**UNITEDSTATES SECURITIES AND 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 the quarterly period ended:April 1, 2006**

** **

**or**

 

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

** **

**For the transition period from                            to                           **

** **

**Commission File Number: 1-14725**

 

**MONACOCOACH CORPORATION**

 

| **Delaware**                                                     | ** ** | **35-1880244**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**91320Industrial Way**

**Coburg,Oregon 97408**

(Address ofprincipal executive offices)

 

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

 

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

 
| YES |   | ý | NO | o |
|-----|--------|--------|----|---|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 

Large Accelerated Filer  o  AcceleratedFiler  ý  Non-AcceleratedFiler  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o   No ý

 

The number of sharesoutstanding of common stock, $.01 par value, as of April 1, 2006: 29,704,166

 

 

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**MONACOCOACH CORPORATION**

** **

**FORM 10-Q**

** **

**APRIL 1,2006**

** **

**INDEX**

 
| **PART I  - FINANCIAL INFORMATION**                                                                      | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|
|                                                                                                     |       |
| **Item 1. Financial  Statements.**                                                                       | ** ** |
|                                                                                                     |       |
| Condensed Consolidated Balance Sheets as of December 31,  2005 and April 1, 2006.                        |       |
|                                                                                                     |       |
| Condensed Consolidated Statements of Income for the quarters  ended April 2, 2005 and April 1, 2006.     |       |
|                                                                                                     |       |
| Condensed Consolidated Statements of Cash Flows for the  quarters ended April 2, 2005 and April 1, 2006. |       |
|                                                                                                     |       |
| Notes to Condensed Consolidated Financial Statements.                                                    |       |
|                                                                                                     |       |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations.** | ** ** |
| ** **                                                                                               | ** ** |
| **Item 3. Quantitative and  Qualitative Disclosures About Market Risk.**                                 | ** ** |
| ** **                                                                                               | ** ** |
| **Item  4. Controls and Procedures.**                                                                    | ** ** |
| ** **                                                                                               | ** ** |
| **PART II - OTHER INFORMATION**                                                                          | ** ** |
| ** **                                                                                               | ** ** |
| **Item 1A. Risk Factors**                                                                                | ** ** |
| ** **                                                                                               | ** ** |
| **Item  6. Exhibits**                                                                                    | ** ** |
| ** **                                                                                               | ** ** |
| **Signatures.**                                                                                          | ** ** |
| ** **                                                                                               | ** ** |
| **Certifications under Section 302(a) and 906 of  the Sarbanes-Oxley Act of 2002.**                      | ** ** |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

3

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(dollarsin thousands)**

 
| ** **                                                                                                                   | ** ** | **December 31,** | ** ** | **April 1,**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                                                                   | ** ** | **2005**         | ** ** | **2006**        | ** ** |
| ** **                                                                                                                   |       |             |       | **(unaudited)** |       |
| **ASSETS**                                                                                                                   |       |             |       | ** **      |       |
| Current assets:                                                                                                              |       |             |       |            |       |
| Cash                                                                                                                         |       | $                | 586        |            | $          | 8,387 |   |
| Trade  receivables, net                                                                                                      |       | 102,666          |       | 126,781         |       |
| Inventories,  net                                                                                                            |       | 183,292          |       | 182,378         |       |
| Resort  lot inventory                                                                                                        |       | 9,135            |       | 6,581           |       |
| Prepaid  expenses                                                                                                            |       | 4,364            |       | 3,961           |       |
| Income  taxes receivable                                                                                                     |       | 206              |       | 0               |       |
| Deferred  income taxes                                                                                                       |       | 36,345           |       | 40,481          |       |
| Discontinued  operations                                                                                                     |       | 4,922            |       | 4,080           |       |
| Total  current assets                                                                                                        |       | 341,516          |       | 372,649         |       |
|                                                                                                                         |       |             |       |            |       |
| Property, plant, and  equipment, net                                                                                         |       | 159,304          |       | 159,735         |       |
| Debt issuance costs,  net of accumulated amortization of $678 and $736, respectively                                         |       | 695              |       | 638             |       |
| Goodwill                                                                                                                     |       | 85,952           |       | 86,025          |       |
| Total  assets                                                                                                                |       | $                | 587,467    |            | $          | 619,047 |   |
|                                                                                                                         |       |             |       |            |       |   |   |
| **LIABILITIES**                                                                                                              |       |             |       |            |       |
| Current liabilities:                                                                                                         |       |             |       |            |       |
| Book  overdraft                                                                                                              |       | $                | 14,550     |            | $          | 0 |   |
| Current  portion of long-term debt                                                                                           |       | 5,714            |       | 5,714           |       |
| Line  of credit                                                                                                              |       | 25,000           |       | 22,500          |       |
| Accounts  payable                                                                                                            |       | 78,299           |       | 101,040         |       |
| Product  liability reserve                                                                                                   |       | 19,275           |       | 18,713          |       |
| Product  warranty reserve                                                                                                    |       | 32,902           |       | 33,865          |       |
| Income  taxes payable                                                                                                        |       | 0                |       | 7,745           |       |
| Accrued  expenses and other liabilities                                                                                      |       | 37,732           |       | 47,705          |       |
| Discontinued  operations                                                                                                     |       | 853              |       | 827             |       |
| Total  current liabilities                                                                                                   |       | 214,325          |       | 238,109         |       |
|                                                                                                                         |       |             |       |            |       |
| Long-term debt, less  current portion                                                                                        |       | 34,786           |       | 34,786          |       |
| Deferred income taxes                                                                                                        |       | 21,624           |       | 21,440          |       |
| Total  liabilities                                                                                                           |       | 270,735          |       | 294,335         |       |
|                                                                                                                         |       |             |       |            |       |
| Commitments and  contingencies (Note 9)                                                                                      |       |             |       |            |       |
|                                                                                                                         |       |             |       |            |       |
| **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, 29,561,766 and  29,704,166 issued and outstanding, respectively |       | 296              |       | 297             |       |
| Additional paid-in  capital                                                                                                  |       | 59,005           |       | 60,472          |       |
| Retained earnings                                                                                                            |       | 257,431          |       | 263,943         |       |
| Total  stockholders’ equity                                                                                             |       | 316,732          |       | 324,712         |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                | 587,467    |            | $          | 619,047 |   |

 

See accompanying notes.

