period ended last year.  For fiscalyears 2003 and 2004, sales to our 10 largest dealers, including Lazy Days RVCenter, accounted for a total of 38.1% and 39.0% of total sales, respectively.  The loss of a significant dealer or asubstantial decrease in sales by any of these dealers could have a materialimpact on our business, results of operations, and financial condition.

 

WE MAY HAVE TOREPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALERDOES NOT REPAY ITS LENDER  As is commonin the recreational vehicle industry, we enter into repurchase agreements withthe financing institutions used by our dealers to finance their purchases ofour products.  These agreements requireus to repurchase the dealer’s inventory in the event that the dealer does notrepay its lender.  Obligations underthese agreements vary from period to period, but totaled approximately $623.2million as of January 1, 2005, with approximately 6.7% concentrated with onedealer.  If we were obligated torepurchase a significant number of units under any repurchase agreement, ourbusiness, operating results, and financial condition could be adverselyaffected.

 

OUR ACCOUNTSRECEIVABLE BALANCE IS SUBJECT TO RISK  Wesell our product to dealers who are predominantly located in the United Statesand Canada.  The terms and conditions ofpayment are a combination of open trade receivables, and commitments fromdealer floor plan lending institutions. For our RV dealers, terms are net 30 days for units that are financed bya third party lender.  Terms of opentrade receivables are granted by us, on a very limited basis, to dealers whohave been subjected to evaluative credit processes conducted by us.  For open receivables, terms vary from net 30days to net 180 days, depending on the specific agreement.  Agreements for payment terms beyond 30 daysgenerally require additional collateral, as well as security interest in theinventory sold.  As of January 1, 2005,total trade receivables were $127.4 million, with approximately $93.6 million,or 73.4% of the outstanding accounts receivable balance concentrated amongfloor plan lenders. The remaining $33.8 million of trade receivables wereconcentrated substantially all with one dealer. For resort lot customers, funds are required at the time of closing.

 

WE MAYEXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICEOR A DECREASE IN THE SUPPLY OF FUEL  Aninterruption in the supply, or a significant increase in the price or tax onthe sale, of diesel fuel or gasoline on a regional or national basis couldsignificantly affect our business. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain.

 

WE DEPEND ONSINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THATWE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components for our products are purchased from asingle or a limited number of sources. These include turbo diesel engines(Cummins and Caterpillar), substantially all of our transmissions (Allison),axles (Dana) for all diesel motor coaches, and chassis (Workhorse and Ford) forgas motor coaches.  We have no long-termsupply contracts with these suppliers or their distributors, and we cannot becertain that these suppliers will be able to meet our future requirements.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocation occurred in1997 from Allison, and in 1999 from Ford. An extended delay or interruption in the supply of any components thatwe obtain from a single supplier or from a limited number of suppliers couldadversely affect our business, results of operations, and financial condition.

 

OUR INDUSTRYIS VERY COMPETITIVE.  WE MUST CONTINUE TOINTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for our products is verycompetitive.  We currently compete with anumber of manufacturers of motor coaches, fifth wheel trailers, and traveltrailers.  Some of these companies havegreater financial resources than we have and extensive distributionnetworks.  These

 

27

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companies, or new competitorsin the industry, may develop products that customers in the industry preferover our products.

 

We believethat the introduction of new products and new features is critical to oursuccess.  Delays in the introduction ofnew models or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely.  For example,unexpected costs associated with model changes have affected our gross marginin the past.  Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

 

OUR PRODUCTSCOULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE,CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTINGIN LOSS OF SALES  Our customers requiredemanding specifications for product performance and reliability.  Because our products are complex and oftenuse advanced components, processes and techniques, undetected errors and designflaws may occur.  Product defects resultin higher product service, warranty and replacement costs and may cause seriousdamage to our customer relationships and industry reputation, all of which willnegatively affect our sales and business.

 

OUR BUSINESSIS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY ANDWARRANTY CLAIMS  We are subject tolitigation arising in the ordinary course of our business, typically forproduct liability and warranty claims that are common in the recreationalvehicle 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 because litigationis an inherently uncertain process.*

 

To date, wehave been successful in obtaining product liability insurance on terms that weconsider acceptable.  The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  We cannot be certain we will be able toobtain insurance coverage in the future at acceptable levels or that the costsof such insurance will be reasonable. Further, successful assertion against us of one or a series of largeuninsured claims, or of a series of claims exceeding our insurance coverage,could have a material adverse effect on our business, results of operations,and financial condition.

 

WE MAY BEUNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT ANDMANUFACTURING  Our success depends inpart upon attracting and retaining highly skilled professionals.  A number of our employees are highly skilledengineers and other technical professionals, and our failure to continue toattract and retain such individuals could adversely affect our ability tocompete in the industry.

 

OUR RECENTGROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, ANDMANAGEMENT INFORMATION SYSTEMS  In thepast few years, we have significantly expanded the size and scope of ourbusiness, which has required us to hire additional employees.  Some of these new employees include newmanagement personnel.  In addition, ourcurrent management personnel have assumed additional responsibilities.  The increase in our size over a relativelyshort period of time has put pressure on our operating, financial, andmanagement information systems.  If wecontinue to expand, such growth would put additional pressure on these systemsand may cause such 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 expansioninto new machinery and equipment technologies involves risks, including thefollowing:

 

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

 

28

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•      Thedevelopment of new processes involves costs associated with new machinery,training of employees, and compliance with environmental, health, and other governmentregulations.

 

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

 

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

 

WE MAYEXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISERESOURCE PLANNING SYSTEM (ERP) IMPLEMENTATION We have recently begun to implement a new ERP system and will be subjectto certain risks including the following:

 

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

 

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

 

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

 

•      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.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

EITF 04-10

 

In Septemberof 2004, the Financial Accounting Standards Board (the Board) issued EITF04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meetthe Quantitative Thresholds.”  FASBStatement No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” requires public companies to report financial and descriptiveinformation about its reportable operating segments.  EITF addresses how to determine if operatingsegments that do not meet the quantitative thresholds of FASB No. 131 are to bereported as separate segments.

 

The EITF TaskForce has delayed the effective date of EITF 04-10 to coincide with a relatedFASB Staff Position to be issued in 2005.

 

We have notyet determined if the provisions of EITF 04-10 will impact the disclosures tobe included in future financial statements.

 

Amendment to FAS 128

 

The Board isamending FAS 128, “Earnings per Share,” to make it consistent withInternational Accounting Standards, and make earnings per share calculationscomparable on a global basis.  Theamendment changes the computation to require the use of the year-to-dateaverage stock price when computing the number of potential

 

29

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incremental common shares fordiluted EPS.  The old method was tocalculate an average of potential incremental common shares computed for eachquarter when computing year-to-date incremental shares.

 

The Board hasdeferred the issuance of the final standard until 2005.

 

We willimplement the provisions of the proposed amendment, and will appropriatelypresent them in our future financial statements.

 

FAS 151

 

In November2004, the Board issued FAS 151, “Inventory Costs an amendment of ARM No. 43,Chapter 4,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material.  The standard is effective for inventory costsincurred during fiscal years beginning after June 15, 2005.

 

We have notyet determined if the provisions of the Statement will impact the Company’sfinancial statements.

 

FAS 123R

 

In December2004, the Board 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.”  TheStatement establishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires a fair-value-based measurementmethod in accounting for share-based payments to employees except for equityinstruments held by employee share ownership plans.  The Statement is effective for publicentities as of the beginning of the first interim or annual reporting periodthat begins after June 15, 2005.

 

We will adoptthe provisions of the Statement in the third quarter of 2005.  If we had included the cost of the employeestock option compensation using the fair value method in our financialstatements, our net income for 2002, 2003 and 2004 would have decreased byapproximately $1.3 million, $1.4 million and $1.6 million, respectively.

 

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

 

We are exposedto market risks related to fluctuations in interest rates on ourborrowings.  We do not currently use rateswaps, futures contracts or options on futures, or other types of derivativefinancial instruments.  Our line ofcredit permits a combination of fixed and variable interest rate options whichallows us to minimize the effect of rising interest rates by locking in fixedrates for periods of up to 6 months.  Webelieve these features of our credit facilities help us reduce the riskassociated with interest rate fluctuations.

 

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**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 3, 2004 and January 1, 2005                                                             |   |
| Consolidated Statements of Income for the  Years Ended December 28, 2002, January 3, 2004, and January 1, 2005                    |   |
| Consolidated Statements of Stockholders’ Equity for the Years Ended  December 28, 2002, January 3, 2004, and January 1, 2005 |   |
| Consolidated Statements of Cash Flows for  the Years Ended December 28, 2002, January 3, 2004, and January 1, 2005                |   |
| Notes to Consolidated Financial Statements                                                                                        |   |

 

32

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**Report of Independent Registered Public Accounting Firm**

 

To the Stockholders and Board of Directors of Monaco Coach Corporation:

 

We have completed an integrated audit of Monaco Coach Corporation’s (the“Company”) January 1, 2005 consolidated financial statements and of itsinternal control over financial reporting as of January 1, 2005 and audits ofits January 3, 2004 and December 28, 2002 consolidated financial statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Our opinions, based onour 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 material respects,the financial position of the Company and its subsidiaries at January 1, 2005and January 3, 2004, and the results of their operations and their cash flowsfor each of the three years in the period ended January 1, 2005 in conformitywith accounting principles generally accepted in the United States ofAmerica.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statements includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable 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 January 1, 2005 based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”), is fairly stated, in all material respects, basedon those criteria.  Furthermore, in ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of January 1, 2005, based on criteriaestablished in Internal Control – Integrated Framework issued by the COSO.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designedto 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 internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) 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.

