**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**ý****                                ****Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For theperiod ended:  July 2, 2005**

**or**

 

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

 

**For theperiod 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**

(Address of principal executive offices)

 

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

 

Indicate by checkmark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat 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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

YES   ý       NO   o

 

The number ofshares outstanding of common stock, $.01 par value, as of July 2, 2005:  29,510,198

 

 

----

 

**MONACOCOACH CORPORATION**

 

**FORM 10-Q**

 

**July 2,2005**

 

**INDEX**

 
| ** **                                                                                                                 | **Page  Reference** |
|----------------------------------------------------------------------------------------------------------------------------|---------------------|
| **PART I - FINANCIAL INFORMATION**                                                                                         |                |
|                                                                                                                       |                |
| **Item  1. Financial Statements.**                                                                                         |                |
|                                                                                                                       |                |
| Condensed  Consolidated Balance Sheets as of  January 1, 2005 and July 2, 2005.                                            | 4                   |
|                                                                                                                       |                |
| Condensed  Consolidated Statements of Income  for the quarters and six-month periods ended  July 3, 2004 and July 2, 2005. | 5                   |
|                                                                                                                       |                |
| Condensed  Consolidated Statements of Cash  Flows for the six-month periods ended  July 3, 2004 and July 2, 2005.          | 6                   |
|                                                                                                                       |                |
| Notes to Condensed Consolidated Financial Statements.                                                                      | 7 -  12             |
|                                                                                                                       |                |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations.**                  | 13 -  27            |
|                                                                                                                       |                |
| **Item 3. Quantitative and  Qualitative Disclosures About Market Risk.**                                                   | 28                  |
|                                                                                                                       |                |
| **Item  4. Controls and Procedures.**                                                                                      | 28                  |
|                                                                                                                       |                |
| **PART II - OTHER INFORMATION**                                                                                            |                |
|                                                                                                                       |                |
| **Item 4. Submission of  Matters to a Vote of Security Holders.**                                                          | 29                  |
|                                                                                                                       |                |
| **Item 6.  Exhibits.**                                                                                                     | 29                  |
|                                                                                                                       |                |
| **Signatures.**                                                                                                            | 30                  |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

3

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

 
| ** **                                                                                                                   | ** ** | **January 1,  2005** | ** ** | **July 2,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| **ASSETS**                                                                                                                   |       |                 |       |              |       |
| Current assets:                                                                                                              |       |                 |       |              |       |
| Trade receivables, net                                                                                                       |       | $                    | 127,380    |              | $          | 105,533 |   |
| Inventories                                                                                                                  |       | 169,777              |       | 179,860           |       |
| Resort lot inventory                                                                                                         |       | 7,315                |       | 6,247             |       |
| Prepaid expenses                                                                                                             |       | 5,190                |       | 5,305             |       |
| Deferred income taxes                                                                                                        |       | 33,188               |       | 33,873            |       |
| Total current assets                                                                                                         |       | 342,850              |       | 330,818           |       |
|                                                                                                                         |       |                 |       |              |       |
| Property, plant, and equipment, net                                                                                          |       | 141,563              |       | 143,114           |       |
| Debt issuance costs net of accumulated  amortization of $616, and $661, respectively                                         |       | 571                  |       | 492               |       |
| Goodwill                                                                                                                     |       | 55,254               |       | 55,254            |       |
| Total assets                                                                                                                 |       | $                    | 540,238    |              | $          | 529,678 |   |
|                                                                                                                         |       |                 |       |              |       |
| **LIABILITIES**                                                                                                              |       |                 |       |              |       |
| Current liabilities:                                                                                                         |       |                 |       |              |       |
| Book overdraft                                                                                                               |       | $                    | 1,587      |              | $          | 21,440 |   |
| Line of credit                                                                                                               |       | 34,062               |       | 7,500             |       |
| Accounts payable                                                                                                             |       | 79,072               |       | 75,333            |       |
| Product liability reserve                                                                                                    |       | 20,233               |       | 19,776            |       |
| Product warranty reserve                                                                                                     |       | 32,369               |       | 32,329            |       |
| Income taxes payable                                                                                                         |       | 2,087                |       | 2                 |       |
| Accrued expenses and other liabilities                                                                                       |       | 31,533               |       | 30,644            |       |
| Total current liabilities                                                                                                    |       | 200,943              |       | 187,024           |       |
|                                                                                                                         |       |                 |       |              |       |
| Deferred income taxes                                                                                                        |       | 19,679               |       | 19,751            |       |
| Total liabilities                                                                                                            |       | 220,622              |       | 206,775           |       |
|                                                                                                                         |       |                 |       |              |       |
| Commitments and contingencies (Note 7)                                                                                       |       |                 |       |              |       |
|                                                                                                                         |       |                 |       |              |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                |       |                 |       |              |       |
| Preferred stock, $.01 par value; 1,934,783  shares authorized, no shares outstanding                                         |       |                 |       |              |       |
| Common stock, $.01 par value; 50,000,000  shares authorized, 29,246,143 and 29,510,198 issued and outstanding,  respectively |       | 294                  |       | 295               |       |
| Additional paid-in capital                                                                                                   |       | 57,454               |       | 58,201            |       |
| Retained earnings                                                                                                            |       | 261,868              |       | 264,407           |       |
| Total stockholders’ equity                                                                                              |       | 319,616              |       | 322,903           |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                    | 540,238    |              | $          | 529,678 |   |

 

See accompanying notes.

 

4

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

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

 
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **July 3,  2004** | ** ** | **July 2,  2005**    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                 | 357,774    |                 | $          | 306,187 |   | $ | 712,750 |   | $ | 637,699 |   |
| Cost of sales                                  |       | 312,125           |       | 273,103              |       | 622,618 |   | 568,398 |   |
| Gross profit                                   |       | 45,649            |       | 33,084               |       | 90,132 |   | 69,301 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general, and administrative  expenses |       | 26,721            |       | 29,411               |       | 51,521 |   | 56,754 |   |
| Plant relocation costs                         |       | 0                 |       | 2,352                |       | 0 |   | 2,352 |   |
| Operating income                               |       | 18,928            |       | 1,321                |       | 38,611 |   | 10,195 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other income, net                              |       | 127               |       | 26                   |       | 213 |   | 140 |   |
| Interest expense                               |       | (372              | )          | (187                 | )          | (777 | ) | (672 | ) |
| Income before income taxes                     |       | 18,683            |       | 1,160                |       | 38,047 |   | 9,663 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for income taxes                     |       | 6,735             |       | 405                  |       | 14,176 |   | 3,585 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                     |       | $                 | 11,948     |                 | $          | 755 |   | $ | 23,871 |   | $ | 6,078 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per common share:                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                          |       | $                 | .41        |                 | $          | .03 |   | $ | .81 |   | $ | .21 |   |
| Diluted                                        |       | $                 | .40        |                 | $          | .03 |   | $ | .80 |   | $ | .20 |   |
| ** **                                     | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding:    | ** ** | ** **        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                          |       | 29,357,514        |       | 29,502,165           |       | 29,326,855 |   | 29,481,152 |   |
| Diluted                                        |       | 30,013,014        |       | 29,824,570           |       | 29,990,241 |   | 29,859,237 |   |

 

See accompanyingnotes.

 

5

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**MONACO COACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited: dollars in thousands)**

 
| ** **                                                                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **July 3,  2004**    | ** ** | **July 2,  2005** | ** ** |
|                                                                                      |       |                 |       |   |   |
| **Increase (Decrease) in Cash:**                                                          |       |                 |       |   |   |
|                                                                                      |       |                 |       |   |   |
| Cash flows from operating activities:                                                     |       |                 |       |   |   |
| Net income                                                                                |       | $                    | 23,871     |   | $ | 6,078 |   |
| Adjustments to reconcile net income to net  cash (used) provided by operating activities: |       |                 |       |   |   |
| Loss on sale of assets                                                                    |       | 43                   |       | 24 |   |
| Depreciation and amortization                                                             |       | 5,388                |       | 5,049 |   |
| Deferred income taxes                                                                     |       | 274                  |       | (613 | ) |
| Changes in working capital accounts:                                                      |       |                 |       |   |   |
| Trade receivables, net                                                                    |       | (25,842              | )          | 21,847 |   |
| Inventories                                                                               |       | (30,885              | )          | (10,083 | ) |
| Resort lot inventory                                                                      |       | 5,842                |       | 2,120 |   |
| Prepaid expenses                                                                          |       | (3,853               | )          | (120 | ) |
| Accounts payable                                                                          |       | 27,971               |       | (3,739 | ) |
| Product liability reserve                                                                 |       | 83                   |       | (457 | ) |
| Product warranty reserve                                                                  |       | 3,582                |       | (40 | ) |
| Income taxes payable                                                                      |       | (26                  | )          | (2,085 | ) |
| Accrued expenses and other liabilities                                                    |       | 5,122                |       | (889 | ) |
| Net cash provided by operating activities                                                 |       | 11,570               |       | 17,092 |   |
| Cash flows from investing activities:                                                     |       |                 |       |   |   |
| Additions to property, plant, and equipment                                               |       | (4,110               | )          | (7,650 | ) |
| Proceeds from sale of assets                                                              |       | 145                  |       | 68 |   |
| Net cash used in investing activities                                                     |       | (3,965               | )          | (7,582 | ) |
| Cash flows from financing activities:                                                     |       |                 |       |   |   |
| Book overdraft                                                                            |       | 0                    |       | 19,853 |   |
| Payments on lines of credit, net                                                          |       | 0                    |       | (26,562 | ) |
| Payments on long-term notes payable                                                       |       | (7,500               | )          | 0 |   |
| Debt issuance costs                                                                       |       | 0                    |       | (10 | ) |
| Dividends paid                                                                            |       | (2,934               | )          | (3,539 | ) |
| Issuance of common stock                                                                  |       | 1,416                |       | 748 |   |
| Net cash used by financing activities                                                     |       | (9,018               | )          | (9,510 | ) |
| Net change in cash                                                                        |       | (1,413               | )          | 0 |   |
| Cash at beginning of period                                                               |       | 13,398               |       | 0 |   |
| Cash at end of period                                                                     |       | $                    | 11,985     |   | $ | 0 |   |

 

See accompanying notes.