 

4

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

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

 
| ** **                                               | ** ** | **Quarter Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **April 2,**      | ** ** | **April 1,** | ** ** |
| ** **                                               | ** ** | **2005**          | ** ** | **2006** | ** ** |
|                                                     |       |              |       |   |   |
| Net sales                                                |       | $                 | 328,813    |   | $ | 385,068 |   |
| Cost of sales                                            |       | 292,917           |       | 336,619 |   |
| Gross  profit                                            |       | 35,896            |       | 48,449 |   |
|                                                     |       |              |       |   |   |
| Selling, general, and  administrative expenses           |       | 26,957            |       | 33,979 |   |
| Operating  income                                        |       | 8,939             |       | 14,470 |   |
|                                                     |       |              |       |   |   |
| Other income, net                                        |       | 114               |       | 132 |   |
| Interest expense                                         |       | (485              | )          | (1,252 | ) |
| Income  before income taxes and discontinued operations  |       | 8,568             |       | 13,350 |   |
|                                                     |       |              |       |   |   |
| Provision for income  taxes, continuing operations       |       | 3,204             |       | 5,057 |   |
|                                                     |       |              |       |   |   |
| Net income from continuing  operations                   |       | 5,364             |       | 8,293 |   |
|                                                     |       |              |       |   |   |
| Loss from discontinued  operations, net of tax provision |       | (41               | )          | 0 |   |
|                                                     |       |              |       |   |   |
| Net  income                                              |       | $                 | 5,323      |   | $ | 8,293 |   |
|                                                     |       |              |       |   |   |
| Earnings per common  share:                              |       |              |       |   |   |
| Basic  from continuing operations                        |       | $                 | 0.18       |   | $ | 0.28 |   |
| Basic  from discontinued operations                      |       | $                 | 0.00       |   | $ | 0.00 |   |
| Basic                                                    |       | $                 | 0.18       |   | $ | 0.28 |   |
|                                                     |       |              |       |   |   |
| Diluted  from continuing operations                      |       | $                 | 0.18       |   | $ | 0.28 |   |
| Diluted  from discontinued operations                    |       | $                 | 0.00       |   | $ | 0.00 |   |
| Diluted                                                  |       | $                 | 0.18       |   | $ | 0.28 |   |
|                                                     |       |              |       |   |   |
| Weighted average common  shares outstanding:             |       |              |       |   |   |
| Basic                                                    |       | 29,460,137        |       | 29,636,222 |   |
| Diluted                                                  |       | 29,893,889        |       | 29,828,187 |   |

 

See accompanying notes.

 

5

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:dollars in thousands)**

 
| ** **                                                                                | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                | ** ** | **April 2,**      | ** ** | **April 1,** | ** ** |
| ** **                                                                                | ** ** | **2005**          | ** ** | **2006** | ** ** |
|                                                                                      |       |              |       |   |   |
| **Increase (Decrease) in Cash:**                                                          |       |              |       |   |   |
| ** **                                                                                |       |              |       |   |   |
| Cash flows from  operating activities:                                                    |       |              |       |   |   |
| Net  income                                                                               |       | $                 | 5,323      |   | $ | 8,293 |   |
| Adjustments  to reconcile net income to net cash provided (used) by operating activities: |       |              |       |   |   |
| Gain  on sale of assets                                                                   |       | (1                | )          | (16 | ) |
| Depreciation  and amortization                                                            |       | 2,509             |       | 3,374 |   |
| Deferred  income taxes                                                                    |       | (128              | )          | (4,320 | ) |
| Restricted  stock unit and stock option expense                                           |       | 0                 |       | 331 |   |
| Changes  in working capital accounts:                                                     |       |              |       |   |   |
| Trade  receivables, net                                                                   |       | (10,449           | )          | (24,115 | ) |
| Inventories,  net                                                                         |       | 1,194             |       | 914 |   |
| Resort  lot inventory                                                                     |       | 139               |       | 2,554 |   |
| Prepaid  expenses                                                                         |       | 251               |       | 400 |   |
| Accounts  payable                                                                         |       | 17,419            |       | 22,741 |   |
| Product  liability reserve                                                                |       | (180              | )          | (635 | ) |
| Product  warranty reserve                                                                 |       | (183              | )          | 963 |   |
| Income  taxes payable                                                                     |       | 1,921             |       | 7,951 |   |
| Accrued  expenses and other liabilities                                                   |       | (682              | )          | 9,972 |   |
| Discontinued  operations                                                                  |       | (1,778            | )          | 720 |   |
|                                                                                      |       |              |       |   |   |
| Net  cash provided by operating activities                                                |       | 15,355            |       | 29,127 |   |
|                                                                                      |       |              |       |   |   |
| Cash  flows from investing activities:                                                    |       |              |       |   |   |
| Additions  to property, plant, and equipment                                              |       | (2,114            | )          | (3,746 | ) |
| Proceeds  from sale of assets                                                             |       | 52                |       | 17 |   |
| Discontinued  operations                                                                  |       | (5                | )          | 0 |   |
|                                                                                      |       |              |       |   |   |
| Net  cash used in investing activities                                                    |       | (2,067            | )          | (3,729 | ) |
|                                                                                      |       |              |       |   |   |
| Cash  flows from financing activities:                                                    |       |              |       |   |   |
| Book  overdraft                                                                           |       | (1,578            | )          | (14,529 | ) |
| Payments  on lines of credit, net                                                         |       | (9,062            | )          | (2,500 | ) |
| Debt  issuance costs                                                                      |       | (11               | )          | 0 |   |
| Dividends  paid                                                                           |       | (1,769            | )          | (1,780 | ) |
| Issuance  of common stock                                                                 |       | 618               |       | 1,137 |   |
| Discontinued  operations                                                                  |       | (9                | )          | 75 |   |
|                                                                                      |       |              |       |   |   |
| Net  cash used by financing activities                                                    |       | (11,811           | )          | (17,597 | ) |
|                                                                                      |       |              |       |   |   |
| Net change in cash                                                                        |       | 1,477             |       | 7,801 |   |
| Cash at beginning of  period                                                              |       | 0                 |       | 586 |   |
| Cash at end of period                                                                     |       | $                 | 1,477      |   | $ | 8,387 |   |

 

See accompanying notes.