 

33

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Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
|                           |
| March 11, 2005                 |

 

34

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**MONACO COACH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

*(in thousands of dollars, except share andper share data)*

* *
| ** **                                                                                                                   | ** ** | **January 3,  2004** | ** ** | **January 1,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **ASSETS**                                                                                                                   | * *   | * *             | * *   | * *             | * *   |
| Current assets:                                                                                                              | * *   | * *             | * *   | * *             | * *   |
| Cash                                                                                                                         |       | $                    | 13,398     |                 | $          | 0 |   |
| Trade receivables, net of allowance for  doubtful accounts of $626 and $485, respectively                                    |       | 89,170               |       | 127,380              |       |
| Inventories                                                                                                                  |       | 127,746              |       | 169,777              |       |
| Resort lot inventory                                                                                                         |       | 13,978               |       | 7,315                |       |
| Prepaid expenses                                                                                                             |       | 3,029                |       | 5,190                |       |
| Deferred income taxes                                                                                                        |       | 33,836               |       | 33,188               |       |
| Total current assets                                                                                                         |       | 281,157              |       | 342,850              |       |
| * *                                                                                                                     | * *   | * *             | * *   | * *             | * *   |
| Property, plant, and equipment, net                                                                                          |       | 141,662              |       | 141,563              |       |
| Debt issuance costs, net of accumulated  amortization of $815 and $572, respectively                                         |       | 596                  |       | 571                  |       |
| Goodwill, net of accumulated amortization  of $5,320                                                                         |       | 55,254               |       | 55,254               |       |
| * *                                                                                                                     | * *   | * *             | * *   | * *             | * *   |
| Total assets                                                                                                                 |       | $                    | 478,669    |                 | $          | 540,238 |   |
|                                                                                                                         |       |                 |       |                 |       |
| **LIABILITIES**                                                                                                              | * *   | * *             | * *   | * *             | * *   |
| Current liabilities:                                                                                                         | * *   | * *             | * *   | * *             | * *   |
| Book overdraft                                                                                                               |       | $                    | 0          |                 | $          | 1,587 |   |
| Line of credit                                                                                                               |       | 0                    |       | 34,062               |       |
| Current portion of long-term note payable                                                                                    |       | 15,000               |       | 0                    |       |
| Accounts payable                                                                                                             |       | 64,792               |       | 79,072               |       |
| Product liability reserve                                                                                                    |       | 20,723               |       | 20,233               |       |
| Product warranty reserve                                                                                                     |       | 29,643               |       | 32,369               |       |
| Income taxes payable                                                                                                         |       | 3,395                |       | 2,087                |       |
| Accrued expenses and other liabilities                                                                                       |       | 26,373               |       | 31,533               |       |
| Total current liabilities                                                                                                    |       | 159,926              |       | 200,943              |       |
| * *                                                                                                                     | * *   | * *             | * *   | * *             | * *   |
| Long-term note payable                                                                                                       |       | 15,000               |       | 0                    |       |
| Deferred income taxes                                                                                                        |       | 17,495               |       | 19,679               |       |
| Total liabilities                                                                                                            |       | 192,421              |       | 220,622              |       |
|                                                                                                                         |       |                 |       |                 |       |
| Commitments and contingencies (Note 16)                                                                                      | * *   | * *             | * *   | * *             | * *   |
| * *                                                                                                                     | * *   | * *             | * *   | * *             | * *   |
| **STOCKHOLDERS’ EQUITY**                                                                                                | * *   | * *             | * *   | * *             | * *   |
| Common stock, $.01 par value; 50,000,000  shares authorized, 29,246,143 and 29,425,787 issued and outstanding,  respectively |       | 292                  |       | 294                  |       |
| Additional paid-in capital                                                                                                   |       | 54,919               |       | 57,454               |       |
| Retained earnings                                                                                                            |       | 231,037              |       | 261,868              |       |
| Total stockholders’ equity                                                                                              |       | 286,248              |       | 319,616              |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                    | 478,669    |                 | $          | 540,238 |   |
|                                                                                                                              |            |                      |            |                      |            |  |  |  |  |  |  |

 

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

 

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**for the years ended December 28, 2002,January 3, 2004, and January 1, 2005**

*(in thousands of dollars, except share andper share data)*

* *
| ** **                                     | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Net sales                                      |       | $          | 1,222,689  |       | $          | 1,168,311  |       | $ | 1,397,243 |   |
| Cost of sales                                  |       | 1,059,560  |       | 1,028,377  |       | 1,227,117  |       |
| Gross profit                                   |       | 163,129    |       | 139,934    |       | 170,126    |       |
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Selling, general, and administrative  expenses |       | 87,202     |       | 101,700    |       | 110,209    |       |
| Operating income                               |       | 75,927     |       | 38,234     |       | 59,917     |       |
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Other income, net                              |       | 105        |       | 260        |       | 343        |       |
| Interest expense                               |       | (2,752     | )          | (2,968     | )          | (1,547     | )          |
| Income before income taxes                     |       | 73,280     |       | 35,526     |       | 58,713     |       |
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Provision for income taxes                     |       | 28,765     |       | 13,326     |       | 22,008     |       |
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Net income                                     |       | $          | 44,515     |       | $          | 22,200     |       | $ | 36,705 |   |
|                                           |       |       |       |       |       |       |       |
| Earnings per common share:                     | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Basic                                          |       | $          | 1.55       |       | $          | .76        |       | $ | 1.25 |   |
| Diluted                                        |       | $          | 1.51       |       | $          | .75        |       | $ | 1.23 |   |
| * *                                       | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Weighted average common shares outstanding:    | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Basic                                          |       | 28,812,473 |       | 29,062,649 |       | 29,370,455 |       |
| Diluted                                        |       | 29,573,420 |       | 29,567,012 |       | 29,958,646 |       |
|                                                |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

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

 

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF****STOCKHOLDERS’ EQUITY**

**for the years ended December 28, 2002,January 3, 2004, and January 1, 2005**

*(in thousands of dollars, except share data)*

* *
| ** **                             | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balances, December 29, 2001            |       | 28,632,774       |       | $                       | 286        |         | $          | 48,522       |       | $ | 164,322 |   | $ | 213,130 |   |
| Issuance of common stock               |       | 238,370          |       | 3                       |       | 1,654        |       |         |       | 1,657 |   |
| Tax benefit of stock options exercised |       |             |       |                    |       | 1,325        |       |         |       | 1,325 |   |
| Net income                             |       |             |       |                    |       |         |       | 44,515       |       | 44,515 |   |
| Balances, December 28, 2002            |       | 28,871,144       |       | 289                     |       | 51,501       |       | 208,837      |       | 260,627 |   |
| 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 |   |
|                                        |            |                  |            |                         |            |              |            |              |            |  |  |  |  |  |  |  |

 

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

* *

37

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**MONACO COACH CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**for the years ended December 28, 2002,January 3, 2004, and January 1, 2005**

*(in thousands of dollars)*

* *
| ** **                                                                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Increase (Decrease) in Cash:**                                                   | * *   | * * | * *   | * * | * *   | * * | * *   |
| * *                                                                           | * *   | * * | * *   | * * | * *   | * * | * *   |
| Cash flows from operating activities:                                              | * *   | * * | * *   | * * | * *   | * * | * *   |
| Net income                                                                         |       | $        | 44,515     |     | $          | 22,200   |       | $ | 36,705 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: | * *   | * * | * *   | * * | * *   | * * | * *   |
| Depreciation and amortization                                                      |       | 8,585    |       | 9,768    |       | 10,699   |       |
| Loss on disposal of assets                                                         |       | 178      |       | 43       |       | 229      |       |
| Deferred income taxes                                                              |       | (1,574   | )          | 3,852    |       | 2,832    |       |
| Change in assets and liabilities:                                                  | * *   | * * | * *   | * * | * *   | * * | * *   |
| Trade receivables, net                                                             |       | (33,932  | )          | 27,854   |       | (38,210  | )          |
| Inventories                                                                        |       | (48,534  | )          | 47,863   |       | (42,031  | )          |
| Resort lot inventory                                                               |       | (98      | )          | 5,869    |       | 6,663    |       |
| Prepaid expenses                                                                   |       | (1,650   | )          | 573      |       | (2,171   | )          |
| Accounts payable                                                                   |       | 10,301   |       | (13,263  | )          | 14,280   |       |
| Product liability reserve                                                          |       | 1,237    |       | (599     | )          | (490     | )          |
| Product warranty reserve                                                           |       | 3,835    |       | (2,102   | )          | 2,726    |       |
| Income taxes payable                                                               |       | 9,597    |       | (1,141   | )          | (1,308   | )          |
| Accrued expenses and other liabilities                                             |       | 8,888    |       | (3,007   | )          | 5,160    |       |
| Net cash provided by (used in) operating  activities                               |       | 1,348    |       | 97,910   |       | (4,916   | )          |
| Cash flows from investing activities:                                              | * *   | * * | * *   | * * | * *   | * * | * *   |
| Additions to property, plant, and equipment                                        |       | (18,735  | )          | (19,510  | )          | (12,314  | )          |
| Proceeds from sale of assets                                                       |       | 387      |       | 2,197    |       | 1,936    |       |
| Proceeds from the sale of Naples property                                          |       | 0        |       | 6,650    |       | 0        |       |
| Collections on notes receivable                                                    |       | 500      |       | 0        |       | 0        |       |
| Payment for business acquisition, net of  cash acquired                            |       | (21,085  | )          | 0        |       | 0        |       |
| Issuance of notes receivable                                                       |       | (385     | )          | 0        |       | 0        |       |
| Net cash used in investing activities                                              |       | (39,318  | )          | (10,663  | )          | (10,378  | )          |
| Cash flows from financing activities:                                              | * *   | * * | * *   | * * | * *   | * * | * *   |
| Book overdraft                                                                     |       | (2,371   | )          | (3,518   | )          | 1,587    |       |
| Borrowings (payments) on line of credit,  net                                      |       | 25,414   |       | (51,413  | )          | 34,062   |       |
| Borrowings on long-term notes payable                                              |       | 22,000   |       | 0        |       | 0        |       |
| Payments on long-term notes payable                                                |       | (10,000  | )          | (22,000  | )          | (30,000  | )          |
| Dividends paid                                                                     |       | 0        |       | 0        |       | (5,874   | )          |
| Issuance of common stock                                                           |       | 2,982    |       | 3,421    |       | 2,537    |       |
| Debt issuance costs                                                                |       | (55      | )          | (339     | )          | (416     | )          |
| Net cash provided by (used in) financing  activities                               |       | 37,970   |       | (73,849  | )          | 1,896    |       |
| Net change in cash                                                                 |       | 0        |       | 13,398   |       | (13,398  | )          |
| Cash at beginning of period                                                        |       | 0        |       | 0        |       | 13,398   |       |
| Cash at end of period                                                              |       | $        | 0          |     | $          | 13,398   |       | $ | 0 |   |

 

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

 

38

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**MONACO COACH CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**Business**

 

Monaco Coach Corporation and its subsidiaries (the “Company”)manufacture premium motor coaches, bus conversions, and towable recreational vehiclesat manufacturing facilities in Oregon and Indiana.  These products are sold to independentdealers primarily throughout the United States and Canada.  In addition, the Company owns two motor coachresort properties, the developed lots are sold to retail customers.

