** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended:  September 29, 2001**

 

**or**

 

**o****        Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the period from________to________**

 

**Commission File Number:  1-14725**

 

**MONACOCOACH CORPORATION**

 

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

 

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

 

The number of shares outstanding of common stock, $.01 par value, as ofSeptember 29, 2001:  28,586,011

 

**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**September 29, 2001**

 

**INDEX**

 
| **PART  I - FINANCIAL INFORMATION** |
|-------------------------------------|
|                                |   |
|                                | **Item 1.  Financial Statements.** |
|                                |
|                                | Condensed  Consolidated Balance Sheets as of December 30, 2000 and September 29, 2001. |
|                                |   |
|                                | Condensed  Consolidated Statements of Income for the quarters and nine-month periods  ended September 30, 2000 and September 29, 2001. |
|                                |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the nine-month periods ended  September 30, 2000 and September 29, 2001. |
|                                |   |
|                                | 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.** |
|                                |   |
| **PART II - OTHER INFORMATION**     |
|                                |   |
|                                | **Item 6.  Exhibits and Reports on Form 8-K.** |
|                                |   |
|                                | **Signatures** |
|                                     |  |  |

 

**PARTI - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

** **

**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited:dollars in thousands)**

 
|                                                                                                                        |   | **December 30,** |    | **September 29,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|-------------------|--------|
|                                                                                                                        |   | **2000**         |    | **2001**          |   |
| **ASSETS**                                                                                                                  |   |             |    |              |   |
| Current assets:                                                                                                             |   |             |    |              |   |
| Trade  receivables, net                                                                                                     |   | $                | 67,998  |              | $      | 74,406 |   |
| Inventories                                                                                                                 |   | 114,397          |    | 126,583           |   |
| Prepaid  expenses                                                                                                           |   | 1,046            |    | 1,041             |   |
| Deferred income  taxes                                                                                                      |   | 13,197           |    | 28,570            |   |
| Total  current assets                                                                                                       |   | 196,638          |    | 230,600           |   |
|                                                                                                                        |   |             |    |              |   |
| Notes  receivable                                                                                                           |   | 2,800            |    | 7,550             |   |
| Property,  plant and equipment, net                                                                                         |   | 103,590          |    | 120,942           |   |
| Debt  issuance costs                                                                                                        |   |             |    | 994               |   |
| Goodwill,  net of accumulated amortization of $4,675 and $5,159, respectively                                               |   | 18,582           |    | 51,983            |   |
|                                                                                                                        |   |             |    |              |   |
| Total assets                                                                                                                |   | $                | 321,610 |              | $      | 412,069 |   |
|                                                                                                                        |   |             |    |              |   |
| **LIABILITIES**                                                                                                             |   |             |    |              |   |
| Current liabilities:                                                                                                        |   |             |    |              |   |
| Book  overdraft                                                                                                             |   | $                | 15,178  |              | $      | 15,038 |   |
| Line  of credit                                                                                                             |   | 20,585           |    | 6,630             |   |
| Current  portion of long-term note payable                                                                                  |   |             |    | 10,000            |   |
| Accounts  payable                                                                                                           |   | 53,098           |    | 68,737            |   |
| Income  taxes payable                                                                                                       |   | 0                |    | 5,123             |   |
| Accrued expenses  and other liabilities                                                                                     |   | 38,478           |    | 65,712            |   |
| Total  current liabilities                                                                                                  |   | 127,339          |    | 171,240           |   |
|                                                                                                                        |   |             |    |              |   |
| Long-term  note payable                                                                                                     |   |             |    | 30,000            |   |
| Deferred income  taxes                                                                                                      |   | 7,646            |    | 6,028             |   |
|                                                                                                                        |   | 134,985          |    | 207,268           |   |
|                                                                                                                        |   |             |    |              |   |
| Commitments and contingencies (Note 8)                                                                                      |   |             |    |              |   |
|                                                                                                                        |   |             |    |              |   |
| **STOCKHOLDERS'  EQUITY**                                                                                                   |   |             |    |              |   |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 18,952,107 and  28,586,011 issued and outstanding respectively |   | 190              |    | 286               |   |
| Additional  paid-in capital                                                                                                 |   | 47,032           |    | 47,812            |   |
| Retained  earnings                                                                                                          |   | 139,403          |    | 156,703           |   |
| Total  stockholders' equity                                                                                                 |   | 186,625          |    | 204,801           |   |
| Total liabilities and  stockholders' equity                                                                                 |   | $                | 321,610 |              | $      | 412,069 |   |

 

See accompanying notes.

 

