**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                     |   | **Quarterly Report Pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |
| **For the quarterly period ended:**  **April 3, 2004**                                                                                                                                                                    |
|                                                                                                                                                                                                                           |
| **or**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                          |   | **Transition Report Pursuant  to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                           |   |                                                                                          |
| **For the period  from                  to                  ** |
|                                                                                                                                                                                                                           |
| **Commission File Number:**  **1-14725**                                                                                                                                                                                  |

 

**MONACO COACH CORPORATION**

 

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

 

Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and  (2) has been subject to such filingrequirements for the past 90 days.

 

YES   ý                  NO   o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

YES   ý                  NO   o

 

The number of shares outstanding of common stock, $.01 par value, as ofApril 3, 2004:  29,330,476

 

 

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**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**APRIL 3, 2004**

 

**INDEX**

 
| **PART I - FINANCIAL  INFORMATION**                                                                             |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| **Item 1.  Financial Statements.**                                                                         |   |
|                                                                                                            |   |
| Condensed  Consolidated Balance Sheets as of January 3, 2004 and April 3, 2004.                                 |   |
|                                                                                                            |   |
| Condensed  Consolidated Statements of Income for the quarters ended March 29, 2003 and  April 3, 2004.          |   |
|                                                                                                            |   |
| Condensed  Consolidated Statements of Cash Flows for the quarters ended March 29, 2003  and April 3, 2004.      |   |
|                                                                                                            |   |
| Notes  to Condensed Consolidated Financial Statements.                                                          |   |
|                                                                                                            |   |
| **Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations.** |   |
|                                                                                                            |   |
| **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk.**                                 |   |
|                                                                                                            |   |
| **Item 4.  Controls and Procedures.**                                                                      |   |
|                                                                                                            |   |
| **PART II - OTHER  INFORMATION**                                                                                |   |
|                                                                                                            |   |
| **Item 6.  Exhibits and Reports on Form 8-K.**                                                             |   |
|                                                                                                            |   |
| **Signatures.**                                                                                                 |   |
|                                                                                                            |   |
| **Certifications under Section 302(a) and 906 of the  Sarbanes-Oxley Act of 2002.**                             |   |

 

2

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**PART I -FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

3

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(dollars in thousands)**

 
|                                                                                                                               |   | **January 3,  2004** |    | **April 3,  2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|--------------------|--------|
|                                                                                                                               |   | **(audited)**        |    | **(unaudited)**    |   |
| **ASSETS**                                                                                                                         |   |                 |    |               |   |
| Current assets:                                                                                                                    |   |                 |    |               |   |
| Cash                                                                                                                               |   | $                    | 13,398  |               | $      | 22,776 |   |
| Trade  receivables, net                                                                                                            |   | 89,170               |    | 114,617            |   |
| Inventories                                                                                                                        |   | 127,746              |    | 146,552            |   |
| Resort lot  inventory                                                                                                              |   | 13,978               |    | 10,618             |   |
| Prepaid expenses                                                                                                                   |   | 3,029                |    | 6,575              |   |
| Deferred income  taxes                                                                                                             |   | 33,836               |    | 33,676             |   |
| Total current  assets                                                                                                              |   | 281,157              |    | 334,814            |   |
|                                                                                                                               |   |                 |    |               |   |
| Property, plant,  and equipment, net                                                                                               |   | 141,662              |    | 141,456            |   |
| Debt issuance  costs, net of accumulated amortization of $815 and $944, respectively                                               |   | 596                  |    | 467                |   |
| Goodwill                                                                                                                           |   | 55,254               |    | 55,254             |   |
| Total assets                                                                                                                       |   | $                    | 478,669 |               | $      | 531,991 |   |
|                                                                                                                               |   |                 |    |               |   |
| **LIABILITIES**                                                                                                                    |   |                 |    |               |   |
| Current liabilities:                                                                                                               |   |                 |    |               |   |
| Current portion  of long-term note payable                                                                                         |   | $                    | 15,000  |               | $      | 15,000 |   |
| Accounts payable                                                                                                                   |   | 64,792               |    | 103,867            |   |
| Product  liability reserve                                                                                                         |   | 20,723               |    | 19,602             |   |
| Product warranty  reserve                                                                                                          |   | 29,643               |    | 30,712             |   |
| Income taxes  payable                                                                                                              |   | 3,395                |    | 6,362              |   |
| Accrued expenses  and other liabilities                                                                                            |   | 26,373               |    | 29,930             |   |
| Total current  liabilities                                                                                                         |   | 159,926              |    | 205,473            |   |
|                                                                                                                               |   |                 |    |               |   |
| Long-term notes  payable                                                                                                           |   | 15,000               |    | 11,250             |   |
| Deferred income  taxes                                                                                                             |   | 17,495               |    | 17,794             |   |
| Total  liabilities                                                                                                                 |   | 192,421              |    | 234,517            |   |
|                                                                                                                               |   |                 |    |               |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                      |   |                 |    |               |   |
| Preferred stock, $.01 par value, 1,934,783  shares authorized, no shares outstanding                                               |   |                 |    |               |   |
| Common stock,  $.01 par value; 50,000,000 shares authorized, 29,246,143 and  29,330,476 issued and outstanding,  respectively |   | 292                  |    | 293                |   |
| Additional  paid-in capital                                                                                                        |   | 54,919               |    | 55,687             |   |
| Retained  earnings                                                                                                                 |   | 231,037              |    | 241,494            |   |
| Total  stockholders’ equity                                                                                                   |   | 286,248              |    | 297,474            |   |
| Total liabilities and stockholders’ equity                                                                                    |   | $                    | 478,669 |               | $      | 531,991 |   |

 

See accompanying notes.