 

6

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**MONACOCOACH CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The interim condensedconsolidated financial statements have been prepared by Monaco CoachCorporation (the “Company”) without audit. In the opinion of management, theaccompanying unaudited financial statements contain all adjustments necessary,consisting only of normal recurring adjustments, to present fairly thefinancial position of the Company as of December 31, 2005 and April 1, 2006,and the results of its operations and its cash flows for the quarters endedApril 2, 2005 and April 1, 2006. 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. The balance sheet data as of December 31,2005 was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders. Theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto appearingin the Company’s Annual Report to Stockholders for the year ended December 31,2005.

 

**2.**             **Acquisition**

** **

**R-Vision**

 

The Company acquired theIndiana-based R-Vision companies and affiliates in an all cash transaction onNovember 18, 2005. The R-Vision companies and affiliates consist of R-Vision,Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC,which are collectively referred to herein as “R-Vision”. R-Vision manufacturestowable and motorized recreational vehicle products, and the acquisition wasprimarily consummated to strengthen the Company’s towable recreational vehiclesegment. R-Vision’s results of operations since November 18, 2005 are includedin the consolidated financial statements of the Company.

 

The cash paid forR-Vision, including transaction costs of $607,016, totaled $54,601,481, net ofcash acquired. The total R-Vision assets acquired and liabilities assumed basedon estimated fair values at November 18, 2005, are as follows:

 
| *** ***                                   | *** *** | **(in thousands)** | *** *** |
|------------------------------------------------|--------------|--------------------|--------------|
|                                           |         |               |         |
| Receivables                                    |         | $                  | 14,571       |   |
| Inventories                                    |         | 18,160             |         |
| Prepaids and other  assets                     |         | 618                |         |
| Property and equipment                         |         | 12,945             |         |
| Goodwill                                       |         | 30,771             |         |
| Total  assets acquired                         |         | 77,065             |         |
|                                           |         |               |         |
| Accounts payable                               |         | 8,769              |         |
| Accrued liabilities                            |         | 11,964             |         |
| Current deferred tax  liability                |         | 868                |         |
| Long-term deferred tax  liability              |         | 863                |         |
| Total  liabilities assumed                     |         | 22,464             |         |
|                                           |         |               |         |
| Total assets acquired  and liabilities assumed |         | $                  | 54,601       |   |

 

7

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The purchase price wasderived from a calculation of a multiple of earnings before interest, taxes,depreciation and amortization for a trailing 12-month period (adjusted forcertain non-recurring expense items), which exceeded the book value of R-Visionand generated goodwill of $30.7 million. The allocation of the purchase priceand the related goodwill has been adjusted for the resolution of pre-aquisitioncontingencies of $72,800. The effects of resolution of pre-aquisitioncontingencies occurring: (i) within one year of the acquisition date will bereflected as an adjustment of the allocation of the purchase price andgoodwill, and (ii) after one year will be recognized in the determination ofnet income.

 

**3.**             **Inventories, net**

 

Inventories are stated atlower of cost (first-in, first-out) or market. The composition of inventory isas follows:

 
| ** **            | ** **   | **December 31,**   | ** ** | **April 1,** | ** ** |
|-----------------------|--------------|--------------------|------------|--------------|------------|
| ** **            | ** **   | **2005**           | ** ** | **2006**     | ** ** |
| *** ***          | *** *** | **(in thousands)** | ** ** |
| Raw materials         |         | $                  | 91,028     |         | $          | 91,638 |   |
| Work-in-process       |         | 61,393             |       | 55,112       |       |
| Finished units        |         | 43,134             |       | 47,089       |       |
| Raw material reserves |         | (12,263            | )          | (11,461      | )          |
|                  |         | $                  | 183,292    |         | $          | 182,378 |   |

 

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

 

The Company’s creditfacilities consist of a revolving line of credit of up to $105.0 million. As ofApril 1, 2006, borrowings outstanding on the revolving line of credit (the “RevolvingLoan”) were $22.5 million. At the election of the Company, the Revolving Loanbears interest at varying rates that fluctuate based on the prime rate or LIBORand are determined based on the Company’s leverage ratio. At April 1, 2006, theinterest rate was 6.9%. The Company also pays interest quarterly on the unusedavailable portion of the Revolving Loan at varying rates, determined by theCompany’s leverage ratio. The Revolving Loan is due and payable in full onNovember 17, 2009 and requires monthly interest payments. The agreementcontains restrictive covenants as to the Company’s leverage ratio, current ratio,fixed charge coverage ratio, and tangible net worth. As of April 1, 2006, theCompany was in compliance with these covenants.

 

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

 

In November 2005, theCompany amended its credit facilities to borrow $40.0 million of term debt (the“Term Debt”) to effect the acquisition of R-Vision (see Note 2). As of April 1,2006, borrowings outstanding were $40.0 million. At the election of theCompany, the Term Debt bears interest at varying rates that fluctuate based onthe prime rate or LIBOR and are determined based on the Company’s leverageratio. The Term Debt requires quarterly interest payments and quarterlyprincipal payments, beginning April 2, 2006, of $1.4 million, with a finalballoon payment of $12.9 million due on November 18, 2010. At April 1, 2006,the interest rate on the Term Debt was 6.6%. The Term Debt is collateralized byall the assets of the Company. The agreement contains restrictive covenants asto the Company’s leverage ratio, current ratio, fixed charge coverage ratio,and tangible net worth. As of April 1, 2006, the Company was in compliance withthese covenants.

 

8

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In November 2005, theCompany obtained a term loan of $500,000 from the State of Oregon in connectionwith the relocation of jobs to the Coburg, Oregon production facilities fromthe Bend, Oregon facility. The principal and interest is due on April 30, 2009.The loan bears a 5% annual interest rate.

 

The following tabledisplays the scheduled principal payments by year that will be due in thousandson all the Company’s term loans.