**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

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

 
|                                          |   | **Quarter Ended** |       | **Nine Months Ended** |       |
|-----------------------------------------------|--------|-------------------|------------|-----------------------|------------|
|                                          |   | **September 30,** |       | **September 29,**     |       | **September 30,** |   | **September 29,** |   |
|                                          |   | **2000**          |       | **2001**              |       | **2000** |   | **2001** |   |
| Net  sales                                    |   | $                 | 226,393    |                  | $          | 240,831 |   | $ | 690,467 |   | $ | 675,483 |   |
| Cost of sales                                 |   | 195,485           |       | 210,283               |       | 590,128 |   | 593,643 |   |
| Gross  profit                                 |   | 30,908            |       | 30,548                |       | 100,339 |   | 81,840 |   |
|                                          |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Selling,  general and administrative expenses |   | 14,604            |       | 18,949                |       | 44,120 |   | 51,677 |   |
| Amortization of  goodwill                     |   | 161               |       | 162                   |       | 484 |   | 484 |   |
| Operating  income                             |   | 16,143            |       | 11,437                |       | 55,735 |   | 29,679 |   |
|                                          |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Other  income, net                            |   | 1                 |       | (42                   | )          | 64 |   | 320 |   |
| Interest expense                              |   | (219              | )          | (539                  | )          | (458 | ) | (1,638 | ) |
| Income  before income taxes                   |   | 15,925            |       | 10,856                |       | 55,341 |   | 28,361 |   |
|                                          |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Provision for  income taxes                   |   | 6,118             |       | 4,234                 |       | 21,468 |   | 11,061 |   |
|                                          |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Net income                                    |   | $                 | 9,807      |                  | $          | 6,622 |   | $ | 33,873 |   | $ | 17,300 |   |
|                                          |   |              |       |                  |       |   |   |   |   |
|                                          |   |              |       |                  |       |   |   |   |   |
| Earnings per common share:                    |   |              |       |                  |       |   |   |   |   |
| Basic                                         |   | $                 | .35        |                  | $          | .23 |   | $ | 1.19 |   | $ | .61 |   |
| Diluted                                       |   | $                 | .34        |                  | $          | .23 |   | $ | 1.17 |   | $ | .59 |   |
|                                          |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Weighted average common shares outstanding:   |   |              | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Basic                                         |   | 28,403,017        |       | 28,550,019            |       | 28,362,291 |   | 28,506,844 |   |
| Diluted                                       |   | 28,960,539        |       | 29,390,018            |       | 28,975,945 |   | 29,241,263 |   |

 

See accompanyingnotes.

** **

**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited:dollars in thousands)**

 
|                                                                                      |   | **Nine-months Ended** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                      |   | **Sep 30, 2000**      |   | **Sep 29, 2001** |   |
| **Increase (Decrease) in Cash:**                                                          |   |                  |   |   |   |
|                                                                                      |   |                  |   |   |   |
| Cash flows from  operating activities:                                                    |   |                  |   |   |   |
| Net  income                                                                               |   | $                     | 33,873 |   | $ | 17,300 |   |
| Adjustments to reconcile net income to net cash  provided (used) by operating activities: |   |                  |   |   |   |
| Gain  on sale of assets                                                                   |   |                  |   | (74 | ) |
| Depreciation  and amortization                                                            |   | 4,664                 |   | 5,212 |   |
| Deferred  income taxes                                                                    |   | 2,613                 |   | 567 |   |
| Changes in working capital accounts:                                                      |   |                  |   |   |   |
| Trade  receivables, net                                                                   |   | (34,671               | )      | (3,497 | ) |
| Inventories                                                                               |   | (18,585               | )      | 13,174 |   |
| Prepaid  expenses                                                                         |   | (849                  | )      | 319 |   |
| Accounts  payable                                                                         |   | 14,964                |   | (8,440 | ) |
| Income  taxes payable                                                                     |   | (476                  | )      | 5,123 |   |
| Accrued expenses  and other liabilities                                                   |   | (129                  | )      | (2,345 | ) |
| Net cash  provided by operating activities                                                |   | 1,404                 |   | 27,339 |   |
| Cash flows from  investing activities:                                                    |   |                  |   |   |   |
| Additions  to property, plant and equipment                                               |   | (14,581               | )      | (6,262 | ) |
| Proceeds  from sale of assets                                                             |   |                  |   | 106 |   |
| Payment  for business acquisition                                                         |   |                  |   | (24,320 | ) |
| Issuance of  notes receivable                                                             |   | (2,800                | )      | (4,750 | ) |
| Net cash used in  investing activities                                                    |   | (17,381               | )      | (35,226 | ) |
| Cash flows from  financing activities:                                                    |   |                  |   |   |   |
| Book  overdraft                                                                           |   | 3,417                 |   | (1,691 | ) |
| (Payments)  borrowings on lines of credit, net                                            |   | 11,889                |   | (30,304 | ) |
| Borrowings  on long-term note payable                                                     |   |                  |   | 40,000 |   |
| Debt  issuance costs                                                                      |   |                  |   | (994 | ) |
| Issuance of  common stock                                                                 |   | 671                   |   | 876 |   |
| Net cash  provided (used) by financing activities                                    |   | 15,977                |   | 7,887 |   |
| Net change in cash                                                                        |   | 0                     |   | 0 |   |
| Cash at beginning  of period                                                              |   | 0                     |   | 0 |   |
| Cash at end of  period                                                                    |   | $                     | 0      |   | $ | 0 |   |

** **

See accompanying notes.

 

**MONACOCOACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

The interim condensed consolidated financial statements have beenprepared by Monaco Coach Corporation (the "Company") withoutaudit.  In the opinion of management,the accompanying unaudited financial statements contain all adjustmentsnecessary, consisting only of normal recurring adjustments, to present fairlythe financial position of the Company as of December 30, 2000 and September 29,2001, and the results of its operations for the quarters and nine-month periodsended September 30, 2000 and September 29, 2001, and cash flows of the Companyfor the nine-month periods ended September 30, 2000 and September 29,2001.  The condensed consolidatedfinancial statements 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 30, 2000 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 ended December 30,2000.

 

**2.     Acquisition of SMC Corporation**

** **

The Company announcedon June 25, 2001 that it had reached an agreemeent with Oregon based motorhomemanufacturer SMC Corporation (“SMC”) to acquire all of the outstanding sharesof SMC pursuant to a cash tender offer at a price of $3.70 per share.  On August 6, 2001, the Company completed theback-end merger, and owned 100% of the shares.