 

6

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**           Basisof Presentation

 

The interim condensed consolidated financialstatements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of January 1, 2005 andJuly 2, 2005, and the results of its operations and its cash flows for thequarters and six months ended July 3, 2004 and July 2, 2005.  The condensed consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of January 1, 2005 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 January 1,2005.

 

**2.**              Inventories

 

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

 
| ** **      | ** ** | **January 1,  2005** | ** ** | **July 2,  2005** | ** ** |
|-----------------|------------|----------------------|------------|-------------------|------------|
| ** **      | ** ** | **(in thousands)**   | ** ** |
| Raw  materials  | ** ** | $                    | 75,853     |              | $          | 68,713 | ** ** |
| Work-in-process |       | 71,387               |       | 66,453            |       |
| Finished units  |       | 22,537               |       | 44,694            |       |
|            |       | $                    | 169,777    |              | $          | 179,860 |   |

 

**3.**           Lineof Credit

 

The Company’scredit facility consists of a revolving line of credit of $105.0 million.  On July 2, 2005, borrowings outstanding onthe revolving line of credit (the “Revolving Loan”) were $7.5 million.  At the election of the Company, the RevolvingLoan bears interest at varying rates that fluctuate based on the Prime rate orLIBOR, and are determined based on the Company’s leverage ratio.  At July 2, 2005, the interest rate was4.13%.  The Company also pays interestmonthly on the unused available portion of the Revolving Loan at varying rates,determined by the Company’s leverage ratio. The Revolving loan is due and payable in full on November 17, 2009 andrequires monthly interest payments.  TheRevolving Loan is collateralized by all the assets of the Company and includesvarious restrictions and financial covenants. As of July 2, 2005, the Company is in compliance with its covenants.

 

7

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**4.**              EarningsPer 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 based onthe weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options.  For the quarter ended July 2, 2005, therewere 655,960 anti-dilutive options excluded from the diluted earnings per sharecalculation (zero for the quarter ended July 3, 2004).  The weighted average number of common sharesused in the computation of earnings per common share are as follows:

 
| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **July 3,  2004** | ** ** | **July 2,  2005**    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| **Basic**                                         |       |              |       |                 |       |   |   |   |   |
| Issued and outstanding shares (weighted  average) |       | 29,357,514        |       | 29,502,165           |       | 29,326,855 |   | 29,481,152 |   |
|                                              |       |              |       |                 |       |   |   |   |   |
| **Effect of Dilutive Securities**                 |       |              |       |                 |       |   |   |   |   |
| Stock Options                                     |       | 655,500           |       | 322,405              |       | 663,386 |   | 378,085 |   |
| **Diluted**                                       |       | 30,013,014        |       | 29,824,570           |       | 29,990,241 |   | 29,859,237 |   |

 

**5.**              StockOption Plans

** **

**AtJuly 2, 2005, the Company had three stock-based employee compensationplans.  The Company accounts for thoseplans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS 123, Accounting for Stock-basedCompensation, to stock-based employee compensation.  All dollars represented are in thousands,except for per share data.**

 
| ** **                                                                                                                                    | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005**    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
|                                                                                                                                          |       |              |       |                 |       |   |   |   |   |
| Net income - as reported                                                                                                                      |       | $                 | 11,948     |                 | $          | 755 |   | $ | 23,871 |   | $ | 6,078 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | 212               |       | 227                  |       | 421 |   | 454 |   |
|                                                                                                                                          |       | $                 | 11,736     |                 | $          | 528 |   | $ | 23,450 |   | $ | 5,624 |   |
|                                                                                                                                          |       |              |       |                 |       |   |   |   |   |
| Earnings per share:                                                                                                                           |       |              |       |                 |       |   |   |   |   |
| Basic - as reported                                                                                                                           |       | $                 | 0.41       |                 | $          | 0.03 |   | $ | 0.81 |   | $ | 0.21 |   |
| Basic - pro forma                                                                                                                             |       | $                 | 0.40       |                 | $          | 0.02 |   | $ | 0.80 |   | $ | 0.19 |   |
|                                                                                                                                          |       |              |       |                 |       |   |   |   |   |
| Diluted - as reported                                                                                                                         |       | $                 | 0.40       |                 | $          | 0.03 |   | $ | 0.80 |   | $ | 0.20 |   |
| Diluted - pro forma                                                                                                                           |       | $                 | 0.39       |                 | $          | 0.02 |   | $ | 0.78 |   | $ | 0.19 |   |

 

8

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**6.**           SegmentReporting

** **

Monaco CoachCorporation is a leading manufacturer of premium Class A and Class C motorcoaches and towable recreational vehicles (“towables”) collectively referred toas the “RV Segment.”  Our product linecurrently consists of a broad line of motor coaches, fifth wheel trailers andtravel trailers under the “Monaco,” “Holiday Rambler,” “Royale Coach,”“Beaver,” “Safari,” and “McKenzie” brand names.

 

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California.  TheResorts offer sales of individual lots to owners, and also offer a commoninterest in the amenities at the resort. The Resorts provide destination locations for premium Class Arecreational vehicle owners, and help to promote the recreational lifestyle.

 

The followingtable provides the results of operations of the two segments of the Company forthe quarters and six-months ended July 3, 2004 and July 2, 2005,respectively.  All dollars representedare in thousands.

** **
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **July 3,  2004** | ** ** | **July 2,  2005**    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
| **Recreational Vehicle Segment**               |       |              |       |                 |       |   |   |   |   |
|                                           |       |              |       |                 |       |   |   |   |   |
| Net sales                                      |       | $                 | 351,467    |                 | $          | 293,730 |   | $ | 700,392 |   | $ | 619,949 |   |
| Cost of sales                                  |       | 308,311           |       | 268,804              |       | 615,310 |   | 562,226 |   |
| Gross profit                                   |       | 43,156            |       | 24,926               |       | 85,082 |   | 57,723 |   |
|                                           |       |              |       |                 |       |   |   |   |   |
| Selling, general and administrative  expenses  |       | 12,436            |       | 16,253               |       | 25,280 |   | 32,519 |   |
| Other reconciling items                        |       | 11,917            |       | 9,843                |       | 21,555 |   | 18,455 |   |
| Plant relocation costs                         |       | 0                 |       | 2,352                |       | 0 |   | 2,352 |   |
| Operating income (loss)                        |       | $                 | 18,803     |                 | $          | (3,522 | ) | $ | 38,247 |   | $ | 4,397 |   |
|                                           |       |              |       |                 |       |   |   |   |   |
| **Motorhome Resorts Segment**                  |       |              |       |                 |       |   |   |   |   |
|                                           |       |              |       |                 |       |   |   |   |   |
| Net sales                                      |       | $                 | 6,307      |                 | $          | 12,457 |   | $ | 12,358 |   | $ | 17,750 |   |
| Cost of sales                                  |       | 3,814             |       | 4,299                |       | 7,308 |   | 6,172 |   |
| Gross profit                                   |       | 2,493             |       | 8,158                |       | 5,050 |   | 11,578 |   |
|                                           |       |              |       |                 |       |   |   |   |   |
| Selling, general, and administrative  expenses |       | 1,044             |       | 2,221                |       | 2,291 |   | 3,729 |   |
| Other reconciling items                        |       | 1,324             |       | 1,094                |       | 2,395 |   | 2,051 |   |
| Operating income                               |       | $                 | 125        |                 | $          | 4,843 |   | $ | 364 |   | $ | 5,798 |   |

 