 

4

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited: dollars in thousands, except share and per sharedata)**

 
|                                           |   | **Quarter Ended**   |    |
|------------------------------------------------|--------|---------------------|---------|
|                                           |   | **March 29,  2003** |    | **April 3,****2004** |   |
|                                           |   |                |    |   |   |
| Net sales                                      |   | $                   | 273,574 |   | $ | 354,976 |   |
| Cost of sales                                  |   | 239,968             |    | 310,493 |   |
| Gross profit                                   |   | 33,606              |    | 44,483 |   |
|                                           |   |                |    |   |   |
| Selling,  general, and administrative expenses |   | 25,649              |    | 24,800 |   |
| Operating income                               |   | 7,957               |    | 19,683 |   |
|                                           |   |                |    |   |   |
| Other income,  net                             |   | 206                 |    | 86 |   |
| Interest expense                               |   | (1,012              | )       | (405 | ) |
| Income before  income taxes                    |   | 7,151               |    | 19,364 |   |
|                                           |   |                |    |   |   |
| Provision for  income taxes                    |   | 2,825               |    | 7,441 |   |
|                                           |   |                |    |   |   |
| Net income                                     |   | $                   | 4,326   |   | $ | 11,923 |   |
|                                           |   |                |    |   |   |
| Earnings per common share:                     |   |                |    |   |   |
| Basic                                          |   | $                   | .15     |   | $ | .41 |   |
| Diluted                                        |   | $                   | .15     |   | $ | .40 |   |
|                                           |   |                |    |   |   |
| Weighted average common shares outstanding:    |   |                |    |   |   |
| Basic                                          |   | 28,956,906          |    | 29,296,193 |   |
| Diluted                                        |   | 29,340,788          |    | 29,967,452 |   |

 

See accompanying notes.

 

5

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited: dollars in thousands)**

 
|                                                                                      |   | **Quarter Ended**     |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                      |   | **March 29,****2003** |   | **April 3,****2004** |   |
|                                                                                      |   |                  |   |   |   |
| **Increase (Decrease) in Cash**:                                                          |   |                  |   |   |   |
|                                                                                      |   |                  |   |   |   |
| Cash flows from operating activities:                                                     |   |                  |   |   |   |
| Net income                                                                                |   | $                     | 4,326  |   | $ | 11,923 |   |
| Adjustments to reconcile net income to net  cash provided (used) by operating activities: |   |                  |   |   |   |
| Loss on sale of  assets                                                                   |   | 16                    |   | 78 |   |
| Depreciation and  amortization                                                            |   | 2,262                 |   | 2,536 |   |
| Deferred income  taxes                                                                    |   | (1,009                | )      | 459 |   |
| Changes in working capital accounts:                                                      |   |                  |   |   |   |
| Trade  receivables, net                                                                   |   | 17,821                |   | (25,447 | ) |
| Inventories                                                                               |   | (24,292               | )      | (18,805 | ) |
| Resort lot  inventory                                                                     |   | 2,606                 |   | 3,360 |   |
| Prepaid expenses                                                                          |   | 792                   |   | (3,547 | ) |
| Accounts payable                                                                          |   | 9,861                 |   | 39,075 |   |
| Product  liability reserve                                                                |   | 1,091                 |   | (1,120 | ) |
| Product warranty  reserve                                                                 |   | (1,071                | )      | 1,068 |   |
| Income taxes  payable                                                                     |   | 2,592                 |   | 2,967 |   |
| Accrued expenses  and other liabilities                                                   |   | (2,664                | )      | 3,556 |   |
| Net cash  provided by operating activities                                                |   | 12,331                |   | 16,103 |   |
| Cash flows from investing activities:                                                     |   |                  |   |   |   |
| Additions to  property, plant, and equipment                                              |   | (8,439                | )      | (2,553 | ) |
| Proceeds from  sale of assets                                                             |   | 687                   |   | 145 |   |
| Net cash used in  investing activities                                                    |   | (7,752                | )      | (2,408 | ) |
| Cash flows from financing activities:                                                     |   |                  |   |   |   |
| Book overdraft                                                                            |   | 14,698                |   | 0 |   |
| Payments on  lines of credit, net                                                         |   | (15,713               | )      | 0 |   |
| Payments on  long-term notes payable                                                      |   | (4,333                | )      | (3,750 | ) |
| Debt issuance  costs                                                                      |   | (11                   | )      | 129 |   |
| Dividends paid                                                                            |   | 0                     |   | (1,465 | ) |
| Issuance of  common stock                                                                 |   | 780                   |   | 769 |   |
| Net cash used by  financing activities                                                    |   | (4,579                | )      | (4,317 | ) |
| Net change in  cash                                                                       |   | 0                     |   | 9,378 |   |
| Cash at  beginning of period                                                              |   | 0                     |   | 13,398 |   |
| Cash at end of period                                                                     |   | $                     | 0      |   | $ | 22,776 |   |

 

See accompanying notes.