 

Pursuant to Statement of Financial AccountingStandards (SFAS) No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” the Company has determined that its core businessactivities are comprised of two distinct operations. The first is the design,manufacture, and sale of recreational vehicles. The second is the developmentand sale of motor coach recreation resort lots. While the nature of the Company’s business is segregated into twodistinct operations, the Company has elected to report its operations as asingle entity, based on the relative immateriality of the motor coach resortoperations when compared to the Company’s operations in its entirety.

 

**Consolidation Policy**

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries.  All material intercompany transactions andbalances have been eliminated.  TheCompany has no variable interest entities.

 

**Fiscal Period**

 

The Company follows a 52/53 week fiscal year periodending on the Saturday closest to December 31. Interim periods also end on the Saturday closest to the calendar quarterend.  The fiscal periods were 52 weekslong for 2002, 53 weeks for 2003, and 52 weeks for 2004.  All references to years in the consolidatedfinancial statements relate to fiscal years rather than calendar years.

 

**Estimates and Industry Factors**

 

Estimates - The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  The Company basesestimates on various assumptions that are believed to be reasonable under thecircumstances.  Management is continuallyevaluating and updating these estimates, and it is possible that these estimateswill change in the near future.

 

Credit Risk - The Companydistributes its products through an independent dealer network for recreationalvehicles.  Sales to one customer wereapproximately 12% of net revenues for fiscal years 2002 and 2003, and 11% for2004.  No other individual dealersrepresented over 10% of net revenues in 2002, 2003, or 2004.  The loss of a significant dealer or asubstantial decrease in sales by such a dealer could have a material adverseeffect on the Company’s business, results of operations, and financialcondition.  The terms and conditions ofpayment are a combination of open trade receivables, and commitments fromdealer floor plan lending institutions. For resort lot customers, funds are required at the time of closing.  For our RV dealers, terms are net 30 days forunits that are financed by a third party lender.  For open receivables, terms vary from net 30days to net 180 days, depending on the specific agreement.  Terms beyond 30 days generally requireadditional collateral, as well as security interest in the inventory sold.

 

39

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As of January 1, 2005, total trade receivables were$127.4 million, with approximately $93.6 million, or 73.4% of the outstandingaccounts receivable balance, concentrated among floor plan lenders. Theremaining open $33.8 million of secured trade receivables, were concentratedsubstantially all with one dealer.  Termsof open trade receivables are granted by the Company, on a very limited basis,to dealers who have been subjected evaluative credit processes conducted by theCompany.  These processes includeevaluating the strength of the dealership’s balance sheet, how long thedealership has been in existence, reputation within the industry, and itsstrength of credit references.

 

Concentrations of credit risk exist for accountsreceivable and repurchase agreements (see Note 16), primarily for the Company’slargest dealers.  As of January 1, 2005,the Company had one dealer that comprised 26.6% of the outstanding tradereceivables.  The Company generally sellsto dealers throughout the United States and there is no geographicconcentration of credit risk.

 

Reliance on Key Suppliers - TheCompany’s production strategy relies on certain key suppliers’ ability todeliver subassemblies and component parts in time to meet manufacturingschedules.  The Company has a variety ofkey suppliers, including Allison, Workhorse, Cummins, Caterpillar, Dana,Meritor, and Ford.  The Company does nothave any long-term contracts with these suppliers or their distributors.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocation occurred in1997 from Allison, and in 1999 from Ford. In light of these dependencies, it is possible that failure of Allison,Ford or any of the other suppliers to meet the Company’s future requirementsfor transmissions, chassis or other key components could have a materialnear-term impact on the Company’s business, results of operations, andfinancial condition.

 

Product Warranty Reserve - Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis).  These estimates arebased on historical average repair costs, as well as other reasonableassumptions as have been deemed appropriate by management.  The following table discloses significantchanges in the product warranty reserve:

 
| ** **                     | ** **   | **2002**           | ** **   | **2003** | ** ** | **2004** | ** ** |
|--------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                   | *** *** | **(in thousands)** | *** *** |
| Beginning balance              |         | $                  | 27,799       |     | $          | 31,745   |       | $ | 29,643 |   |
| Expense                        |         | 34,237             |         | 35,186   |       | 34,426   |       |
| Payments/adjustments           |         | (30,402            | )            | (37,288  | )          | (31,700  | )          |
| Adjustment for SMC Acquisition |         | 111                |         | 0        |       | 0        |       |
| Ending balance                 |         | $                  | 31,745       |     | $          | 29,643   |       | $ | 32,369 |   |
|                                |              |                    |              |          |            |          |            |  |  |  |  |

 

40

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Product Liability Reserve -Estimated litigation costs are provided for at the time of sale of products, orat the time a determination is made that an estimable loss has occurred.  These estimates are developed by legalcounsel based on professional judgment, as well as historical experience.  The following table discloses significantchanges in the product liability reserve:

 
| ** **                     | ** **   | **2002**           | ** **   | **2003** | ** ** | **2004** | ** ** |
|--------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                   | *** *** | **(in thousands)** | *** *** |
| Beginning balance              |         | $                  | 19,856       |     | $          | 21,322   |       | $ | 20,723 |   |
| Expense                        |         | 8,020              |         | 12,670   |       | 11,044   |       |
| Payments/adjustments           |         | (6,783             | )            | (13,269  | )          | (11,534  | )          |
| Adjustment for SMC Acquisition |         | 229                |         |     |       |     |       |
| Ending balance                 |         | $                  | 21,322       |     | $          | 20,723   |       | $ | 20,233 |   |
|                                |              |                    |              |          |            |          |            |  |  |  |  |  |

 

**Inventories**

 

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

 

**Resort Lot Inventory**

 

Resort lot inventories consist of construction-in-progresson motor coach properties, as well as fully developed motor coachproperties.  These properties are statedat the lower of cost (specific identification) or market.  Costs of land, construction, and interestincurred during construction, are capitalized as the cost basis for lotsavailable for sale.  The cost of land isallocated to each phase of the total project based on acreage used.  Allocated land cost plus all other costs ofconstruction for each phase have been allocated to each developed lot on a prorata basis, using estimated fair values.

 

**Property, Plant, and Equipment**

 

Property, plant, and equipment, including significantimprovements thereto, are stated at cost less accumulated depreciation andamortization.  Cost includes expendituresfor major improvements, replacements and renewals and the net amount ofinterest cost associated with significant capital additions during periods ofconstruction.  Capitalized interest waszero in 2002, $285,000 in 2003, and zero in 2004.  Maintenance and repairs are charged toexpense as incurred.  Replacements andrenewals are capitalized.  When assetsare sold, retired or otherwise disposed of, the cost and accumulated depreciationare removed from the accounts and any resulting gain or loss is reflected inincome.

 

The cost of plant and equipment is depreciated usingthe straight-line method over the estimated useful lives of the relatedassets.  Buildings are generallydepreciated over 39 years and equipment is depreciated over 3 to 10 years.  Leasehold improvements are amortized underthe straight-line method based on the shorter of the lease periods or theestimated useful lives.

 

At each balance sheet date, management assesseswhether there has been permanent impairment in the value of property, plant,and equipment assets.  The amount of anysuch impairment is determined by comparing anticipated undiscounted future cashflows from operating activities with the associated carrying value.  The factors considered by management inperforming this assessment include current operating results, trends andprospects, as well as the effects of obsolescence, demand, competition, andother economic factors.

 

41

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**Goodwill**

 

Goodwill represents the excess of the cost ofacquisition over the fair value of net assets acquired.  The Company is the successor to a companyformed in 1968 (the “Predecessor”) and commenced operations on March 5, 1993 byacquiring substantially all of the assets and liabilities of the Predecessor.  As of January 1, 2005, the goodwill arisingfrom the acquisition of the assets and operations of the Company’s Predecessorin March 1993 was $16.1 million.  InMarch 1996, the Company acquired the Holiday Rambler Division ofHarley-Davidson, Inc. (“Holiday Rambler”). As of January 1, 2005, the goodwill arising from the acquisition ofHoliday Rambler was $1.8 million.  TheCompany also recorded $37.3 million of goodwill associated with the August 2,2001 acquisition of SMC Corporation (SMC). For years ending December 29, 2001 and prior, the Company amortizedgoodwill using the straight-line method over a 40 year period for theacquisition of the Company’s Predecessor, as well as for the Holiday Rambleracquisition.  In accordance withStatements of Financial Accounting Standards No. 142 (SFAS 142) “Accounting forGoodwill and Other Intangible Assets,” no amortization was recorded for the SMCacquisition for 2001, and no amortization was recorded for any of theacquisitions for fiscal years 2002, 2003, and 2004.