9

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**6.**           SegmentReporting (continued)

 
| ** **                       | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|-------------------|------------|----------------------|------------|
| **Reconciliation to Net Income** | ** ** | **July 3,  2004** | ** ** | **July 2,  2005**    | ** ** | **July 3,  2004** | ** ** | **July 2,  2005** | ** ** |
|                             |       |              |       |                 |       |   |   |   |   |
| Operating income (loss):         |       |              |       |                 |       |   |   |   |   |
| Recreational vehicle segment     |       | $                 | 18,803     |                 | $          | (3,522 | ) | $ | 38,247 |   | $ | 4,397 |   |
| Motorhome resorts segment        |       | 125               |       | 4,843                |       | 364 |   | 5,798 |   |
| Total operating income (loss)    |       | 18,928            |       | 1,321                |       | 38,611 |   | 10,195 |   |
|                             |       |              |       |                 |       |   |   |   |   |
| Other income, net                |       | 127               |       | 26                   |       | 213 |   | 140 |   |
| Interest expense                 |       | (372              | )          | (187                 | )          | (777 | ) | (672 | ) |
| Income before income taxes       |       | 18,683            |       | 1,160                |       | 38,047 |   | 9,663 |   |
|                             |       |              |       |                 |       |   |   |   |   |
| Provision for income taxes       |       | 6,735             |       | 405                  |       | 14,176 |   | 3,585 |   |
| Net income                       |       | $                 | 11,948     |                 | 755        |   | $ | 23,871 |   | $ | 6,078 |   |
|                                  |            |                   |            |                      |            |  |  |  |  |  |  |  |  |

 
| **Assets of the Recreational  Vehicle  and Motorhome Resorts Segments** | ** ** | **January 1,  2005** | ** ** | **July 2,  2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
|                                                                    |       |                 |       |              |       |
| Recreational vehicle segment                                            |       | $                    | 529,826    |              | $          | 521,400 |   |
| Motorhome resorts segment                                               |       | 10,412               |       | 8,278             |       |
| Total assets                                                            |       | $                    | 540,238    |              | $          | 529,678 |   |

 

**7.**              Commitmentsand Contingencies

 

Repurchase Agreements

 

Many of the Company’s sales to independent dealers are made on a “floorplan” basis by a bank or finance company which lends the dealer all orsubstantially all of the wholesale purchase price and retains a securityinterest in the vehicles.  Upon requestof a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.  In addition, on a limited basis, the Companywill extend limited guarantees of repayment for dealers to assist in temporarycredit constraints.  Guarantees ofrepayment are offered only to well qualified dealers.  As of July 2, 2005, approximately $4.0million worth of product was subject to this arrangement.

 

The Company’s liability under repurchase agreements is limited to theunpaid balance owed to the lending institution, and to guarantees referred toabove, by reason of its extending credit to the dealer to purchase itsvehicles, reduced by the resale value of vehicles which may berepurchased.  The risk of loss is spreadover numerous dealers and financial institutions.

 

10

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The approximate amount subject to contingent repurchase obligationsarising from these agreements at July 2, 2005 is $531.8 million, withapproximately 6.0% concentrated with one dealer.  TheCompany has included the disclosure requirements of FASB Interpretation No. 45(FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” in its financialstatements, and has determined that the recognition provisions of FIN 45 applyto certain guarantees routinely made by the Company including contingentrepurchase obligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $780,000 for potential losses resulting from guaranteeson repurchase obligations for products shipped to dealers.  This estimatedliability is based on the Company’s experience of losses associated with therepurchase and resale of units in prior years. If the Company were obligated to repurchase a significant numberof units under any repurchase agreement, its business, operating results, andfinancial condition could be adversely affected.

 

Product Liability

 

The Company is subject to regulations which may require the Company torecall products with design or safety defects, and such a recall could have amaterial adverse effect on the Company’s business, results of operations, andfinancial condition.

 

The Company has from time to time been subject to product liabilityclaims.  To date, the Company has beensuccessful in obtaining product liability insurance on terms the Companyconsiders acceptable.  The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  There can be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the cost of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

Litigation

 

The Company is involved in various legal proceedings, certain of whichmay involve material amounts, which are incidental to the industry and forwhich certain matters are covered in whole or in part by insurance or,otherwise, the Company has recorded accruals for estimated settlements.  Management believes that any liability whichmay result from these proceedings will not have a material adverse effect onthe Company’s consolidated financial statements.

 

Aircraft Lease Commitment

 

The Company has an aircraft under an operating lease, with annualrenewals for up to three years.  TheCompany began its second year of renewal in February 2005.  The future minimum rental commitments underthe renewal term of this lease is $1.5 million in 2005 and $252,000 in 2006.The Company has guaranteed up to $15.1 million of any deficiency in the eventthat the Lessor’s net sales proceeds of the aircraft are less than $16.9million.

 

11

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** **

**8.**                 Closureof Plant Facility

** **

Subsequent to July 2, 2005, the Company announced thatit plans to exit its Royale Coach operations in Elkhart, Indiana.  Royale Coach produces Prevost bus conversionmotor coaches with price points in excess of $1.4 million.  Royale Coach sells approximately 20 coachesper year and is not a significant portion of the Company’s overall business.  One time plant closure costs of approximately$1.6 million will be recognized in the third quarter of 2005.

 

12

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

 

This Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements include, but are not limitedto, those below that have been marked with an asterisk (*).  In addition, statements containing words suchas “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”“seeks,” and variations of such words and similar expressions are intended toidentify forward-looking statements. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements to differ materially from those expressed or implied by suchforward-looking statements, including those set forth below under the caption“Factors That May Affect Future Operating Results” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth under the caption “Factors That May Affect FutureOperating Results.”  We caution thereader, however, that these factors may not be exhaustive.

 

**GENERAL**

 

Monaco Coach Corporation is a leading manufacturer of premium Class Aand Class C motor coaches and towable recreational vehicles (“towables”)collectively referred to as the “RV Segment.” Our product line currently consists of a broad line of motor coaches,fifth wheel trailers and travel trailers under the “Monaco,” “Holiday Rambler,”“Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  Our products, which are typically priced atthe high end of their respective product categories, range in suggested retailprice from $75,000 to $1.4 million for motor coaches and from $20,000 to$65,000 for towables.

 

Subsequent to July 2,2005, the Company announced that it plans to exit its Royale Coach operationsin Elkhart, Indiana.  Royale Coachproduces Prevost bus conversion motor coaches with price points in excess of$1.4 million.  Royale Coach sellsapproximately 20 coaches per year and is not a significant portion of theCompany’s overall business.  We estimatethat one time plant closure costs of approximately $1.6 million will berecognized in the third quarter of 2005.*

 

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California.  TheResorts offer sales of individual lots to owners, and also offer a commoninterest in the amenities at the resort. Lot prices at the two resorts range from $119,000 to $259,000.  Amenities at the Resorts segment include clubhouse facilities, tennis, swimming, and golf. The Resorts provide destination locations for premium Class Arecreational vehicle owners, and help to promote the recreational lifestyle.

 

**RESULTSOF CONSOLIDATED OPERATIONS**

 

*Quarterended July 2, 2005 Compared to Quarter ended July 3, 2004*

 

The followingtable illustrates the results of consolidated operations for the quarters endedJuly 3, 2004, and July 2, 2005.  Alldollars represented are in thousands.

 
| ** **                                     | ** ** | **Quarter  Ended   July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|-----------------|------------|----------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                 | 357,774    |            | 100.0      | %                                | $          | 306,187         |       | 100.0         | %          | $             | (51,587    | ) | -14.4 | % |
| Cost of sales                                  |       | 312,125                           |       | 87.2            | %          | 273,103                          |       | 89.2            | %          | 39,022        |       | 12.5          | %          |
| Gross profit                                   |       | 45,649                            |       | 12.8            | %          | 33,084                           |       | 10.8            | %          | (12,565       | )          | -27.5         | %          |
| Selling, general, and administrative  expenses |       | 26,721                            |       | 7.5             | %          | 29,411                           |       | 9.6             | %          | (2,690        | )          | -10.1         | %          |
| Plant relocation costs                         |       | —                            |       | —          |       | 2,352                            |       | 0.8             | %          | (2,352        | )          | —        |       |
|                                           |       |                              |       |            |       |                             |       |            |       |          |       |          |       |
| Operating income                               |       | $                                 | 18,928     |            | 5.3        | %                                | $          | 1,321           |       | 0.4           | %          | $             | (17,607    | ) | -93.1 | % |

 

*Performancein the second quarter of 2005*

 

The current market continues to be challenging, as we and othermanufacturers contend for space on dealer lots. Industry Class A retail registrations for the 2005 year-to-date throughMay 2005, compared to the same period in 2004, have decreased by 6.5%.  While our own Class A retail registrationsare up slightly, our dealers appear to be reducing inventories on their lots,putting further pressures on wholesale shipments.  In response, we offered heavier discounts anddealer promotions to maintain market share, and slowed production rates to holdfinished

 

13

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goods inventory toan acceptable level.  We expect thatthere will be a modest reduction in discounting moving forward into the thirdquarter, and continuing to decrease in the fourth quarter.*

 

Consolidated salesin the second quarter of 2005 were $306.2 million versus $357.8 million in thecorresponding quarter of 2004, a 14.4% reduction.  This reduction in consolidated sales waspredominantly due to the softening of wholesale demand in the recreational vehicle(RV) retail market, combined with dealers seeking to reduce their inventorylevels.

 

Cost of salesdecreased by $39.0 million from the second quarter of 2004 to the secondquarter of 2005, but increased as a percent of sales by 2%.  This change was predominantly caused by lowersales volumes which created inefficiencies in our plants as production outputswere reduced, as well as increases in discounting of wholesale sellingprices.  Further pressures on margin werecreated as fixed indirect cost of sales became a larger percentage of the lowersales volume.