 

| **Year** | ** ** | **Amount of payment due** | ** ** |
|----------|------------|---------------------------|------------|
| 2006     |       | $                         | 5,714      |   |
| 2007     |       | $                         | 5,714      |   |
| 2008     |       | $                         | 5,714      |   |
| 2009     |       | $                         | 6,214      |   |
| 2010     |       | $                         | 17,144     |   |
|     |       | $                         | 40,500     |   |

 

**6.**             EarningsPer Common Share

** **

Basicearnings per common share is based on the weighted average number of sharesoutstanding 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 outstanding stock based awards. For thequarter ended April 1, 2006, there were 682,740 non-dilutive options excludedfrom the diluted earnings per share calculation (365,670 for the quarter endedApril 2, 2005). The weighted average number of common shares used in thecomputation of earnings per common share are as follows:

 
| ** **                                        | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **April 2,  2005** | ** ** | **April 1,  2006** | ** ** |
| **Basic**                                         |       |                    |       |   |   |
| Issued and  outstanding shares (weighted average) |       | 29,460,137              |       | 29,636,222 |   |
|                                              |       |                    |       |   |   |
| **Effect  of Dilutive Securities**                |       |                    |       |   |   |
| Restricted Stock  Units                           |       | 0                       |       | 3,458 |   |
| Stock Options                                     |       | 433,752                 |       | 188,507 |   |
| **Diluted**                                       |       | 29,893,889              |       | 29,828,187 |   |

 

**7.****             StockOption Plans**

 

The Company has an Employee Stock Purchase Plan (the“Purchase Plan”) - 1993, a  Non-employeeDirector Stock Plan (the “Director Plan”) - 1993, and an Incentive Stock OptionPlan (the “Option Plan”) - 1993.

 

As of January 1, 2006, theCompany adopted the provisions of FAS 123R, “Share-Based Payment” (the“Statement”). The Statement replaces FAS 123, “Accounting for Stock-BasedCompensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees.”  The Statement establishesfair value as the measurement objective in accounting for share-based paymentarrangements and requires a fair-value-based measurement method in accountingfor share-based payments to employees except for equity instruments held byemployee share ownership plans. We elected to adopt the modified prospectiveapplication method of the Statement.

 

Prior to the adoption, theCompany accounted for the stock-based employee compensation plans under therecognition and measurement principle of APB Opinion No. 25. No stock-basedemployee compensation cost related to these options was reflected in net incomeof prior periods, as all options granted under those plans had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.

 

**StockPurchase Plan**

 

The  Purchase Plan qualifies under Section 423 ofthe Internal Revenue Code. The Company has reserved 683,438 shares of CommonStock for issuance under the Purchase Plan. During the quarter ended April 1,2006,  34,166 shares were issued underthe Purchase Plan. The weighted-average fair value of purchase rights grantedin the first quarter of 2006 was $17.76. Under the Purchase Plan, an eligibleemployee may purchase shares of common stock from the Company through payrolldeductions of up to 10% of base compensation, at a price per share equal to 85%of the lesser of the fair market value of the Company’s Common Stock as of thefirst day (grant date) or the last day (purchase date) of each six-monthoffering period under the Purchase Plan.

 

ThePurchase Plan is administered by a committee appointed by the Board ofDirectors. Any employee who is customarily employed for at least 20 hours perweek and more than five months in a calendar year by the Company, or by anymajority-owned subsidiary designated from time to time by the Board ofDirectors, and

 

9

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whodoes not own 5% or more of the total combined voting power or value of allclasses of the Company’s outstanding capital stock, is eligible to participatein the Purchase Plan.

 

**Directors’Option Plan**

 

Eachnon-employee director of the Company is entitled to participate in the DirectorPlan. The Board of Directors and the stockholders have authorized a total of352,500 shares of Common Stock for issuance pursuant to the Director Plan.Under the terms of the Director Plan, each eligible non-employee director isautomatically granted an option to purchase 8,000 shares of Common Stock (the“Initial Option”) on which the optionee first becomes a director of theCompany. Thereafter, each optionee is automatically granted an additionaloption to purchase 4,000 shares of Common Stock (a “Subsequent Option”) onSeptember 30 of each year if, on such date, the optionee has served as adirector of the Company for at least six months. Each Initial Option vests overfive years at the rate of 20% of the shares subject to the Initial Option atthe end of each anniversary following the date of grant. Each Subsequent Optionvests in full on the fifth anniversary of its date of grant. The exercise priceof each option is the fair market value of the Common Stock as determined bythe closing price reported by the New York Stock Exchange on the date of grant.The maximum term of these options are 10 years. As of April 1, 2006, 102,000options had been exercised, and options to purchase 158,050 shares of commonstock were outstanding. Under the Director Plan, the directors of the Companymay elect to receive up to 50% of the value of their retainer in the form of CommonStock or an option to purchase shares of Common Stock. As of April 1, 2006,11,320 shares of Common Stock had been issued in lieu of cash retainer underthe plan.

 

**OptionPlan**

 

TheOption Plan provides for the grant to employees of incentive stock optionswithin the meaning of Section 422 of the Internal Revenue Code and for thegrant to employees and consultants of the Company of nonstatutory stockoptions. A total of 3,257,813 shares of Common Stock have been reserved forissuance under the Option Plan. As of April 1, 2006, 1,567,516 options had beenexercised, and options to purchase 1,200,667 shares of Common Stock were outstanding.These options vest ratably over five years commencing with the date of grant.

 

Theexercise price of all incentive stock options granted under the Option Planmust be at least equal to the fair market value of a share of the Company’sCommon Stock on the date of grant. With respect to any participant possessingmore than 10% of the voting power of the Company’s outstanding capital stock,the exercise price of any option granted must equal at least 110% of the fairmarket value on the grant date, and the maximum term of the option must notexceed five years. The terms of all other options granted under the Option Planmay not exceed ten years.

 

Transactionsinvolving the Director Plan and the Option Plan are summarized withcorresponding weighted-average exercise prices as follows:

 

| ** **                        | ** ** | **Shares** | ** ** | **Price** | ** ** |
|-----------------------------------|------------|------------|------------|-----------|------------|
| Outstanding at  December 31, 2005 |       | 1,469,275  |       | $         | 14.71      |   |
| Granted                           |       | —     |       | —    |       |
| Exercised                         |       | (106,358   | )          | 6.99      |       |
| Forfeited                         |       | (4,200     | )          | 22.78     |       |
| Outstanding at  April 1, 2006     |       | 1,358,717  |       | 15.29     |       |
|                                   |            |            |            |           |            |  |

 

10

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Forvarious price ranges, weighted average characteristics of all outstanding stockoptions at April 1, 2006 were as follows:

