**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 period  ended:  June  28, 2003** |
|                                                 |   |                                                                                          |
| **or**                                               |
|                                                 |   |                                                                                          |
| **o**                                                |   | **Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |

 

**For the period from                   to                   **

 

**Commission FileNumber:  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, includingarea code **(541) 686-8011**

 

Indicate by check mark whether theregistrant  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90days.

 

YES ý         NOo

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

 

YES ý         NOo

 

Thenumber of shares outstanding of common stock, $.01 par value, as ofJune 28, 2003:  29,051,281

 

 

----

 

**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**June 28, 2003**

 

**INDEX**

 
| **PART I - FINANCIAL  INFORMATION**                                                                                                      |
|------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                     |
| **Item 1.  Financial Statements.**                                                                                                  |
|                                                                                                                                     |
| Condensed Consolidated Balance Sheets as  of   December 28, 2002 and June 28, 2003.                                            |
|                                                                                                                                     |
| Condensed  Consolidated Statements of Income   for the quarters and six-month periods ended   June 29, 2002 and June 28, 2003. |
|                                                                                                                                     |
| Condensed Consolidated  Statements of Cash   Flows for the six-month periods ended   June 29, 2002 and June 28, 2003.          |
|                                                                                                                                     |
| 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  4.  Submission of Matters to a Vote of  Security Holders.**                                                                 |
|                                                                                                                                     |
| **Item 6.  Exhibits and Reports on Form 8-K.**                                                                                      |
|                                                                                                                                     |
| **Signatures.**                                                                                                                          |
|                                                                                                                                     |

 

2

----

 

**PART I -FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

3

----

 

**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited: dollars in thousands, except share and pershare data)**

 
|                                                                                                                        |   | **December 28,  2002** |       | **June 28,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                  |   |                        | ** ** |                    | ** ** |
| Current  assets:                                                                                                            |   |                        |       |                    |       |
| Trade receivables, net                                                                                                      |   | $                           | 116,647    |                    | $          | 104,790 |   |
| Inventories                                                                                                                 |   | 175,609                     |       | 161,176                 |       |
| Resort lot inventory                                                                                                        |   | 26,883                      |       | 22,622                  |       |
| Prepaid expenses                                                                                                            |   | 3,612                       |       | 3,527                   |       |
| Deferred income taxes                                                                                                       |   | 33,379                      |       | 32,468                  |       |
| Total current assets                                                                                                        |   | 356,130                     |       | 324,583                 |       |
|                                                                                                                        |   |                        |       |                    |       |
| Property, plant, and equipment, net                                                                                         |   | 135,350                     |       | 143,052                 |       |
| Debt issuance costs net of accumulated  amortization of $389, and $566, respectively                                        |   | 683                         |       | 806                     |       |
| Goodwill, net of accumulated amortization of  $5,320 and $5,320, respectively                                               |   | 55,254                      |       | 55,254                  |       |
| Total assets                                                                                                                |   | $                           | 547,417    |                    | $          | 523,695 |   |
|                                                                                                                        |   |                        |       |                    |       |
| **LIABILITIES**                                                                                                             |   |                        | ** ** |                    | ** ** |
| Current  liabilities:                                                                                                       |   |                        |       |                    |       |
| Book overdraft                                                                                                              |   | $                           | 3,518      |                    | $          | 9,486 |   |
| Line of credit                                                                                                              |   | 51,413                      |       | 41,785                  |       |
| Current portion of long-term note payable                                                                                   |   | 21,667                      |       | 21,667                  |       |
| Accounts payable                                                                                                            |   | 78,055                      |       | 67,396                  |       |
| Product liability reserve                                                                                                   |   | 21,322                      |       | 21,491                  |       |
| Product warranty reserve                                                                                                    |   | 31,745                      |       | 29,329                  |       |
| Income taxes payable                                                                                                        |   | 4,536                       |       | 0                       |       |
| Accrued expenses and other liabilities                                                                                      |   | 29,633                      |       | 28,545                  |       |
| Total current liabilities                                                                                                   |   | 241,889                     |       | 219,699                 |       |
|                                                                                                                        |   |                        |       |                    |       |
| Long-term note payable                                                                                                      |   | 30,333                      |       | 21,667                  |       |
| Deferred income taxes                                                                                                       |   | 14,568                      |       | 15,815                  |       |
|                                                                                                                        |   | 286,790                     |       | 257,181                 |       |
|                                                                                                                        |   |                        |       |                    |       |
| Commitments  and contingencies (Note 8)                                                                                     |   |                        |       |                    |       |
|                                                                                                                        |   |                        |       |                    |       |
| **STOCKHOLDERS’ EQUITY**                                                                                               |   |                        | ** ** |                    | ** ** |
| Preferred  stock, $.01 par, 1,934,783 shares authorized, no shares outstanding                                              |   |                        |       |                    |       |
| Common stock, $.01 par value; 50,000,000 shares  authorized, 28,871,144 and 29,051,281 issued and outstanding, respectively |   | 289                         |       | 291                     |       |
| Additional paid-in capital                                                                                                  |   | 51,501                      |       | 52,478                  |       |
| Retained earnings                                                                                                           |   | 208,837                     |       | 213,745                 |       |
| Total stockholders’ equity                                                                                             |   | 260,627                     |       | 266,514                 |       |
| Total liabilities and stockholders’ equity                                                                             |   | $                           | 547,417    |                    | $          | 523,695 |   |

 

Seeaccompanying notes.

