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**SECURITIES AND EXCHANGECOMMISSION****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 30, 2001** |
|                                           |
| **or**                                         |
|                                           |
| **o**                                          | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |

**For the period from              to              **

**Commission File Number: 1-14725**

**MONACO COACH CORPORATION**

| **Delaware**              | **35-1880244**                        |
|---------------------------|---------------------------------------|
| (State  of Incorporation) | (I.R.S.  Employer Identification No.) |

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

Registrant'stelephone number, including area code **(541)686-8011**

             Indicate by check mark whether the registrant  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and  (2)has been subject to such filing requirements for the past 90 days.**YES****ý****NO****o**

             Thenumber of shares outstanding of common stock, $.01 par value, as of June 30,2001:  19,009,559

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**MONACO COACH CORPORATION**

**FORM 10-Q**

**June 30, 2001**

**INDEX**

 

| **PART I - FINANCIAL  INFORMATION** |                                                                                                                       |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                       |
|                                | **Item 1. **                                                                                                          | **Financial Statements.** |   |
|                                |                                                                                                                       |   |   |
|                                | Condensed  Consolidated Balance Sheets as of December 30, 2000 and June 30, 2001.                                          |   |
|                                |                                                                                                                       |   |
|                                | Condensed  Consolidated Statements of Income for the quarters and six-month periods  ended July 1, 2000 and June 30, 2001. |   |
|                                |                                                                                                                       |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the six-month periods ended July 1,  2000 and June 30, 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  4.**                                                                                                               | **Submission  of Matters to a Vote of Security Holders** |   |
|                                |                                                                                                                       |   |   |
|                                | **Item  6.**                                                                                                               | **Exhibits  and Reports on Form 8-K.** |   |
|                                |                                                                                                                       |   |
|                                | **Signatures**                                                                                                             |   |

**PART I- FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCESHEETS(Unaudited: dollars in thousands)**

 

|                                                                          | **December 30,**                            |    | **June 30,** |    |
|-------------------------------------------------------------------------------|---------------------------------------------|---------|--------------|---------|
|                                                                          | **2000**                                    |    | **2001**     |    |
|                                                                          | ****                                   |    | ****    |    |
| **ASSETS**                                                                    |                                        |    |         |    |
| Current  assets:                                                              |                                        |    |         |    |
|                                                                          | Trade  receivables, net                     | $       | 67,998       |    | $ | 79,427 |   |
|                                                                          | Inventories                                 | 114,397 |         | 96,636  |   |
|                                                                          | Prepaid  expenses                           | 1,046   |         | 1,566   |   |
|                                                                          | Deferred  income taxes                      | 13,197  |         | 13,816  |   |
|                                                                          |                                        |    |         |    |
|                                                                          | Total  current assets                       | 196,638 |         | 191,445 |   |
|                                                                          |                                        |    |         |    |
| Notes  receivable                                                             | 2,800                                       |    | 7,550        |    |
| Property,  plant and equipment, net                                           | 103,590                                     |    | 104,413      |    |
| Goodwill,  net of accumulated amortization of $4,675 and $4,998, respectively | 18,582                                      |    | 18,259       |    |
|                                                                          |                                        |    |         |    |
|                                                                          | Total  assets                               | $       | 321,610      |    | $ | 321,667 |   |
|                                                                          |                                        |    |         |    |
|                                                                          |                                        |    |         |    |
| **LIABILITIES**                                                               |                                        |    |         |    |
| Current  liabilities:                                                         |                                        |    |         |    |
|                                                                          | Book  overdraft                             | $       | 15,178       |    | $ | 21,452 |   |
|                                                                          | Line  of credit                             | 20,585  |         | 14,088  |   |
|                                                                          | Accounts  payable                           | 53,098  |         | 40,453  |   |
|                                                                          | Income  taxes payable                       | 0       |         | 1,695   |   |
|                                                                          | Accrued  expenses and other liabilities     | 38,478  |         | 37,188  |   |
|                                                                          |                                        |    |         |    |
|                                                                          | Total  current liabilities                  | 127,339 |         | 114,876 |   |
|                                                                          |                                        |    |         |    |
|                                                                          |                                        |    |         |    |
| Deferred  income taxes                                                        | 7,646                                       |    | 8,994        |    |
|                                                                          |                                        |    |         |    |
|                                                                          | 134,985                                     |    | 123,870      |    |
|                                                                          |                                        |    |         |    |
| Commitments  and contingencies (Note 6)                                       |                                        |    |         |    |
|                                                                          |                                        |    |         |    |
| **STOCKHOLDERS' EQUITY**                                                      |                                        |    |         |    |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 18,952,107 and   |                                        |    |         |    |
| 19,009,559  issued and outstanding respectively                               | 190                                         |    | 190          |    |
| Additional  paid-in capital                                                   | 47,032                                      |    | 47,527       |    |
| Retained  earnings                                                            | 139,403                                     |    | 150,080      |    |
|                                                                          |                                        |    |         |    |
|                                                                          | Total  stockholders' equity                 | 186,625 |         | 197,797 |   |
|                                                                          |                                        |    |         |    |
|                                                                          | Total  liabilities and stockholders' equity | $       | 321,610      |    | $ | 321,667 |   |
|                                                                          |                                        |    |         |    |
|                                                                               |                                             |         |              |         |  |  |  |  |

 

Seeaccompanying notes.