 

SFAS 142 requires that management assess annuallywhether there has been permanent impairment in the value of goodwill.  This initial test involves managementcomparing the market capitalization of the Company, to the carrying amount,including goodwill, of the net book value of the Company, to determine ifgoodwill has been impaired.  If theCompany determines that the market capitalization is not representative of thefair value 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 SFAS 142, management hascompleted its annual testing during 2002, 2003, and 2004 and has determinedthat there has been no impairment of goodwill requiring a write-down.

 

 **Debt Issuance Costs**

 

Unamortized debt issuance costs of $596,000, and$571,000 (at January 3, 2004, and January 1, 2005, respectively), are beingamortized over the terms of the related loans.

 

**Stock-Based Employee Compensation Plans**

 

At January 1, 2005, the Company has three stock-basedemployee compensation plans (see Note 13). The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related Interpretations.  Nostock-based employee compensation cost is 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.

 

**Income Taxes**

 

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

 

42

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**Revenue Recognition**

 

The Company recognizes revenue from the sale ofrecreational vehicles upon shipment and recognizes revenue from resort lotsales upon closing.  The Company does notoffer any rights of return to our dealers, or resort lot customers.

 

In December 2003, the Securities and ExchangeCommission issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognitionin Financial Statements.  SAB No. 104provides guidance for revenue recognition under certain circumstances.  The Company has complied with the guidanceprovided by SAB No. 104 for the fiscal years 2002, 2003, and 2004.

 

**Repurchase Obligations**

 

Upon request of a lending institution financing adealer’s purchases of the Company’s product, the Company will execute arepurchase agreement.** **The Company has recorded aliability associated with the disposition of repurchased inventory.  To determine the appropriate liability, theCompany calculates a reserve, based on an estimate of potential net losses,along with qualitative and quantitative factors, including dealer inventoryturn rates, and the financial strength of individual dealers.

 

**Advertising and Printing Costs**

 

The Company expenses advertising and printing costs asincurred, except for prepaid show costs which are expensed when the event takesplace.  Advertising and printing costs,including retail programs, are recorded as selling, general and administrativeexpenses, while discounts off of invoice, or sales allowances (includingwholesale volume incentives), are recorded as adjustments to net sales.  During 2004, approximately $12.5 million($12.9 million in 2002 and $11.7 million in 2003) of advertising and printingcosts were expensed.

 

**Research and Development Costs**

 

Research and development costs are charged to expenseas incurred and were $1.4 million in 2004 ($1.2 million in 2002 and 2003).

 

**New Accounting Pronouncements**

 

EITF 04-10

 

In September of 2004, the FinancialAccounting Standards Board (the Board) issued EITF 04-10, “Determining Whetherto Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.”  FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires public companiesto report financial and descriptive information about its reportable operatingsegments.  EITF addresses how todetermine if operating segments that do not meet the quantitative thresholds ofFASB No. 131 are to be reported as separate segments.

 

The EITF Task Force has delayed the effectivedate of EITF 04-10 to coincide with a related FASB Staff Position to be issuedin 2005.

 

We have not yet determined if the provisionsof EITF 04-10 will impact the disclosures to be included in future financialstatements.

 

43

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Amendment to FAS 128

 

The Board is amending FAS 128, “Earnings perShare,” to make it consistent with International Accounting Standards, and makeearnings per share calculations comparable on a global basis.  The amendment changes the computation torequire the use of the year-to-date average stock price when computing thenumber of potential incremental common shares for diluted EPS.  The old method was to calculate an average ofpotential incremental common shares computed for each quarter when computingyear-to-date incremental shares.

 

The Board has deferred the issuance of thefinal standard until 2005.

 

We will implement the provisions of theproposed amendment, and will appropriately present them in our future financialstatements.

 

FAS 151

 

In November 2004, the Board issued FAS 151, “InventoryCosts an amendment of ARM No. 43, Chapter 4,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  The standard is effective forinventory costs incurred during fiscal years beginning after June 15, 2005.

 

We have not yet determined if the provisionsof the Statement will impact the Company’s financial statements.

 

FAS 123R

 

In December 2004, the Board issued FAS 123R, “Share-BasedPayment.”  The Statement replaces FAS123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees.” The Statement establishes fair value as the measurement objective inaccounting for share-based payment arrangements and requires a fair-value-basedmeasurement method in accounting for share-based payments to employees exceptfor equity instruments held by employee share ownership plans.  The Statement is effective for publicentities as of the beginning of the first interim or annual reporting periodthat begins after June 15, 2005.

 

We will adopt the provisions of the Statementin the third quarter of 2005.  If we hadincluded the cost of the employee stock option compensation using the fairvalue method in our financial statements, our net income for 2002, 2003 and2004 would have decreased by approximately $1.3 million, $1.4 million and $1.6million, respectively.

 

**Supplemental Cash Flow Disclosures:**

 
| ** **                                                                       | ** **   | **2002**           | ** **   | **2003** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                                                                     | *** *** | **(in thousands)** | *** *** |
| Cash paid during the period for:                                                 |         |               |         |     |       |     |       |
| Interest, net of amount capitalized of $0  in 2002, $285 in 2003, and $0 in 2004 |         | $                  | 2,464        |     | $          | 2,552    |       | $ | 964 |   |
| Income taxes                                                                     |         | 18,753             |         | 9,604    |       | 19,531   |       |
|                                                                                  |              |                    |              |          |            |          |            |  |  |  |

 

44

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**2.****              ACQUISITION:**

 

**Outdoor Resorts**

 

On November 27, 2002, the Company completed theacquisition of all of the outstanding stock of Outdoor Resorts of Las Vegas,Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), and Outdoor ResortsMotorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed and undevelopedluxury motor coach resorts.

 

Previous to the acquisition, the Company had providedOutdoor Resorts of America (ORA) with loans in the amount of $8.0 million, aswell as co-guaranteeing $10 million in bank debt secured by ORA.  In the third quarter of 2003, the Companysold the undeveloped land associated with ORN and received proceeds of $6.7million.

 

As consideration for the acquisition, Monaco assumedthe current debt and liabilities of the projects of approximately $30.8million, including the $8.0 million note payable to the Company, and the $10million co-guaranteed debt. This acquisition relieved ORA of certain debtpressures associated with resort construction and allowed ORA to continue tofocus on development and lot sales, as well as providing management servicesfor the Company on the Projects.

 

The cash paid for the Projects, including transactioncosts of $522,000 totaled $21,113,000. The total assets acquired and liabilities assumed of the Projects, basedon estimated fair values at November 27, 2002, is as follows:

 
| *** ***                                   | *** *** | **(In thousands)** | *** *** |
|------------------------------------------------|--------------|--------------------|--------------|
|                                           |         |               |         |
| Cash                                           |         | $                  | 28           |   |
| Resort lot inventory                           |         | 26,098             |         |
| Deferred tax asset                             |         | 1,654              |         |
| Property and equipment                         |         | 2,974              |         |
| Total assets acquired                          |         | 30,754             |         |
|                                           |         |               |         |
| Notes payable                                  |         | (8,027             | )            |
| Accounts payable                               |         | (1,165             | )            |
| Accrued liabilities                            |         | (449               | )            |
| Total liabilities assumed                      |         | (9,641             | )            |
|                                           |         |               |         |
| Total assets acquired and liabilities  assumed |         | $                  | 21,113       |   |

 

During 2003, the allocation of the purchase price was adjusted for theresolution of pre-ORA Acquisition contingencies of $1.4 million.  The effects of resolution of pre-ORAAcquisition contingencies occurring:  (1)within one year of the acquisition date have been reflected as an adjustment ofthe allocation of the purchase price, and (ii) after one year were recognizedin the determination of net income.

 

45

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The following unaudited pro forma information presentsthe consolidated results as if the acquisition had occurred at the beginning ofthe 2002 fiscal period and giving effect to the adjustments for the relatedinterest on financing the purchase price and depreciation.  The pro forma information does notnecessarily reflect results that would have occurred or is it necessarilyindicative of future operating results.

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

 

 

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

 

Inventories consist of the following:

 
| ** **      | ** **   | **January 3,  2004** | ** **   | **January 1,  2005** | ** ** |
|-----------------|--------------|----------------------|--------------|----------------------|------------|
| *** ***    | *** *** | **(In thousands)**   | *** *** |
| Raw materials   |         | $                    | 60,946       |                 | $          | 75,853 |   |
| Work-in-process |         | 60,604               |         | 71,387               |       |
| Finished units  |         | 6,196                |         | 22,537               |       |
|            |         | $                    | 127,746      |                 | $          | 169,777 |   |

 

**4.****              PROPERTY, PLANT, ANDEQUIPMENT:**

 

Property, plant, and equipment consist of thefollowing:

 
| ** **                                      | ** **   | **January 3,  2004** | ** **   | **January 1,  2005** | ** ** |
|-------------------------------------------------|--------------|----------------------|--------------|----------------------|------------|
| *** ***                                    | *** *** | **(In thousands)**   | *** *** |
| Land                                            |         | $                    | 15,508       |                 | $          | 14,548 |   |
| Buildings                                       |         | 115,963              |         | 115,799              |       |
| Equipment                                       |         | 33,875               |         | 36,598               |       |
| Furniture and fixtures                          |         | 12,534               |         | 14,079               |       |
| Vehicles                                        |         | 2,681                |         | 2,936                |       |
| Leasehold improvements                          |         | 2,151                |         | 2,730                |       |
| Construction in progress                        |         | 1,282                |         | 7,230                |       |
|                                            |         | 183,994              |         | 193,920              |       |
| Less accumulated depreciation and  amortization |         | 42,332               |         | 52,357               |       |
|                                            |         | $                    | 141,662      |                 | $          | 141,563 |   |