 

4

----

 

**MONACO COACH CORPORATION**

** CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

**(Unaudited: dollars in thousands, except share and pershare data)**

 
|                                          |   | **Quarter Ended**       |       | **Six-Months Ended**    |       |
|-----------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
|                                          |   | **June 29,  2002** |       | **June 28,  2003** |       | **June 29,  2002** |   | **June 28,********2003** |   |
|                                          |   |                    | ** ** |                    | ** ** |   | ** ** |   | ** ** |
| Net sales                                     |   | $                       | 313,742    |                    | $          | 268,361 |   | $ | 607,342 |   | $ | 541,935 |   |
| Cost of sales                                 |   | 272,513                 |       | 241,108                 |       | 528,368 |   | 481,076 |   |
| Gross profit                                  |   | 41,229                  |       | 27,253                  |       | 78,974 |   | 60,859 |   |
|                                          |   |                    |       |                    |       |   |   |   |   |
| Selling, general, and administrative expenses |   | 22,505                  |       | 25,744                  |       | 43,671 |   | 51,393 |   |
| Operating income                              |   | 18,724                  |       | 1,509                   |       | 35,303 |   | 9,466 |   |
|                                          |   |                    |       |                    |       |   |   |   |   |
| Other income, net                             |   | 2                       |       | 232                     |       | 43 |   | 438 |   |
| Interest expense                              |   | (669                    | )          | (779                    | )          | (1,367 | ) | (1,791 | ) |
| Income before income taxes                    |   | 18,057                  |       | 962                     |       | 33,979 |   | 8,113 |   |
|                                          |   |                    |       |                    |       |   |   |   |   |
| Provision for income taxes                    |   | 7,087                   |       | 380                     |       | 13,336 |   | 3,205 |   |
| Net income                                    |   | $                       | 10,970     |                    | $          | 582 |   | $ | 20,643 |   | $ | 4,908 |   |
|                                          |   |                    |       |                    |       |   |   |   |   |
| Earnings  per common share:                   |   |                    |       |                    |       |   |   |   |   |
| Basic                                         |   | $                       | .38        |                    | $          | .02 |   | $ | .72 |   | $ | .17 |   |
| Diluted                                       |   | $                       | .37        |                    | $          | .02 |   | $ | .70 |   | $ | .17 |   |
|                                          |   |                    |       |                    |       |   |   |   |   |
| Weighted  average common shares outstanding:  |   |                    |       |                    |       |   |   |   |   |
| Basic                                         |   | 28,807,792              |       | 29,027,603              |       | 28,760,396 |   | 28,992,255 |   |
| Diluted                                       |   | 29,660,847              |       | 29,469,777              |       | 29,642,792 |   | 29,405,286 |   |

 

Seeaccompanying notes.

 

5

----

 

**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CAS****H FLOWS**

**(Unaudited: dollars in thousands)**

** **
|                                                                                      |   | **Six-Months Ended**    |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                      |   | **June 29,  2002** |   | **June 28,  2003** |   |
|                                                                                      |   |                    |   |   |   |
| **Increase (Decrease) in Cash**:                                                          |   |                    |   |   |   |
|                                                                                      |   |                    |   |   |   |
| Cash  flows from operating activities:                                                    |   |                    |   |   |   |
| Net income                                                                                |   | $                       | 20,643 |   | $ | 4,908 |   |
| Adjustments  to reconcile net income to net cash (used) provided by operating activities: |   |                    |   |   |   |
| Gain on sale of assets                                                                    |   | 0                       |   | 287 |   |
| Depreciation and amortization                                                             |   | 4,010                   |   | 4,677 |   |
| Deferred income taxes                                                                     |   | 4,030                   |   | 2,158 |   |
| Changes  in working capital accounts:                                                     |   |                    |   |   |   |
| Trade receivables, net                                                                    |   | (39,301                 | )      | 11,857 |   |
| Inventories                                                                               |   | (24,105                 | )      | 14,433 |   |
| Resort lot inventory                                                                      |   | 0                       |   | 4,261 |   |
| Prepaid expenses                                                                          |   | (2,992                  | )      | 80 |   |
| Accounts payable                                                                          |   | 21,198                  |   | (10,659 | ) |
| Product liability reserve                                                                 |   | 568                     |   | 169 |   |
| Product warranty reserve                                                                  |   | 2,081                   |   | (2,416 | ) |
| Income taxes payable                                                                      |   | 6,317                   |   | (4,536 | ) |
| Accrued expenses and other liabilities                                                    |   | 6,304                   |   | (1,088 | ) |
| Net cash (used) provided by operating activities                                          |   | (1,247                  | )      | 24,131 |   |
| Cash  flows from investing activities:                                                    |   |                    |   |   |   |
| Additions to property, plant, and equipment                                               |   | (6,797                  | )      | (14,272 | ) |
| Proceeds from sale of assets                                                              |   | 13                      |   | 1,789 |   |
| Issuance of notes receivable                                                              |   | (13                     | )      | 0 |   |
| Net cash used in investing activities                                                     |   | (6,797                  | )      | (12,483 | ) |
| Cash  flows from financing activities:                                                    |   |                    |   |   |   |
| Book overdraft                                                                            |   | 10,869                  |   | 5,968 |   |
| (Payments) borrowings on lines of credit, net                                             |   | 1,000                   |   | (9,628 | ) |
| Payments on long-term notes payable                                                       |   | (5,000                  | )      | (8,666 | ) |
| Debt issuance costs                                                                       |   | 0                       |   | (301 | ) |
| Issuance of common stock                                                                  |   | 1,175                   |   | 979 |   |
| Net cash provided (used) by financing activities                                          |   | 8,044                   |   | (11,648 | ) |
| Net change in cash                                                                        |   | 0                       |   | 0 |   |
| Cash at beginning of period                                                               |   | 0                       |   | 0 |   |
| Cash at end of period                                                                     |   | $                       | 0      |   | $ | 0 |   |

 

Seeaccompanying notes.

 

6

----

 

**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIA****L STATEMENTS**

**(Unaudited)**

 

**1.****             ****Basis of Presentation**

 

Theinterim condensed consolidated financial statements have been prepared byMonaco 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 December 28, 2002 and June 28,2003, and the results of its operations for the quarters and six-month periodsended June 29, 2002 and June 28, 2003, and cash flows of the Companyfor the six-month periods ended June 29, 2002 and June 28, 2003.  The condensed consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of December 28, 2002 was derived from audited financialstatements, but does not include all disclosures contained in the Company’sAnnual Report to Stockholders.  Theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto appearingin the Company’s Annual Report to Stockholders for the year endedDecember 28, 2002.