** **

The cash paid for SMC, including transaction costs of$3,062,000, totalled $24,320,000.  Thetotal assets acquired and liabilities assumed of SMC based on estimated fairvalues at August 6, 2001, is as follows:

 

|                                           |   | ***(in thousands)*** |          |
|------------------------------------------------|--------|----------------------|---------------|
| Receivables                                    |   | $                    |  2,911   |   |
| Inventories                                    |   | 25,360               |          |
| Deferred tax asset                             |   | 17,558               |          |
| Property and equipment                         |   | 15,850               |          |
| Prepaids and other  assets                     |   | 314                  |          |
| Goodwill                                       |   | 33,885               |          |
| Total  assets acquired                         |   | 95,878               |          |
|                                           |   |                 |          |
| Book overdraft                                 |   | (1,551               | )             |
| Notes payable                                  |   | (16,349              | )             |
| Accounts payable                               |   | (24,079              | )             |
| Accrued  liabilities                           |   | (29,579              | )             |
| Total  liabilities assumed                     |   | $                    |  (71,558 | ) |
|                                           |   |                 |          |
| Total assets  acquired and liabilities assumed |   | $                    |  24,320  |   |

** **

**3.     Inventories**

 

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

 

|            |   | **December 30,**     |          | **September 29,** |
|-----------------|--------|----------------------|---------------|-------------------|
|            |   | **2000**             |          | **2001**          |
|            |   | ***(in thousands)*** |
| Raw  materials  |   | $                    |  45,187  |              | $ |  50,326 |
| Work-in-process |   | 31,739               |          | 42,144            |
| Finished units  |   | 37,471               |          | 34,113            |
|            |   | $                    |  114,397 |              | $ |  126,583 |

 

**4.     Goodwill**

 

Goodwill, which represents the excess of the cost ofacquisition over the fair value of net assets acquired, is being amortized on astraight-line basis over 20 and 40 years, except for goodwill arising from theacquisition of SMC on August 6, 2001 which is not being amortized (See Note 9“Recent Accounting Pronouncements”). Management assesses whether there has been permanent impairment in thevalue of goodwill and the amount of such impairment by comparing anticipatedundiscounted future cash flows from operating activities with the carryingvalue of the goodwill.  The factorsconsidered by management in performing this assessment include current operatingresults, trends and prospects, as well as the effects of obsolescence, demand,competition and other economic factors.

** **

**5.     Line of Credit**

 

The Company has a bank line of credit consisting of arevolving line of credit of up to $70.0 million.  At the election of the Company, the line of credit bears interestat varying 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 line at varying rates, determined by the Company’s leverageratio.  The revolving line of credit isdue and payable in full on June 30, 2004, and requires monthly interestpayments.  The balance outstanding underthe line of credit at September 29, 2001 was $6.6 million.  The line of credit is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.

 

**6.     Long-term Note Payable**

 

The Company has a long-term note payable of $40million outstanding at September 29, 2001. The term note bears interest at varying rates that fluctuate based onthe Prime rate or LIBOR, and are determined based on the Company's leverageratio.  The term note requires monthlyinterest payments and quarterly principal payments and is collateralized by allthe assets of the Company.  The termnote is due and payable in full on September 28, 2005.

** **

**7.     Earnings Per Common Share**

 

Basic earnings per common share is based on theweighted average number of shares outstanding during the period.  Diluted earnings per common share is basedon the weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options.   The weighted average number of commonshares used in the computation of earnings per common share are as follows:

 

|                                              |   | **Quarter Ended** |   | **Nine Months Ended** |
|---------------------------------------------------|--------|-------------------|--------|-----------------------|
|                                              |   | **September 30,** |   | **September 29,**     |   | **September 30,** |   | **September 29,** |
|                                              |   | **2000**          |   | **2001**              |   | **2000** |   | **2001** |
| **Basic**                                         |   |              |   |                  |   |   | ** ** |   |
| Issued and outstanding  shares (weighted average) |   | 28,403,017        |   | 28,550,019            |   | 28,362,291 |   | 28,506,844 |
|                                              |   |              |   |                  |   |   |   |   |
| **Effect of Dilutive Securities**                 |   |              |   |                  |   |   |   |   |
| Stock Options                                     |   | 557,522           |   | 839,999               |   | 613,654 |   | 734,419 |
| **Diluted**                                       |   | 28,960,539        |   | 29,390,018            |   | 28,975,945 |   | 29,241,263 |

** **

**8.     Commitmentsand Contingencies**

 

Repurchase Agreements

 

Substantially allof the Company's sales to independent dealers are made on terms requiring cashon delivery.  However, most dealersfinance units on a "floor plan" basis with a bank or finance companylending the dealer all or substantially all of the wholesale purchase price andretaining a security interest in the vehicles. Upon request of a lending institution financing a dealer's purchases ofthe Company's product, the Company will execute a repurchase agreement.  These agreements provide that, for varyingperiods of up to 18 months after a unit is shipped, the Company will repurchaseits products from the financing institution in the event that they haverepossessed them upon a dealer’s default. The risk of loss resulting from these agreements is further reduced bythe resale value of the products repurchased. The Company's contingent obligations under repurchase agreements varyfrom period to period and totaled approximately $361.6 million as of September29, 2001, with approximately  6.6%concentrated with one dealer.