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATEDSTATEMENTS OF INCOME(Unaudited: dollars in thousands, except share and per share data)**

 
|                                          | **Quarter Ended**           |       | **Six Months Ended** |       |
|-----------------------------------------------|-----------------------------|------------|----------------------|------------|
|                                          | ****                   |       | ****            |       |
|                                          | **July 1,**                 |       | **June 30,**         |       | **July 1,** |   | **June 30,** |   |
|                                          | **2000**                    |       | **2001**             |       | **2000** |   | **2001** |   |
|                                          | ****                   |       | ****            |       | ****  |   | ****  |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Net  sales                                    | $                           | 226,091    |                 | $          | 223,424 |   | $ | 464,074 |   | $ | 434,652 |   |
| Cost  of sales                                | 193,974                     |       | 197,620              |       | 394,643 |   | 383,360 |   |
|                                          |                        |       |                 |       |   |   |   |   |
|                                          | Gross  profit               | 32,117     |                 | 25,804     |   | 69,431 |   | 51,292 |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Selling,  general and administrative expenses | 13,738                      |       | 16,489               |       | 29,516 |   | 32,728 |   |
| Amortization  of goodwill                     | 162                         |       | 162                  |       | 323 |   | 323 |   |
|                                          |                        |       |                 |       |   |   |   |   |
|                                          | Operating  income           | 18,217     |                 | 9,153      |   | 39,592 |   | 18,241 |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Other  income, net                            | 62                          |       | 245                  |       | 63 |   | 361 |   |
| Interest  expense                             | (127                        | )          | (414                 | )          | (239 | ) | (1,098 | ) |
|                                          |                        |       |                 |       |   |   |   |   |
|                                          | Income  before income taxes | 18,152     |                 | 8,984      |   | 39,416 |   | 17,504 |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Provision  for income taxes                   | 7,004                       |       | 3,504                |       | 15,350 |   | 6,827 |   |
|                                          | ****                   | ** ** | ****            | ** ** | ****  | ** ** | ****  | ** ** |
|                                          | Net  income                 | $          | 11,148               |       | $ | 5,480 |   | $ | 24,066 |   | $ | 10,677 |   |
|                                          | ****                   | ** ** | ****            | ** ** | ****  | ** ** | ****  | ** ** |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Earnings  per common share:                   |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
|                                          | Basic                       | $          | .59                  |       | $ | .29 |   | $ | 1.27 |   | $ | .56 |   |
|                                          | Diluted                     | $          | .58                  |       | $ | .28 |   | $ | 1.25 |   | $ | .55 |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Weighted  average common shares outstanding:  |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |
|                                          | Basic                       | 18,902,592 |                 | 19,003,465 |   | 18,894,620 |   | 18,990,171 |   |
|                                          | Diluted                     | 19,276,722 |                 | 19,480,100 |   | 19,322,434 |   | 19,450,814 |   |
|                                          |                        | ** ** |                 | ** ** |   | ** ** |   | ** ** |

 

Seeaccompanying notes.

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited: dollars in thousands)**

|                                   | **Six-months Ended**                                                                      |    |
|----------------------------------------|-------------------------------------------------------------------------------------------|---------|
|                                   | ****                                                                                 |    |
|                                   | **July 1,**                                                                               |    | **June 30,** |   |
|                                   | **2000**                                                                                  |    | **2001** |   |
|                                   |                                                                                      |    |   |   |
| **Increase (Decrease) in Cash:**       |                                                                                      |    |   |   |
|                                   |                                                                                      |    |   |   |
| Cash  flows from operating activities: |                                                                                      |    |   |   |
|                                   | Net  income                                                                               | $       | 24,066 |   | $ | 10,677 |   |
|                                   | Adjustments  to reconcile net income to net cash provided (used) by operating activities: |    |   |   |   |
|                                   | Gain  on sale of assets                                                                   |    |   | (74 | ) |
|                                   | Depreciation  and amortization                                                            | 3,056   |   | 3,316 |   |
|                                   | Deferred  income taxes                                                                    | 1,809   |   | 729 |   |
|                                   | Changes  in working capital accounts:                                                     |    |   |   |   |
|                                   | Trade  receivables, net                                                                   | (23,096 | ) | (11,429 | ) |
|                                   | Inventories                                                                               | (17,225 | ) | 17,761 |   |
|                                   | Prepaid  expenses                                                                         | (2,333  | ) | (520 | ) |
|                                   | Accounts  payable                                                                         | 25,736  |   | (12,645 | ) |
|                                   | Income  taxes payable                                                                     | 262     |   | 1,695 |   |
|                                   | Accrued  expenses and other liabilities                                                   | (1,406  | ) | (1,290 | ) |
|                                   |                                                                                      |    |   |   |
|                                   | Net  cash provided by operating activities                                                | 10,869  |   | 8,220 |   |
|                                   |                                                                                      |    |   |   |
| Cash  flows from investing activities: |                                                                                      |    |   |   |
|                                   | Additions  to property, plant and equipment                                               | (9,198  | ) | (3,848 | ) |
|                                   | Proceeds  from sale of assets                                                             |    |   | 106 |   |
|                                   | Issuance  of notes receivable                                                             |    |   | (4,750 | ) |
|                                   |                                                                                      |    |   |   |
|                                   | Net  cash used in investing activities                                                    | (9,198  | ) | (8,492 | ) |
|                                   |                                                                                      |    |   |   |
| Cash  flows from financing activities: |                                                                                      |    |   |   |
|                                   | Book  overdraft                                                                           | (5,751  | ) | 6,274 |   |
|                                   | (Payments)  borrowings on lines of credit, net                                            | 3,726   |   | (6,497 | ) |
|                                   | Issuance  of common stock                                                                 | 354     |   | 495 |   |
|                                   |                                                                                      |    |   |   |
|                                   | Net  cash  provided (used) by financing  activities                                  | (1,671  | ) | 272 |   |
|                                   |                                                                                      |    |   |   |
| Net  change in cash                    | 0                                                                                         |    | 0 |   |
| Cash  at beginning of period           | 0                                                                                         |    | 0 |   |
|                                   |                                                                                      |    |   |   |
| Cash  at end of period                 | $                                                                                         | 0       |   | $ | 0 |   |
|                                   |                                                                                      |    |   |   |
|                                        |                                                                                           |         |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes.