 

**2.****             ****Acquisition of OutdoorResorts**

 

OnNovember 27, 2002, the Company completed the acquisition from OutdoorResorts of America (“ORA”) of all the outstanding stock of Outdoor Resorts ofLas Vegas, Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), and OutdoorResorts Motorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed and undevelopedluxury motor coach resorts.  Previous tothe acquisition, the Company had provided ORA with loans in the amount of $8.0million, as well as  co-guaranteeing $10million in bank debt secured by ORA.

 

Asconsideration for the acquisition, the Company assumed the current debt andliabilities of the projects of approximately $30.8 million, including the $8.0million note payable to the Company, and the $10 million co-guaranteed debt.

 

Thecash portion of the $30.8 million in consideration given, paid for theProjects, including transaction costs of $522,000 totaled $21,113,000.  The total assets acquired and liabilitiesassumed of the Projects, based on estimated fair values at November 27,2002, are as follows:

 
|                                          |   | **(in  thousands)** |     |
|-----------------------------------------------|--------|---------------------|----------|
|                                          |   |                | * * |
| Cash                                          |   | $                   | 28       |   |
| Resort lot inventory                          |   | 26,784              |     |
| Deferred tax asset                            |   | 272                 |     |
| Property and equipment                        |   | 3,670               |     |
| 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   |   |

 

7

----

 

**3.****             ****Inventories**

 

Inventoriesare stated at lower of cost (first-in, first-out) or market.  The composition of inventory is as follows:

 
|            |   | **December 28,  2002** |    | **June 28,  2003** |   |
|-----------------|--------|-----------------------------|---------|-------------------------|--------|
|            |   | **(in  thousands)**         |    |
| Raw materials   |   | $                           | 70,021  |                    | $      | 54,392 |   |
| Work-in-process |   | 62,022                      |    | 60,254                  |   |
| Finished units  |   | 43,566                      |    | 46,530                  |   |
|            |   | $                           | 175,609 |                    | $      | 161,176 |   |

 

**4.****             ****Line of Credit**

 

TheCompany has a bank line of credit consisting of a revolving line of credit ofup to $95 million (the “Revolving Loan”). At the election of the Company, the Revolving Loan bears interest atvariable rates that fluctuate based on the Prime rate or LIBOR, and aredetermined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused availableportion of the Revolving Loan at varying rates, determined by the Company’sleverage ratio.  The Revolving Loan isdue and payable in full on June 30, 2005, and requires monthly interestpayments.  The balance outstanding underthe Revolving Loan at June 28, 2003 was $41.8 million.  The Revolving Loan is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.

 

**5.****             ****Long-term Notes Payable**

 

TheCompany has long-term notes payable of $43.3 million outstanding atJune 28, 2003.  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 September 28,2005.

 

Thefollowing table displays the scheduled future principal payments by fiscal yearthat will be due on the term loan.

 

| **Year** |   | **Amount of  Payment********Due** |   |
|----------|--------|-----------------------------------|--------|
|     |   | **(in  thousands)**               |   |
| 2003     |   | $                                 | 13,000 |   |
| 2004     |   | 17,334                            |   |
| 2005     |   | 13,000                            |   |
|     |   |                              |   |
|     |   | $                                 | 43,334 |   |

 

8

----

 

**6.****             ****Earnings Per Common Share**

 

Basicearnings per common share is based on the weighted average number of sharesoutstanding during the period.  Dilutedearnings per common share is based on the weighted average number of sharesoutstanding during the period, after consideration of the dilutive effect ofstock options.  The weighted averagenumber of common shares used in the computation of earnings per common shareare as follows:

 
|                                            |   | **Quarter Ended**       |       | **Six Months Ended**          |       |
|-------------------------------------------------|--------|-------------------------|------------|-------------------------------|------------|
|                                            |   | **June 29,  2002** |       | **June 28,********2003** |       | **June 29,********2002** |   | **June 28,********2003** |   |
| **Basic**                                       |   |                    | ** ** |                          | ** ** |   | ** ** |   | ** ** |
| Issued and outstanding shares(weighted average) |   | 28,807,792              |       | 29,027,603                    |       | 28,760,396 |   | 28,992,255 |   |
|                                            |   |                    |       |                          |       |   |   |   |   |
| **Effect of Dilutive Securities**               |   |                    | ** ** |                          | ** ** |   | ** ** |   | ** ** |
| Stock Options                                   |   | 853,055                 |       | 442,174                       |       | 882,396 |   | 413,031 |   |
| **Diluted**                                     |   | 29,660,847              |       | 29,469,777                    |       | 29,642,792 |   | 29,405,286 |   |

 

**7.****             ****Stock Option Plans**

 

AtJune 28, 2003, the Company had three stock-based employee compensationplans.  The Company accounts for thoseplans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123, Accounting forStock-based Compensation, to stock-based employee compensation.

 
|                                                                                                                                          |   | **Quarter Ended**       |       | **Six Months Ended**          |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------------|------------|
|                                                                                                                                          |   | **June 29,  2002** |       | **June 28,********2003** |       | **June 29,********2002** |   | **June 28,********2003** |   |
|                                                                                                                                          |   |                    | ** ** |                          | ** ** |   | ** ** |   | ** ** |
| Net income - as reported                                                                                                                      |   | $                       | 10,970     |                          | $          | 582 |   | $ | 20,643 |   | $ | 4,908 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 130                     |       | 172                           |       | 260 |   | 338 |   |
|                                                                                                                                          |   | $                       | 10,840     |                          | $          | 410 |   | $ | 20,383 |   | $ | 4,570 |   |
|                                                                                                                                          |   |                    |       |                          |       |   |   |   |   |
| Earnings  per share:                                                                                                                          |   |                    |       |                          |       |   |   |   |   |
| Basic - as reported                                                                                                                           |   | $                       | 0.38       |                          | $          | 0.02 |   | $ | 0.72 |   | $ | 0.17 |   |
| Basic - pro forma                                                                                                                             |   | $                       | 0.38       |                          | $          | 0.01 |   | $ | 0.71 |   | $ | 0.16 |   |
|                                                                                                                                          |   |                    |       |                          |       |   |   |   |   |
| Diluted - as reported                                                                                                                         |   | $                       | 0.37       |                          | $          | 0.02 |   | $ | 0.70 |   | $ | 0.17 |   |
| Diluted - pro forma                                                                                                                           |   | $                       | 0.37       |                          | $          | 0.01 |   | $ | 0.69 |   | $ | 0.16 |   |

 

9

----

 

**8.****             ****Commitments andContingencies**

 

Repurchase Agreements

 

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in thevehicles.  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement. These agreements provide that, for up to 18 months after a unit isshipped, the Company will repurchase a dealer’s inventory in the event of adefault by a dealer to its lender.