 

46

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**5.****              ACCRUED EXPENSES ANDOTHER LIABILITIES:**

** **
| ** **                                      | ** **   | **January 3,  2004** | ** **   | **January 1,  2005** | ** ** |
|-------------------------------------------------|--------------|----------------------|--------------|----------------------|------------|
| *** ***                                    | *** *** | **(In thousands)**   | *** *** |
| Payroll, vacation, and related accruals         |         | $                    | 12,842       |                 | $          | 17,037 |   |
| Payroll and property taxes                      |         | 1,110                |         | 560                  |       |
| Promotional and advertising                     |         | 3,897                |         | 5,140                |       |
| Health insurance reserves and premiums  payable |         | 4,369                |         | 4,789                |       |
| Other                                           |         | 4,155                |         | 4,007                |       |
|                                            |         | $                    | 26,373       |                 | $          | 31,533 |   |

 

**6.****              LINE OF CREDIT:**

 

On November 17, 2004, the Company amended its credit facilities,increasing its revolving line of credit from $95.0 million to $105.0 millionand extending the term of the facility for five years. As part of the amendmentprocess, the Company moved amounts of $15.0 million in term loans to itsrevolving line of credit.  At the end ofthe 2004 year, borrowings outstanding on the revolving line of credit (the “RevolvingLoan”) were $34.1 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 onthe Company’s leverage ratio.  TheCompany also pays interest monthly on the unused available portion of theRevolving Loan at varying rates, determined by the Company’s leverageratio.  The Revolving loan is due andpayable in full on November 17, 2009 and requires monthly interestpayments.  The Revolving Loan iscollateralized by all the assets of the Company and include variousrestrictions and financial covenants.

 

The weighted average interest rate on the outstanding borrowings underthe revolving line of credit was 4.2% and 4.3% for 2003 and 2004,respectively.  Interest expense on theunused available portion of the line was $219,000 or 0.5% and $188,000 or 1.1%of weighted average outstanding borrowings for 2003 and 2004,respectively.  The revolving line ofcredit is collateralized by all the assets of the Company.  The agreement contains restrictive covenantsas to the Company’s leverage ratio, current ratio, fixed charge coverage ratio,and tangible net worth.  As of January 1,2005, the Company was in compliance with these covenants.

 

**7.****              LONG-TERM NOTEPAYABLE:**

 

In November 2004, the Company moved the remaining $15.0 million currentportion long-term notes payable to its Revolving loan.  Therefore, at the end of 2004 there are nooutstanding borrowings associated with long-term notes payable.

 

**8.****              PREFERRED STOCK:**

 

The Company has authorized “blank check” preferred stock (1,934,783shares authorized, $.01 par value) (“Preferred Stock”), which may be issuedfrom time to time in one or more series upon authorization by the Company’sBoard of Directors.  The Board ofDirectors, without further approval of the stockholders, is authorized to fixthe dividend rights and terms, conversion rights, voting rights, redemptionrights and terms, liquidation preferences, and any other rights, preferences,privileges, and restrictions applicable to each series of the PreferredStock.  There were no shares of PreferredStock outstanding as of January 3, 2004 or January 1, 2005.

 

47

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**9.****              INCOME TAXES:**

 

The provision for income taxes is as follows:

 
| ** **                 | ** **   | **2002**           | ** **   | **2003** | ** ** | **2004** | ** ** |
|----------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***               | *** *** | **(in thousands)** | *** *** |
| Current:                   |         |               |         |     |       |     |       |
| Federal                    |         | $                  | 25,303       |     | $          | 8,713    |       | $ | 17,250 |   |
| State                      |         | 5,278              |         | 1,899    |       | 1,926    |       |
|                       |         | 30,581             |         | 10,612   |       | 19,176   |       |
| Deferred:                  |         |               |         |     |       |     |       |
| Federal                    |         | (1,556             | )            | 2,191    |       | 2,366    |       |
| State                      |         | (260               | )            | 523      |       | 466      |       |
| Provision for income taxes |         | $                  | 28,765       |     | $          | 13,326   |       | $ | 22,008 |   |
|                            |              |                    |              |          |            |          |            |  |  |  |  |

 

The reconciliation of the provision for income taxesat the U.S. federal statutory rate to the Company’s effective income tax rateis as follows:

 
| ** **                                             | ** **   | **2002**           | ** **   | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                                           | *** *** | **(in thousands)** | *** *** |
| Expected U.S. federal income taxes at statutory  rates |         | $                  | 25,648       |     | $          | 12,434   |       | $ | 20,550 |   |
| State and local income taxes, net of federal  benefit  |         | 3,262              |         | 1,574    |       | 1,987    |       |
| Change in valuation allowance                          |         |               |         | (280     | )          | (433     | )          |
| Other                                                  |         | (145               | )            | (402     | )          | (96      | )          |
| Provision for income taxes                             |         | $                  | 28,765       |     | $          | 13,326   |       | $ | 22,008 |   |
|                                                        |              |                    |              |          |            |          |            |  |  |  |  |

 

The components of the current net deferred tax assetand long-term net deferred tax liability are:

 
| ** **                                 | ** **   | **January 3,  2004** | ** **   | **January 1,  2005** | ** ** |
|--------------------------------------------|--------------|----------------------|--------------|----------------------|------------|
| *** ***                               | *** *** | **(in thousands)**   | *** *** |
| Current deferred income tax assets:        |         |                 |         |                 |       |
| Warranty liability                         |         | $                    | 11,807       |                 | $          | 11,527 |   |
| Product liability                          |         | 8,565                |         | 8,258                |       |
| Inventory allowances                       |         | 4,543                |         | 4,459                |       |
| Payroll and related accruals               |         | 2,007                |         | 2,300                |       |
| Insurance accruals                         |         | 1,965                |         | 2,258                |       |
| Resort lot inventory                       |         | 1,522                |         | 864                  |       |
| Other accruals                             |         | 3,427                |         | 3,522                |       |
|                                       |         | $                    | 33,836       |                 | $          | 33,188 |   |
| Long-term deferred income tax liabilities: |         |                 |         |                 |       |
| Depreciation                               |         | $                    | 13,601       |                 | $          | 15,025 |   |
| Amortization                               |         | 4,246                |         | 4,876                |       |
| Net operating loss (NOL) carryforward      |         | (873                 | )            | (222                 | )          |
| Valuation allowance on NOL carryforward    |         | 521                  |         | 0                    |       |
|                                       |         | $                    | 17,495       |                 | $          | 19,679 |   |

 

48

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Management believes that the temporary differenceswhich gave rise to the deferred income tax assets will be realized in theforeseeable future, including benefits arising from the NOL carryforwardassociated with the SMC Acquisition. Accordingly, management has reduced the valuation allowance to zero forthe portion of the NOL carryforward that will be fully recognized.

 

**10.****       EARNINGS PER SHARE:**

 

Basic earnings per common share is based on theweighted average number of shares outstanding during the period using netincome attributable to common stock as the numerator.  Diluted earnings per common share is based onthe weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options and convertible preferredstock, using net income as the numerator. The weighted average number of common shares used in the computation ofearnings per common share for the years ended December 28, 2002, January 3,2004, and January 1, 2005 are as follows:

 
| ** **                                       | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Basic**                                        |       |       |       |       |       |       |       |
| Issued and outstanding shares (weighted average) |       | 28,812,473 |       | 29,062,649 |       | 29,370,455 |       |
|                                             |       |       |       |       |       |       |       |
| **Effect of Dilutive Securities**                |       |       |       |       |       |       |       |
| Stock options                                    |       | 760,947    |       | 504,363    |       | 588,191    |       |
|                                             |       |       |       |       |       |       |       |
| **Diluted**                                      |       | 29,573,420 |       | 29,567,012 |       | 29,958,646 |       |

 

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

 

The Company has commitments under certainnoncancelable operating leases.   Totalrental expense for the fiscal years ended December 28, 2002, January 3, 2004,and January 1, 2005 related to operating leases amounting to approximately $3.8million, $3.8 million, and $3.7 million, respectively.  The Company’s most significant lease is anoperating lease for an aircraft with annual renewals for up to three additionalyears.  The Company began its second yearof renewal in February 2005.  The futureminimum rental commitments under the renewal term of this lease is $1.5 millionin 2005 and $252,000 in 2006. The Company has guaranteed up to $15.1 million ofany deficiency in the event that the Lessor’s net sales proceeds of theaircraft are less than $16.9 million.

 

Approximate future minimum rental commitments underthese leases at January 1, 2005 are summarized as follows:

 
| **Fiscal Year**      | ** ** | **(In thousands)** | *** *** |
|----------------------|------------|--------------------|--------------|
| 2005                 |       | $                  | 3,201        |   |
| 2006                 |       | $                  | 1,819        |   |
| 2007                 |       | $                  | 1,141        |   |
| 2008                 |       | $                  | 1,018        |   |
| 2009                 |       | $                  | 1,003        |   |
| 2010 and  thereafter |       | $                  | 2,711        |   |

 

49

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**12.****       BONUS PLAN:**

 

The Company has a discretionary bonus plan for certainkey employees.  Bonus expense included inselling, general, and administrative expenses for the years ended December 28,2002, January 3, 2004, and January 1, 2005 was $11.5 million, $5.2 million, and$8.9 million, respectively.

 

**13.****       STOCK OPTION PLANS:**

 

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

 

**Stock Purchase Plan**

 

The Company’s Purchase Plan qualifies under Section423 of the Internal Revenue Code.  TheCompany has reserved 683,438 shares of Common Stock for issuance under thePurchase Plan.  During the years endedJanuary 3, 2004 and January 1, 2005, 67,163 shares and 55,322 shares,respectively, were purchased under the Purchase Plan.  The weighted-average fair value of purchaserights granted in 2003 and 2004 was $15.45 and $24.56, respectively.  Under the Purchase Plan, an eligible employeemay purchase shares of common stock from the Company through payroll deductionsof up to 10% of base compensation, at a price per share equal to 85% of thelesser of the fair market value of the Company’s Common Stock as of the firstday (grant date) or the last day (purchase date) of each six-month offeringperiod under the Purchase Plan.