 

6

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.     Basis ofPresentation**

 

The interim condensed consolidated financial statements have beenprepared by Monaco Coach Corporation (the “Company”) without audit.  In the opinion of management, theaccompanying unaudited financial statements contain all adjustments necessary,consisting only of normal recurring adjustments, to present fairly thefinancial position of the Company as of January 3, 2004 and April 3, 2004, andthe results of its operations and its cash flows for the quarters ended March29, 2003 and April 3, 2004.  Thecondensed consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiaries, and all significant intercompany accountsand transactions have been eliminated in consolidation.  The balance sheet data as of January 3, 2004was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders.  These interim condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and notes thereto appearing in the Company’s Annual Report toStockholders for the year ended January 3, 2004.

 

**2.     Inventories**

 

Inventories are stated at lower of cost (first-in, first-out) ormarket.  The composition of inventory isas follows:

 
|            |   | **January 3,****2004** |    | **April 3,****2004** |   |
|-----------------|--------|------------------------|---------|----------------------|--------|
|            |   | **(in  thousands)**    |    |
| Raw materials   |   | $                      | 60,946  |                 | $      | 67,412 |   |
| Work-in-process |   | 60,604                 |    | 67,422               |   |
| Finished units  |   | 6,196                  |    | 11,718               |   |
|            |   | $                      | 127,746 |                 | $      | 146,552 |   |

 

**3.     Line ofCredit**

 

The Company’s line of credit facility consists of a revolving line ofcredit of up to $95.0 million (the “Revolving Loan”).  At the election of the Company, the Revolving Loan bears interestat variable rates based on the Prime Rate or LIBOR.  At April 3, 2004, the interest rate was 4.0%.  The Revolving Loan is due and payable infull on June 30, 2005, and requires monthly interest payments.  The balance outstanding under the RevolvingLoan at April 3, 2004 was zero.  Therevolving line of credit is collateralized by all the assets of theCompany.  The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. As of April 3, 2004, the Company was in compliance with these covenants.

 

7

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**4.     Long-termNotes Payable**

 

The Company has long-term notes payable of $26.3 million outstanding atApril 3, 2004.  The term notes bearinterest at varying rates that fluctuate based on the Prime rate or LIBOR, andare determined based on the Company’s leverage ratio.  The term notes require monthly interest payments and quarterlyprincipal payments and are collateralized by all the assets of theCompany.  Additional prepayments forportions of the term notes are required in the event the Company sellssubstantially all or any motor coach resort location.  The term notes are due and payable in full on October 3, 2005.

 

The following table displays the scheduled future principal payments byfiscal year that will be due on the term loan.

 

| **Year** |   | **Amount of  Payment  Due** |   |
|----------|--------|-----------------------------|--------|
|     |   | **(in  thousands)**         |   |
| 2004     |   | 15,000                      |   |
| 2005     |   | 11,250                      |   |
|     |   | $                           | 26,250 |   |
|          |        |                             |        |  |

 

**5.     EarningsPer Common Share**

 

Basic earnings per common share is based on the weighted average numberof shares outstanding during the period. Diluted earnings per common share is based on the weighted averagenumber of shares outstanding during the period, after consideration of thedilutive effect of stock options.   Theweighted average number of common shares used in the computation of earningsper common share are as follows:

 
|                                                   |   | **Quarter Ended**     |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **March 29,****2003** |   | **April 3,****2004** |   |
| **Basic**                                              |   |                  |   |   |   |
| Issued and outstanding shares  (weighted average) |   | 28,956,906            |   | 29,296,193 |   |
|                                                   |   |                  |   |   |   |
| **Effect of Dilutive Securities**                      |   |                  |   |   |   |
| Stock Options                                          |   | 383,882               |   | 671,259 |   |
| **Diluted**                                            |   | 29,340,788            |   | 29,967,452 |   |

 

8

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**6.**              Stock Option Plans

 

**At April 3, 2004, the Company had three stock-basedemployee compensation plans.  TheCompany accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated Interpretations.  No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS 123, Accounting for Stock-based Compensation, to stock-based employeecompensation.**

 
|                                                                                                                                                 |   | **Quarter Ended**                           |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                                                                 |   | **March 29,  2003**                         |   | **April 3,  2004** |   |
|                                                                                                                                                 |   | **(In  thousands, except per share  data)** |   |
| Net income - as reported                                                                                                                             |   | $                                           | 4,326  |   | $ | 11,923 |   |
| Deduct:   Total stock-based employee compensation expense  Determined under fair value based method for all awards, net of related tax  effects |   | 168                                         |   | 209 |   |
|                                                                                                                                                 |   |                                        |   |   |   |
|                                                                                                                                                 |   | $                                           | 4,158  |   | $ | 11,714 |   |
|                                                                                                                                                 |   |                                        |   |   |   |
| Earnings per share:                                                                                                                                  |   |                                        |   |   |   |
| Basic - as reported                                                                                                                                  |   | $                                           | 0.15   |   | $ | 0.41 |   |
| Basic - pro forma                                                                                                                                    |   | $                                           | 0.14   |   | $ | 0.40 |   |
|                                                                                                                                                 |   |                                        |   |   |   |
| Diluted - as reported                                                                                                                                |   | $                                           | 0.15   |   | $ | 0.40 |   |
| Diluted - pro forma                                                                                                                                  |   | $                                           | 0.14   |   | $ | 0.39 |   |

 

**7.**              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 theCompany’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

The Company’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.