 

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

 

Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at June 28, 2003 is $461.0 million, with approximately8.43% concentrated with one dealer.  Ifthe Company were obligated to repurchase a significant number of units underany repurchase agreement, its business, operating results, and financialcondition could be adversely affected. The Company has included the disclosure requirements of FASBInterpretation No. 45 (FIN 45), “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” in its financial statements, and has determined that the recognitionprovisions of FIN 45 apply to certain guarantees routinely made by the Companyincluding contingent repurchase obligations to third party lenders forinventory financing of dealer inventories. As of June 28, 2003, the Company has provided a reserve in theamount of $300,000, and expects to record an expense in each of the next twoconsecutive quarters in the amount of $150,000.  This estimated liability is based on the Company’s experience oflosses associated with the repurchase and resale of units in prior years.

 

Product liability

 

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

 

TheCompany has from time to time been subject to product liability claims.  To date, the Company has been successful inobtaining product liability insurance on terms the Company considersacceptable.  The terms of the policycontain a self-insured retention amount of $500,000 per occurrence, with a maximumannual 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 Company will be able to obtaininsurance coverage in the future at acceptable levels or that the cost ofinsurance 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

 

TheCompany is involved in various legal proceedings which are incidental to theindustry and for which certain matters are covered in whole or in part byinsurance or, otherwise, the Company has recorded accruals for estimatedsettlements.  Management believes thatany liability which may result from these proceedings will not have a materialadverse effect on the Company’s consolidated financial statements.

 

10

----

 

Aircraft Lease Commitment

 

TheCompany has a two-year operating lease for an aircraft, endingFebruary 11, 2004, with annual renewals for up to three additionalyears.  If at the end of the initiallease period the Company elects to return the aircraft, the Company hasguaranteed up to $16 million in the event the Lessor’s net sales proceeds areless than $18.5 million.

 

11

----

 

**Item2.  Management’s Discussion and Ana****lysis of Financial Conditionand Results of Operations**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E 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, the Company may from time totime make forward-looking statements through statements that include the words“believes,” “expects,” “anticipates,” or similar expressions.  Such forward-looking statements involveknown and  unknown risks, uncertaintiesand other factors that may cause actual results, performance or achievements ofthe Company to differ materially from those expressed or implied by suchforward-looking statements, including those set forth below under the caption“Factors That May Affect Future Operating Results” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth under the caption “Factors That May AffectFuture Operating Results.”  The Companycautions the reader, however, that these factors may not be exhaustive.

 

**GENERAL**

 

MonacoCoach Corporation is a leading manufacturer of premium Class A and Class Cmotor coaches and towable recreational vehicles (“towables”).  The Company’s product line currently consistsof a broad line of motor coaches, fifth wheel trailers and travel trailersunder the “Monaco,” “Holiday Rambler,” “Royale Coach,” “Beaver,” “Safari,” and“McKenzie” brand names.  The Company’sproducts, which are typically priced at the high end of their respectiveproduct categories, range in suggested retail price from $70,000 to $1.1million for motor coaches and from $25,000 to $65,000 for towables.

 

**RESULTS OF OPERATIONS**

 

**Quarter ended June  28, 2003 Compared to Quarter endedJune 29, 2002**

 

Secondquarter net sales decreased 14.5% to $268.4 million compared to $313.7 millionfor the same period last year. Gross diesel motorized revenues were down 14.5%,while gas motorized were down 9.8% and towables were down 31.4%, reflectingcontinued challenging market conditions. The Company’s overall unit sales were down 24.6% in the second quarterof 2003 with diesel motorized unit sales down 21.1% to 1,173 units, gasmotorized unit sales down 12.2% to 535 units, and towable unit sales down by38.7% to 552 units.  The Company’s totalaverage selling price increased to $119,000 from $106,000 in the same periodlast year.

 

Grossprofit for the second quarter of 2003 decreased to $27.3 million, down from$41.2 million in 2002, and gross margin decreased from 13.1% in the secondquarter of 2002 to 10.2% in the second quarter of 2003.  The decrease in gross margin over the prioryear was due in part to an increase in sales discounts, which increased as apercentage of sales by 1.1%.  Grossmargins were further dampened by higher indirect costs of sales due to lowerrun rates in the Company’s production facilities which impacted gross marginnegatively by approximately 2%.

 

Selling,general, and administrative expenses increased by $3.2 million to $25.7 millionin the second quarter of 2003 and increased as a percentage of sales from 7.2%in 2002 to 9.6% in 2003.  The increasein selling, general, and administrative expenses in the second quarter of 2003was due to increases in retail promotion efforts that enabled the Company tosell substantially all of its 2003 model year product.  These increases were partially offset byslightly lower administrative wages and salary.  The Company’s selling, general, and administrative expense mayfluctuate in future periods depending on the Company’s strategy of retailpromotions as a result of difficult market conditions or competitivepressures.*

 

Operatingincome was $1.5 million, or 0.6% of sales in the second quarter of 2003compared to $18.7 million, or 6.0% of sales in the similar 2002 period.  The decrease in operating margins reflectslower gross margins, and higher selling, general, and administrative costs.