 

The Purchase Plan is administered by a committeeappointed by the Board.  Any employee whois customarily employed for at least 20 hours per week and more than fivemonths in a calendar year by the Company, or by any majority-owned subsidiarydesignated from time to time by the Board, and who does not own 5% or more ofthe total combined voting power or value of all classes of the Company’soutstanding capital stock, is eligible to participate in the Purchase Plan.

 

**Directors’ Option Plan**

 

Each non-employee director of the Company is entitledto participate in the Company’s “Director Plan.”  The Board of Directors and the stockholdershave authorized a total of 352,500 shares of Common Stock for issuance pursuantto the Director Plan.  Under the terms ofthe Director Plan, each eligible non-employee director is automatically grantedan option to purchase 8,000 shares of Common Stock (the “Initial Option”) onwhich the optionee first becomes a director of the Company.  Thereafter, each optionee is automatically grantedan additional option to purchase 4,000 shares of Common Stock (a “SubsequentOption”) on September 30 of each year if, on such date, the optionee has servedas a director of the Company for at least six months.  Each Initial Option vests over five years atthe rate of 20% of the shares subject to the Initial Option at the end of eachanniversary following the date of grant. Each Subsequent Option vests in full on the fifth anniversary of itsdate of grant.  The exercise price ofeach option is the fair market value of the Common Stock as determined by theclosing price reported by the New York Stock Exchange on the date ofgrant.  The maximum term of these optionsare 10 years.  As of January 1, 2005,93,900 options had been exercised, and options to purchase 142,900 shares ofcommon stock were outstanding.  Under theDirector Plan, the directors of the Company may elect to receive up to 50% ofthe value of their retainer in the form of common stock or an option topurchase shares of common stock.  As ofJanuary 1, 2005, 5,408 shares of common stock had been issued in lieu of cashretainer under the plan.

 

50

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**Option Plan**

 

The Option Plan provides for the grant to employees ofincentive stock options within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended (the “Code”), and for the grant to employeesand consultants of the Company of nonstatutory stock options.  A total of 3,257,813 shares of Common Stockhave been reserved for issuance under the Option Plan.  As of January 1, 2005, 1,397,180 options hadbeen exercised, and options to purchase 1,171,673 shares of Common Stock wereoutstanding.  These options vest ratablyover five years commencing with the date of grant.

 

The exercise price of all incentive stock optionsgranted under the Option Plan must be at least equal to the fair market valueof a share of the Company’s Common 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 allother options granted under the Option Plan may not exceed ten years.

 

Transactions involving the Director Plan and theOption Plan are summarized with corresponding weighted-average exercise pricesas follows:

 

| ** **                       | ** ** | **Shares** | ** ** | **Price** | ** ** |
|----------------------------------|------------|------------|------------|-----------|------------|
| Outstanding at December 29, 2001 |       | 1,370,773  |       | $         | 7.62       |   |
| Granted                          |       | 178,650    |       | 23.88     |       |
| Exercised                        |       | (192,495   | )          | 4.62      |       |
| Forfeited                        |       | (15,405    | )          | 13.77     |       |
| Outstanding at December 28, 2002 |       | 1,341,523  |       | 10.15     |       |
| 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      |   |

 

For various price ranges, weighted averagecharacteristics of all outstanding stock options at January 1, 2005 were asfollows:

 

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**      | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices**               | ** ** | **Shares**              | ** ** | **Remaining  Life  (years)** | ** ** | **Weighted-  Average  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Price** | ** ** |
| $ 2.44  -     5.36 |       | 156,359                 |       | 1.6                          |       | $ | 3.23 |   | 156,359 |   | $ | 3.23 |   |
| $ 5.36  -     8.04 |       | 124,942                 |       | 3.3                          |       | $ | 7.72 |   | 124,942 |   | $ | 7.72 |   |
| $ 8.05  -  10.72             |       | 287,734                 |       | 6.4                          |       | $ | 10.31 |   | 157,174 |   | $ | 10.26 |   |
| $10.73 -  13.40                        |       | 318,658                 |       | 5.8                          |       | $ | 12.21 |   | 188,373 |   | $ | 12.33 |   |
| $13.41 -  16.08                        |       | 18,500                  |       | 7.5                          |       | $ | 15.04 |   | 1,600 |   | $ | 16.08 |   |
| $16.09 -  18.76                        |       | 38,950                  |       | 7.8                          |       | $ | 16.41 |   | 8,550 |   | $ | 16.21 |   |
| $18.77 -  21.44                        |       | 17,500                  |       | 7.7                          |       | $ | 20.03 |   | — |   | — |   |
| $21.45 -  24.12                        |       | 28,000                  |       | 9.7                          |       | $ | 21.65 |   | — |   | — |   |
| $24.13 -  26.80                        |       | 323,930                 |       | 8.2                          |       | $ | 25.64 |   | 56,620 |   | $ | 24.30 |   |
|                                        |       | 1,314,573               |       |                         |       |   |   | 693,618 |   |   |   |

 

51

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At January 1, 2005, the Company has three stock-basedemployee compensation plans.  The Companyaccounts for those plans under the recognition and measurement principles ofAPB Opinion No. 25, Accounting for Stock Issued to Employees, and relatedInterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS 123,Accounting for Stock-based Compensation, to stock-based employee compensation.

 
| ** **                                                                                                                                    | ** **   | **2002**                                  | ** **   | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------|--------------|----------|------------|----------|------------|
| *** ***                                                                                                                                  | *** *** | **(In thousands, except per share data)** | *** *** |
| Net income - as reported                                                                                                                      |         | $                                         | 44,515       |     | $          | 22,200   |       | $ | 36,705 |   |
| Deduct: Total stock-based employee  compensation expense Determined under fair value based method for all awards,  net of related tax effects |         | (1,328                                    | )            | (1,357   | )          | (1,569   | )          |
| Net income - pro forma                                                                                                                        |         | $                                         | 43,187       |     | $          | 20,843   |       | $ | 35,136 |   |
|                                                                                                                                          |         |                                      |         |     |       |     |       |
| Earnings per share:                                                                                                                           |         |                                      |         |     |       |     |       |
| Basic - as reported                                                                                                                           |         | $                                         | 1.55         |     | $          | 0.76     |       | $ | 1.25 |   |
| Basic - pro forma                                                                                                                             |         | 1.50                                      |         | 0.72     |       | 1.20     |       |
|                                                                                                                                          |         |                                      |         |     |       |     |       |
| Diluted - as reported                                                                                                                         |         | $                                         | 1.51         |     | $          | 0.75     |       | $ | 1.23 |   |
| Diluted - pro forma                                                                                                                           |         | 1.46                                      |         | 0.71     |       | 1.17     |       |
|                                                                                                                                               |              |                                           |              |          |            |          |            |  |  |  |  |  |

 

For purposes of the above pro forma information, thefair value of each option grant was estimated at the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions:

 
| ** **               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate  |       | 4.22     | %          | 3.89     | %          | 3.54     | %          |
| Expected life (in years) |       | 5.97     |       | 5.81     |       | 6.09     |       |
| Expected volatility      |       | 56.92    | %          | 54.70    | %          | 36.31    | %          |
| Expected dividend yield  |       | 0.00     | %          | 0.00     | %          | 1.00     | %          |

 

**14.****       FAIR VALUE OF FINANCIALINSTRUMENTS:**

 

The fair value of the Company’s financial instrumentsare presented below.  The estimatesrequire subjective judgments and are approximate.  Changes in methodologies and assumptionscould significantly affect estimates.

 

Line of Credit - The carrying amountoutstanding on the revolving line of credit is zero and $34.1 million atJanuary 3, 2004 and January 1, 2005, respectively, which approximates theestimated fair value as this instrument requires interest payments at a marketrate of interest plus a margin.

 

52

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**15.****       401(K) DEFINED CONTRIBUTIONPLAN:**

 

The Company sponsors a 401(k) defined contributionplan covering substantially all full-time employees.  Company contributions to the plan totaled$748,000 in 2002, $678,000 in 2003, and $879,000 in 2004.

 

**16.****       COMMITMENTS ANDCONTINGENCIES:**

 

**Repurchase Agreements**

 

Many of the Company’s sales to independent dealers aremade on a “floor plan” basis by a bank or finance company which lends thedealer all or substantially all of the wholesale purchase price and retains asecurity interest in the vehicles.  Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

The Company’s liability under repurchase agreements islimited to the unpaid balance owed to the lending institution by reason of itsextending credit to the dealer to purchase its vehicles, reduced by the resalevalue of vehicles which may be repurchased. The risk of loss is spread over numerous dealers and financialinstitutions.

 

Losses of approximately $252,000, $897,000 and$600,000 were incurred in 2002, 2003, and 2004, respectively.  The approximate amount subject to contingentrepurchase obligations arising from these agreements at January 1, 2005 is$623.2 million, with approximately 6.7% concentrated with one dealer.  The Company has recorded a liability ofapproximately $780,000 for potential losses resulting from guarantees onrepurchase obligations for products shipped to dealers. If the Company wereobligated to repurchase a significant number of units under any repurchaseagreement, its business, operating results, and financial condition could beadversely affected.