**MONACO COACH CORPORATIONNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.          Basisof Presentation**

The interim condensedconsolidated financial statements have been prepared by Monaco CoachCorporation (the "Company") without audit.  In the opinion of management, the accompanying unauditedfinancial statements contain all adjustments necessary, consisting only ofnormal recurring adjustments, to present fairly the financial position of theCompany as of December 30, 2000 and June 30, 2001, and the results of itsoperations for the quarters and six-month periods ended July 1, 2000 and June30, 2001, and cash flows of the Company for the six-month periods ended July 1,2000 and June 30, 2001.  The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries, and all significant intercompany accounts andtransactions have been eliminated in consolidation.  The balance sheet data as of December 30, 2000 was derived fromaudited financial statements, but does not include all disclosures contained inthe Company's Annual Report to Stockholders. These interim condensed consolidated financial statements should be readin conjunction with the audited financial statements and notes theretoappearing in the Company's Annual Report to Stockholders for the year endedDecember 30, 2000.

**2.          Inventories**

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

|            | December 30,  2000 |    | June 30,  2001 |   |
|-----------------|-------------------------|---------|---------------------|--------|
|            |                    |    |                |   |
|            | *(in thousands)*        |
| Raw  materials  | $                       | 45,187  |                | $      | 43,113 |   |
| Work-in-process | 31,739                  |    | 30,364              |   |
| Finished  units | 37,471                  |    | 23,159              |   |
|            |                    |    |                |   |
|            | $                       | 114,397 |                | $      | 96,636 |   |
|            |                    |    |                |   |

**3.          Goodwill**

Goodwill, whichrepresents the excess of the cost of acquisition over the fair value of netassets acquired, is being amortized on a straight-line basis over 20 and 40years.  Management assesses whetherthere has been permanent impairment in the value of goodwill and the amount ofsuch impairment by comparing anticipated undiscounted future cash flows fromoperating activities with the carrying value of the goodwill.  The factors considered by management inperforming this assessment include current operating results, trends andprospects, as well as the effects of obsolescence, demand, competition andother economic factors.

**4.          Lineof Credit**

The Company has a bankline of credit consisting of a revolving line of credit of up to $50.0 million.  At the election of the Company, the line ofcredit bears interest at varying rates that fluctuate based on the Prime rateor LIBOR, and are determined based on the Company's leverage ratio.  The Company also pays interest monthly onthe unused available portion of the line at varying rates, determined by theCompany’s leverage ratio.  The revolvingline of credit is due and payable in full on April 30, 2003, and requiresmonthly interest payments.  The balanceoutstanding under the line of credit at June 30, 2001 was $14.1 million. The line of credit is collateralized by all the assets of the Companyand includes various restrictions and financial covenants.

**5.          EarningsPer Common Share**

Basic earnings percommon share is based on the weighted average number of shares outstandingduring the period.  Diluted earnings percommon share is based on the weighted average number of shares outstandingduring the period, after consideration of the dilutive effect of stockoptions.   The weighted average numberof common shares used in the computation of earnings per common share are asfollows:

|                                              | **Quarter Ended** |   | **Six Months Ended** |   |
|---------------------------------------------------|-------------------|--------|----------------------|--------|
|                                              | ****         |   | ****            |   |
|                                              | **July 1,**       |   | **June 30,**         |   | **July 1,** |   | **June 30,** |   |
|                                              | **2000**          |   | **2001**             |   | **2000** |   | **2001** |   |
|                                              | ****         |   | ****            |   | ****  |   | ****  |   |
| **Basic**                                         |              |   |                 |   |   |   |   |   |
| Issued  and outstanding shares (weighted average) | 18,902,592        |   | 19,003,465           |   | 18,894,620 |   | 18,990,171 |   |
|                                              |              |   |                 |   |   |   |   |   |
| **Effect of Dilutive Securities**                 |              |   |                 |   |   |   |   |   |
| Stock  Options                                    | 374,130           |   | 476,635              |   | 427,814 |   | 460,643 |   |
|                                              |              |   |                 |   |   |   |   |   |
| **Diluted**                                       | 19,276,722        |   | 19,480,100           |   | 19,322,434 |   | 19,450,814 |   |
|                                              |              |   |                 |   |   |   |   |   |

**6.          Commitmentsand Contingencies**

Repurchase Agreements

Substantially all of theCompany's sales to independent dealers are made on terms requiring cash ondelivery.  However, most dealers financeunits on a "floor plan" basis with a bank or finance company lendingthe 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 have repossessedthem upon a dealer’s default.  The riskof loss resulting from these agreements is further reduced by the resale valueof the products repurchased.  TheCompany's contingent obligations under repurchase agreements vary from periodto period and totaled approximately $307.4 million as of June 30, 2001, withapproximately  7.4% concentrated withone dealer.