 

9

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The approximate amount subject to contingentrepurchase obligations arising from these agreements at April 3, 2004 is $522.0million, with approximately 7.38% concentrated with one dealer.  If the Company were obligated to repurchasea significant number of units under any repurchase agreement, its business,operating results, and financial condition could be adversely affected.  The Company has included the disclosurerequirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” in its financial statements, and has determined thatthe recognition provisions of FIN 45 apply to certain guarantees routinely madeby the Company including contingent repurchase obligations to third partylenders for inventory financing of dealer inventories.  The Company has recorded a liability ofapproximately $750,000 for potential losses resulting from guarantees onrepurchase obligations for products shipped to dealers.  This estimated liability, is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.  If the Companywere obligated 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.

 

Aircraft Lease Commitment

 

The Company has an aircraft under an operating lease, with annualrenewals for up to three years. Currently the Company began it’s first year of renewal in February 2004,with two optional years remaining.  Ifat the end of the initial lease period the Company elects to return theaircraft, the Company has guaranteed up to $16 million in the event thelessor’s net sales proceeds are less than $18.5 million.

 

10

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

This Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements include, but are notlimited to, those below that have been marked with an asterisk (*).  In addition, we may from time to time makeforward-looking statements through statements that include words such as“believes,” “expects,” “anticipates” or similar expressions.  Such forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, performance or achievements to differ materially from thoseexpressed or implied by such forward-looking statements, including those setforth below under the caption “Factors That May Affect Future OperatingResults” and elsewhere in this Quarterly Report on Form 10-Q.  The reader should carefully consider,together with the other matters referred to herein, the factors set forth underthe caption “Factors That May Affect Future Operating Results.”  We caution the reader, however, that thesefactors may not be exhaustive.

 

**GENERAL**

 

Monaco Coach Corporation is a leading manufacturer of premium Class Aand Class C motor coaches and towable recreational vehicles (“towables”).  Our product line currently consists of abroad line of motor coaches, fifth wheel trailers and travel trailers under the“Monaco,” “Holiday Rambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie”brand names.  Our products, which aretypically priced at the high end of their respective product categories, rangein suggested retail price from $70,000 to $1.4 million for motor coaches andfrom $25,000 to $65,000 for towables.

 

**RESULTS OFOPERATIONS**

 

The followingtable illustrates the results of operations for the quarters ended March 29,2003, and April 3, 2004.  All dollarsrepresented are in thousands.

 

 
|                                         |   | **2003** |    | **%********of Sales** |   | **2004** |   | **%********of Sales** |   | **$****Change** |   | **%****Change** |   |
|----------------------------------------------|--------|----------|---------|-----------------------|--------|----------|--------|-----------------------|--------|-----------------|--------|-----------------|--------|
| Net sales                                    |   | $        | 273,574 |                  | 100.0  | %        | $      | 354,976               |   | 100.0           | %      | $               | 81,402 |   | 29.8 | % |
| Cost of Sales                                |   | 239,968  |    | 87.7                  | %      | 310,493  |   | 87.5                  | %      | 70,525          |   | 29.4            | %      |
| Gross Profit                                 |   | 33,606   |    | 12.3                  | %      | 44,483   |   | 12.5                  | %      | 10,877          |   | 32.4            | %      |
| Selling, general and administrative expenses |   | 25,649   |    | 9.4                   | %      | 24,800   |   | 7.0                   | %      | -849            |   | -3.3            | %      |
|                                         |   |     |    |                  |   |     |   |                  |   |            |   |            |   |
| Operating income                             |   | $        | 7,957   |                  | 2.9    | %        | $      | 19,683                |   | 5.5             | %      | $               | 11,726 |   | 147.4 | % |

 

*Performancein the first quarter of 2004*

 

We are pleased with the record revenues generated for the first quarterof 2004.  Profits for the first quarterof 2004 were improved over that of the similar quarter of 2003.  Improved gross profit margins helped fuel an$11 million improvement in gross profit. However, margins were dampened by the increase in certain commodityproduct prices, such as steel, copper, aluminum, and wood.   Due to rising costs in these and relatedmaterials, along with changes in our mix, our own material costs were impactedby as much as 1.3% of first quarter sales. In response to these rising costs, we are passing along proportionalprice increases in our products.  Wewill continue to monitor these, as well as other costs, and take appropriateactions to minimize the impact of additional commodity price increases.*

 

In addition to improved gross margins, we were also successful inreducing selling, general, and administrative (S,G&A) expenses.  The decrease in S,G&A was due to a lowerlevel of legal settlement expenses, retail sales promotions, as well as showcosts compared to the same period last year. The decrease in settlement expense was a result of receiving a lowerthan normal number of new cases, combined with the closure of certain casesthat were favorable when associated with their respective reserve amounts.  The reduction in retail sales

 

11

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promotionswas due to improved demand for our product in the market place, while the showexpense reduction was a result of a continuing effort to streamline showparticipation.

 

*Quarterended April 3, 2004 compared to Quarter ended******March 29, 2003*

 

Firstquarter net sales increased 29.8% to $355.0 million compared to $273.6 millionfor the same period last year. Gross diesel motorized sales were up 27.9%, gasmotorized sales were up 34.8%, and towables were up 35.0%.  Diesel products accounted for 77% of ourfirst quarter revenues while gas products were 14%, and towables were 9%.  The overall increase in revenues has beendriven by improving market conditions, continued lower interest rates, andcontinuing increased interest in the recreational industry.  Our overall unit sales were up 32.5% in thefirst quarter of 2004 to 3,136 units, with diesel motorized unit sales up 23.1%to 1,506 units, gas motorized unit sales up 33.9% to 636 units, and towableunit sales up 48.6% to 994 units.  Ourtotal average unit selling price decreased to $111,500 from $114,200 in thesame period last year, reflecting our continued emphasis on increasing the saleof lower priced gas motor homes and towable product.