 

| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Shares**                   | ** ** | **Remaining  Life  (years)** | ** ** | **Weighted-  Average  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Price** | ** ** |
| $2.68 - 5.36                            |       | 60,652                       |       | 1.0                          |       | $ | 3.52 |   | 60,652 |   | $ | 3.52 |   |
| $5.37 - 8.04                            |       | 107,818                      |       | 2.0                          |       | $ | 7.72 |   | 107,818 |   | $ | 7.72 |   |
| $8.05 - 10.72                           |       | 245,814                      |       | 5.2                          |       | $ | 10.31 |   | 187,054 |   | $ | 10.29 |   |
| $10.73 - 13.40                          |       | 269,693                      |       | 4.6                          |       | $ | 12.23 |   | 266,493 |   | $ | 12.24 |   |
| $13.41 - 16.08                          |       | 47,000                       |       | 8.5                          |       | $ | 15.04 |   | 8,000 |   | $ | 16.08 |   |
| $16.09 - 18.76                          |       | 288,970                      |       | 8.3                          |       | $ | 16.30 |   | 288,970 |   | $ | 16.30 |   |
| $18.77 - 21.44                          |       | 17,500                       |       | 5.2                          |       | $ | 20.03 |   | 17,500 |   | $ | 20.03 |   |
| $21.45 - 24.12                          |       | 28,000                       |       | 7.3                          |       | $ | 21.65 |   | 28,000 |   | $ | 21.65 |   |
| $24.13 - 26.80                          |       | 293,270                      |       | 7.0                          |       | $ | 25.63 |   | 293,270 |   | $ | 25.63 |   |
|                                    |       | 1,358,717                    |       |                         |       |   |   | 1,257,757 |   |   |   |

 

**The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FAS 123 to stock-based employeecompensation in the quarter ended April 2, 2005 compared to the fair valuerecognition provisions of FAS 123R that are applied to the stock-based paymentarrangements in the quarter ended April 1, 2006.**

 
| ** **                                                                                                                                    | ** ** | **Quarter Ended**                                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **April 2,  2005**                                        | ** ** | **April 1,  2006** | ** ** |
| ** **                                                                                                                                    | ** ** | **(in thousands, except per share  data)** | ** ** |
|                                                                                                                                          |       |                                                           |       |   |   |
| Net income  before stock-based compensation expense                                                                                           |       | $                                                              | 5,323      |   | $ | 8,498 |   |
|                                                                                                                                          |       |                                                           |       |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 227                                                            |       | 205 |   |
|                                                                                                                                          |       |                                                           |       |   |   |
| Net income*                                                                                                                                   |       | $                                                              | 5,096      |   | $ | 8,293 |   |

 

----

* Net income in 2005 and prior years are pro-forma forthe effect of FAS 123R.

 
| Earnings per  share:                     |   |   |   |   |   |
|------------------------------------------|--------|--------|--------|--------|--------|
| Basic - as  reported                     |   | $      | 0.18   |   | $      | 0.28 |   |
| Basic - with  stock-based compensation   |   | $      | 0.17   |   | $      | 0.28 |   |
|                                     |   |   |   |   |   |
| Diluted - as  reported                   |   | $      | 0.18   |   | $      | 0.28 |   |
| Diluted - with  stock-based compensation |   | $      | 0.17   |   | $      | 0.28 |   |

 

11

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Forpurposes of the above information, the fair value of each option grant wasestimated at the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions:

 
| ** **                | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|
|                      |       |     |       |
| Risk-free  interest rate  |       | 4.03     | %          |
| Expected life  (in years) |       | 6.69     |       |
| Expected  volatility      |       | 31.25    | %          |
| Expected  dividend yield  |       | 1.70     | %          |

 

Therewas approximately $71,000 of stock-based compensation expense recognized fromthe combination of the Option Plan and the Director Plan during the quarter endedApril 1, 2006. The total remaining expense to be recognized in future periodsfor outstanding non-vested stock options related to the Option Plan andDirector Plan is approximately $527,000. This amount will be recognized overthe following periods according to the schedule below:

 

| **Fiscal Year** | ** ** | **Stock Option Expense** | ** ** |
|----------------------|------------|------------------------------------|------------|
| 2006                 |       | $                                  | 212,000    |   |
| 2007                 |       | 191,000                            |       |
| 2008                 |       | 71,000                             |       |
| 2009                 |       | 32,000                             |       |
| 2010                 |       | 21,000                             |       |
| Total                |       | $                                  | 527,000    |   |

 

**RestrictedStock Unit Grant**

 

Acomponent of the Option Plan permits the Company to grant shares of restrictedstock units (RSU’s). These grants are compensation expense under the rules ofAPB No. 25, and are required to be recognized in the Company’s incomestatement. During the quarter ended April 1, 2006, the Company grantedrestricted shares of restricted stock units totaling approximately $260,000.These costs have been recorded as compensation expense in the current quarter’sincome statement. The total number of outstanding RSU’s as of April 1, 2006 was282,409 shares.

 

**8.**             **Segment Reporting**

 

Monaco Coach Corporationis a leading manufacturer of premium Class A, B and C motor coaches (MotorizedRecreational Vehicle Segment) and towable recreational vehicle (TowableRecreational Vehicle Segment). Our product line currently consists of a broadline of motor coaches, fifth wheel trailers, travel trailers, and specialtytrailers under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie,”“R-Vision,” “Bison,” and “Roadmaster” brand names.

 

12

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In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (Motorhome Resort Segment) located inLas Vegas, Nevada, and Indio, California. The resorts offer sales of individuallots to recreational vehicle owners and also offer a common interest in theamenities at the resort. The resorts provide destination locations for premiumClass A recreational vehicle owners and help to promote the recreational vehiclelifestyle.

 

The following tableprovides the results of operations of the three segments of the Company for thefirst quarter ending April 2, 2005 and April 1, 2006, respectively.