 

Litigation

 

The Company is involved in legal proceedings arisingin the ordinary course of its business, including a variety of productliability and warranty claims typical in the recreational vehicleindustry.  Management does not believethat the outcome of its pending legal proceedings will have a material adverseeffect on the business, financial condition, or results of operations of theCompany.

 

Debt Guarantee

 

In 2000, theCompany entered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”)and ORLV’s parent company Outdoor Resorts of America (“ORA”), for the purposeof constructing a luxury motor coach resort in Las Vegas, Nevada.  In the first quarter of 2001, two additionalprojects, one in Naples, Florida, and the other in Indio, California, wereadded.  As of September 29, 2001, theCompany had advanced $7.5 million in the form of a long term note receivablefrom ORA and its respective subsidiaries. As part of the financing structure for the projects, the Company alsoagreed to act as co-guarantor with ORLV’s parent company, ORA, on an $11.2million construction loan for the Las Vegas resort.  At September 29, 2001, ORLV and ORA had drawn approximately $7.6million on the construction loan.  Inreturn for the Company’s loans and guarantee commitment, ORLV and ORA hasagreed to pay interest and income participation to the Company.

 

**9.     RecentAccounting Pronouncements**

** **

The FinancialAccounting Standards Board (FASB) recently issued No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.”  The Company applied the provisions of FAS141 for the acquisition of SMC on August 6, 2001.  The Company had $18.1 million of goodwill at September 29, 2001,which has been amortized in prior periods. The annual amortization of $645,000 of this goodwill will bediscontinued with the future adoption of FAS 142 for fiscal year 2002.  The remaining goodwill at September 29, 2001of $33.9 million, which arose from the acquisition of SMC, has not beenamortized in accordance with the transition rules of FAS 142.  In accordance with FAS 142, the Company willreview the carrying values of goodwill for impairment of value, if any, atleast annually.

 

On October 3, 2001, the FASB issued Statement of Financial AccountingStandards No. 144 "Accounting for the Impairment or Disposal of Long-LivedAssets” (“SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf." SFAS 144 applies to all long-lived assets (including discontinuedoperations) and consequently amends Accounting Principles Board Opinion No. 30(APB 30), “Reporting Results of Operations - Reporting the Effects of Disposalof a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transaction.” SFAS 144 develops one accounting model forlong-lived assets that are to be disposed of by sale. SFAS 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less cost to sell. Additionally, SFAS 144 expandsthe scope of discontinued operations to include all components of an entitywith operations that (1) can be distinguished from the rest of the entity and(2) will be eliminated from the ongoing operations of the entity in a disposaltransaction. The provisions of this Statement are effective forfinancial statements issued for fiscal years beginning after December 15, 2001,and interim periods within those fiscal years, with early applicationencouraged.  The Company is in the processof evaluating the effect of SFAS 144 on its financial statements.

 

**Item2.  Management's Discussion and Analysisof Financial Condition**

**and Results of Operations**

 

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements include, but are not limited to, those below that havebeen marked with an asterisk (*).  Inaddition, the Company may from time to time make forward-looking statementsthrough statements that include the words “believes”, “expects”, “anticipates”or similar expressions.  Suchforward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of the Company to differ materially fromthose expressed or implied by such forward-looking statements, including thoseset forth 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".  The Company cautions the reader, however,that these factors may not be exhaustive.

 

**GENERAL**

 

Monaco CoachCorporation is a leading manufacturer of premium Class A motor coaches andtowable recreational vehicles ("towables").  The Company’s product line currently consists of a broad line ofmotor coaches, fifth wheel trailers and travel trailers under the “Monaco”,“Holiday Rambler”, “Beaver”, “Safari”, “Royale Coach”, and “McKenzie” brandnames.  The Company's products, whichare typically priced at the high end of their respective product categories,range in suggested retail price from $60,000 to $1.2 million for motor coachesand from $24,000 to $49,000 for towables.

 

**RESULTS OF OPERATIONS**

 

**Quarter ended September 29, 2001Compared to Quarter ended September 30, 2000**

Third quarter netsales were up 6.4% to $240.8 million compared to $226.4 million for the sameperiod last year. Sales of newly acquired Beaver and Safari brands wereresponsible for the increase, with sales of these brands contributingincremental gross revenue of $24.9 million. Gross sales dollars on motorized products were up 3.1%, reflecting acontinued soft market. The Company’s gross towable sales were up 10.3% as theHoliday Rambler towable operations reported increases that more than offsetdecreases on the McKenzie towable sales. The Company’s overall unit sales were down 2.4% in the third quarter of2001 with motorized unit sales down 2.8% to 1,606 units, and towable unit salesoff by 1.7% to 765 units.  The Company’saverage unit selling prices increased in the third quarter of 2001 to $136,500from $128,600 for motorized and to $28,600 from $25,600 for towables.  The Company’s total average unit sellingprice increased to $101,700 from $95,600 in the same period last year.  The Company’s continued expansion into newproduct price points and shifts in model mix, is expected to keep the averageselling price around $100,000 in the future.*

 

Gross profit forthe third quarter of 2001 decreased to $30.5 million, down from $30.9 millionin 2000, and gross margin decreased from 13.7% in the third quarter of 2000 to12.7% in the third quarter of 2001.  Thedecrease in gross margin was due to a combination of factors.  The positive effect of a reduction in salesdiscounts from the prior year was more than offset by increased indirectproduction costs, and inefficiencies created from reduced production.  Gross margins were dampened during theintegration of the Safari production line into our plant in Coburg, as well asfrom product development efforts.  TheCompany’s overall gross margin may fluctuate in future periods if the mix ofproducts shifts from higher to lower gross margin units or if the Companyencounters unexpected manufacturing difficulties or competitive pressures.*