 

Grossprofit for the first quarter of 2004 increased to $44.5 million, up from $33.6million in 2003, and gross margin increased from 12.3% in the first quarter of2003 to 12.5% in the first quarter of 2004. The increase in gross margin over the prior year was due to acombination of factors, including a reduction in discounts off of wholesaleinvoices of approximately 0.2% of sales. In addition, other direct costs, such as labor and warranty improved by1.2% of sales.  These benefits wereoffset by a higher material usage rate of 1.3% due to increases in commodityprices, as well as shifts in product mix. Additional improvements in indirect costs as a percentage of salesamounted to 0.1%.  Our overall grossmargin may decline in future periods if the mix of products continues to shiftfrom higher to lower gross margin units or if we encounter unexpected manufacturingdifficulties or competitive pressures.

 

Selling,general, and administrative expenses (S,G&A) decreased by $849 thousand to$24.8 million in the first quarter of 2004 and decreased as a percentage ofsales from 9.4% in 2003 to 7.0% in 2004. Selling, general, and administrative expenses in the first quarter of2004 included decreases in litigation settlement costs of 1.4% as a percentageof sales, decreases in retail promotions of 0.6% as a percentage of sales, anddecrease in show expense of 0.3% as a percentage of sales.  Certain of these costs, such as litigationsettlement expenses, were lower than normal, and, accordingly, we expectS,G&A expenses for future quarters to increase to more normalized rates ofbetween 7.2% and 7.4% of sales.*

 

Operating income was $19.7 million, or 5.5% of sales in the firstquarter of 2004 compared to $8.0 million, or 2.9% of sales in the similar 2003period.  The increase in operatingmargins reflects improved gross margins as well as reduced S,G&A as apercentage of sales.

 

Netinterest expense was $405 thousand in the first quarter of 2004 compared to$1.0 million in the comparable 2003 period, reflecting a lower level ofborrowing during the first quarter of 2004.

 

Wereported a provision for income taxes of $7.4 million, or an effective tax rateof 38.4% in the first quarter of 2004, compared to $2.8 million, or aneffective tax rate of 39.5% for the comparable 2003 period.  The decrease in the effective tax rate wasdue primarily to benefits received from foreign sales activities, as well asfavorable tax law changes at certain state levels.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During  the first quarterof 2004, we generated cash of $16.1 million from operating activities.  We generated $14.5 million from net incomeand non-cash expenses such as depreciation and amortization. Other sources ofcash included a $39.1 million increase in trade payables, $3.6 million increasein accrued liabilities, a $3.4 million decrease in resort lot inventory, and a$4.0 million increase in tax and warranty liabilities.  Trade payables increased primarily due toincreased production levels as well as timing associated with the regularlyscheduled shut down of the plants that occurs at year end.  Other liabilities increased due to payrollaccruals also associated with the plant shut downs at the end of 2003.  Reduced resort lot inventories reflect thestrong sales of the first quarter, and increases in tax and warrantyliabilities are the result of improved profits, and increases in productionthat drive the warranty reserves.  Thesesources of cash were mostly offset by a $25.4 million increase in receivables, an $18.8 million increase ininventories, a $3.5 million increase in prepaid expenses, and an

 

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$1.1million decrease in the product liability reserve.  Trade receivables increased due to lower shipment levelsoccurring at the end of the fourth quarter 2003 (which were a result ofscheduled plant shut downs) versus shipment levels at the end of the firstquarter 2004.  Inventory increases arethe result of increased production, as well as the below normal finished goodlevels that existed at the end of 2003. Prepaid expenses were up due to the renewal of certain liabilityinsurance policies that expired during the quarter.  Product liability reserves decreased, reflecting the closure ofvarious litigation and settlement claims.

 

Wehave credit facilities consisting of a revolving line of credit of up to $95.0million of which no borrowings were outstanding at April 3, 2004 (the“Revolving Loan”) and term loans with balances of $26.3 million at April 3,2004 (the “Term Loans”).  At ourelection, the Revolving Loan and Term Loans bear interest at varying rates thatfluctuate based on the Prime rate or LIBOR, and are determined based on ourleverage ratio.  We also pay interestmonthly on the unused available portion of the Revolving Loan at varying rates,determined by our leverage ratio.  TheRevolving loan is due and payable in full on June 30, 2005, and requiresmonthly interest payments.  Additionalprepayments for portions of the term notes are required in the event we sellsubstantially all, or any, motor coach resort location.  The Term Loans require monthly interestpayments and principal payments that total $3.75 million per quarter.  The Revolving Loan and Term Loans arecollateralized by all of our assets and include various restrictions andfinancial covenants.  We utilize “zerobalance” bank disbursement accounts in which an advance on the line of creditis automatically made for checks clearing each day.  Since the balance of the disbursement account at the bank returnsto zero at the end of each day, our outstanding checks are reflected as aliability.  The outstanding checkliability is combined with our positive cash balance accounts to reflect a netcash balance for financial reporting.

 

Our principal working capital requirementsare for purchases of inventory and financing of trade receivables.  Many of our dealers finance productpurchases under wholesale floor plan arrangements with third parties asdescribed below.  At April 3, 2004, wehad working capital of approximately $129.3 million, an increase of $8.1million from working capital of $121.2 million at January 3, 2004.  We have been using cash flow from operationsto finance our capital expenditures.