 

Netinterest expense was $779,000 (after the capitalization of $135,000 forconstruction-in-progress) in the second quarter of 2003 versus $669,000 in thecomparable 2002 period, reflecting a higher level of borrowing during thesecond quarter of 2003.

 

12

----

 

TheCompany reported a provision for income taxes of $380,000, or an effective taxrate of 39.5%, in the second quarter of 2003, compared to $7.1 million, or aneffective tax rate of 39.3%, for the comparable 2002 period.

 

Netincome for the second quarter of 2003 was $582,000 compared to $11.0 million in2002 due to an increase in sales combined with a lower operating margin thatwas only partially offset by a decrease in interest expense.

 

**Six Months ended June 28, 2003 Compared to Six Monthsended June 29, 2002**

 

Netrevenues decreased 10.8% to $541.9 million compared to $607.3 million for thesame period last year.  Gross dieselmotorized sales revenues were down 13.5%, gas motorized were up 1.6%, andtowables were down 17.9%. Overall unit sales for the Company were down 18.7% inthe first six months of 2003 compared to the similar period in 2002 with dieselmotorized unit sales down 19.7% to 2,396 units, gas motorized down 2.3% to1,010 units, and towables down 26.9 % to 1,221. The Company’s average unitselling prices increased in the first six months of 2003 compared to thesimilar 2002 period to $117,000 from $108,000.

 

Grossprofit for the six-month period ended June 28, 2003 decreased to $60.9million from $79.0 million in 2002, and gross margin decreased to 11.2% in 2003from 13.0% in 2002. The decrease in gross margin over the prior year was due inpart to an increase in sales discounts, which increased as a percentage ofsales by 0.9%.  Gross margins werefurther dampened by higher indirect costs of sales due to lower run rates inthe Company’s production facilities which impacted gross margin negatively by1.3%, and by various other direct costs of sales.

 

Selling, general, andadministrative expenses increased by $7.7 million to $51.4 million in the firstsix months of 2003 and increased as a percentage of sales from 7.2% in 2002 to9.5% in 2003.  Selling, general, andadministrative expenses in the first six months of 2003 were higher than thecorresponding period of 2002, due primarily to an increase of 2.1%, as a percentageof sales, in dealer promotions, which include retail incentives.

 

Operating income decreasedto $9.5 million in the first six months of 2003 from $35.3 million in2002.  The Company’s higher selling,general, and administrative expense as a percentage of sales combined with thedecline in the Company’s gross margin, resulted in a decrease in operatingmargin of 1.7% in the first six months of 2003 compared to 5.8% in the firstsix months of 2002.

 

Netinterest expense was $1.8 million (after the capitalization of $135,000 forconstruction-in-progress) in the first six months of 2003 versus $1.4 millionin the comparable 2002  period,reflecting a higher level of borrowing during the first half of 2003.

 

TheCompany reported a provision for income taxes of $3.2 million, or an effectivetax rate of 39.5%, for the first six months of 2003, compared to $13.3 million,or an effective tax rate of 39.3%, for the comparable 2002 period.

 

Netincome for the first half of 2003 was $4.9 million compared to $20.6 million in2002 due to the decrease in sales combined with lower gross margins, and higherselling, general, and administrative costs.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During the first six months of 2003, the Company generated cashof $24.1 million from operating activities. The Company generated $9.9 million from net income and non-cash expensessuch as depreciation and amortization. Additional sources of cash included a decrease in trade receivables of$11.9 million, a decrease in inventories of $14.4 million, and a decrease inresort lot inventory of $4.3 million. The uses of cash in operating activities included a decrease in accountspayable of $10.7 million, a decrease in product warranty reserve of $2.4million, and a decrease of $1.1 million in accrued expenses, and a decrease of$4.5 million in income taxes payable. The decrease in trade receivables reflects decreased shipments in thelast week of the second quarter of 2003 compared to the fourth quarter of2002.  Decreased inventory levelsreflect a decrease in finished goods and raw materials in accordance with theCompany’s desire to reduce working capital needs.  Decreased payables and liabilities are reflective of decreasedpurchases for lower production run rates over the prior year, model change,accruals for current income taxes payable, and various other accruedliabilities.

 

13

----

 

OnMay 29, 2003 the Company amended it’s credit facility to increase it’soperating line of credit from $70.0 million to $95.0 million.  This amendment also extended the maturitydate of the operating line of credit from September 30, 2004 toJune 30, 2005.  At June 28,2003, the Company had credit facilities consisting of a revolving line ofcredit of up to $95.0 million of which $41.8 million was outstanding  (the “Revolving Loan”) and term loans withbalances of $43.3 million at June 28, 2003 (the “Term Loans”).  At the election of the Company, the RevolvingLoan and Term Loans bear interest at varying rates that fluctuate based on thePrime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly onthe unused available portion of the Revolving Loan at varying rates, determinedby the Company’s 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 theCompany sells substantially all of any motor coach resort location.  The Term Loans require monthly interestpayments and quarterly principal payments that total $4.3 million.  The Revolving Loan and Term Loans are collateralizedby all the assets of the Company and include various restrictions and financialcovenants.  The Company utilizes “zerobalance” bank disbursement accounts in which an advance on the line of creditis automatically made for checks clearing each day.  Since the balance of the disbursement account at the bank returnsto zero at the end of each day, the outstanding checks of the Company arereflected as a liability.  Theoutstanding check liability is combined with the Company’s positive cash balanceaccounts to reflect a net book overdraft or a net cash balance for financialreporting.

 

TheCompany’s principal working capital requirements are for purchases of inventoryand financing of trade receivables. Many of the Company’s dealers finance product purchases under wholesalefloor plan arrangements with third parties as described below.  At June 28, 2003, the Company hadworking capital of approximately $104.9 million, a decrease of $9.3 millionfrom working capital of $114.2 million at December 28, 2002.  The Company has been using short-term creditfacilities and cash flows from operations to finance its capital expenditures.