 

Selling, general,and administrative expenses (S,G,&A) increased by $2.7 million in thesecond quarter of 2004 to $29.4 million in the second quarter of 2005 andincreased as a percentage of sales from 7.5% in 2004 to 9.6% from the secondquarter of 2004.  Increases in spendingover the prior year, as a percentage of sales, are shown in the followingtable.  All dollars represented are inthousands, percentages are expressed as percent of net sales:

 
| ** **                             | ** ** | **Quarter  Ended  July 3,  2004** | ** ** | **% of  Sales** | ** ** | **Quarter  Ended  July 2,  2005** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------|------------|-----------------------------------|------------|-----------------|------------|---------------------------|------------|
| Salaries, bonus, and benefits expenses |       | $                                 | 6,817      |            | 1.9        | %                                 | $          | 4,511           |       | 1.5                       | %          | -0.4 | % |
| Selling expenses                       |       | 8,166                             |       | 2.3             | %          | 10,836                            |       | 3.5             | %          | 1.2                       | %          |
| Settlement expense                     |       | 3,592                             |       | 1.0             | %          | 2,831                             |       | 0.9             | %          | -0.1                      | %          |
| Marketing expenses                     |       | 2,060                             |       | 0.6             | %          | 2,367                             |       | 0.8             | %          | 0.2                       | %          |
| Other                                  |       | 6,086                             |       | 1.7             | %          | 8,866                             |       | 2.9             | %          | 1.2                       | %          |
| Total S,G,&A expenses              |       | $                                 | 26,721     |            | 7.5        | %                                 | $          | 29,411          |       | 9.6                       | %          | 2.1 | % |
|                                        |            |                                   |            |                 |            |                                   |            |                 |            |                           |            |  |  |  |

 

The changes notedabove, comparing July 3, 2004 to July 2, 2005, are discussed below:

 

•                  Decreases insalaries, bonus, and benefits expenses, as a percent of sales, were dueprimarily to reduced management bonus.

•                  Increases inselling expenses, as a percent of sales, were due to continued sales efforts toassist dealers in developing programs  toincrease customer awareness of product offerings.

•                  Decreases insettlement expense (litigation settlement expense), in total dollars, were dueto continued success in the resolution of outstanding litigation claims.

•                  Increases inother expenses were due primarily to costs associated with the installation ofnew information systems, as well as start up costs for the new franchiseprogram.

 

Plant relocationcosts in the second quarter of 2005 were associated with the consolidation ofour Bend, Oregon manufacturing facility to our Coburg, Oregon operations.  We relocated these operations to improveutilization of our plants, to improve direct and indirect labor rates, and toreduce warranty and related costs.  Costsassociated with the relocation of the Bend facility are comprised of employeetermination, relocation, and job assistance programs.  In addition, we have incurred costs relatedto various operating leases.  We expectthat total costs associated with the relocation will not exceed the $2.4million we have already expensed.*

 

Operating incomewas $1.3 million, or .4% of sales, in the second quarter of 2005 compared to$18.9 million, or 5.3% of sales, in the similar 2004 period.** **Decreases inoperating income****were due predominantly to lowersales, decreased gross margin, and increases in S,G,&A costs.

 

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Net interestexpense was $187,000 in the second quarter of 2005 versus $372,000 in thecomparable 2004 period, reflecting a lower level of borrowing during the secondquarter of 2005.

 

We reported aprovision for income taxes of $405,000, or an effective tax rate of 34.9%, inthe second quarter of 2005, compared to $6.7 million, or an effective tax rateof 36.1% for the comparable 2004 period. The decrease in the effective tax rate was due primarily to benefitsreceived from foreign sales activities, as well as favorable tax law changes atcertain state levels.

 

Net income for thesecond quarter of 2005 was $755,000 compared to $11.9 million in 2004 due to adecrease in sales combined with a lower operating margin, the effects of whichwere somewhat offset by a decrease in interest expense, and an improvement inthe effective tax rate.

 

*SecondQuarter 2005 versus Second Quarter 2004 for the Recreational Vehicle Segment*

 

The following table illustratesthe results of the Recreational Vehicle Segment (RV Segment) for the quartersended July 3, 2004, and July 2, 2005. All dollars represented are in thousands.

 
| ** **                                     | ** ** | **Quarter  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **$   Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------|------------|-----------------|------------|---------------------|------------|---------------|------------|
| Net sales                                      |       | $                                | 351,467    |            | 100.0      | %                                | $          | 293,730         |       | 100.0               | %          | ($57,737      | )          | -16.4 | % |
| Cost of sales                                  |       | 308,311                          |       | 87.7            | %          | 268,804                          |       | 91.5            | %          | 39,507              |       | 12.8          | %          |
| Gross profit                                   |       | 43,156                           |       | 12.3            | %          | 24,926                           |       | 8.5             | %          | (18,230             | )          | -42.2         | %          |
| Selling, general, and administrative  expenses |       | 12,436                           |       | 3.5             | %          | 16,253                           |       | 5.5             | %          | (3,817              | )          | -30.7         | %          |
| Corporate overhead allocation                  |       | 11,917                           |       | 3.4             | %          | 9,843                            |       | 3.4             | %          | 2,074               |       | 17.4          | %          |
| Plant relocation costs                         |       | —                           |       | —          |       | 2,352                            |       | 0.8             | %          | (2,352              | )          | —        |       |
| Operating income                               |       | $                                | 18,803     |            | 5.4        | %                                | $          | (3,522          | )          | -1.2                | %          | $             | (22,325    | ) | -118.7 | % |
|                                                |            |                                  |            |                 |            |                                  |            |                 |            |                     |            |               |            |  |  |  |  |

 

Total net salesfor the RV Segment were down from $351.5 million in the second quarter of 2004,to $293.7 million in the second quarter of 2005.  Gross diesel motorized revenues were down13.6%, gas motorized revenues were down 36.8% and towable revenues were down2.6%.  Diesel products accounted for75.5% of our second quarter RV Segment revenues while gas products were 12.9%, andtowables were 11.6%.  The overall decreasein revenues reflects continuing challenges in the marketplace as dealers seekto match their current inventories with retail demand.  Our overall unit sales were down 16.0% in thesecond quarter of 2005 to 2,811 units, with diesel motorized unit sales down17.0% to 1,123 units, gas motorized unit sales down 37.4% to 483 units, andtowable unit sales down 1.4% to 1,205 units. Our total average unit selling price decreased to $105,000 in the secondquarter of 2005 from $106,000 in the same period last year.

 

Gross profit forthe second quarter of 2005 decreased to $24.9 million, down from $43.2 millionin 2004, and gross margin decreased from 12.3% in the second quarter of 2004 to8.5% in the second quarter of 2005.  Thedecrease in gross margin in 2005 is illustrated in the following table.  All dollars represented are in thousands,percentages are expressed as a percent of net sales:

 
| ** **          | ** ** | **Quarter  Ended  July 3, 2004** | ** ** | **% of Sales** | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **% of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|----------------------------------|------------|----------------|------------|----------------------------------|------------|----------------|------------|---------------------------|------------|
| Direct materials    |       | $                                | 216,735    |           | 61.7       | %                                | $          | 184,722        |       | 62.9                      | %          | 1.2 | % |
| Direct labor        |       | 36,427                           |       | 10.3           | %          | 30,042                           |       | 10.2           | %          | -0.1                      | %          |
| Warranty            |       | 10,548                           |       | 3.0            | %          | 9,274                            |       | 3.2            | %          | 0.2                       | %          |
| Other direct        |       | 16,063                           |       | 4.6            | %          | 16,429                           |       | 5.6            | %          | 1.0                       | %          |
| Indirect            |       | 28,538                           |       | 8.1            | %          | 28,337                           |       | 9.6            | %          | 1.5                       | %          |
| Total cost of sales |       | $                                | 308,311    |           | 87.7       | %                                | $          | 268,804        |       | 91.5                      | %          | 3.8 | % |

 

The changes notedabove, comparing July 3, 2004 to July 2, 2005, are discussed below.

 

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•                  Direct materialincreases, as a percent of sales, were mostly due to increases in products thathave a higher material cost as a percentage of sales, as well as a favorablephysical inventory adjustment in the second quarter of 2004.

•                  Direct labordecreases, as a percent of sales, were predominantly due to improvements inautomation of certain plant operations.

•                  Increases inwarranty expense, as a percent of sales, were due mostly to a slight increasein the warranty experience on current year models.

•                  Increases inother direct costs, as a percent of sales, were due mostly to increases inemployee health benefits, and delivery expense for the Company’s products.

•                  Increases inindirect costs, as a percent of sales, were due mostly to inefficiencies withinthe production facilities associated with lower run rates in the second quarterof 2005 versus the same period in 2004.

 

Selling, general,and administrative expenses (S,G,&A), for the RV Segment, increased both asa percent of sales and in total dollars due in part to lower sales levels, andincreases in selling expenses.  Corporateoverhead allocation reflects a decrease due to lower management bonus levelsallocated to the RV Segment as a result of lower profits.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

 

Plant relocationcosts are related to the costs incurred to relocate the Bend, Oregonmanufacturing facility to the Coburg, Oregon plant.  We believe this relocation will ultimatelyresult in improved margins for the Oregon operations.*

 

Operating incomedecreased as both a percent of sales and in total dollars due to lower grossmargins, increases in S,G,&A expenses, and from the relocation of the Bend,Oregon operations to the Coburg, Oregon facility.