Litigation

The Company is involvedin legal proceedings arising in the ordinary course of its business, includinga variety of product liability and warranty claims typical in the recreationalvehicle industry.  Management does notbelieve that the outcome of its pending legal proceedings will have a materialadverse effect on the business, financial condition, or results of operationsof the Company.

Debt Guarantee

In 2000, the Companyentered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”) and ORLV’sparent company Outdoor Resorts of America (“ORA”), for the purpose ofconstructing 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 June 30, 2001, the Companyhad advanced $7.5 million in the form of a long term note receivable from ORAand its respective subsidiaries.  Aspart of the financing structure for the projects, the Company also agreed toact as co-guarantor with ORLV’s parent company, ORA, on an $11.2 millionconstruction loan for the Las Vegas resort. At June 30, 2001, ORLV and ORA had drawn approximately $7.6 million onthe construction loan.  In return forthe Company’s loans and guarantee commitment, ORLV and ORA has agreed to payinterest and income participation to the Company.

**7.          SubsequentEvent - Acquisition**

The Company announced onJune 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.  As of August 6, 2001, the Company completedthe back end merger, and owned 100% of the shares.  The total amount of funds required by the Company to purchase alloutstanding shares of SMC pursuant to the offer and to pay fees and expensesrelated to the offer and the merger was approximately $24.5 million.  In addition to the consideration paid by theCompany for tendering shareholders pursuant to the offer, the Company also paidapproximately $17 million for the purpose of extinguishing  SMC’s credit facility.

**8.          RecentAccounting Pronouncements**

The Financial AccountingStandards Board (FASB) recently announced the issuance of No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.”  The company has goodwill for whichamortization has been recorded against in prior periods. The impact of thefuture adoption of FAS 142 has not been determined by the Company.  Currently, amortization of goodwill perquarter is $164,300, therefore the impact for the entire year would be$657,200.  In addition, the company willneed to review the potential impairment of carrying values of goodwill todetermine if there will be a write-down. Currently goodwill is valued at $18.4 million.

**Item 2.  Management'sDiscussion and Analysis of Financial Conditionand Results of Operations**

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Thesestatements include, but are not limited to, those below that have been markedwith an asterisk (*).  In addition, theCompany may from time to time make forward-looking statements throughstatements that include the words “believes”, “expects”, “anticipates” orsimilar 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 Coach Corporationis a leading manufacturer of premium Class A motor coaches and towablerecreational vehicles ("towables"). The Company’s product line currently consists of a broad line of motorcoaches, fifth wheel trailers and travel trailers under the “Monaco”, “HolidayRambler”, “Royale Coach”, and “McKenzie” brand names.  The Company's products, which are typically priced at the highend of their respective product categories, range in suggested retail pricefrom $60,000 to $1.2 million for motor coaches and from $24,000 to $49,000 fortowables.

**RESULTSOF OPERATIONS**

**Quarterended June 30, 2001 Compared to Quarter ended July 1, 2000**

Second quarter net saleswere down a slight 1.2% to $223.4 million compared to $226.1 million for thesame period last year. Gross sales dollars on motorized products were down1.1%, reflecting continuing softer market conditions. The Company’s grosstowable sales were up 3.9% as the Holiday Rambler towable operations reportedincreases that more than offset decreases on the McKenzie towable sales.  The Company’s overall unit sales were down9.6% in the second quarter of 2001 with motorized unit sales down 10.4% to1,540 units, and towable unit sales off by 8.2% to 855 units.  The Company’s average unit selling pricesincreased in the second quarter of 2001 to $133,000 from $121,000 for motorizedand to $27,000 from $24,000 for towables. The Company’s total average unit selling price increased to $95,000 from$87,000 in the same period last year. The Company’s continued expansion into new product price points andshifts in model mix, is expected to push the average selling price over$100,000 in the near future.*

Gross profit for thesecond quarter of 2001 decreased to $25.8 million, down from $32.1 million in2000, and gross margin decreased from 14.2% in the second quarter of 2000 to11.5% in the second quarter of 2001. Gross margin in the second quarter of 2001 was significantly impacted byabove normal sales discounts, which net against gross sales. Other majorcontributors to the change in gross margin include production inefficiencies createdfrom reduced production, shifting the volume among the production lines in theplants, and shifting the mix of products on those lines.  In addition, many of the 2001 model yearunits that were previously carried in finished goods inventory were lowermargin units and were sold in the second quarter.  The Company’s overall gross margin may fluctuate in futureperiods if the mix of products shifts from higher to lower gross margin unitsor if the Company encounters unexpected manufacturing difficulties orcompetitive pressures.