 

Selling, general, andadministrative expenses increased by $4.3 million to $18.9 million in the thirdquarter of 2001 and increased as a percentage of sales from 6.5% in 2000 to7.9% in 2001.  Selling, general andadministrative expenses in the third quarter of 2001 included significantincreases in spending related to retail promotion efforts.  The Company’s selling, general, andadministrative expense may fluctuate in future periods depending on theCompany’s strategy  of retail promotionsas a  result of difficult market conditionsor competitive pressures.*

 

Amortization ofgoodwill was $162,000 in the third quarter of 2001 and $161,000 in the sameperiod of 2000.  At September 29,2001, total goodwill, net of accumulated amortization was $52.0 million.  Goodwill of $33.9 million was added in thethird quarter from the acquisition of SMC which is not being amortized.

 

Operating incomewas $11.4 million, or 4.7% of sales in the third quarter of 2001 compared to$16.1 million, or 7.1% of sales in the similar 2000 period.  The decrease in operating margins reflectthe lower gross profit combined with higher selling, general and administrativecosts.

 

Net interestexpense was $539,000 in the third quarter of 2001 compared to $219,000 in thecomparable 2000  period, reflecting ahigher level of borrowing during the third quarter of 2001 due to theacquisition of SMC.

 

The Companyreported a provision for income taxes of $4.2 million, or an effective tax rateof 39.0% in the third quarter of 2001, compared to $6.1 million, or an effectivetax rate of 38.4% for the comparable 2000 period.

 

Net income for thethird quarter of 2001 was $6.6 million compared to $9.8 million in 2000 due tothe lower operating margin and an increase in interest expense.

 

**Nine Months ended September 29, 2001Compared to Nine Months ended September 30, 2000**

 

Net salesdecreased 2.2% to $675.5 million compared to $690.5 million for the same periodlast year.  Gross sales dollars onmotorized and towable products were down 3.0% and up 3.4%, respectively for thefirst nine months of 2001.  Overall unitsales for the Company were down 10.5% in the first nine months of 2001 comparedto the similar period in 2000 with motorized unit sales down 11.7% to 4,578units and  towable unit sales down 8.1%to 2,484.  The Company’s average unitselling prices increased in the first nine months of 2001 compared to thesimilar 2000 period to $134,800 from $122,700 for motorized and to $27,700 from$24,700 for towables.

 

Gross profit forthe nine-month period ended September 29, 2001 decreased to $81.8 million from$100.3 million in 2000, and gross margin decreased to 12.1% in 2001 from 14.5%in 2000. Gross margin in the first nine months of 2001 was significantlyimpacted by above normal sales discounts, which net against gross sales as wellas increased indirect production costs, and inefficiencies created from reducedproduction.  Other major contributors tothe change in gross margin include production inefficiencies created from shiftingthe volume among the production lines in the plants, and shifting the mix ofproducts on those lines.

 

Selling, general,and administrative expenses increased by $7.6 million to $51.7 million in thefirst nine months of 2001 and increased as a percentage of sales from 6.4% in2000 to 7.7% in 2001.  Selling, generaland administrative expenses in the first nine months of 2001 includedsignificant increases in spending related to retail promotion efforts.

 

Amortization ofgoodwill was $484,000 in both the first nine months of 2001 and the same periodof 2000.

 

Operating incomedecreased to $29.7 million in the first nine months of 2001 from $55.7 millionin 2000.  The Company’s higher selling,general, and administrative expense as a percentage of sales combined with the declinein the Company’s gross margin, resulted in a decrease in operating margin to4.4% in the first nine months of 2001 compared to 8.1% in the first nine monthsof 2000.

 

Net interestexpense was $1.6 million in the first nine months of 2001 compared to $458,000in the comparable 2000  period,reflecting a higher level of borrowing during the first nine months of 2001.

 

The Companyreported a provision for income taxes of $11.1 million, or an effective taxrate of 39.0% for the first nine months of 2001, compared to $21.5 million, oran effective tax rate of 38.8% for the comparable 2000 period.

 

Net income for thefirst nine months of 2001 was $17.3 million compared to $33.9 million in 2000due to the decrease in sales combined with a lower operating margin and anincrease in interest expense.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company'sprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During the first nine months of 2001, the Company had cash flowsof $27.3 million from operating activities. The Company generated $22.4 million from net income and non-cashexpenses such as depreciation and amortization. The increase in income taxespayable and the decrease in inventories added to this cash flow, and  these increases were only partially offsetby an increase in accounts receivable combined with decreases in accountspayable and accrued liabilities.

 

The Company hascredit facilities consisting of a revolving line of credit of up to $70.0million (the “Revolving Loan”) and a term note of $40.0 million (the “TermLoan”).  At the election of the Company,the Revolving Loan and Term Loan bear interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company'sleverage ratio.  The Company also paysinterest monthly on the unused available portion of the Revolving Loan atvarying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable infull on June 30, 2004, while the Term Loan is due and payable in full onSeptember 28, 2005 and both require monthly interest payments.  The balance outstanding under the RevolvingLoan at September 29, 2001 was $6.6 million and the balance on the Term Loanwas $40.0 million.  The Revolving Loanand Term Loan are collateralized by all the assets of the Company and includevarious restrictions and financial covenants. The Company utilizes “zero balance” bank disbursement accounts in whichan advance on the line of credit is automatically made for checks clearing eachday.  Since the balance of thedisbursement account at the bank returns to zero at the end of each day theoutstanding checks of the Company are reflected as a liability.  The outstanding check liability is combinedwith the Company’s positive cash balance accounts to reflect a net bookoverdraft or a net cash balance for financial reporting.