 

*SecondQuarter 2005 versus Second Quarter 2004 for the Motorhome Resorts Segment*

 

The following table illustratesthe results of the Motorhome Resorts Segment (Resorts Segment) for the quartersended July 3, 2004, and July 2, 2005. All dollars represented are in thousands.

 
| ** **                                     | ** ** | **Quarter  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|----------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                | 6,307      |            | 100.0      | %                                | $          | 12,457          |       | 100.0         | %          | $             | 6,150      |   | 97.5 | % |
| Cost of sales                                  |       | 3,814                            |       | 60.5            | %          | 4,299                            |       | 34.5            | %          | (485          | )          | -12.7         | %          |
| Gross profit                                   |       | 2,493                            |       | 39.5            | %          | 8,158                            |       | 65.5            | %          | 5,665         |       | 227.2         | %          |
| Selling, general, and administrative  expenses |       | 1,044                            |       | 16.6            | %          | 2,221                            |       | 17.8            | %          | (1,177        | )          | -112.7        | %          |
| Corporate overhead allocation                  |       | 1,324                            |       | 21.0            | %          | 1,094                            |       | 8.8             | %          | 230           |       | 17.4          | %          |
| Operating income                               |       | $                                | 125        |            | 1.9        | %                                | $          | 4,843           |       | 38.9          | %          | $             | 4,718      |   | 3,774.4 | % |

 

Net salesincreased 97.5% to $12.5 million compared to $6.3 million for the same periodlast year.  This increase was due in partto a buildup of pending lot sales from the first quarter of 2005, that wereclosed and funded in the second quarter of 2005.  In addition, strong demand addedsignificantly to the sales on a year-over-year basis.

 

Gross profit forthe Resorts Segment increased to 65.5% of sales compared to 39.5% of sales inthe same period last year.  This was dueto a heavier absorption of infrastructure costs in earlier phases.  These costs were expensed in earlier phases,due to uncertainties as to the ultimate completion and sell through of theentire projects. The result was an improvement in the gross margins in thelater phases of the developments, and most particularly in the second quarterof 2005.

 

Selling, general,and administrative expenses increased due to real estate commissions paid onthe sales of lots.  Additional increaseswere due to accruals for profit sharing payments which will be made to OutdoorResorts of America upon completion of the project.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

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Operating incomeincreased due to improvements in sales and gross margins that were onlyslightly offset by higher S,G,&A costs*.*

 

*Sixmonths ended July 2, 2005 Compared to Six months ended July 3, 2004*

 

The followingtable illustrates the results of consolidated operations for the six monthsended July 3, 2004, and July 2, 2005. All dollars represented are in thousands.

 
| ** **                                     | ** ** | **Six Months  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                   | 712,750    |            | 100.0      | %                                   | $          | 637,699         |       | 100.0         | %          | $             | (75,051    | ) | -10.5 | % |
| Cost of sales                                  |       | 622,618                             |       | 87.4            | %          | 568,398                             |       | 89.1            | %          | 54,220        |       | 8.7           | %          |
| Gross profit                                   |       | 90,132                              |       | 12.6            | %          | 69,301                              |       | 10.9            | %          | (20,831       | )          | -23.1         | %          |
| Selling, general, and administrative  expenses |       | 51,521                              |       | 7.2             | %          | 56,754                              |       | 8.9             | %          | (5,233        | )          | -10.2         | %          |
| Plant relocation costs                         |       | —                              |       | —          |       | 2,352                               |       | 0.4             | %          | (2,352        | )          | —        |       |
| Operating income                               |       | $                                   | 38,611     |            | 5.4        | %                                   | $          | 10,195          |       | 1.6           | %          | $             | (28,416    | ) | -73.6 | % |
|                                                |            |                                     |            |                 |            |                                     |            |                 |            |               |            |               |            |  |  |  |  |

 

Consolidated salesfor the six months ended July 2, 2005 were $637.7 million versus $712.8, a10.5% reduction.  This reduction waspredominantly due to softening of wholesale demand in the RV market and dealersseeking to reduce their carrying levels of finished goods.

 

Cost of salesdecreased by $54.2 million from the first six months of 2004 to the first sixmonths of 2005, but increased as a percent of sales by 1.7%.  This change was predominantly caused by lowersales volumes which created inefficiencies in our plants as production outputswere reduced, as well as increases in discounting of wholesale sellingprices.  Further pressures on margin werecreated as fixed indirect cost of sales became a larger percentage of the lowersales volume.

 

Selling, general,and administrative expenses (S,G,&A) increased by $5.2 million to $56.8million for the first six months of 2005 and increased as a percentage of salesfrom 7.2% in 2004 to 8.9% in 2005. Increases in spending over the prior year, as a percentage of sales, areshown in the following table.  All dollarsrepresented are in thousands, percentages are expressed as a percent of netsales:

 
| ** **                             | ** ** | **Six Months  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **% of  Sales** | ** ** | **Change  in % of  Sales** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|----------------------------|------------|
| Salaries, bonus, and benefits expenses |       | $                                   | 14,055     |            | 2.0        | %                                   | $          | 9,859           |       | 1.6                        | %          | -0.4 | % |
| Selling expenses                       |       | 15,929                              |       | 2.2             | %          | 20,403                              |       | 3.2             | %          | 1.0                        | %          |
| Settlement expense                     |       | 4,532                               |       | 0.6             | %          | 5,791                               |       | 0.9             | %          | 0.3                        | %          |
| Marketing expenses                     |       | 5,099                               |       | 0.7             | %          | 5,160                               |       | 0.8             | %          | 0.1                        | %          |
| Other                                  |       | 11,906                              |       | 1.7             | %          | 15,541                              |       | 2.4             | %          | 0.7                        | %          |
| Total S,G,&A expenses              |       | $                                   | 51,521     |            | 7.2        | %                                   | $          | 56,754          |       | 8.9                        | %          | 1.7 | % |

 

The changes notedabove, comparing the six months ended July 3, 2004 to the six months ended July2, 2005, are discussed below.

 

•                  Decreases insalaries, bonus, and benefits expenses, as a percent of sales, were dueprimarily to reduced management bonus.

•                  Increases inselling expenses, as a percent of sales, were due to continued sales efforts toassist dealers in developing programs  toincrease customer awareness of product offerings.

•                  Increases insettlement expense (litigation settlement expense), in total dollars, as apercent of sales were due to expenses returning to more normalized levels inthe first half of 2005 versus the corresponding period in 2004.

•                  Increases inother expenses were due primarily to costs associated with the installation ofnew information systems, as well as start up costs for the new franchiseprogram.

 

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Plant relocationcosts were associated with the consolidation of our Bend, Oregon manufacturingfacility to our Coburg, Oregon operations. We relocated these operations to improve utilization of our plants, toimprove direct and indirect labor rates, and to reduce warranty and relatedcosts.  Costs associated with therelocation of the Bend facility are comprised of employee termination,relocation, and job assistance programs. In addition, we have incurred costs related to various operating leases.  We expect that total costs associated withthe relocation will not exceed the $2.4 million we have already expensed.*

 

Operating incomewas $10.2 million, or 1.6% of sales, for the first six months of 2005 comparedto $38.6 million, or 5.4% of sales, in the similar 2004 period.** **Decreases inoperating income****were due predominantly to lowersales and increases in S,G,&A costs.

 

Net interestexpense was $672,000 for the first six months of 2005 versus $777,000 in thecomparable 2004 period, reflecting a lower level of borrowing during the firstsix months of 2005.

 

We reported aprovision for income taxes of $3.6 million, or an effective tax rate of 37.1%for the first six months of 2005, compared to $14.2 million, or an effectivetax rate of 37.3% for the comparable 2004 period.  The decrease in the effective tax rate wasdue primarily to benefits received from foreign sales activities, as well asfavorable tax law changes at certain state levels.

 

Net income for thefirst six months of 2005 was $6.1 million compared to $23.9 million in 2004 dueto a decrease in sales combined with a lower operating margin, the effects ofwhich were somewhat offset by a decrease in interest expense, and animprovement in the effective tax rate.

 

*First SixMonths of 2005 versus First Six Months 2004 for the Recreational Vehicle Segment*

 

The following table illustratesthe results of the RV Segment for the six months ended July 3, 2004, and July2, 2005.  All dollars represented are inthousands.

 
| ** **                                     | ** ** | **Six Months  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                   | 700,392    |            | 100.0      | %                                   | $          | 619,949         |       | 100.0         | %          | $             | (80,443    | ) | -11.5 | % |
| Cost of sales                                  |       | 615,310                             |       | 87.9            | %          | 562,226                             |       | 90.7            | %          | 53,084        |       | 8.6           | %          |
| Gross profit                                   |       | 85,082                              |       | 12.1            | %          | 57,723                              |       | 9.3             | %          | (27,359       | )          | -32.2         | %          |
| Selling, general, and administrative  expenses |       | 25,280                              |       | 3.6             | %          | 32,519                              |       | 5.2             | %          | (7,239        | )          | -28.6         | %          |
| Corporate overhead allocation                  |       | 21,555                              |       | 3.1             | %          | 18,455                              |       | 3.0             | %          | 3,100         |       | 14.4          | %          |
| Plant relocation costs                         |       | —                              |       | —          |       | 2,352                               |       | 0.4             | %          | (2,352        | )          | —        |       |
| Operating income                               |       | $                                   | 38,247     |            | 5.4        | %                                   | $          | 4,397           |       | 0.7           | %          | $             | (33,850    | ) | -88.5 | % |

 

Total netsales for the RV Segment were down from $700.4 million in the first six monthsof 2004, to $619.9 million in the first six months of 2005.  Gross diesel motorized  revenues were down 8.5%, gas motorizedrevenues were down 33.3% and towable revenues were up 5.3%.  Diesel products accounted for 76.7% of ourfirst six months RV Segment revenues while gas products were 12.3%, andtowables were 11.0%.  The overalldecrease in revenues reflects continuing challenges in the market place asdealers seek to match their current inventories with retail demand.  Our overall unit sales were down 10.0% in thefirst six months of 2005 to 5,836 units, with diesel motorized unit sales down12.4% to 2,443 units, gas motorized unit sales down 35.0% to 961 units, andtowable unit sales up 9.7% to 2,432 units. Our total average unit selling price decreased to $107,000 for the firstsix months of 2005 from $109,000 in the same period last year. 