Selling, general, andadministrative expenses increased by $2.8 million to $16.5 million in thesecond quarter of 2001 and increased as a percentage of sales from 6.1% in 2000to 7.4% in 2001.  Selling, general and administrativeexpenses in the first quarter of 2001 included significant increases inspending related to retail promotion efforts. The Company’s selling, general, and administrative expense may fluctuatein future periods depending on the Company’s strategy  of retail promotions as a result of difficult market conditions or competitive pressures.*

Amortization of goodwillwas $162,000 in both the second quarter of 2001 and the same period of2000.  At June 30, 2001, goodwill, netof accumulated amortization was $18.3 million.

Operating income was$9.2 million, or 4.1% of sales in the second quarter of 2001 compared to $18.2million, or 8.1% of sales in the similar 2000 period.  The decrease in operating margins reflect the lower gross profitcombined with higher selling, general and administrative costs.

Net interest expense was$414,000 in the second quarter of 2001 compared to $127,000 in the comparable2000  period, reflecting a higher levelof borrowing during the second quarter of 2001.

The Company reported aprovision for income taxes of $3.5 million, or an effective tax rate of 39.0%in the second quarter of 2001, compared to $7.0 million, or an effective taxrate of 38.6% for the comparable 2000 period.

Net income for thesecond quarter of 2001 was $5.5 million compared to $11.1 million in 2000 dueto the decrease in sales combined with a lower operating margin and an increasein interest expense.

 

**SixMonths ended June 30, 2001 Compared to Six Months ended July 1, 2000**

Net sales decreased 6.3%to $434.7 million compared to $464.1 million for the same period lastyear.  Gross sales dollars on motorizedand towable products were down 6.l% and up .5%, respectively for the first sixmonths of 2001.  Overall unit sales forthe Company were down 14.1% in the first six months of 2001 compared to thesimilar period in 2000 with motorized unit sales down 15.9% to 2,972 unitsand  towable unit sales down 10.7% to1,719.  The Company’s average unitselling prices increased in the first six months of 2001 compared to the similar2000 period to $134,000 from $120,000 for motorized and to $27,000 from $24,000for towables.

Gross profit for thesix-month period ended June 30, 2001 decreased to $51.3 million from $69.4million in 2000, and gross margin decreased to 11.8% in 2001 from 15.0% in2000. Gross margin in the first six months of 2001 was  significantly impacted by above normal salesdiscounts, which net against gross sales. Other major contributors to thechange in gross margin include production inefficiencies created from reducedproduction, shifting the volume among the production lines in the plants, andshifting the mix of products on those lines.

Selling, general, andadministrative expenses increased by $3.2 million to $32.7 million in the firstsix months of 2001 and increased as a percentage of sales from 6.4% in 2000 to7.5% in 2001.  Selling, general andadministrative expenses in the first six months of 2001 included significantincreases in spending related to retail promotion efforts.

Amortization of goodwillwas $323,000 in both the first six months of 2001 and the same period of 2000.

Operating incomedecreased to $18.2 million in the first six months of 2001 from $39.6 millionin 2000.  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 to 4.2% in the first six months of 2001 compared to 8.5% in the firstsix months of 2000.

Net interest expense was$1.1 million in the first six months of 2001 compared to $239,000 in thecomparable 2000  period, reflecting ahigher level of borrowing during the first half of 2001.

The Company reported aprovision for income taxes of $6.8 million, or an effective tax rate of 39.0%for the first six months of 2001, compared to $15.4 million, or an effectivetax rate of 38.9% for the comparable 2000 period.

Net income for the firsthalf of 2001 was $10.7 million compared to $24.1 million in 2000 due to thedecrease in sales combined with a lower operating margin and an increase ininterest expense.

**LIQUIDITYAND 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 2001, the Company had cash flowsof $8.2 million from operating activities. The Company generated $14.0 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, however theseincreases were more than offset by an increase in accounts receivable combinedwith  decreases in accounts payable andaccrued liabilities.

The Company has creditfacilities consisting of a revolving line of credit of up to $50.0 million (the“Revolving Loan”).  At the election ofthe Company, the Revolving Loan bears interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company'sleverage ratio.  The Company also paysinterest monthly on the unused available portion of the Revolving Loan atvarying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable infull on April 30, 2003, and requires monthly interest payments.  The balance outstanding under the RevolvingLoan at June 30, 2001 was $14.1 million. The Revolving Loan is collateralized by all the assets of the Companyand includes various restrictions and financial covenants.  The Company utilizes “zero balance” bankdisbursement accounts in which an advance on the line of credit isautomatically 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 cashbalance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

The Company increasedits line of credit to $95 million effective on August 2, 2001.

The Company's principalworking capital requirements are for purchases of inventory and, to a lesserextent, financing of trade receivables. The Company's dealers typically finance product purchases underwholesale floor plan arrangements with third parties as described below.  At June 30, 2001, the Company had workingcapital of approximately $76.6 million, an increase of $7.3 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 Company believesthat cash flow from operations and funds available under its anticipated creditfacilities will be sufficient to meet the Company's liquidity requirements for thenext 12 months.*  The Company's capitalexpenditures were $3.8 million in the first half of 2001, primarily forcompleting the Company’s warranty and service center projects.  The Company anticipates that capitalexpenditures for all of 2001 will be approximately $10 to $12 million, whichincludes $4 to $5 million of routine capital expenditures for computer systemupgrades and additions, smaller scale plant remodeling projects and normalreplacement of outdated or worn-out equipment.*  The Company may require additional equity or debt financing toaddress working capital and facilities expansion needs, particularly if theCompany significantly increases the level of working capital assets such asinventory and accounts receivable.  TheCompany may also from time to time seek to acquire businesses that wouldcomplement the Company's current business, and any such acquisition couldrequire additional financing.  There canbe no assurance that additional financing will be available if required or onterms deemed favorable by the Company.