 

We believe that cash flow from operations andfunds available under our credit facilities will be sufficient to meet ourliquidity requirements for the next 12 months.*  Our capital expenditures were $2.6 million in the first quarterof 2004, which included costs related to installation of certain automatedmachinery, enhancements to the Company’s information system infrastructure, aswell as various other routine capital expenditures.  We anticipate that capital expenditures for all of 2004 will beapproximately $12 to $15 million, which includes expenditures to purchaseadditional machinery and equipment in both our Coburg, Oregon and Wakarusa,Indiana facilities, as well as upgrades to existing information systemsinfrastructures.*  We may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if we significantly increase the level of workingcapital assets such as inventory and accounts receivable.  We may also from time to time seek toacquire businesses that would complement our current business, and any suchacquisition could require additional financing.  There can be no assurance that additional financing will beavailable if required or on terms deemed favorable by us.

 

As is typical in the recreational vehicleindustry, many of our retail dealers utilize wholesale floor plan financingarrangements with third party lending institutions to finance their purchasesof our products.  Under the terms ofthese floor plan arrangements, institutional lenders customarily require therecreational vehicle manufacturer to agree to repurchase any unsold units ifthe dealer fails to meet its commitments to the lender, subject to certainconditions.  We have agreements withseveral institutional lenders under which we currently have repurchaseobligations.  Our contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units.  Ourobligations under these repurchase agreements vary from period to period up to18 months.  At April 3, 2004,approximately $522.0 million of products sold by us to independent dealers weresubject to potential repurchase under existing floor plan financing agreementswith approximately 7.38% concentrated with one dealer.  Historically, we have been successful inmitigating losses associated with repurchase obligations.  During the first quarter of 2004, the lossesassociated with the exercise of repurchase agreements were less than $100,000.  If we were obligated to repurchase asignificant number of units under any repurchase agreement, our business,operating results, and financial condition could be adversely affected.

 

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As part of thenormal course of business, we incur certain contractual obligations andcommitments 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** |   |
| Long-term Debt(1)                           |   | $                           | 15,000 |   | $ | 11,250 |   | $ | 0 |   | $ | 0 |   | $ | 26,250 |   |
| Operating Leases(2)                         |   | 2,203                       |   | 2,479 |   | 1,957 |   | 3,599 |   | 10,238 |   |
| Total Contractual Cash Obligations          |   | $                           | 17,203 |   | $ | 13,729 |   | $ | 1,957 |   | $ | 3,599 |   | $ | 36,488 |   |

 
|                                 |   | **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(3)                   |   | $                                              | 0      |   | $ | 95,000 |   | $ | 0 |   | $ | 0 |   | $ | 95,000 |   |
| Guarantees                           |   |                                           |   | 16,000 | (2) | 0 |   | 0 |   | 16,000 |   |
| Repurchase  Obligations(4)           |   | 0                                              |   | 521,973 |   | 0 |   | 0 |   | 521,973 |   |
| Total Commitments                    |   | $                                              | 0      |   | $ | 632,973 |   | $ | 0 |   | $ | 0 |   | $ | 632,973 |   |

 

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(1)  See Note 4 to the financials.

(2)  Various leases including manufacturing facilities, aircraft, andmachinery and equipment.  See Note 7 tothe financials.

(3)  See Note 3  to thefinancials.  The amount listedrepresents available borrowings on the line of credit at April 3, 2004.

(4)  Reflects obligations under manufacturer repurchasecommitments.  See Note 7 to thefinancials.

 

**INFLATION**

 

In the first quarter of 2004, we experiencedsignificant increases in the prices of certain commodity items that we use inthe manufacturing of our products. These include, but are not limited to, steel, copper, aluminum, petroleum,and wood.  While these raw materials arenot necessarily indicative of widespread inflationary trends, they have had amaterial impact on our production costs, and accordingly, we have passed alongprice increases to offset these increased costs.  However, even though we have been able to pass along past priceincreases, there is no guarantee that we will be able to pass along futureincreases.  This, combined withpotential future increases in raw material costs could have a materiallyadverse impact on our business going forward.*

 

**CRITICALACCOUNTING POLICIES**

 

The discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an ongoing basis,we evaluate our estimates, including those related to warranty costs, productliability, and impairment of goodwill. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  We believe the following critical accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financial statements.

 

WARRANTY COSTS Estimated warranty costs areprovided for at the time of sale of products with warranties covering theproducts for up to one year from the date of retail sale (five years for thefront and sidewall frame structure, and three years on the Roadmasterchassis).  These estimates are based onhistorical average repair costs, as well as other reasonable assumptions ashave been deemed appropriate by management.

 

PRODUCT LIABILITY We provide an estimatefor accrued product liability based on current pending cases, as well as forthose cases which are incurred but not reported.  This estimate is developed by legal counsel based on professionaljudgment, as well as historical experience.

 

IMPAIRMENT OFGOODWILL We assess the potential impairment of goodwill in accordance withFinancial Accounting Standards Board (FASB) Statement No. 142.  This initial test involves management

 

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comparing our market capitalization, to the carrying amount, includinggoodwill, of our net book value, to determine if goodwill has been impaired.

 

INVENTORY RESERVES We write down ourinventory 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.