 

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Gross profit forthe first six months of 2005 decreased to $57.7 million, down from $85.1million in 2004, and gross margin decreased from 12.1% in the first six monthsof 2004 to 9.3% in the first six months of 2005.  The decrease in gross margin in 2005 is illustratedin the following table.  All dollarsrepresented are in thousands, percentages are expressed as a percent of netsales:

 
| ** **          | ** ** | **Six Months  Ended  July 3, 2004** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|---------------------------|------------|
| Direct materials    |       | $                                   | 433,829    |            | 61.9       | %                                   | $          | 390,121         |       | 62.9                      | %          | 1.0 | % |
| Direct labor        |       | 71,588                              |       | 10.2            | %          | 62,460                              |       | 10.1            | %          | -0.1                      | %          |
| Warranty            |       | 19,884                              |       | 2.9             | %          | 16,809                              |       | 2.7             | %          | -0.2                      | %          |
| Other direct        |       | 32,431                              |       | 4.6             | %          | 34,386                              |       | 5.6             | %          | 1.0                       | %          |
| Indirect            |       | 57,578                              |       | 8.2             | %          | 58,450                              |       | 9.4             | %          | 1.2                       | %          |
| Total cost of sales |       | $                                   | 615,310    |            | 87.8       | %                                   | $          | 562,226         |       | 90.7                      | %          | 2.9 | % |

 

The changes notedabove, comparing July 3, 2004 to July 2, 2005, are discussed below.

 

•                  Directmaterial increases, as a percent of sales, were mostly due to increases inproducts that have a higher material cost as a percentage of sales, as well asa favorable physical inventory adjustment in the second quarter of 2004.

•                  Direct labordecreases, as a percent of sales, were predominantly due to improvements inautomation of certain plant operations.

•                  Decreases inwarranty expense, as a percent of sales, were due mostly to a slight decreasein the warranty experience on current year models.

•                  Increases inother direct costs, as a percent of sales, were due mostly to increases inemployee health benefits, and delivery expense for the Company’s products.

•                  Increases inindirect costs, as a percent of sales, were due mostly to inefficiencies withinthe production facilities associated with lower run rates in the first sixmonths of 2005 versus the same period in 2004.

 

Selling, general,and administrative expenses (S,G,&A) for the RV Segment increased both as apercent of sales and in total dollars due in part to lower sales levels andincreases in selling expenses.  Corporateoverhead allocation reflects a decrease due to lower management bonus levelsallocated to the RV Segment as a result of lower profits.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

Plant relocationcosts are related to the costs incurred to relocate the Bend, Oregonmanufacturing facility to the Coburg, Oregon plant.  We believe this relocation will ultimatelyresult in improved margins for the Oregon operations.*

 

Operating incomedecreased as both a percent of sales and in total dollars due to lower grossmargins, increases in S,G,&A expenses, and from the relocation of the Bend,Oregon operations to the Coburg, Oregon facility.

 

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*First SixMonths 2005 versus First Six Months 2004 for the Motorhome Resorts Segment*

 

The following table illustratesthe results of the Motorhome Resorts Segment (Resorts Segment) for the firstsix months ended July 3, 2004, and July 2, 2005.  All dollars represented are in thousands.

 
| ** **                                     | ** ** | **Six Months  Ended  June 3, 2004** | ** ** | **% of  Sales** | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **% of  Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                   | 12,358     |            | 100.0      | %                                   | $          | 17,750          |       | 100.0         | %          | $             | 5,392      |   | 43.6 | % |
| Cost of sales                                  |       | 7,308                               |       | 59.1            | %          | 6,172                               |       | 34.8            | %          | 1,136         |       | 15.5          | %          |
| Gross profit                                   |       | 5,050                               |       | 40.9            | %          | 11,578                              |       | 65.2            | %          | 6,528         |       | 129.3         | %          |
| Selling, general, and administrative  expenses |       | 2,291                               |       | 18.5            | %          | 3,729                               |       | 21.0            | %          | (1,438        | )          | -62.8         | %          |
| Corporate overhead allocation                  |       | 2,395                               |       | 19.4            | %          | 2,051                               |       | 11.6            | %          | 344           |       | 14.4          | %          |
| Operating income                               |       | $                                   | 364        |            | 3.0        | %                                   | $          | 5,798           |       | 32.6          | %          | $             | 5,434      |   | 1,492.9 | % |

 

Net salesincreased 43.6% to $17.8 million compared to $12.4 million for the same periodlast year.  This was due to the continuedstrong demand for lots at both of our resort locations.

 

Gross profit forthe Resorts Segment increased to 65.2% of sales compared to 40.9% of sales inthe same period last year. This was due to a heavier absorption ofinfrastructure costs in earlier phases. These costs were expensed in earlier phases, due to uncertainties as tothe ultimate completion and sell through of the entire projects.   The result was an improvement in the grossmargins in the later phases of the developments, and most particularly in thesecond quarter of 2005.

 

Selling, general,and administrative expenses increased due to real estate commissions paid onthe sales of lots.  Additional increaseswere due to accruals for profit sharing payments which will be made to OutdoorResorts of America upon completion of the project.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

Operating incomeincreased due to improvements in sales and gross margins that were onlyslightly offset by higher S,G,&A costs.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our primarysources of liquidity are internally generated cash from operations andavailable borrowings under our credit facilities.  During the second quarter of 2005, wegenerated cash of $17.1 million from operating activities.  We generated $11.1 million from net incomeand non-cash expenses such as depreciation and amortization. Other sources ofcash included a $21.0 million decrease in accounts receivable, and a $2.1million decrease in resort lot inventory. Accounts receivable decreased due to the decrease in net sales.  These sources of cash were offset by a $10.1million increase in inventories, a $3.7 million decrease in accounts payable, a$457,000 decrease in product liability reserve, an $889,000 decrease in accruedexpenses, and a $2.1 million decrease in tax liability.

 

The Company’scredit facility consists of a revolving line of credit of up to $105.0million.  As of July 2, 2005, borrowingsoutstanding on the revolving line of credit (the “Revolving Loan”) were $7.5million.  At the election of the Company,the Revolving Loan bears interest at varying rates that fluctuate based on thePrime rate or LIBOR, and are determined based on the Company’s leverageratio.  The Company also pays interestmonthly on the unused available portion of the Revolving Loan at varying rates,determined by the Company’s leverage ratio. The Revolving loan is due and payable in full on November 17, 2009 andrequires monthly interest payments.  TheRevolving Loan is collateralized by all the assets of the Company and includesvarious restrictions and financial covenants. The Company was in compliance with these covenants at July 2, 2005.  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 accountat the bank returns to zero at the end of each day, the outstanding checks ofthe Company are reflected as a liability. The outstanding check liability is combined with the Company’s positivecash balance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

 

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Our principalworking capital requirements are for purchases of inventory and financing oftrade receivables.  Many of our dealersfinance product purchases under wholesale floor plan arrangements with thirdparties as described below.  At July 2,2005, we had working capital of approximately $143.8 million, an increase of$1.9 million from working capital of $141.9 million at January 1, 2005.  We have been using cash flow from operationsto finance our capital expenditures.

 

We believethat cash flow from operations and funds available under our credit facilitieswill be sufficient to meet our liquidity requirements for the next 12months.*  Our capital expenditures were$7.6 million in the first six months of 2005, which included costs related toinstallation of certain automated machinery, enhancements to the Company’sinformation system infrastructure, as well as various other routine capitalexpenditures.  We anticipate that capitalexpenditures for all of 2005 will be approximately $15 to $17 million, whichincludes expenditures to purchase additional machinery and equipment in bothour Coburg, Oregon and Wakarusa, Indiana facilities, as well as upgrades toexisting information systems infrastructures.* We may require additional equity or debt financing to address workingcapital and facilities expansion needs, particularly if we significantlyincrease the level of working capital assets such as inventory and accountsreceivable.  We may also from time totime seek to acquire businesses that would complement our 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 us.