 
| ** **                                     | ** **   | **Quarter Ended**  | ** **   |
|------------------------------------------------|--------------|--------------------|--------------|
| ** **                                     | ** **   | **April 2,**       | ** **   | **April 1,** | ** ** |
| ** **                                     | ** **   | **2005**           | ** **   | **2006** | ** ** |
| *** ***                                   | *** *** | **(in thousands)** | *** *** |
| **Motorized Recreational Vehicle  Segment**    |         |               |         |   |   |
| ** **                                     |         |               |         |   |   |
| Net sales                                      |         | $                  | 290,166      |   | $ | 254,954 |   |
| Cost of sales                                  |         | 259,315            |         | 230,001 |   |
| Gross  profit                                  |         | 30,851             |         | 24,953 |   |
|                                           |         |               |         |   |   |
| Selling, general, and  administrative expenses |         | 10,256             |         | 8,530 |   |
| Corporate overhead  allocation                 |         | 11,566             |         | 11,603 |   |
| Operating  income                              |         | $                  | 9,029        |   | $ | 4,820 |   |
|                                           |         |               |         |   |   |
| **Towable Recreational Vehicle  Segment**      |         |               |         |   |   |
| ** **                                     |         |               |         |   |   |
| Net sales                                      |         | $                  | 33,354       |   | $ | 114,413 |   |
| Cost of sales                                  |         | 31,729             |         | 100,133 |   |
| Gross  profit                                  |         | 1,625              |         | 14,280 |   |
|                                           |         |               |         |   |   |
| Selling, general, and  administrative expenses |         | 1,233              |         | 3,630 |   |
| Corporate overhead  allocation                 |         | 1,395              |         | 5,778 |   |
| Operating  income (loss)                       |         | $                  | (1,003       | ) | $ | 4,872 |   |
|                                           |         |               |         |   |   |
| **Motorhome Resort Segment**                   |         |               |         |   |   |
| ** **                                     |         |               |         |   |   |
| Net sales                                      |         | $                  | 5,293        |   | $ | 15,701 |   |
| Cost of sales                                  |         | 1,873              |         | 6,485 |   |
| Gross  profit                                  |         | 3,420              |         | 9,216 |   |
|                                           |         |               |         |   |   |
| Selling, general, and  administrative expenses |         | 1,461              |         | 3,072 |   |
| Corporate overhead  allocation                 |         | 1,046              |         | 1,366 |   |
| Operating  income                              |         | $                  | 913          |   | $ | 4,778 |   |

 

13

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| ** **                                               | ** **   | **Quarter Ended**  | ** **   |
|----------------------------------------------------------|--------------|--------------------|--------------|
| ** **                                               | ** **   | **April 2,**       | ** **   | **April 1,** | ** ** |
| ** **                                               | ** **   | **2005**           | ** **   | **2006** | ** ** |
| *** ***                                             | *** *** | **(in thousands)** | *** *** |
| **Reconciliation to Net Income**                         |         |               |         |   |   |
| ** **                                               |         |               |         |   |   |
| Operating income:                                        |         |               |         |   |   |
| Motorized  recreational vehicle segment                  |         | $                  | 9,029        |   | $ | 4,820 |   |
| Towable  recreational vehicle segment                    |         | (1,003             | )            | 4,872 |   |
| Motorhome  resort segment                                |         | 913                |         | 4,778 |   |
| Total  operating income                                  |         | 8,939              |         | 14,470 |   |
|                                                     |         |               |         |   |   |
| Other income, net                                        |         | 114                |         | 132 |   |
| Interest expense                                         |         | (485               | )            | (1,252 | ) |
| Income  before income taxes and discontinued operations  |         | 8,568              |         | 13,350 |   |
|                                                     |         |               |         |   |   |
| Provision  for income taxes, continuing operations       |         | 3,204              |         | 5,057 |   |
|                                                     |         |               |         |   |   |
| Net income from  continuing operations                   |         | 5,364              |         | 8,293 |   |
|                                                     |         |               |         |   |   |
| Loss from discontinued  operations, net of tax provision |         | (41                | )            | 0 |   |
| Net  income                                              |         | $                  | 5,323        |   | $ | 8,293 |   |

 

**9.**             **Commitments and Contingencies**

 

RepurchaseAgreements

 

Many of the Company’ssales to independent dealers are made on a “floor plan” basis by a bank orfinance company which lends the dealer all or substantially all of thewholesale purchase price and retains a security interest in the vehicles. Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement. These agreementsprovide that, for up to 18 months after a unit is shipped, the Company willrepurchase a dealer’s inventory in the event of a default by a dealer to itslender.

 

The Company’s liabilityunder repurchase agreements is limited to the unpaid balance owed to thelending institution by reason of its extending credit to the dealer to purchaseits vehicles, reduced by the resale value of vehicles which may be repurchased.The risk of loss is spread over numerous dealers and financial institutions.

 

14

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The approximate amountsubject to contingent repurchase obligations arising from these agreements atApril 1, 2006 is $635.3 million, with approximately 6.1% concentrated with onedealer. If the Company were obligated to repurchase a significant number ofunits under any repurchase agreement, its business, operating results, and financialcondition could be adversely affected. The Company has included the disclosurerequirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” in its financial statements, and has determined thatthe recognition provisions of FIN 45 apply to certain guarantees routinely madeby the Company including contingent repurchase obligations to third partylenders for inventory financing of dealer inventories. The Company has recordeda liability of approximately $780,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers. Thisestimated liability is based on the Company’s experience of losses associatedwith the repurchase and resale of units in prior years.

 

Product Liability

 

The Company is subject toregulations which may require the Company to recall products with design orsafety defects, and such recall could have a material adverse effect on theCompany’s business, results of operations, and financial condition.

 

The Company has from timeto time been subject to product liability claims. To date, the Company has beensuccessful in obtaining product liability insurance on terms the Companyconsiders acceptable. The terms of the policy contain a self-insured retentionamount of $500,000 per occurrence, with a maximum annual aggregate self-insuredretention of $3.0 million. Overall product liability insurance, includingumbrella coverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. There can be no assurance that theCompany will be able to obtain insurance coverage in the future at acceptablelevels or that the cost of insurance will be reasonable. Furthermore,successful assertion against the Company of one or a series of large uninsuredclaims, or of one or a series of claims exceeding any insurance coverage, couldhave a material adverse effect on the Company’s business, results of operations,and financial condition.

 

Litigation

 

The Company is involvedin various legal proceedings which are incidental to the industry and for whichcertain matters are covered in whole or in part by insurance or, for thosematters not covered by insurance, the Company has recorded accruals forestimated settlements. Management believes that any liability which may resultfrom these proceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

 

15

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These statements include, but are not limitedto, those below that have been marked with an asterisk (*). In addition, we mayfrom time to time make forward-looking statements through statements thatinclude words such as “believes,” “expects,” “anticipates” or similarexpressions. 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 or referred to under“Item IA. Risk Factors” in Part II of this Quarterly Report on Form 10-Q. Wecaution the reader, however, that these factors may not be exhaustive.

 

**GENERAL**

 

OVERVIEW

 

*Background*

 

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium recreational vehiclesincluding Class A, B, and C motor coaches, as well as towable recreationalvehicles. The Company also develops and sells luxury motorcoach resortfacilities. These three operations, while closely tied into the recreationallifestyle, are segmented for reporting purposes as the Motorized RecreationalVehicle (MRV) segment, the Towable Recreational Vehicle (TRV) segment, and theMotorhome Resort (MR) segment.