 

INCOME TAXES In conjunction withpreparing our consolidated financial statements, we must estimate our incometaxes in each of the jurisdictions in which we operate. 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. We must then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent management believes that recovery is not likely, avaluation allowance must be established. Significant management judgment isrequired in determining our provision for income taxes, deferred tax assets andliabilities, and any valuation allowance recorded against net deferred taxassets.

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

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

 

•                  The marginsassociated with the mix of products we sell in any particular period.

 

•                  Our ability toutilize and expand our manufacturing resources efficiently.

 

•                  Shortages ofmaterials used in our products.

 

•                  A determinationby us that goodwill or other intangible assets are impaired and have to bewritten down to their fair values, resulting in a charge to our results ofoperations.

 

•                  Our ability tointroduce new models that achieve consumer acceptance.

 

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

 

•                  The addition orloss of our dealers.

 

•                  The timing oftrade shows and rallies, which we use to market and sell our products.

 

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

 

Our overall gross margin may decline infuture periods to the extent that we increase the percentage of sales of lowergross margin towable products or if the mix of motor coaches we sell shifts tolower gross margin units.  In addition,a relatively small variation in the number of recreational vehicles we sell inany quarter can have a significant impact on total sales and operating resultsfor that quarter.

 

Demand in the recreational vehicle industrygenerally declines during the winter months, while sales are generally higherduring the spring and summer months. With the broader range of products we now offer, seasonal factors couldhave a significant impact on our operating results in the future.  Additionally, unusually severe weatherconditions in certain markets could delay the timing of shipments from onequarter to another.

 

We attempt to forecast orders for ourproducts accurately and commence purchasing and manufacturing prior to receiptof such orders.  However, it is highlyunlikely that we will consistently accurately forecast the timing, rate, andmix of orders.  This aspect of ourbusiness makes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results, and cash flow for any given quarter.

 

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THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TOSLOWDOWNS IN THE GENERAL ECONOMY  Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic,and political conditions that affect disposable income for leisure-timeactivities.  For example, unit sales ofrecreational vehicles (excluding conversion vehicles) peaked at approximately259,000 units in 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 rebounded up toapproximately 321,000 units.  Ourbusiness is subject to the cyclical nature of this industry.  Some of the factors that contribute to thiscyclicality include fuel availability and costs, interest rate levels, thelevel of discretionary spending, and availability of credit and overall consumerconfidence.  The recent decline in consumerconfidence and slowing of the overall economy has adversely affected therecreational vehicle market.  Anextended continuation of these conditions would materially affect our business,results of operations, and financial condition.

 

WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANTPERCENTAGE OF OUR SALES  Although ourproducts were offered by 332 dealerships located primarily in the United Statesand Canada as of April 3, 2004, a significant percentage of our sales areconcentrated among a relatively small number of independent dealers.  For the quarter ended April 3, 2004, salesto one dealer, Lazy Days RV Center, accounted for 12.2% of total sales comparedto 12.4% of sales in the same period ended last year.  For quarters ended March 29, 2003 and April 3, 2004, sales to our10 largest dealers, including Lazy Days RV Center, accounted for a total of43.4% and 41.6% of total sales, respectively. The loss of a significant dealer or a substantial decrease in sales byany of these dealers could have a material impact on our business, results ofoperations, and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THEEVENT THAT THE DEALER DOES NOT REPAY ITS LENDER  As is common in the recreational vehicle industry, we enter intorepurchase agreements with the financing institutions used by our dealers tofinance their purchases of our products. These agreements require us to repurchase the dealer’s inventory in theevent that the dealer does not repay its lender.  Obligations under these agreements vary from period to period,but totaled approximately $522.0 million as of April 3, 2004, withapproximately 7.38% concentrated with one dealer.  If we were obligated to repurchase a significant number of unitsunder any repurchase agreement, our business, operating results, and financialcondition could be adversely affected.

 

OURACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK  We sell our product to dealers who arepredominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.  As of April 3,2004, total trade receivables were $114.6 million, with approximately $84.1million, or 73.4% of the outstanding accounts receivable balance concentratedamong floor plan lenders. The remaining $30.5 million of trade receivables wereconcentrated substantially all with one dealer.

 

WE MAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO ANINCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL  An interruption in the supply, or asignificant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect ourbusiness.  Diesel fuel and gasolinehave, at various times in the past, been either expensive or difficult toobtain.

 

WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAINIMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS  A number of important components for certainof our products are purchased from single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana and Meritor) for all diesel motorcoaches and chassis (Workhorse and Ford) for gas motor coaches.  We have no long-term supply contracts withthese suppliers or their distributors, and we cannot be certain that thesesuppliers will be able to meet our future requirements.  Consequently, we have periodically beenplaced 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.

 

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OUR INDUSTRY IS VERY COMPETITIVE.  WE MUST CONTINUE TO INTRODUCE NEW MODELS ANDNEW FEATURES TO REMAIN COMPETITIVE  Themarket for our products is very competitive. We currently compete with a number of manufacturers of motor coaches,fifth wheel trailers, and travel trailers. Some of these companies have greater financial resources than we haveand extensive distribution networks. These companies, or new competitors in the industry, may developproducts that customers in the industry prefer over our products.

 

We believe that the introduction of new products and new features iscritical to our success.  Delays in theintroduction of new models or product features, quality problems associatedwith these introductions, or a lack of market acceptance of new models orfeatures could affect us adversely.  Forexample, unexpected costs associated with model changes have affected our grossmargin in the past.  Further, newproduct introductions can divert revenues from existing models and result infewer sales of existing products.