 

As is typicalin the recreational vehicle industry, many of our retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of our products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  We have agreements withseveral institutional lenders under which we currently have repurchaseobligations.  Our contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units.  Ourobligations under these repurchase agreements vary from period to period up to18 months.  At July 2, 2005,approximately $531.8 million of products sold by us to independent dealers weresubject to potential repurchase under existing floor plan financing agreementswith approximately 6.0% concentrated with one dealer.  On a limited basis, we may also grant arepurchase agreement that has a component of limited guarantee of payment onbehalf of the dealer in the event of default. At July 2, 2005, we had approximately $4.0 million of product subject toa repurchase agreement of this nature. Historically, we have been successful in mitigating losses associatedwith repurchase obligations.  During thesecond quarter of 2005, we did not repurchase any product under theserepurchase obligations, and there were accordingly no losses.  If we were obligated to repurchase asignificant number of units under any repurchase agreement, our business,operating results, and financial condition could be adversely affected.  Dealers for the Company undergo credit reviewprior to becoming a dealer and periodically thereafter.  Financial institutions that providefloor-plan financing also perform credit reviews and floor checks on an ongoingbasis.  We closely monitor sales todealers that are a higher credit risk. The repurchase period is limited, usually to a maximum of 18months.  We believe these activitiesminimize the number of required repurchases. Additionally, the repurchase agreement specifies that the dealer isrequired to make principal payments during the repurchase period.  Since the Company repurchases the units basedon the schedule of principal payments, the repurchase amount is typically lessthan the original invoice amount. Therefore, there is already some built in discount when we offer theinventory to another dealer at an amount lower than the original invoice asincentive for the dealer to take the repurchased inventory.  This helps minimize the losses we incur onrepurchased inventory. 

 

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As part of thenormal course of business, we incur certain contractual obligations andcommitments which will require future cash payments. The following tablessummarize the significant obligations and commitments.

 

PAYMENTS DUE BYPERIOD

 
| **Contractual Obligations (in  thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Operating Leases (1)                        |       | $                  | 1,807      |             | $          | 3,530            |       | $              | 2,571      |      | $          | 3,816 |   | $ | 11,724 |   |
| Total Contractual Cash Obligations          |       | $                  | 1,807      |             | $          | 3,530            |       | $              | 2,571      |      | $          | 3,816 |   | $ | 11,724 |   |

 

AMOUNT OFCOMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Line of Credit (2)                   |       | $                  | 7,500      |             | $          | 97,500           |       | $              | 0          |      | $          | 0 |   | $ | 105,000 |   |
| Guarantees                           |       | 0                  |       | 19,100           | (1)        | 0                |       | 0              |       | 19,100    |       |
| Repurchase Obligations (3)           |       | 0                  |       | 0                |       | 0                |       | 0              |       | 0         |       |
| Total Commitments                    |       | $                  | 7,500      |             | $          | 116,600          |       | $              | 0          |      | $          | 0 |   | $ | 124,100 |   |

 

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(1)           Various leases includingmanufacturing facilities, aircraft, machinery and equipment, and certain guarantees of manufacturersrepurchase commitments.  See Note 7 tothe Condensed Consolidated Financial Statements.

(2)           See Note 3  to the Condensed Consolidated FinancialStatements.  The amount listed representsavailable borrowings on the line of credit at July 2, 2005.

(3)           Reflects obligations undermanufacturer repurchase commitments.  SeeNote 7 to the Condensed Consolidated Financial Statements.

 

**INFLATION**

 

During 2004 and to a lesser extent in thefirst six months of 2005, we experienced increases in the prices of certaincommodity items that we use in the manufacturing of our products.  These include, but are not limited to, steel,copper, aluminum, petroleum, and wood. While these raw materials are not necessarily indicative of widespreadinflationary trends, they had an impact on our production costs.  While the impact of these increases has notcaused us to increase our selling prices since the beginning of the secondquarter of 2004, we may need to pass along increases in the future to maintainan acceptable gross margin on our product. A significant adverse trend in these prices could have a materiallyadverse impact on our business going forward.

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussionand analysis of our financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from these estimatesunder different assumptions or conditions. We believe the following critical accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financialstatements.

 

WARRANTY COSTSEstimated warranty costs are provided for at the time of sale of products withwarranties covering the products for up to one year from the date of retailsale (five years for the front and sidewall frame structure, and three years onthe Roadmaster chassis).  These estimatesare based on historical average repair costs, feedback from the Company’sproduction facilities on new product design changes, technical advice fromvendors, as well as other reasonable assumptions that have been deemedappropriate by management.

 

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PRODUCTLIABILITY  The Company provides anestimate for accrued product liability based on current pending cases, as wellas for those cases which are incurred but not reported.  This estimate is developed by legal counselbased on professional judgment, as well as historical experience.

 

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

 

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

 

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

 

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

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTSFOR A VARIETY OF REASONS.  Our net sales,gross margin, and operating results may fluctuate significantly from period toperiod due to a number of factors, many of which are not readilypredictable.  These factors include thefollowing:

 

•                  Themargins associated with the mix of products we sell in any particular period.

 

•                  Ourability to utilize and expand our manufacturing resources efficiently.

 

•                  Shortagesof materials used in our products.

 

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

 

•                  Ourability to introduce new models that achieve consumer acceptance.

 

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

 

•                  Theaddition or loss of our dealers.

 

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

 

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

 

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Our overall gross margin may decline in future periods to the extentthat we increase the percentage of sales of lower gross margin towable productsor if the mix of motor coaches we sell shifts to lower gross margin units.  In addition, a relatively small variation inthe number of recreational vehicles we sell in any quarter can have a significantimpact on total sales and operating results for that quarter.

 

Demand in the recreational vehicle industry generally declines duringthe winter months, while sales are generally higher during the spring andsummer months.  With the broader range ofproducts we now offer, seasonal factors could have a significant impact on ouroperating results in the future. Additionally, unusually severe weather conditions in certain marketscould delay the timing of shipments from one quarter to another.

 

We attempt to forecast orders for our products accurately and commencepurchasing and manufacturing prior to receipt of such orders.  However, it is highly unlikely that we willconsistently accurately forecast the timing, rate, and mix of orders.  This aspect of our business makes ourplanning inexact and, in turn, affects our shipments, costs, inventories,operating results, and cash flow for any given quarter.

 

THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY.  The recreationalvehicle industry has been characterized by cycles of growth and contraction inconsumer demand, reflecting prevailing economic, demographic, and politicalconditions that affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry climbed toapproximately 321,000 units, but declined to 286,000 units during 2004.  The decline has continued into 2005.  Our business is subject to the cyclicalnature of this industry.  Some of thefactors that contribute to this cyclicality include fuel availability andcosts, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidence andslowing of the overall economy has adversely affected the recreational vehiclemarket.  An extended continuation ofthese conditions would materially affect our business, results of operations,and financial condition.

 

WE RELY ON ARELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OURSALES.  Although our products wereoffered by 332 dealerships located primarily in the United States and Canada asof July 2, 2005, a significant percentage of our sales are concentrated among arelatively small number of independent dealers. For the quarter ended July 2, 2005, sales to one dealer, Lazy Days RVCenter, accounted for 11.1% of total sales compared to 10.3% of sales in the sameperiod ended last year.  For quartersended July 3, 2004 and July 2, 2005, sales to our 10 largest dealers, includingLazy Days RV Center, accounted for a total of 40.0% and 41.7% of total sales,respectively.  The loss of a significantdealer or a substantial decrease in sales by any of these dealers could have amaterial impact on our business, results of operations, and financialcondition.

 

WE MAY HAVE TOREPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALERDOES NOT REPAY ITS LENDER.  As is commonin the recreational vehicle industry, we enter into repurchase agreements withthe financing institutions used by our dealers to finance their purchases ofour products.  These agreements requireus to repurchase the dealer’s inventory in the event that the dealer does not repayits lender.  Obligations under theseagreements vary from period to period, but totaled approximately $531.8 millionas of July 2, 2005, with approximately 6.0% concentrated with one dealer.  If we were obligated to repurchase asignificant number of units under any repurchase agreement, our business,operating results, and financial condition could be adversely affected.

 

OUR ACCOUNTSRECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK.  We sell our product to dealers who arepredominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.    For our RVdealers, terms are net 30 days for units that are financed by a third partylender.  Open trade receivables aregranted by us, on a very limited basis, to dealers who have been subjected toevaluative credit processes conducted by us. Terms vary from net 30 days to net 180 days, depending on the specificagreement.  As of July 2, 2005, totaltrade receivables were $105.5 million, with approximately $89.0 million, or84.4% of the outstanding accounts receivable balance concentrated among floorplan lenders. The remaining $16.5 million of open trade receivables wereconcentrated substantially all with one dealer. For resort lot customers, funds are required at the time of closing.

 

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

 

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

 

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

 

Webelieve that the introduction of new products and new features is critical toour success.  Delays in the introductionof new models or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features could affectus adversely.  Unexpected costsassociated with model changes have affected our gross margin in the past.  Further, new product introductions can divertrevenues from existing models and result in fewer sales of existing products.