As is common in therecreational vehicle industry, the Company enters into repurchase agreementswith the financing institutions used by its dealers to finance their purchases.These agreements obligate the Company to repurchase a dealer's inventory undercertain circumstances in the event of a default by the dealer to its lender. Ifthe Company were obligated to repurchase a significant number of its productsin the future, it could have a material adverse effect on the Company'sfinancial condition, business and results of operations. The Company’scontingent obligations under repurchase agreements vary from period to periodand totaled approximately $307.4 million as of June 30, 2001, withapproximately 7.4% concentrated with one dealer.

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

             ACQUISITION OF SMC CORPORATION    The Company announced on June 25, 2001 that it had agreed withOregon based motorhome manufacturer SMC Corporation to acquire all of theoutstanding shares of SMC pursuant to a cash tender offer at a price of $3.70per share.  As of August 6, the Companyhad completed it’s purchase of all SMC Corporation shares.  The anticipated benefits of this acquisitionmay not be achieved unless Monaco successfully integrates SMC into Monaco’soperations.  SMC incurred a net lossfrom operations of $5.4 million for 2000 and $1.9 million for the first quarterof 2001.  Unless Monaco is able to increasesales or reduce the operating expenses of SMC substantially from historicalexpense levels, the acquisition could have a material adverse affect on thefinancial condition and results of operations of Monaco.  The process of integration may result inunforseen operating difficulties and expenditures and may absorb significantmanagement attention that would otherwise be available for the ongoingdevelopment of Monaco’s business.  Thismay cause an interruption or a loss of momentum in the operating activities ofMonaco which in turn would have a material adverse affect on Monaco’s operatingresults and financial condition. Moreover, the acquisition involves a number of additional risks, such asthe assimilation of the operations and personnel of the acquired business, theincorporation of acquired products into Monaco’s existing product line, adverseshort-term effects of reported operating results, the amortization of acquiredassets, the loss of key employees of SMC as a result of the acquisition, andthe difficulty of integrating disparate corporate cultures and presenting aunified corporate image.  Accordingly,the anticipated benefits may not be realized or the acquisition may have amaterial adverse affect on Monaco’s operating results and financial condition.

             CARRYING VALUES OF INTANGIBLE ASSETS MAY BE SUBJECT TOPERIODIC WRITE-DOWN Goodwill and other intangible assets are reviewed forimpairment whenever an event or change in circumstances indicates that thecarrying amount may not be recoverable. If the carrying value of our intangibleassets exceeds the expected undiscounted future cash flows, a loss would berecognized to the extent the carrying amount of assets exceeds their fairvalues. This loss may negatively impact results of operation.

             POTENTIAL FLUCTUATIONS IN OPERATING RESULTS  The Company’s net sales, gross margin andoperating results may fluctuate significantly from period to period due tofactors such as the mix of products sold, the ability to utilize and expandmanufacturing resources efficiently, material shortages, the introduction andconsumer acceptance of new models offered by the Company, competition, theaddition or loss of dealers, the timing of trade shows and rallies, and factorsaffecting the recreational vehicle industry as a whole. In addition, theCompany’s overall gross margin on its products may decline in future periods tothe extent the Company increases its sales of lower gross margin towableproducts or if the mix of motor coaches sold shifts to lower gross marginunits. Due to the relatively high selling prices of the Company's products (inparticular, its High-Line Class A motor coaches), a relatively small variationin the number of recreational vehicles sold in any quarter can have asignificant effect on sales and operating results for that quarter. Demand inthe overall recreational vehicle industry generally declines during the wintermonths, while sales and revenues are generally higher during the spring andsummer months. With the broader range of recreational vehicles now offered bythe Company, seasonal factors could have a significant impact on the Company'soperating results in the future. In addition, unusually severe weatherconditions in certain markets could delay the timing of shipments from onequarter to another.

             CYCLICALITY  Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic andpolitical conditions that affect disposable income for leisure-time activities.Unit sales of recreational vehicles (excluding conversion vehicles) reached apeak of approximately 259,000 units in 1994 and declined to approximately247,000 units in 1996.  The industrypeaked again in 1999 at approximately 321,000 units and began decliningthereafter as unit sales in 2000 were approximately 300,000 units. Furthermore,the Company offers a broad range of recreational vehicle products and issusceptible to the cyclicality inherent in the recreational vehicle industry.Factors affecting cyclicality in the recreational vehicle industry include fuelavailability and fuel prices, prevailing interest rates, the level ofdiscretionary spending, the availability of credit and overall consumerconfidence.  In particular, the declinein consumer confidence and/or a slowing of the overall economy has had amaterial adverse effect on the recreational vehicle market.  An extended continuance of these conditionscould have a material adverse effect on the Company's business, results ofoperations and financial condition.