 

The Company believes thatcash flow from operations and funds available under its credit facilities willbe sufficient to meet the Company’s liquidity requirements for the next 12months.*  The Company’s capitalexpenditures were $14.3 million in the first six months of  2003, which included costs related to theconstruction of a new paint facility at the Company’s Indiana location, anexpansion of the Indiana towable plant, a new service facility in Florida, aswell as various other routine capital expenditures.  The Company anticipates that capital expenditures for all of 2003will be approximately $21 to $22 million, which includes expenditures tocomplete the Indiana towable plant expansion, an expansion of the Oregonchassis plant, and routine capital expenditures for computer system upgradesand additions, smaller scale plant remodeling projects, and normal replacement ofoutdated or worn-out equipment.*  TheCompany may require additional equity or debt financing to address workingcapital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable.  The Companymay also from time to time seek to acquire businesses 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 typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lending institutionsto finance their purchases of the Company’s products.  Under the terms of these floor plan arrangements, institutionallenders customarily require the recreational vehicle manufacturer to agree torepurchase any unsold units if the dealer fails to meet its commitments to thelender, subject to certain conditions. The Company has agreements with several institutional lenders underwhich the Company currently has repurchase obligations.  The Company’s contingent obligations underthese repurchase agreements are reduced by the proceeds received upon the saleof any repurchased units.  The Company’sobligations under these repurchase agreements vary from period to period.  At June 28, 2003, approximately $461.0million of products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 8.43% concentrated with one dealer.  Historically, the Company has been successful in mitigatinglosses associated with repurchase obligations. During the first six months of 2003, there were approximately $600,000in losses associated with the exercise of repurchase agreements.  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.

 

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

 

14

----

 

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)                         |   | $                  | 21,667 |             | $      | 21,667           |   | $              | 0      |      | $      | 0 |   | $ | 43,334 |   |
| Operating Leases (2)                       |   | 2,598              |   | 2,216            |   | 2,003            |   | 3,178          |   | 9,995     |   |
| Total Contractual Cash Obligations         |   | $                  | 24,265 |             | $      | 23,883           |   | $              | 2,003  |      | $      | 3,178 |   | $ | 53,329 |   |

 

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      |             | $      | 41,785           |   | $              | 0      |      | $      | 0 |   | $ | 41,785 |   |
| Guarantees                           |   |               |   | 16,000           | (2)    | 0                |   | 0              |   | 16,000    |   |
| Repurchase Obligations (4)           |   | 0                  |   | 461,000          |   | 0                |   | 0              |   | 461,000   |   |
| Total Commitments                    |   | $                  | 0      |             | $      | 518,785          |   | $              | 0      |      | $      | 0 |   | $ | 518,785 |   |

 

----

(1)          See Note 5 to the financials.

(2)          Various leases including manufacturingfacilities, aircraft, and machinery and equipment.  See Note 8 to the financials.

(3)          See Note 4 to the financials.  The amount listed represents availableborrowings on the line of credit at June 28, 2003.

(4)          Reflects obligations under manufacturerrepurchase commitments.  See Note 8 tothe financials.

 

**INFLATION**

 

The Company does not believethat inflation has had a material impact on its results of operations for theperiods presented.

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those relatedto warranty costs, product liability, and impairment of goodwill.  We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results maydiffer from these estimates under different assumptions or conditions.  We believe the following critical accountingpolicies and related judgments and estimates affect the preparation of ourconsolidated financial statements.

 

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

 

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

 

IMPAIRMENT OF GOODWILL  The Company assesses the potentialimpairment of goodwill in accordance with Financial Accounting Standards Board(FASB) Statement No. 142.  This analysisinvolves management comparing the market capitalization of the Company, to thecarrying amount, including goodwill, of the net book value of the Company todetermine if goodwill has been impaired.

 

INVENTORY RESERVES  The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated market value. These write-downs are based on assumptions about

 

15

----

 

future sales demand and marketconditions.  If actual sales demand ormarket conditions change from those projected by management, additionalinventory write-downs may be required.

 

INCOME TAXES  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.

 

**FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OFREASONS  Our net sales, gross margin,and operating results may fluctuate significantly from period to period due toa number of factors, many of which are not readily predictable.  These factors include the following:

 

•                  The margins associated with the mix ofproducts we sell in any particular period.

 

•                  Our ability to utilize our manufacturingresources efficiently may be adversely impacted due to reduced run rates in ourplants.

 

•                  Shortages of materials used in our products.

 

•                  A determination by us that goodwill or otherintangible assets are impaired and have to be written down to their fairvalues, resulting in a charge to our results of operations.

 

•                  Our ability to introduce new models thatachieve consumer acceptance.

 

•                  The introduction, marketing and sale ofcompeting products by others, including significant discounting offered by ourcompetitors.

 

•                  The addition or loss of our dealers.

 

•                  The timing of trade shows and rallies, whichwe use to market and sell our products.

 

•                  Factors affecting the recreational vehicleindustry as a whole, including economic and seasonal factors.

 

Our overall gross margin maydecline in future periods to the extent that we increase the percentage ofsales of lower gross margin towable products or if the mix of motor coaches wesell shifts to lower gross margin units. In addition, a relatively small variation in the number of recreationalvehicles we sell in any quarter can have a significant impact on total salesand operating results for that quarter.

 

Our overall gross margin maydecline in the future to the extent we continue to run at reduced rates in ourplants.  These reduced rates createinefficiencies in plant overhead and indirect costs associated with theproduction process.

 

Demand in the recreationalvehicle industry generally declines during the winter months, while sales aregenerally higher during the spring and summer months.  With the broader range of products we now offer, seasonal factorscould have 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 forecastorders for our products accurately and commence purchasing and manufacturingprior 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.