 

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVETO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OURREPUTATION AND RESULTING IN LOSS OF SALES. Our customers require demanding specifications for product performanceand reliability.  Because our productsare complex and often use advanced components, processes and techniques,undetected errors and design flaws may occur. Product defects result in higher product service and warranty and replacementcosts and may cause serious damage to our customer relationships and industryreputation, all of which could negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDINGPRODUCT LIABILITY AND WARRANTY CLAIMS. We are subject to litigation arising in the ordinary course of our business,typically for product liability and warranty claims that are common in therecreational vehicle industry.  While wedo not believe that the outcome of any pending litigation, net of insurancecoverage, will materially adversely affect our business, results of operations,or financial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

Todate, we have been successful in obtaining product liability insurance on termsthat we consider acceptable.  Theterms of the policy contain a self-insured retention amount of $500,000 peroccurrence, with a maximum annual aggregate self-insured retention of $3.0million.  Overall product liabilityinsurance, including umbrella coverage, is available to a maximum amount of$100.0 million for each occurrence, as well as in the aggregate.  We cannot becertain we will be able to obtain insurance coverage in the future atacceptable levels or that the costs of such insurance will be reasonable.  Further, successful assertion against us ofone or a series of large uninsured claims, or of a series of claims exceedingour insurance coverage, could have a material adverse effect on our business,results of operations, and financial condition.

 

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCTDEVELOPMENT AND MANUFACTURING.  Oursuccess depends in part upon attracting and retaining highly skilledprofessionals.  A number of our employeesare highly skilled engineers and other technical professionals, and our failureto continue to attract and retain such individuals could adversely affect ourability to compete in the industry.

 

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OUR RECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUROPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS.  In the past few years, we have significantlyexpanded the size and scope of our business, which has required us to hireadditional employees.  Some of these newemployees include new management personnel. In addition, our current management personnel have assumed additionalresponsibilities.   The increase in oursize over a relatively short period of time has put pressure on our operating,financial, and management information systems. If we continue to expand, such growth would put additional pressure onthese systems and may cause such systems to malfunction or to experiencesignificant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OURMANUFACTURING EQUIPMENT AUTOMATION PLAN. As we continue to work towards involving automated machinery andequipment to improve efficiencies and quality, we will be subject to certainrisks involving implementing new technologies into our facilities.

 

The expansion into new machinery and equipment technologies involvesrisks, including the following:

 

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

 

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

 

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

 

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

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSESASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION.  We are implementing anew ERP system which is subject to certain risks including the following:

 

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

 

•                  The implementation could result in significant andunexpected increases in our operating expenses and capital expenditures,particularly if the project takes longer than we expect.

 

•                  The project could complicate and prolong our internaldata gathering and analysis processes.

 

•                  It could require us to restructure or develop ourinternal processes to adapt to the new system.

 

•                  We could require extended work hours from our employeesand use temporary outside resources, resulting in increased expenses, toresolve any software configuration issues or to process transactions manuallyuntil issues are resolved.

 

•                  As management focuses attention to the implementation,they could be diverted from other issues.

 

•                  The project could disrupt our operations if thetransition to the ERP system creates new or unexpected difficulties or if thesystem does not perform as expected.

 

WE MAY EXPERIENCEDIFFICULTIES IN RELOCATING OUR BEND, OREGON MANUFACTURING FACILITY.  We recently announced that we will be closingour Bend, Oregon manufacturing plant and relocating those operations to ourCoburg, Oregon plants.  This relocationwill be subject to certain risks including the following:

 

•                   As managementfocuses some of its attention on the relocation, they could be diverted fromother issues.

 

•                  We may notexperience the efficiencies we expect due to difficulties with integrating newproducts into an existing production line.

 

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•                  We mayexperience difficulties in hiring an experienced workforce for the increasedproduction in the Coburg, Oregon plant.

 

•                  Our customersmay react adversely to the relocation of the facilities and reduce orders fornew coaches**.**

 

**NEWLY ISSUED FINANCIAL REPORTINGPRONOUNCEMENTS**

 

EITF 04-10

 

In September of 2004, the FinancialAccounting Standards Board (the Board) issued EITF 04-10, “Determining Whetherto Aggregate Operating Segments That Do Not Meet the QuantitativeThresholds.”  FASB Statement No. 131,“Disclosures about Segments of an Enterprise and Related Information,” requirespublic companies to report financial and descriptive information about itsreportable operating segments.  EITFaddresses how to determine if operating segments that do not meet thequantitative thresholds of FASB No. 131 are to be reported as separatesegments.

 

The EITF Task Force has delayed theeffective date of EITF 04-10 to coincide with a related FASB Staff Position tobe issued in 2005.

 

We have determined that the provisionsof EITF 04-10 will impact the disclosures to be included in future financialstatements.

 

Amendment to FAS 128

 

The Board is amending FAS 128,“Earnings per Share,” to make it consistent with International AccountingStandards, and make earnings per share calculations comparable on a globalbasis.  The amendment changes thecomputation to require the use of the year-to-date average stock price whencomputing the number of potential incremental common shares for dilutedEPS.  The old method was to calculate anaverage of potential incremental common shares computed for each quarter whencomputing year-to-date incremental shares.

 

The Board has deferred the issuance ofthe final standard until sometime in 2005. When those standards are finalized, we will implement them andappropriately present them in our future financial statements.

 

FAS 151

 

In November 2004, the Board issued FAS151, “Inventory Costs an amendment of ARM No. 43, Chapter 4,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material.  The standardis effective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.

 

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

 

FAS 123R

 

In December 2004, the Board issued FAS123R, “Share-Based Payment.”  TheStatement replaces FAS 123, “Accounting for Stock-Based Compensation,” andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The Statement establishes fair value as themeasurement objective in accounting for share-based payment arrangements andrequires a fair-value-based measurement method in accounting for share-basedpayments to employees except for equity instruments held by employee shareownership plans.  The Statement is effectivefor public entities as of the beginning of the first annual reporting periodthat begins after June 15, 2005.

 

We will adopt the provisions of theStatement for the fiscal year beginning 2006. If we had included the cost of the employee stock option compensationusing the fair value method in our financial statements, our net income for thefirst two quarters of 2004 and 2005 would have been impacted by $421,000 and$454,000, respectively.

 

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item 4.  Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures

 

Ourmanagement evaluated, with the participation of our Chief Executive Officer andour Chief Financial Officer, the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act) as of the end of the period covered by this QuarterlyReport on Form 10-Q.  Based on thisevaluation, our management, including our Chief Executive Officer and our ChiefFinancial Officer, have concluded that our disclosure controls and proceduresare effective to ensure that material information we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures will prevent allerror and all fraud.  Because of inherentlimitations in any system of disclosure controls and procedures, no evaluationof controls can provide absolute assurance that all instances of error orfraud, if any, within the Company may be detected.  However, our management, including our ChiefExecutive Officer and our Chief Financial Officer, have designed our disclosurecontrols and procedures to provide reasonable assurance of achieving theirobjectives and have, pursuant to the evaluation discussed above, concluded thatour disclosure controls and procedures are, in fact, effective at thisreasonable assurance level.

 

Therewas no change in our internal control over financial reporting that occurredduring the period covered by this Quarterly Report on Form 10-Q that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

At the AnnualMeeting of Stockholders of the Company, held on May 18, 2005 in Wakarusa,Indiana, the Stockholders (i) elected four Class II directors to serve on theCompany’s Board of Directors, and, (ii) ratified the Company’s appointment of PricewaterhouseCoopers LLP asindependent auditors.

 

The vote for theelection of the four Class II directors was as follows:

 
| **Nominee**            | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------|------------|------------|------------|--------------|------------|
| John F. Cogan          |       | 27,957,774 |       | 767,286      |       |
| Robert P. Hanafee, Jr. |       | 22,065,015 |       | 6,660,045    |       |
| Dennis D. Oklak        |       | 27,963,930 |       | 761,130      |       |
| Roger A. Vandenberg    |       | 27,926,371 |       | 798,689      |       |

 

Other directorswhose terms of office continued after the meeting are:

 
| Kay L. Toolson   |   |
|------------------|--------|
| L. Ben Lytle     |   |
| Richard A. Rouse |   |
| Daniel C. Ustian |   |

 

The vote forratifying the appointment of PricewaterhouseCoopers LLP was as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 28,397,833 |       | 288,646     |       | 38,581        |       |

 

**Item6.  Exhibits**

 
| **Exhibits** |   |                                                                                                                                                                             |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1         |   | Agreement between Monaco Coach Corporation and GE  Commercial Distribution Finance dated June 28, 2005.                                                                          |
| 31.1         |   | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                     |
| 31.2         |   | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                     |
| 32.1         |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|   | **MONACO  COACH CORPORATION**                                                                            |
|--------|----------------------------------------------------------------------------------------------------------|
|   | ** **                                                                                               |
|   |                                                                                                     |
| Dated: |   August  11, 2005                                                                                  |   | /s/  P. Martin Daley |   |
|   | P. Martin Daley                                                                                          |
|   | Vice President  and  Chief Financial Officer (Duly  Authorized Officer and Principal  Financial Officer) |
|        |                                                                                                          |  |  |  |

 

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**EXHIBITSINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                         |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                        |
|        |       |                                                                                                                                                                               |
| 10.1        |       | Agreement between  Monaco Coach Corporation and GE Commercial Distribution Finance dated June  28, 2005.                                                                           |
|        |       |                                                                                                                                                                               |
| 31.1        |       | Sarbanes-Oxley Section  302(a) Certification.                                                                                                                                      |
|        |       |                                                                                                                                                                               |
| 31.2        |       | Sarbanes-Oxley Section  302(a) Certification.                                                                                                                                      |
|        |       |                                                                                                                                                                               |
| 32.1        |       | Certification of Chief Executive Officer and Chief Financial Officer  Pursuant to 18 U.S.C. Section1 1350, and Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

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