             MANAGEMENT OF GROWTH Over the past several years the Company has experienced significantgrowth in the number of its employees and the scope of its business. Thisgrowth has resulted in the addition of new management personnel and increasedresponsibilities for existing management personnel, and has placed addedpressure on the Company's operating, financial and management informationsystems. While management believes it has been successful in managing thisexpansion there can be no assurance that the Company will not encounterproblems in the future associated with the continued growth of theCompany.  Failure to adequately supportand manage the growth of its business could have a material adverse effect onthe Company's business, results of operations and financial condition.

             MANUFACTURING EXPANSION The Company has significantly increased its manufacturing capacity overthe last few years. The integration of the Company's facilities and theexpansion of the Company's manufacturing operations involve a number of risksincluding unexpected building and production difficulties. In the past theCompany experienced startup inefficiencies in manufacturing a new model andalso has experienced difficulty in increasing production rates at a plant.There can be no assurance that the Company will successfully integrate itsmanufacturing facilities or that it will achieve the anticipated benefits andefficiencies from its expanded manufacturing operations.  In addition, the Company’s operating resultscould be materially and adversely affected if sales of the Company's productsdo not increase at a rate sufficient to offset the Company's increased expenselevels resulting from this expansion.

 

             The setup of new models and scale-up of productionfacilities 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 newmodels involves risks and costs associated with the development and acquisitionof new production lines, molds and other machinery, the training of employees,and compliance with environmental, health and safety and other regulatoryrequirements. The inability of the Company to complete the scale-up of itsfacilities and to commence full-scale commercial  production in a timely manner could have a material adverseeffect on the Company's business, results of operations and financial condition.In addition, the Company may from time to time experience lower thananticipated yields or production constraints that may adversely affect itsability to satisfy customer orders. Any prolonged inability to satisfy customerdemand could have a material adverse effect on the Company's business, resultsof operations and financial condition.

             CONCENTRATION OF SALES TO CERTAIN DEALERS  Although the Company’s products were offeredby 338 dealerships located primarily in the United States and Canada at the endof 2000, a significant percentage of the Company’s sales have been and willcontinue to be concentrated among a relatively small number of independentdealers.   Sales to Lazy Days RV Center,Inc. accounted for 10.0% of the Company’s sales in 1999 and 12.1% in 2000.  The Company’s 10 largest dealers, includingLazy Days RV Center, Inc., accounted for a combined 33.0% of sales in 1999 and36.0% in 2000.  The loss of asignificant dealer or a substantial decrease in sales by such a dealer couldhave a material adverse effect on the Company's business, results of operationsand financial condition.

             POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS  As is common in the recreational vehicleindustry, the Company enters into repurchase agreements with the financinginstitutions used by its dealers to finance their purchases. These agreementsobligate the Company to repurchase a dealer's inventory under certaincircumstances in the event of a default by the dealer to its lender. If theCompany were obligated to repurchase a significant number of its products inthe future, it could have a material adverse effect on the Company's financialcondition, business and results of operations. The Company’s contingentobligations under repurchase agreements vary from period to period and totaledapproximately $307.4 million as of June 30, 2001, with approximately 7.4%concentrated with one dealer. See “Liquidity and Capital Resources” and Note 6of Notes to the Company’s Condensed Consolidated Financial Statements.

             AVAILABILITY AND COST OF FUEL  An interruption in the supply, or a significant increase in theprice or tax on the sale, of diesel fuel or gasoline on a regional or nationalbasis could have a material adverse effect on the Company's business, resultsof operations and financial condition. Diesel fuel and gasoline have, atvarious times in the past, been difficult to obtain, and there can be noassurance that the supply of diesel fuel or gasoline will continueuninterrupted, that rationing will not be imposed, or that the price of or taxon diesel fuel or gasoline, which have increased in price in the past year,will not significantly increase in the future, any of which could have amaterial adverse effect on the Company's business, results of operations andfinancial condition.

             DEPENDENCE ON CERTAIN SUPPLIERS  A number of important components for certainof the Company's products are purchased from single or limited sources,including its turbo diesel engines (Cummins), substantially all of itstransmissions (Allison), axles (Dana) for all diesel motor coaches other thanthe Holiday Rambler Endeavor Diesel model and chassis (Workhorse and Ford) forcertain of its motorhome products.  TheCompany has no long term supply contracts with these suppliers or their distributors,and there can be no assurance that these suppliers will be able to meet theCompany’s future requirements for these components. From time to time, Allisonhas put all chassis manufacturers on allocation with respect to certaintransmissions the Company uses, and in 1999 Ford put one of its gasolinepowered chassis on allocation. The Company presently believes that itsallocation by suppliers of all components is sufficient to meet plannedproduction volumes, and the Company does not foresee any operating difficultiesas a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any ofthe Company’s other suppliers will be able to meet the Company’s futurerequirements for transmissions, chassis or other key components.  An extended delay or interruption in thesupply of any components obtained from a single or limited source suppliercould have a material adverse effect on the Company's business, results ofoperations and financial condition.

             NEWPRODUCT INTRODUCTIONS  The Companybelieves that the introduction of new features and new models will be criticalto its future success. Delays in the introduction of new models or productfeatures or a lack of market acceptance of new models or features and/orquality problems with new models or features could have a material adverseeffect on the Company's business, results of operations and financialcondition. For example, unexpected costs associated with model changes haveadversely affected the Company’s gross margin in the past. Future product introductionscould divert revenues from existing models and adversely affect the Company'sbusiness, results of operations and financial condition.