 

*Motorizedand Towable Recreational Vehicle Segment Products*

 

Our products range insuggested retail price from $45,000 to $575,000 for motor coaches and from$1,000 to $70,000 for towables. Based upon retail registrations in 2005, webelieve we had 26.0% share of the market for diesel Class A motor coaches, a10.3% share of the market for gas Class A motor coaches, an 18.1% share of themarket for all Class A motor coaches, a 3.2% market for all Class C motorcoaches, a 4.5% share of the market for fifth wheel towables and a 5.1% shareof the market for travel trailers.

 

*MotorhomeResort Segment*

 

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. The Resorts offer sales of individual lots toowners, and also offer a common interest in the amenities at the resort. Lotprices at the two resorts range from $79,900 to $319,900. Amenities at theResorts include club house facilities, tennis, swimming, and golf. The Resortsprovide destination locations for premium Class A recreational vehicle owners,and help to promote the recreational lifestyle.

 

*BusinessChanges*

 

We have conducted aseries of acquisitions during our history. Beginning in March 1993, when wecommenced operations by acquiring substantially all of the assets andliabilities of a predecessor company that had been formed in 1968. In March1996, we acquired the Holiday Rambler Division of Harley-Davidson, Inc., amanufacturer of a full line of Class A motor coaches and towables. In August2001, we acquired SMC Corporation, manufacturer of the Beaver and Safari brandClass A motorhomes. In November 2002, we acquired from Outdoor Resorts ofAmerica (“ORA”) three luxury motorcoach resort properties being developed byORA in Las Vegas, Nevada, Indio, California, and Naples, Florida. In September2003, we sold the property in Naples, Florida. And, in November of 2005, weacquired R-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, andRoadmaster, LLC (collectively referred to as “R-Vision”), manufacturers ofR-Vision, Bison, and Roadmaster motorized and towable products. The R-Visionacquisition was accomplished as a cash purchase on November 18, 2005 and was accountedfor using the purchase method of accounting. All operations of R-Vision havebeen incorporated for the period ended April 1, 2006 in the consolidatedquarterly financial statements of the Company included with this QuarterlyReport on Form 10-Q.

 

16

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During the third quarterof 2005, the Company announced that it was closing its Royale Coach operationsin Elkhart, Indiana. Royale Coach produced Prevost bus conversion motor coacheswith price points in excess of $1.4 million. Royale Coach sold approximately 20coaches per year and was not a significant portion of the Company’s overallbusiness. All closure costs have been accrued for in the Company’s financialstatements.

 

**RESULTSOF CONSOLIDATED OPERATIONS**

 

*Quarterended April 1, 2006 compared to Quarter ended******April2, 200*5

 

The following tableillustrates the results of operations for the quarters ended April 2, 2005, andApril 1, 2006. All dollars represented are in thousands.

 
| ** **                                     | ** ** | **Quarter ended** | ** ** | **%**        | ** ** | **Quarter ended** | ** ** | **%**        | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **April 2, 2005** | ** ** | **of Sales** | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                 | 328,813    |         | 100.0      | %                 | $          | 385,068      |       | 100.0      | %          | $          | 56,255     |   | 17.1 | % |
| Cost of sales                                  |       | 292,917           |       | 89.1         | %          | 336,619           |       | 87.4         | %          | -43,702    |       | -14.9      | %          |
| Gross  profit                                  |       | 35,896            |       | 10.9         | %          | 48,449            |       | 12.6         | %          | 12,553     |       | 35.0       | %          |
| Selling,  general, and administrative expenses |       | 26,957            |       | 8.2          | %          | 33,979            |       | 8.8          | %          | -7,022     |       | -26.1      | %          |
|                                           |       |              |       |         |       |              |       |         |       |       |       |       |       |
| Operating  income                              |       | $                 | 8,939      |         | 2.7        | %                 | $          | 14,470       |       | 3.8        | %          | $          | 5,531      |   | 61.9 | % |

 

*Motorizedand Towable Recreational Vehicle Segments*

 

The recreational vehiclemarket is cyclical in nature. This was demonstrated in 2005 when the marketunderwent a significant retraction in the motorized Class A segment. Accordingly,we took steps to minimize costs in our plants, reduce excess capacity, andstreamline our selling, general, and administrative operations. While thesewere difficult changes to make, they were necessary to improve the Company’smargins and overall profitability. The result was positive for both ourmotorized and towable operations.

 

The motorized marketcontinues to be a challenging environment. Higher interest rates are placingpressures on our dealers. Floorplan interest charges are a significant cost ofcarrying inventory, and as interest rates rise our dealers, as well as ourcompetitors' dealers, are more cautious in the amount of inventory that theyare willing to carry. Despite the current cyclical downturn in the motorizedmarket, we continue to remain optimistic on the prospects for long-term growthin this sector, as the demographics for our customer base shows a continuingincrease in the number of new entrants into our target age and economic group.*

 

The towable market,unlike the motorized market, has shown surprising resilience, and has remainedstrong through the first quarter of 2006. In part, this has been the result oforders placed by FEMA for temporary houses needed after the 2005 hurricaneseason in the Southeastern United States. However, the towable sector,exclusive of FEMA orders was still robust. Our own products have been wellreceived, and with the addition of R-Vision we have secured a solid position asthe number five towable manufacturer in the United States.

 

The recreational vehicleindustry remains extremely competitive, and retail customers have many choicesavailable to them. To distinguish ourselves within the industry, we introducedour Franchise For The Future (FFTF) program for our Class A dealers in June of2005. This program was designed to introduce the concept to our dealer partnersthat our specific brands have intrinsic values as a selling tool. To supportthis, and to encourage our dealers to participate in FFTF, we worked withoutside marketing consultants to develop brand signage, informational computerkiosks, and brand specific displays that are placed within our variousindependent dealer locations. We believe that this concept, along with otherfeatures designed to entice our dealers to focus selling efforts on our variousproduct offerings, will assist them in their sales efforts through the strengthof improved brand identity.