 

**Product Liability**

 

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

 

The Company has from time to time been subject toproduct liability claims.  To date, theCompany has been successful in obtaining product liability insurance on termsthe Company considers acceptable.  Theterms of the policy contain a self-insured retention amount of $500,000 peroccurrence, with a maximum annual aggregate self-insured retention of $3.0million.  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 be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the cost of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

**Litigation**

 

The Company is involved in various legal proceedingswhich are incidental to the industry and for which certain matters are coveredin whole or in part by insurance or, otherwise, the Company has recordedaccruals for estimated settlements. Management believes that any liability which may result from theseproceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

 

53

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

** **
| **Year  ended December 28, 2002**       | ** ** | **1st  Quarter**     | ** ** | **2nd  Quarter**     | ** ** | **3rd  Quarter**     | ** ** | **4th  Quarter** | ** ** |
|-----------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|------------------|------------|
| *(In thousands, except per share data)* | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Net sales                               |       | $                    | 293,600    |                 | $          | 313,742              |       | $                | 314,680    |   | $ | 300,667 |   |
| Gross profit                            |       | 37,745               |       | 41,229               |       | 42,817               |       | 41,338           |       |
| Operating income                        |       | 16,579               |       | 18,724               |       | 20,034               |       | 20,590           |       |
| Net income                              |       | 9,673                |       | 10,970               |       | 11,788               |       | 12,084           |       |
| Earnings per common share:              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Basic                                   |       | $                    | 0.34       |                 | $          | 0.38                 |       | $                | 0.41       |   | $ | 0.42 |   |
| Diluted                                 |       | $                    | 0.33       |                 | $          | 0.37                 |       | $                | 0.40       |   | $ | 0.41 |   |
| ** **                              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| **Year  ended January 3, 2004**         | ** ** | **1st  Quarter (1)** | ** ** | **2nd  Quarter (1)** | ** ** | **3rd  Quarter (1)** | ** ** | **4th  Quarter** | ** ** |
| *(In thousands, except per share data)* | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Net sales                               |       | $                    | 273,761    |                 | $          | 268,456              |       | $                | 303,231    |   | $ | 322,863 |   |
| Gross profit                            |       | 33,793               |       | 27,348               |       | 36,773               |       | 42,020           |       |
| Operating income                        |       | 8,144                |       | 1,604                |       | 11,106               |       | 17,380           |       |
| Net income                              |       | 4,326                |       | 582                  |       | 6,262                |       | 11,030           |       |
| Earnings per common share:              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Basic                                   |       | $                    | 0.15       |                 | $          | 0.02                 |       | $                | 0.22       |   | $ | 0.38 |   |
| Diluted                                 |       | $                    | 0.15       |                 | $          | 0.02                 |       | $                | 0.21       |   | $ | 0.37 |   |
| ** **                              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| **Year  ended January 1, 2005**         | ** ** | **1st  Quarter**     | ** ** | **2nd  Quarter**     | ** ** | **3rd  Quarter**     | ** ** | **4th  Quarter** | ** ** |
| *(In thousands, except per share data)* | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Net sales                               |       | $                    | 354,976    |                 | $          | 357,774              |       | $                | 358,869    |   | $ | 325,624 |   |
| Gross profit                            |       | 44,483               |       | 45,649               |       | 43,415               |       | 36,579           |       |
| Operating income                        |       | 19,683               |       | 18,928               |       | 12,379               |       | 8,927            |       |
| Net income                              |       | 11,923               |       | 11,948               |       | 7,436                |       | 5,398            |       |
| Earnings per common share:              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **       | ** ** |
| Basic                                   |       | $                    | 0.41       |                 | $          | 0.41                 |       | $                | 0.25       |   | $ | 0.18 |   |
| Diluted                                 |       | $                    | 0.40       |                 | $          | 0.40                 |       | $                | 0.25       |   | $ | 0.18 |   |

 

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(1) The 2003 quarterly amounts have been revised for a reclassificationof revenue from other non-operating income to net sales of $187, $95, and $53,for the first, second, and third quarters, respectively.

 

54

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**ITEM 9****.     CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND**

**FINANCIAL DISCLOSURE**

 

Not Applicable.

 

**ITEM 9A****.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure 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 thisevaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission rules and forms.

 

Our management, including our Chief Executive Officer and Chief FinancialOfficer, does not expect that our disclosure controls and procedures willprevent all error and all fraud.  Becauseof inherent limitations in any system of disclosure controls and procedures, noevaluation of controls can provide absolute assurance that all instances oferror or fraud, if any, within the Company may be detected.  However, our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, have designed our disclosure controlsand procedures to provide reasonable assurance of achieving their objectivesand have, pursuant to the evaluation discussed above, concluded that ourdisclosure controls and procedures are, in fact, effective at this reasonableassurance level.

 

**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-K thathas materially effected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Management’s Report on Internal Control Over Financial Reporting**

 

Management of Monaco Coach Corporation (the Company) is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Actof 1934.  The Company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Internalcontrol over financial reporting includes those policies and procedures that:

 

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

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

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

 

Management assessed the effectiveness of the Company’s internal controlover financial reporting as of January 1, 2005. In making this assessment, management used the criteria set forth inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

Based on its assessment of internal controls over financial reporting,management has concluded that, as of January 1, 2005, the Company’s internalcontrol over financial reporting was effective to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

 

55

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Management’s assessment of the effectiveness of internal control overfinancial reporting as of January 1, 2005 has been audited by PricewaterhouseCoopers,LLP, an independent registered public accounting firm, as stated in theirreport, see Item 8. “Financial Statements and Supplemental Data.”

 

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

 

None

 

56

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**PART III**

 

**ITEM 10****.  DIRECTORS AND EXECUTIVE OFFICERS OFREGISTRANT**

 

Theinformation required by this item concerning the executive officers is setforth in Part I, Item 1 - “Business” of this Annual Report on Form 10-K.

 

Informationrequired by this Item regarding directors and compliance with Section 16(a) ofthe Exchange Act set forth under the captions “Proposal 1 - Election ofDirectors” and “Compliance with Section 16(a) of the Securities Exchange Act”in the Company’s definitive Proxy Statement is incorporated herein byreference.

 

**Audit Committee Financial Expert**

 

The Company’sBoard of Directors has determined that Mr. Dennis Oklak is the Company’sdesignated audit committee financial expert. Mr. Oklak is considered “independent” as the term is used in Item7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

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

 

The Companyhas certain corporate governance guidelines, a code of ethics that applies toits senior financial officers, as well as a code of business conduct.  The code of ethics, code of conduct, as wellas other corporate governance information is posted on our Internet web-site.The Internet address for our website is http://www.monaco-online.com, and thecode of ethics, code of conduct, and other corporate governance information maybe found as follows:

 

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

 

*2. Next,select “Corporate Governance” 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 tosatisfy the disclosure requirement under Item 10 of Form 8-K regarding anamendment to, or waiver from, a provision of this Code of Ethics for SeniorFinancial Officers by posting such information on our website, at the addressand location specified above.

 

**ITEM 11****.  EXECUTIVE COMPENSATION**

 

Informationrequired by this Item regarding compensation of the Company’s directors andexecutive officers set forth under the captions “Corporate Governance -Director Compensation” and “Executive Compensation” in the Proxy Statement isincorporated herein by reference.

 

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**ITEM 12****.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Informationrequired by this Item regarding beneficial ownership of the Company’s CommonStock by certain beneficial owners and management set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in the Proxy Statementis incorporated herein by reference.

 

**Equity Compensation Plan Information**

 

The followingtable sets forth information with respect to the Company’s equity compensationplans as of the end of the most recently completed fiscal year.

 
| **Plan Category**                                           | ** ** | **(a)  Number of securities to be  issued upon exercise of  outstanding options,  warrants, and rights** | ** ** | **(b)  Weighted-average exercise price of  outstanding options, warrants, and  rights** | ** ** | **(c)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected   in column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 1,314,573                                                                                                |       | $                                                                                       | 14.08      |                                                                                                                                                       | 1,021,950  |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                   |       | —                                                                                  |       | —                                                                                                                                                     |       |
|                                                        |       |                                                                                                     |       |                                                                                    |       |                                                                                                                                                       |       |
| Total                                                       |       | 1,314,573                                                                                                |       | $                                                                                       | 14.08      |                                                                                                                                                       | 1,021,950  |   |

 

**ITEM 13****.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Informationrequired by this Item regarding certain relationships and related transactionswith management set forth under the caption “Compensation Committee Interlocksand Insider Participation” in the Proxy Statement is incorporated herein byreference.

 

**ITEM 14****.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Theinformation required by this item is included under the caption “Ratificationof Appointment of Independent Registered Public Accounting Firm” in the ProxyStatement and is incorporated herein by reference.

 

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**PART IV**

 

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

 

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

 

1.             FinancialStatements.  The ConsolidatedFinancial Statements of Monaco Coach Corporation and the Report of IndependentRegistered Public Accounting Firm are filed in Item 8 within this AnnualReport on Form 10-K.

 

2.             FinancialStatement Schedule.  None

 

Schedules not listed above have been omitted because they are notapplicable or are not required or the information required to be set forththerein is included in the consolidated financial statements or notes thereto.

 

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

 

2.1           StockPurchase Agreement by and among Monaco Coach Corporation, MCC AcquisitionCorporation, Outdoor Resorts of America, Inc., and Outdoor Resorts of Naples,Inc., dated November 27, 2002. (Incorporated herein by reference to Exhibit (2.1) to the Registrant’sAnnual Report on Form 10-K for the year ended December 28, 2002.)

 

2.2           StockPurchase Agreement by and among Monaco Coach Corporation, MCC AcquisitionCorporation, Outdoor Resorts of America, Inc., and Outdoor Resorts MotorcoachCountry Club, Inc., dated November 27, 2002. (Incorporated herein by referenceto Exhibit (2.2) to the Registrant’s Annual Report on Form 10-K for the yearended December 28, 2002.)

 

2.3           StockPurchase Agreement by and among Monaco Coach Corporation, MCC AcquisitionCorporation, Outdoor Resorts of America, Inc., and Outdoor Resorts of LasVegas, Inc., dated November 27, 2002. (Incorporated herein by reference toExhibit (2.3) to the Registrant’s Annual Report on Form 10-K for the year endedDecember 28, 2002.)