 

The Company'sprincipal working capital requirements are for purchases of inventory and, to alesser extent, financing of trade receivables. The Company's dealers typically finance product purchases underwholesale floor plan arrangements with third parties as described below.  At September 29, 2001, the Company hadworking capital of approximately $59.4 million, a decrease of $9.9 million fromworking capital of $69.3 million at December 30, 2000.  The Company has been using short-term creditfacilities and cash flow to finance its capital expenditures.

 

The Companybelieves that cash flow from operations and funds available under its anticipatedcredit facilities will be sufficient to meet the Company's liquidityrequirements for the next 12 months.* The Company's capital expenditures were $6.3 million in the first ninemonths of 2001, primarily for completing the Company’s warranty and servicecenter projects.  The Companyanticipates that capital expenditures for all of 2001 will be approximately $9to $11 million, which includes $4 to $5 million of routine capital expendituresfor computer system upgrades and additions, smaller scale plant remodelingprojects and normal replacement of outdated or worn-out equipment.*  The Company may require additional equity ordebt financing to address working capital and facilities expansion needs,particularly if the Company significantly increases the level of workingcapital assets such as inventory and accounts receivable.  The Company may also from time to time seekto acquire businesses that would complement the Company's current business, andany such acquisition could require additional financing.  There can be no assurance that additionalfinancing will be available if required or on terms deemed favorable by theCompany.

 

As is common inthe recreational vehicle industry, the Company enters into repurchaseagreements with the financing institutions used by its dealers to finance theirpurchases. These agreements obligate the Company to repurchase a dealer'sinventory under certain circumstances in the event of a default by the dealerto its lender. If the Company were obligated to repurchase a significant numberof its products in the future, it could have a material adverse effect on theCompany's financial condition, business and results of operations. TheCompany’s contingent obligations under repurchase agreements vary from periodto period and totaled approximately $ 361.6 million as of September 29, 2001,with approximately 6.6 % concentrated with one dealer.

 

**FACTORS THAT MAY AFFECT FUTUREOPERATING RESULTS**

 

ACQUISITIONOF SMC CORPORATION    The Companyannounced on June 25, 2001 that it had agreed with Oregon based motorhomemanufacturer SMC Corporation to acquire all of the outstanding shares of SMCpursuant to a cash tender offer at a price of $3.70 per share.  On August 6, the Company had completed it’spurchase of all SMC Corporation shares. The anticipated benefits of this acquisition may not be achieved unlessMonaco successfully integrates SMC into Monaco’s operations.  SMC incurred a net loss from operations of$5.4 million for 2000 and $1.9 million for the first quarter of 2001.  Unless Monaco is able to increase sales orreduce the operating expenses of SMC substantially from historical expenselevels, the acquisition could have a material adverse affect on the financialcondition and results of operations of Monaco. The process of integration may result in unforseen operatingdifficulties and expenditures and may absorb significant management attentionthat would otherwise be available for the ongoing development of Monaco’sbusiness.  This may cause aninterruption or a loss of momentum in the operating activities of Monaco whichin turn would have a material adverse affect on Monaco’s operating results andfinancial condition.  Moreover, theacquisition involves a number of additional risks, such as the assimilation ofthe operations and personnel of the acquired business, the incorporation ofacquired products into Monaco’s existing product line, adverse short-termeffects of reported operating results, the amortization of acquired assets, theloss of key employees of SMC as a result of the acquisition, and the difficultyof integrating disparate corporate cultures and presenting a unified corporateimage.  Accordingly, the anticipatedbenefits may not be realized or the acquisition may have a material adverseaffect on Monaco’s operating results and financial condition.

 

CARRYING VALUES OFINTANGIBLE ASSETS MAY BE SUBJECT TO PERIODIC WRITE-DOWN Goodwill and other intangible assets arereviewed for impairment whenever an event or change in circumstances indicatesthat the carrying amount may not be recoverable. If the carrying value of ourintangible assets exceeds the expected undiscounted future cash flows, a losswould be recognized to the extent the carrying amount of assets exceeds theirfair values. This loss may negatively impact results of operation.

 

POTENTIALFLUCTUATIONS IN OPERATING RESULTS  TheCompany’s net sales, gross margin and operating results may fluctuatesignificantly from period to period due to factors such as the mix of productssold, the ability to utilize and expand manufacturing resources efficiently,material shortages, the introduction and consumer acceptance of new modelsoffered by the Company, competition, the addition or loss of dealers, thetiming of trade shows and rallies, and factors affecting the recreationalvehicle industry as a whole. In addition, the Company’s overall gross margin onits products may decline in future periods to the extent the Company increasesits sales of lower gross margin towable products or if the mix of motor coachessold shifts to lower gross margin units. Due to the relatively high sellingprices of the Company's products (in particular, its High-Line Class A motorcoaches), a relatively small variation in the number of recreational vehiclessold in any quarter can have a significant effect on sales and operatingresults for that quarter. Demand in the overall recreational vehicle industrygenerally declines during the winter months, while sales and revenues aregenerally higher during the spring and summer months. With the broader range ofrecreational vehicles now offered by the Company, seasonal factors could have asignificant impact on the Company's operating results in the future. Inaddition, unusually severe weather conditions in certain markets could delaythe timing of shipments from one quarter to another.