 

16

----

 

THE RECREATIONAL VEHICLEINDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY  The recreational vehicle industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic, demographic, and political conditions thataffect disposable income for leisure-time activities.  For example, unit sales of recreational vehicles (excludingconversion vehicles) peaked at approximately 259,000 units in 1994 and declinedto approximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units anddeclined in 2001 to 257,000 units.  In2002, the industry rebounded up to approximately 307,000 units.  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, and availabilityof credit and overall consumer confidence. The recent decline in consumer confidence and slowing of the overalleconomy has adversely affected the recreational vehicle market.  An extended continuation of these conditionswould materially affect our business, results of operations, and financialcondition.

 

OUR RECENT GROWTH HAS PUTPRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENTINFORMATION SYSTEMS  In the past fewyears, we have significantly expanded the size and scope of our business, whichhas required us to hire additional employees. Some of 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 UNEXPECTEDPROBLEMS AND EXPENSES WHEN WE EXPAND OUR MANUFACTURING CAPACITY  In the past few years, we have significantlyincreased our manufacturing capacity. In connection with this expansion, we have also integrated some of ourmanufacturing facilities.  We mayexperience unexpected building and production problems associated with any suchexpansion.  In the past, we have haddifficulties with the manufacturing of new models and increasing the rates ofproduction of our plants.  Our expenseshave increased as a result of the expansion and we will be materially andadversely affected if the expansion does not result in an increase in revenuefrom new or additional products.

 

This expansion involvesrisks, including the following:

 

•                  We must rely on timely performance bycontractors, subcontractors, and government agencies, whose performance we maybe unable to control.

 

•                  The development of new products involvescosts associated with new machinery, training of employees, and compliance withenvironmental, health, and other government regulations.

 

•                  The newly developed products may not besuccessful in the marketplace.

 

•                  We may be unable to complete a plannedexpansion in a timely manner, which could result in lower production levels andan inability to satisfy customer demand for our products.

 

WE RELY ON A RELATIVELYSMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although our products were offered byapproximately 420 dealerships located primarily in the United States and Canadaas of June 28, 2003, a significant percentage of our sales areconcentrated among a relatively small number of independent dealers.  For the quarter ended June 28, 2003,sales to one dealer, Lazy Days RV Center, accounted for 13.6% of total salescompared to 12.5% of sales in the same period ended last year. For the secondquarter of 2003, sales to our 10 largest dealers, including Lazy Days RVCenter, accounted for a total of 40.0% of sales, compared to 42.1% of sales forthe same period in 2002.  The loss of asignificant dealer or a substantial decrease in sales by any of these dealerscould have a material impact on our business, results of operations, andfinancial condition.

 

WE MAY HAVE 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 $461.0million as of June 28, 2003, with approximately 8.43% concentrated withone dealer.  Losses associated withrepurchases and subsequent resales of the Company’s products have historicallybeen immaterial to operations, 

 

17

----

 

however the Company has provided a reserve inaccordance with FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, in the amount of $300,000 for the first six months of2003.  Nonetheless, if the Company wereobligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could beadversely affected.

 

OUR ACCOUNTS RECEIVABLEBALANCE IS SUBJECT TO CONCENTRATION RISK We sell our product to dealers who are predominantly located in theUnited States and Canada.  The terms andconditions of payment are a combination of open trade receivables, andcommitments from dealer floor plan lending institutions.  As of June 28, 2003, total trade receivableswere $104.8 million, with approximately $83.5 million, or 79.7% of theoutstanding accounts receivable balance concentrated among floor plan lenders.The remaining $21.3 million of trade receivables were concentratedsubstantially all with one dealer.

 

WE MAY EXPERIENCE ADECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASEIN THE SUPPLY OF FUEL  An interruptionin the supply, or a significant increase in the price or tax on the sale, ofdiesel fuel or gasoline on a regional or national basis could significantlyaffect our business.  Diesel fuel andgasoline have, at various times in the past, been either expensive or difficultto obtain.

 

WE DEPEND ON SINGLE ORLIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE INTHE PRODUCTION OF OUR PRODUCTS  A numberof important components for certain of our products are purchased from singleor a limited number of sources. These include turbo diesel engines (Cummins andCaterpillar), substantially all of our transmissions (Allison), axles (Dana andMeritor) for all diesel motor coaches and chassis (Workhorse and Ford) for gasmotor 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.  For example, in 1997, Allison placed allchassis manufacturers on allocation with respect to one of the transmissionsthat we use, and again in 1999 Ford placed one of its gasoline- powered chassison allocation.  An extended delay orinterruption in the supply of any components that we obtain from a singlesupplier or from a limited number of suppliers could adversely affect ourbusiness, results of operations, and financial condition.

 

OUR INDUSTRY IS VERYCOMPETITIVE.  WE MUST CONTINUE TOINTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for our products is verycompetitive.  We currently compete witha number of manufacturers of motor coaches, fifth wheel trailers, and travel trailers.  Some of these companies have greaterfinancial resources than we have and extensive distribution networks.  These companies, or new competitors in theindustry, may develop products that customers in the industry prefer over ourproducts.

 

We believe that theintroduction of new products and new features is critical to our success.  Delays in the introduction of new models orproduct features, quality problems associated with these introductions, or alack of market acceptance of new models or features could affect usadversely.  For example, unexpectedcosts associated with model changes have affected our gross margin in thepast.  Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

 

OUR PRODUCTS COULD FAIL TOPERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGETO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OFSALES  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 TOVARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTYCLAIMS  We are subject to litigationarising in the ordinary course of our business, typically for product liabilityand warranty claims 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.*

 

18

----

 

To date, we have beensuccessful in obtaining product liability insurance on terms that we consideracceptable.  The terms of the policycontain a self-insured retention amount of $500,000 per occurrence, with a maximumannual 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 to obtain insurance coveragein the future at acceptable levels or that the costs of such insurance will bereasonable.  Further, successfulassertion against us of one or a series of large uninsured claims, or of aseries of claims exceeding our insurance coverage, could have a materialadverse effect on our business, results of operations, and financial condition.

 

WE MAY BE UNABLE TOATTRACT 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.