 

3.1           Amendedand Restated Certificate of Incorporation of the Registrant (Incorporatedherein by reference to Exhibit (3.1) to the Registrant’s Annual Report on Form10-K for the year ended January 1, 1994).

 

3.2           Certificateof Amendment of Amended and Restated Certificate of Incorporation dated June30, 1999 (Incorporated herein by reference to Exhibit (3.2) to the Registrant’sAnnual Report on Form 10-K for the year ended January 1, 2000).

 

3.3           Bylawsof Registrant, as amended to date (Incorporated herein by reference to Exhibit(3.1) to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedJune 29, 2002).

 

10.1         Formof Indemnification Agreement for directors and executive officers (Incorporatedherein by reference to Exhibit (10.2) to the Registrant’s RegistrationStatement on Form S-1 (Reg. No. 33-67374) declared effective on September 23,1993).

 

10.2         1993Director Option Plan as Amended Through May 13, 2003. (Incorporated herein byreference to Exhibit (10.2) to the Registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 28, 2003).

 

10.2+       1993Incentive Stock Option Plan as amended through October 23, 2002. (Incorporatedherein by reference to Exhibit (10.1) to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended September 28, 2002).

 

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10.3+    1993Director Option Plan as amended through May 16, 2002.  (Incorporated herein by reference to Exhibit(10.2) to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedJune 29, 2002.

 

10.4+    1993Employee Stock Purchase Plan and form of subscription agreement thereunder(Incorporated herein by reference to Exhibit (10.5) to the Registrant’sRegistration Statement on Form S-1 (Reg. No. 33-67374) declared effective onSeptember 23, 1993).

 

10.5+    ExecutiveVariable Compensation Plan (Incorporated herein by reference to Appendix B tothe Registrant’s definitive Proxy Statement filed with the Securities andExchange Commission on April 5, 2004).

 

10.6         Amendedand Restated Credit Agreement dated September 28, 2001 with U.S. Bank NationalAssociation. (Incorporated herein by reference to Exhibit (10.1) to theRegistrant’s quarterly report on Form 10-Q filed November 13, 2001).

 

10.7         FirstAmendment to the Amended and Restated Credit Agreement dated April 30, 2002with U.S. Bank National Association. (Incorporated herein by reference to Exhibit (10.7) to the Registrant’sAnnual Report on Form 10-K for the year ended December 28, 2002.)

 

10.8         SecondAmendment to the Amended and Restated Credit Agreement dated November 27, 2002with U.S. Bank National Association. (Incorporated herein by reference to Exhibit (10.8) to the Registrant’sAnnual Report on Form 10-K for the year ended December 28, 2002.)

 

10.12       ThirdAmendment to the Amended and Restated Credit Agreement dated May 29, 2003 withU.S. Bank National Association. (Incorporated herein by reference to Exhibit(10.12) to the Registrant’s quarterly report on Form 10-Q for the quarter endedJune 28, 2003).

 

10.13       SecondAmended and Restated Credit Agreement dated November 17, 2004 with U.S. BankNational Association.

 

11.1         Computationof earnings per share (see Note 10 of Notes to Consolidated FinancialStatements included in Item 8 hereto).

 

21.1         Subsidiariesof Registrant.

 

23.1         Consentof Independent Registered Public Accounting Firm.

 

24.1         Powerof Attorney (included on the signature pages hereof).

 

31.1         Certificationof CFO under the Exchange Act as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2         Certificationof CEO under the Exchange Act as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32            Certificationof CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

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+                              Theitem listed is a compensatory plan.

 

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**SIGNATURES**

 

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

 
| March 14, 2005 | MONACO COACH CORPORATION |
|----------------|--------------------------|
|           |                     |
|           | By:                      | /s/ Kay L. Toolson |   |
|           |                     | Kay L. Toolson |
|           |                     | Chief Executive Officer |

 

**POWER OF ATTORNEY**

 

KNOW ALLPERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Kay L. Toolson and P. Martin Daley, and each ofthem, jointly and severally, his attorneys-in-fact, each with the power ofsubstitution, for him in any and all capacities, to sign any and all amendmentsto this Report on Form 10-K and to file the same, with exhibits thereto andother documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his substitute or substitutes, may do or cause to be doneby 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 14, 2005 |
| (Kay L. Toolson)         |       | Officer (Principal Executive Officer)        |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ P. Martin Daley      |       |                                         | Vice President and Chief Financial Officer |     | March 14, 2005 |
| (P. Martin Daley)        |       | (Principal Financial and Accounting Officer) |                                       |     |
|                     |       |                                         |                                       |     |
|                     |       |                                         | Director                                   |     | March    , 2005 |
| (Robert P. Hanafee, Jr.) |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ L. Ben Lytle         |       |                                         | Director                                   |     | March 14, 2005 |
| (L. Ben Lytle)           |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ Dennis D. Oklak      |       |                                         | Director                                   |     | March 14, 2005 |
| (Dennis D. Oklak)        |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ Carl E. Ring, Jr.    |       |                                         | Director                                   |     | March 14, 2005 |
| (Carl E. Ring, Jr.)      |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ Richard A. Rouse     |       |                                         | Director                                   |     | March 14, 2005 |
| (Richard A. Rouse)       |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ Daniel C. Ustian     |       |                                         | Director                                   |     | March 14, 2005 |
| (Daniel C. Ustian)       |       |                                         |                                       |     |
|                     |       |                                         |                                       |     |
| /s/ Roger A. Vandenberg  |       |                                         | Director                                   |     | March 14, 2005 |
| (Roger A. Vandenberg)    |       |                                         |                                       |     |
|                          |            |                                              |                                            |          |  |  |  |  |  |  |  |

 

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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 of Naples, Inc., dated November 27, 2002. (Incorporated herein by  reference to Exhibit (2.1) 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 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.) |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 2.3             |       | Stock Purchase Agreement by and among Monaco Coach Corporation, MCC  Acquisition Corporation, Outdoor Resorts of America, Inc., and Outdoor  Resorts of Las Vegas, Inc., dated November 27, 2002. (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.)            |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 3.1             |       | Amended and Restated Certificate of Incorporation of the Registrant  (Incorporated herein by reference to Exhibit (3.1) to the Registrant’s Annual  Report on Form 10-K for the year ended January 1, 1994).                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 3.2             |       | Certificate of Amendment of Amended and Restated Certificate of  Incorporation dated June 30, 1999 (Incorporated herein by reference to  Exhibit (3.2) to the Registrant’s Annual Report on Form 10-K for the year  ended January 1, 2000).                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 3.3             |       | Bylaws of Registrant, as amended to date (Incorporated herein by  reference to Exhibit (3.1) to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 29, 2002).                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.1            |       | Form of Indemnification Agreement for directors and executive  officers (Incorporated herein by reference to Exhibit (10.2) to the  Registrant’s Registration Statement on Form S-1 (Reg. No. 33-67374) declared  effective on September 23, 1993).                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.2            |       | 1993 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).                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.2+           |       | 1993 Incentive Stock Option Plan as amended through October 23, 2002.  (Incorporated herein by reference to Exhibit (10.1) to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended September 28, 2002).                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.3+           |       | 1993 Director Option Plan as amended through May 16, 2002.  (Incorporated herein by reference to Exhibit (10.2) to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended June 29, 2002).                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.4+           |       | 1993 Employee Stock Purchase Plan and form of subscription agreement  thereunder (Incorporated herein by reference to Exhibit (10.5) to the  Registrant’s Registration Statement on Form S-1 (Reg. No. 33-67374) declared  effective on September 23, 1993).                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.5+           |       | Executive Variable Compensation Plan (Incorporated herein by  reference to Appendix B to the Registrant’s definitive Proxy Statement filed  with the Securities and Exchange Commission on April 5, 2004).                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                         |
| 10.6            |       | Amended and Restated Credit Agreement dated September 28, 2001 with  U.S. Bank National Association. (Incorporated herein by reference to Exhibit  (10.1) to the Registrant’s quarterly report on Form 10-Q filed November 13,  2001).                                                                                                                  |

 

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| 10.7   |   | First Amendment to the Amended and Restated Credit Agreement dated  April 30, 2002 with U.S. Bank National Association. (Incorporated herein by  reference to Exhibit (10.7) to the Registrant’s Annual Report on Form 10-K  for the year ended December 28, 2002.)     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                         |
| 10.8   |   | Second Amendment to the Amended and Restated Credit Agreement dated  November 27, 2002 with U.S. Bank National Association. (Incorporated herein  by reference to Exhibit (10.8) to the Registrant’s Annual Report on Form 10-K  for the year ended December 28, 2002.) |
|   |   |                                                                                                                                                                                                                                                                         |
| 10.12  |   | Third Amendment to the Amended and Restated Credit Agreement dated  May 29, 2003 with U.S. Bank National Association. (Incorporated herein by  reference to Exhibit (10.12) to the Registrant’s quarterly report on Form  10-Q for the quarter ended June 28, 2003).    |
|   |   |                                                                                                                                                                                                                                                                         |
| 10.13  |   | Second Amended and Restated Credit Agreement dated November 17, 2004  with U.S. Bank National Association.                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                         |
| 11.1   |   | Computation of earnings per share (see Note 10 of Notes to  Consolidated Financial Statements included in Item 8 hereto).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                         |
| 21.1   |   | Subsidiaries of Registrant.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                         |
| 23.1   |   | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                         |
| 24.1   |   | Power of Attorney (included on the signature pages hereof).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                         |
| 31.1   |   | Certification of CFO under the Exchange Act as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                         |
| 31.2   |   | Certification of CEO under the Exchange Act as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                         |
| 32     |   | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      |

 

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+                              Theitem listed is a compensatory plan.

 

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