 

CYCLICALITY  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. Unit sales ofrecreational vehicles (excluding conversion vehicles) reached a peak ofapproximately 259,000 units in 1994 and declined to approximately 247,000 unitsin 1996.  The industry peaked again in1999 at approximately 321,000 units and began declining thereafter as unitsales in 2000 were approximately 300,000 units. Furthermore, the Company offersa broad range of recreational vehicle products and is susceptible to thecyclicality inherent in the recreational vehicle industry. Factors affectingcyclicality in the recreational vehicle industry include fuel availability andfuel prices, prevailing interest rates, the level of discretionary spending,the availability of credit and overall consumer confidence.  In particular, the decline in consumerconfidence and/or a slowing of the overall economy has had a material adverseeffect on the recreational vehicle market. An extended continuance of these conditions could have a materialadverse effect on the Company's business, results of operations and financialcondition.

 

MANAGEMENTOF GROWTH  Over the past several yearsthe Company has experienced significant growth in the number of its employeesand the scope of its business. This growth has resulted in the addition of newmanagement personnel and increased responsibilities for existing managementpersonnel, and has placed added pressure on the Company's operating, financialand management information systems. While management believes it has beensuccessful in managing this expansion there can be no assurance that theCompany will not encounter problems in the future associated with the continuedgrowth of the Company.  Failure toadequately support and manage the growth of its business could have a materialadverse effect on the Company's business, results of operations and financialcondition.

 

MANUFACTURINGEXPANSION  The Company has significantlyincreased its manufacturing capacity over the last few years. The integrationof the Company's facilities and the expansion of the Company's manufacturingoperations involve a number of risks including unexpected building andproduction difficulties. In the past the Company experienced startupinefficiencies in manufacturing a new model and also has experienced difficultyin increasing production rates at a plant. There can be no assurance that theCompany will successfully integrate its manufacturing facilities or that itwill achieve the anticipated benefits and efficiencies from its expandedmanufacturing operations.  In addition,the Company’s operating results could be materially and adversely affected ifsales of the Company's products do not increase at a rate sufficient to offsetthe Company's increased expense levels resulting from this expansion.  The setup of new models and scale-up ofproduction facilities involve various risks and uncertainties, including timelyperformance of a large number of contractors, subcontractors, suppliers andvarious government agencies that regulate and license construction, each ofwhich is beyond the control of the Company. The setup of production for new models involves risks and costsassociated with the development and acquisition of new production lines, moldsand other machinery, the training of employees, and compliance withenvironmental, health and safety and other regulatory requirements.  The inability of the Company to complete thescale-up of its facilities and to commence full-scale commercial  production in a timely manner could have amaterial adverse effect on the Company's business, results of operations andfinancial condition.  In addition, theCompany may from time to time experience lower than anticipated yields orproduction constraints that may adversely affect its ability to satisfycustomer orders.  Any prolongedinability to satisfy customer demand could have a material adverse effect onthe Company's business, results of operations and financial condition.

 

CONCENTRATIONOF SALES TO CERTAIN DEALERS  Althoughthe Company’s products were offered by 338 dealerships located primarily in theUnited States and Canada at the end of 2000, a significant percentage of theCompany’s sales have been and will continue to be concentrated among arelatively small number of independent dealers.   Sales to Lazy Days RV Center, Inc. accounted for 10.0% of theCompany’s sales in 1999 and 12.1% in 2000. The Company’s 10 largest dealers, including Lazy Days RV Center, Inc.,accounted for a combined 33.0% of sales in 1999 and 36.0% in 2000.  The loss of a significant dealer or asubstantial decrease in sales by such a dealer could have a material adverseeffect on the Company's business, results of operations and financialcondition.

 

POTENTIALLIABILITY UNDER REPURCHASE AGREEMENTS As is common in the recreational vehicle industry, the Company entersinto repurchase agreements with the financing institutions used by its dealersto finance their purchases.  Theseagreements obligate the Company to repurchase a dealer's inventory undercertain circumstances in the event of a default by the dealer to itslender.  If the Company were obligatedto repurchase a significant number of its products in the future, it could havea material adverse effect on the Company's financial condition, business andresults of operations. The Company’s contingent obligations under repurchaseagreements vary from period to period and totaled approximately $ 361.6 millionas of September 29, 2001, with approximately 6.6 % concentrated with onedealer.  See “Liquidity and CapitalResources” and Note 8 of Notes to the Company’s Condensed ConsolidatedFinancial Statements.

 

AVAILABILITYAND COST OF FUEL  An interruption in thesupply, or a significant increase in the price or tax on the sale, of dieselfuel or gasoline on a regional or national basis could have a material adverseeffect on the Company's business, results of operations and financialcondition. Diesel fuel and gasoline have, at various times in the past, beendifficult to obtain, and there can be no assurance that the supply of diesel fuelor gasoline will continue uninterrupted, that rationing will not be imposed, orthat the price of or tax on diesel fuel or gasoline, which have increased inprice in the past year, will not significantly increase in the future, any ofwhich could have a material adverse effect on the Company's business, resultsof operations and financial condition.