             COMPETITION  Themarket for the Company’s products is highly competitive. The Company currentlycompetes with a number of other manufacturers of motor coaches, fifth wheeltrailers and travel trailers, many of which have significant financialresources and extensive distribution capabilities.  There can be no assurance that either existing or new competitorswill not develop products that are superior to, or that achieve better consumeracceptance than, the Company’s products, or that the Company will continue toremain competitive.

             RISKS OF LITIGATION The Company is subject to litigation arising in the ordinary course ofits business, including a variety of product liability and warranty claimstypical in the recreational vehicle industry. Although the Company does not believe that the outcome of any pendinglitigation, net of insurance coverage, will have a material adverse effect onthe business, results of operations or financial condition of the Company, dueto the inherent uncertainties associated with litigation there can be noassurance in this regard.*

             To date, the Company has been successful in obtainingproduct liability insurance on terms the Company considers acceptable. TheCompany’s current policies jointly provide coverage against claims based onoccurrences within the policy periods up to a maximum of $65.0 million for eachoccurrence and $66.0 million in the aggregate. There can be no assurance thatthe Company will be able to obtain insurance coverage in the future atacceptable levels or that the costs of insurance will be reasonable.Furthermore, successful assertion against the Company of one or a series oflarge uninsured claims, or of one or a series of claims exceeding any insurancecoverage, could have a material adverse effect on the Company's business,results of operations and financial condition.

**RECENTACCOUNTING PRONOUNCEMENTS**

             On June 29, 2001, the Financial Accounting StandardsBoard (FASB or the “Board”) unanimously voted in favor of issuing twoStatements:  Statement No. 141 (FAS141), *Business Combinations,* andStatement No. 142 (FAS 142), *Goodwill andOther 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 whether intangibleassets acquired in a business combination should be recognized separately fromgoodwill.  FAS 141 is effective for allbusiness combinations (as defined in the Statement) *initiated* after June 30, 2001 and for all businesscombinations accounted for by the purchase method that are *completed after* June 30, 2001 (that is,the date of acquisition 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 ofgoodwill and indefinite intangible assets, and requires, at minimum, an annualtest for impairment at the reporting unit level.  In addition, the amortization period of intangible assets with finitelives is no longer limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001to all goodwill and other intangible assets recognized in an entity's statementof financial position at that date, regardless of when those assets wereinitially recognized.  Early applicationis permitted for entities with fiscal years beginning after March 15, 2001provided that the first interim period financial statements have not been issuedpreviously.  Retroactive application isnot permitted.

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

             Not applicable.

**PART II - OTHER INFORMATION**

**Item 4.  Submission ofMatters to a Vote of Security Holders**

 At the Annual Meeting of Stockholders of theCompany, held on May 17, 2001 in Wakarusa, Indiana, the Stockholders (i) elected three Class II directors toserve on the Company's Board of Directors, (ii) amended the Company’s DirectorOption Plan to increase the number of sharesissuable thereunder by 100,000 shares, and (iii)  ratified the Company's appointment of PricewaterhouseCoopers LLP asindependent auditors.

| Nominee              |   | For        |   | Withheld |   |
|----------------------|--------|------------|--------|----------|--------|
|                 |   |       |   |     |   |
| Carl  E. Ring, Jr.   |   | 17,769,625 |   | 95,808   |   |
| Richard  A. Rouse    |   | 17,769,688 |   | 95,745   |   |
| Roger  A. Vandenberg |   | 17,769,728 |   | 95,705   |   |

 

             Thevote for amending the Company’s Director Option Plan was as follows:

 

| For        |   | Against |   | Abstained |
|------------|--------|---------|--------|-----------|
|       |   |    |   |      |
| 16,472,352 |   | 878,059 |   | 515,022   |

 

              The vote for ratifying the appointment ofPricewaterhouseCoopers LLP was as follows:

 

| For        |   | Against |   | Abstained |
|------------|--------|---------|--------|-----------|
|       |   |    |   |      |
| 17,766,916 |   | 88,266  |   | 10,251    |

 

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

| (a)    | Exhibits                                                                                                                                                                                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                   |
|   | 10.1  Agreement and Plan of Merger dated as of  June 23, 2001, among Monaco Coach Corporation, Salmon Acquisition, Inc., and  SMC Corporation (incorporated by reference to Monaco's Schedule 13D filed  with the Commission on July 3, 2001, Exhibit 99.(2)(b)). |
|   |                                                                                                                                                                                                                                                                   |
| (b)    | Reports on Form 8-K                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                   |
|   | No reports on Form 8-K  were required to be filed during the quarter ended June 30, 2001, for which  this report is filed.                                                                                                                                             |

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

|   |            |   | MONACO COACH  CORPORATION                                    |
|--------|-----------------|--------|--------------------------------------------------------------|
|   |            |   |                                                         |
|   |            |   |                                                         |
| Dated: | August 14, 2001 |   | /s/   P. Martin Daley                              |
|   |            |   |                                                         |
|   |            |   | P. Martin Daley                                              |
|   |            |   | Vice President and  Chief Financial Officer                  |
|   |            |   | (Duly Authorized  Officer and   Principal Financial Officer) |