 

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES  Our customers require demandingspecifications 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 and warranty and replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich will negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OFLITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  We are subject to litigation arising in theordinary course of our business, typically for product liability and warrantyclaims that are common in the recreational vehicle industry.  While we do not believe that the outcome ofany pending litigation, net of insurance coverage, will materially adverselyaffect our business, results of operations, or financial condition, we cannotprovide assurances in this regard because litigation is an inherently uncertainprocess.*

 

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

 

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEYEMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING  Our success depends in part upon attractingand retaining highly skilled professionals. A number of our employees are highly skilled engineers and othertechnical professionals, and our failure to continue to attract and retain suchindividuals could adversely affect our ability to compete in the industry.

 

OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATIONSYSTEMS  In the past few years, we havesignificantly expanded the size and scope of our business, which has requiredus to hire additional employees.  Someof these new employees include new management personnel.  In addition, our current managementpersonnel have assumed additional responsibilities.   The increase in our size over a relatively short period of timehas put pressure on our operating, financial, and management informationsystems.  If we continue to expand, suchgrowth would put additional pressure on these systems and may cause suchsystems to malfunction or to experience significant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN  As we continue to work towards involvingautomated machinery and equipment to improve efficiencies and quality, we willbe subject to certain risks involving implementing new technologies into ourfacilities.

 

The expansion into new machinery andequipment technologies involves risks, including the following:

 

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•                  We must rely ontimely performance by contractors, subcontractors, and government agencies,whose performance we may be unable to control.

 

•                  The developmentof new processes involves costs associated with new machinery, training ofemployees, and compliance with environmental, health, and other governmentregulations.

 

•                  The newlydeveloped products may not be successful in the marketplace.

 

•                  We may be unableto complete a planned machinery and equipment implementation in a timelymanner, which could result in lower production levels and an inability tosatisfy customer demand for our products.

 

**NEWLYISSUED FINANCIAL REPORTING PRONOUNCEMENTS**

 

SFAS 150

 

In May of 2003, the Financial AccountingStandards Board (the Board), issued SFAS 150 Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity (SFAS150).  This Statement establishes standardsfor how an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Many ofthose instruments would previously have been classified as an equity.

 

This Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003, except for mandatorily redeemable financial instruments of nonpublicentities.

 

We have reviewed the provisions of SFAS 150,and believe that it does not have any financial instruments requiringreclassifications under SFAS 150.

 

FIN 46

 

In January 2003, the Board issued FASBInterpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities -an Interpretation of ARB No. 51, Consolidated Financial Statements.  The Interpretation addresses how variableinterest entities are to be identified and how an enterprise assesses itsinterests in a variable interest entity to decide whether to consolidate thatentity.  The Interpretation alsorequires existing unconsolidated variable interest entities to be consolidatedby their primary beneficiaries if the entities do not effectively disperserisks among the parties involved.

 

FIN 46 is effective in the first fiscal yearor interim period beginning after June 15, 2003, to variable interest entitiesin which a company holds a variable interest that is acquired before February1, 2003.

 

The provisions of FIN 46 have been reviewed,and we do not believe that we have any entities requiring consolidation.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Not applicable.

 

**Item4.  Controls and Procedures**

 

Evaluation of DisclosureControls 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 QuarterlyReport on Form 10-Q.  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 Securities and ExchangeCommission rules and forms.

 

Our management, including our chief executiveofficer and chief financial officer, does not expect that our disclosurecontrols and procedures will prevent all error and all fraud.  Because of inherent limitations in anysystem of disclosure controls and procedures, no evaluation of controls canprovide absolute assurance that all instances of error or fraud, if any, withinthe Company may be detected.  However,our management, including our chief executive officer and our chief financialofficer, have designed our disclosure controls and procedures to providereasonable assurance of achieving their objectives and have, pursuant to theevaluation discussed above, concluded that our disclosure controls andprocedures are, in fact, effective at this reasonable assurance level.

 

Changes in Internal ControlsOver Financial Reporting

 

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

 

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**PART II -OTHER INFORMATION**

 

**Item 6.  Exhibits and Reports on Form 8-K**

 
| (a)    |   | Exhibits             |
|--------|--------|----------------------|
|   |   |                 |
|   |   | 31.1                 | Sarbanes-Oxley  Section 302(a) Certification. |
|   |   | 31.2                 | Sarbanes-Oxley  Section 302(a) Certification. |
|   |   | 32.1                 | Certification of  Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|   |   |                 |   |
| (b)    |   | Reports on Form  8-K |
|   |   |                 |   |
|   |   | i.                   | On February 3,  2004, the Company filed a Form 8-K which furnished a copy of a press release  announcing the Company’s results of operations for fourth quarter and full  fiscal year ended January 3, 2004. |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|         | **MONACO  COACH CORPORATION**                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------|
|         |                                                                                                    |
|         |                                                                                                    |
| Dated:  | May 13, 2004                                                                                            |   | /s/ | P. Martin Daley |   |
|         | P. Martin Daley                                                                                         |
|         | Vice President and  Chief Financial Officer (Duly  Authorized Officer and Principal  Financial Officer) |
|              |                                                                                                         |  |  |  |  |

 

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**EXHIBITS INDEX**

 
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                       |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                              |
| 31.1                |   | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                     |
|                |   |                                                                                                                                                                              |
| 31.2                |   | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                     |
|                |   |                                                                                                                                                                              |
| 32.1                |   | Certification of  Chief Executive Officer and Chief Financial Officer 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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