 

DEPENDENCEON CERTAIN SUPPLIERS  A number ofimportant components for certain of the Company's products are purchased fromsingle or limited sources, including its turbo diesel engines (Cummins),substantially all of its transmissions (Allison), axles (Dana) for all dieselmotor coaches other than the Holiday Rambler Endeavor Diesel model and chassis(Workhorse and Ford) for certain of its motorhome products.  The Company has no long term supplycontracts with these suppliers or their distributors, and there can be noassurance that these suppliers will be able to meet the Company’s futurerequirements for these components. From time to time, Allison has put allchassis manufacturers on allocation with respect to certain transmissions theCompany uses, and in 1999 Ford put one of its gasoline powered chassis onallocation. The Company presently believes that its allocation by suppliers ofall components is sufficient to meet planned production volumes, and theCompany does not foresee any operating difficulties as a result of vendorsupply issues.*  Nevertheless, there canbe no assurance that Allison, Ford, or any of the Company’s other supplierswill be able to meet the Company’s future requirements for transmissions,chassis or other key components.  Anextended delay or interruption in the supply of any components obtained from asingle or limited source supplier could have a material adverse effect on theCompany's business, results of operations and financial condition.

 

NEWPRODUCT INTRODUCTIONS  The Companybelieves that the introduction of new features and new models will be criticalto its future success.  Delays in theintroduction of new models or product features or a lack of market acceptanceof new models or features and/or quality problems with new models or featurescould have a material adverse effect on the Company's business, results ofoperations and financial condition. For example, unexpected costs associatedwith model changes have adversely affected the Company’s gross margin in thepast. Future product introductions could divert revenues from existing modelsand adversely affect the Company's business, results of operations andfinancial condition.

 

COMPETITION  The market for the Company’s products ishighly competitive. The Company currently competes with a number of othermanufacturers of motor coaches, fifth wheel trailers and travel trailers, manyof which have significant financial resources and extensive distributioncapabilities.  There can be no assurancethat either existing or new competitors will not develop products that aresuperior to, or that achieve better consumer acceptance than, the Company’sproducts, or that the Company will continue to remain competitive.

 

RISKSOF LITIGATION  The Company is subject tolitigation arising in the ordinary course of its business, including a varietyof product liability and warranty claims typical in the recreational vehicleindustry.  Although the Company does notbelieve that the outcome of any pending litigation, net of insurance coverage,will have a material adverse effect on the business, results of operations orfinancial condition of the Company, due to the inherent uncertainties associatedwith litigation there can be no assurance in this regard.*

 

Todate, the Company has been successful in obtaining product liability insuranceon terms the Company considers acceptable. The Company’s current policies jointly provide coverage against claimsbased on occurrences within the policy periods up to a maximum of $65.0 millionfor each occurrence and $66.0 million in the aggregate. There can be noassurance that the Company will be able to obtain insurance coverage in thefuture at acceptable levels or that the costs of insurance will bereasonable.  Furthermore, successfulassertion against the Company of one or a series of large uninsured claims, orof one or a series of claims exceeding any insurance coverage, could have amaterial adverse effect on the Company's business, results of operations andfinancial condition.

** **

**RECENTACCOUNTING PRONOUNCEMENTS**

 

On June 29, 2001, theFinancial Accounting Standards Board (FASB or the “Board”) unanimously voted infavor of issuing two Statements: Statement No. 141 (FAS 141), BusinessCombinations*,*and Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets*.*

 

FAS 141 requires the use of the purchase method ofaccounting for all business combinations, thereby eliminating thepooling-of-interests method. Additionally, it provides new criteria for determining whetherintangible assets acquired in a business combination should be recognizedseparately from goodwill.  FAS 141 iseffective for all business combinations (as defined in the Statement) initiatedafter June 30, 2001 and for all business combinations accounted for by thepurchase method that are completed after June 30, 2001 (that is, the date ofacquisition is July 1, 2001, or later).

 

FAS 142 primarily addresses the accounting for goodwilland intangible assets subsequent to their acquisition (i.e., thepost-acquisition accounting).  FAS 142supercedes APB 17, Intangible Assets*.* FAS 142 eliminates the amortization of goodwill and indefiniteintangible assets, and requires, at minimum, an annual test for impairment atthe reporting unit level.  In addition,the amortization period of intangible assets with finite lives is no longerlimited to forty years.  FAS 142 iseffective for fiscal years beginning after December 15, 2001 to all goodwilland other intangible assets recognized in an entity's statement of financialposition at that date, regardless of when those assets were initiallyrecognized.  Early application ispermitted for entities with fiscal years beginning after March 15, 2001 providedthat the first interim period financial statements have not been issuedpreviously.  Retroactive application isnot permitted.

 

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk******

Not applicable.

 

**PART II - OTHER INFORMATION**

 

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

 

(a)       Exhibits

 

10.1 Credit Agreementwith U.S. Bank National Association dated September 28, 2001.

 

(b)       Reports on Form 8-K

 

No reports on Form 8-Kwere required to be filed during the quarter ended September 29, 2001, forwhich this report is filed.

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   |               |   |                                         | **MONACO COACH CORPORATION**                                                                           |
|--------|--------------------|--------|----------------------------------------------|--------------------------------------------------------------------------------------------------------|
|   |               |   |                                         |                                                                                                   |
|   |               |   |                                         |                                                                                                   |
| Dated: | November 13,  2001 |   | /s/:     P. Martin Daley |
|   |               |   |                                         | P. Martin Daley                                                                                        |
|   |               |   |                                         | Vice President  and Chief Financial Officer (Duly Authorized Officer and Principal Financial  Officer) |