 

WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES WITH OUR INVESTMENT IN THE OUTDOOR RESORTSPROJECTS  We acquired from OutdoorResorts of America, Inc. (“ORA”) three luxury motor coach resort propertiesbeing developed by ORA in Las Vegas, Nevada; Indio, California; and Naples,Florida.  The resorts offer individuallots to owners, with undivided interests in the resort amenities.  If weexperience difficulties in selling these properties, we could incur additionalexpenses which would adversely affect our profits.

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

FIN46

 

In January 2003, theBoard issued FASB Interpretation No. 46 (FIN 46), Consolidation of VariableInterest Entities - an Interpretation of ARB No. 51, Consolidated FinancialStatements.  The Interpretationaddresses how variable interest entities are to be identified and how anenterprise assesses its interests in a variable interest entity to decidewhether to consolidate that entity.  TheInterpretation also requires existing unconsolidated variable interest entitiesto be consolidated by their primary beneficiaries if the entities do noteffectively disperse risks among the parties involved.

 

FIN 46 is effective in thefirst fiscal year or interim period beginning after June 15, 2003 tovariable interest entities (VIE), in which a company holds a variable interestthat is acquired before February 1, 2003. The Company does not believe it is a primary beneficiary of a VIE orholds any significant interest or involvement in a VIE and therefore there willbe no impact of adopting this standard on the Company’s consolidated financialstatements.

**Item3.  Quantitative and Qualitative Di****sclosures About Market Risk**

 

Notapplicable.

 

19

----

 

**Item 4.  Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures

 

Our chief executive officerand our chief financial officer, after evaluating our “disclosure controls andprocedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”)Rules 13a-14(c) and 15-d-14(c)) have concluded that as of a date within 90 daysof the filing date of this report (the “Evaluation Date”) our disclosurecontrols and procedures are effective to ensure that information we arerequired to disclose in reports that we file or submit under the Exchange Actis recorded, processed, summarized, and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.

 

Changesin Internal Controls

 

Subsequent to the“Evaluation Date,” there were no significant changes in our internal controlsor in other factors that could significantly affect internal controls, nor werethere any significant deficiencies or material weaknesses in our internalcontrols.  As a result, no correctiveactions were required or undertaken.

 

20

----

 

**PART II -OTHER INFORMATION**

 

**Item4.  Submission of Matters to a Vote****of Security Holders**

 

At the Annual Meeting ofStockholders of the Company, held on May 13, 2003 in Coburg, Oregon, theStockholders (i) elected four Class II directors to serve on the Company’sBoard of Directors, (ii) amended the Company’s Director Option Plan to (a)increase the number of stock options non-employee directors receive annually to4,000 shares; and (b) to allow non-employee directors to receive up to fiftypercent (50%) of their annual cash compensation in the form of Companysecurities, and, (iii)  ratified theCompany’s appointment of PricewaterhouseCoopers LLP as independent auditors.

 

The vote for the election ofthe four Class II directors was as follows:

 
| **Nominee**            |   | **For**    |   | **Withheld** |   |
|------------------------|--------|------------|--------|--------------|--------|
| Robert P. Hanafee, Jr. |   | 27,318,301 |   | 204,286      |   |
| Dennis D. Oklak        |   | 27,257,442 |   | 265,145      |   |
| Carl E. Ring, Jr.      |   | 27,254,376 |   | 268,211      |   |
| Roger A. Vandenberg    |   | 27,254,888 |   | 267,699      |   |

 

The vote for amending the Company’s Director Option Plan was asfollows:

 
| **For**    |   | **Against** |   | **Abstained** |   |
|------------|--------|-------------|--------|---------------|--------|
| 25,293,261 |   | 1,309,377   | +      | 703,231       |   |

 

The vote for ratifying the appointment of PricewaterhouseCoopers LLPwas as follows:

 
| **For**    |   | **Against** |   | **Abstained** |   |
|------------|--------|-------------|--------|---------------|--------|
| 27,030,789 |   | 265,054     | +      | 10,026        |   |

 

----

+ Includes 0 broker nonvotes

 

**Item6.  Exhibits and Reports on Form 8-****K**

 
| (a)    |   | Exhibits             |
|--------|--------|----------------------|
|   |   |                 |
|   |   | 10.2                 |   | 1993  Director Option Plan as Amended Through May 13, 2003. |
|   |   |                 |   |   |
|   |   | 10.12                |   | Third  Amendment to the Amended and Restated Credit Agreement dated May 28,  2003 with U.S. Bank National Association. |
|   |   |                 |   |   |
|   |   | 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, and Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
|   |   |                 |   |   |
| (b)    |   | Reports  on Form 8-K |
|   |   |                 |
|   |   | i.                   |   | On  April 3, 2003, the Company filed a Form 8-K which furnished a copy of a  press release announcing preliminary results for the three months ended  March 28, 2003. |
|   |   |                 |   |   |
|   |   | ii.                  |   | On  April 9, 2003, the Company filed a Form 8-K which furnished certain  remarks made by management in a conference call. |
|   |   |                 |   |   |
|   |   | iii.                 |   | On  April 23, 2003, the Company filed a Form 8-K which furnished a copy of a  press release announcing the Company’s results of operations for the three  months ended March 28, 2003.. |

 

21

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                              | **MONACO COACH CORPORATION**                                                                             |
|-----------------------------------|----------------------------------------------------------------------------------------------------------|
|                              |                                                                                                     |
|                              |                                                                                                     |
| Dated:  August 11, 2003 | /s/  P. Martin Daley                                                                                |   |
|                              | P.  Martin Daley                                                                                         |
|                              | Vice  President and  Chief Financial Officer (Duly  Authorized Officer and Principal  Financial Officer) |

 

22

----

 

**EXHIBITS INDEX**

 
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                        |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                               |
| 10.2                |   | 1993  Director Option Plan as Amended Through May 13, 2003.                                                                                                                   |
|                |   |                                                                                                                                                                               |
| 10.12               |   | Third  Amendment to the Amended and Restated Credit Agreement dated May 29,  2003 with U.S. Bank National Association.                                                        |
|                |   |                                                                                                                                                                               |
| 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, and Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |

 

23

----