 

17

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*Motorhome Resort Segment*

 

While the recreational vehicle industry isstill a challenging environment, our motorhome resort properties sales andprofits were very successful in the first quarter of 2006. Our properties in bothLas Vegas, Nevada and Indio, California experienced better than expectedresults of operations, with combined operating profits of $4.8 million for thefirst quarter of 2006 versus operating profits of $913,000 in the comparableperiod in 2005. We believe that these resort properties will continue to sellthrough their respective remaining available inventories of lots for theremainder of 2006 and into the first quarter of 2007.* During 2006 we willcontinue to evaluate opportunities for new property developments, with theintent of bringing new developments to the market in 2007.*

* *

*Performance in the first quarter of 2006*

 

First quarter net sales increased 17.1% to$385.1 million compared to $328.8 million for the same period last year. Grossdiesel motorized sales were down 12.4%, gas motorized sales were down 4.0%, andtowables were up 238.6%. Diesel products accounted for 59.1% of our firstquarter revenues while gas products were 9.7%, and towables were 31.2%. Theoverall increase in revenues was driven by a strong increase in towable sales,partially fueled by FEMA sales of $26.8 million. Our overall unit sales were up192.5% in the first quarter of 2006 to 8,832 units, with diesel motorized unitsales down 13.1% to 1,143 units, gas motorized unit sales down 1.3% to 472units, and towable unit sales up 488.2% to 7,217 units. Towable unit salesincreases were due primarily to the addition of FEMA orders in the firstquarter of 2006, as well as the inclusion of units from the R-Visionacquisition. Our total average unit selling price decreased to $42,600 from$108,100 in the same period last year, reflecting the impacts of lower pricedorders for FEMA towables in the first quarter of 2006, as well as the inclusionof R-Vision products.

 

Gross profit for the first quarter of 2006increased to $48.4 million, up from $35.9 million in 2005, and gross marginincreased from 10.9% in the first quarter of 2005 to 12.6% in the first quarterof 2006. The increase in gross margin in 2006 is illustrated in the followingtable. Changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):

 
| ** **           | ** ** | ** **        | ** ** | ** **     | ** ** | ** **        | ** ** | ** **     | ** ** | **Change in % of** | ** ** |
|----------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|----------------|------------|--------------------|------------|
| ** **           | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **April 1, 2006** | ** ** | **% of Sales** | ** ** | **Sales**          | ** ** |
| Direct materials     |       | $                 | 206,100    |           | 62.7       | %                 | $          | 232,095        |       | 60.3               | %          | -2.4 | % |
| Direct labor         |       | 31,765            |       | 9.6            | %          | 38,386            |       | 10.0           | %          | 0.4                | %          |
| Warranty             |       | 7,517             |       | 2.3            | %          | 10,722            |       | 2.8            | %          | 0.5                | %          |
| Other direct         |       | 17,694            |       | 5.4            | %          | 23,295            |       | 6.0            | %          | 0.6                | %          |
| Indirect             |       | 29,841            |       | 9.1            | %          | 32,121            |       | 8.3            | %          | -0.8               | %          |
| Total  cost of sales |       | $                 | 292,917    |           | 89.1       | %                 | $          | 336,619        |       | 87.4               | %          | -1.7 | % |

 

•      Direct material decreases, in 2006 as apercent of sales, were due mostly to increases in sales of lots at our resortproperties which have lower material costs than our recreational vehicles.

•      Direct labor increases, in 2006 as apercent of sales, were predominantly due to changes in product mix to a greaterconcentration of towable products which have a higher labor content as apercent of sales.

•      Increases in warranty expense, in 2006 asa percent of sales, were due mostly to lower than expected costs in 2005.Current year expenses are closer to a historical rate.

•      Increases in other direct costs, in 2006as a percent of sales, were due mostly to increases in employee healthbenefits, and delivery expense for the Company’s product.

•      Decreases in indirect costs, in 2006 as apercent of sales, were due mostly to reductions in plant capacity through plantclosures that occurred in 2005, as well as in reductions in expenditures forexpenses such as worker’s compensation and general insurance.

 

18

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Selling, general, and administrative expenses(S,G&A) increased by $7.0 million to $34.0 million in the first quarter of2006 and increased as a percentage of sales from 8.2% in 2005 to 8.8% in2006.  Increases in spending over theprior year, as a percentage of sales, are set forth in the following table(dollars in thousands):

 
| ** **                | ** ** | ** **        | ** ** | ** **     | ** ** | ** **        | ** ** | ** **     | ** ** | **Change in % of** | ** ** |
|---------------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|----------------|------------|--------------------|------------|
| ** **                | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **April 1, 2006** | ** ** | **% of Sales** | ** ** | **Sales**          | ** ** |
| Wages and salaries        |       | $                 | 5,282      |           | 1.6        | %                 | $          | 9,581          |       | 2.5                | %          | 0.9 | % |
| Selling  expenses         |       | 9,358             |       | 2.9            | %          | 10,987            |       | 2.8            | %          | -0.1               | %          |
| Settlement  expense       |       | 2,961             |       | 0.9            | %          | 2,318             |       | 0.6            | %          | -0.3               | %          |
| Marketing  expenses       |       | 2,753             |       | 0.8            | %          | 1,876             |       | 0.5            | %          | -0.3               | %          |
| Other                     |       | 6,603             |       | 2.0            | %          | 9,217             |       | 2.4            | %          | 0.4                | %          |
| Total  S,G&A expenses |       | $                 | 26,957     |           | 8.2        | %                 | $          | 33,979         |       | 8.8                | %          | 0.6 | % |

 

•      Increases in wages and salaries, in 2006 as a percent ofsales, were due primarily to increases in management bonus as a result ofimproved profits, as well as the expensing of incentive stock based pay. In2005, and prior periods, the Company did not expense incentive stock based pay,but instead elected to disclose the impact under SFAS 123 (Accounting for StockBased Compensation).

•      The decrease in selling expenses, in 2006 as a percent ofsales, was due to continued sales efforts to assist dealers in developingprograms to increase customer awareness of product offerings.

•      Decreases in settlement expense (litigation settlementexpense), in 2006 as a percent of sales, were due to the successful resolutionof certain litigation claims, and a reduction in the number of new claims beingfiled.

•      Increases in other expenses, in 2006 as a percent of sales,were due mostly to expenses related to the implementation of our new computersystem, and profit participation expenses associated with increased salesvolumes from our resort property segment.

 

Operating income was $14.5 million, or3.8% of sales in the first quarter of 2006 compared to $8.9 million, or 2.7% ofsales in the similar 2005 period. The increase in operating margins reflectsimproved gross margins that were only partially offset by higher S,G&A as apercentage of sales.

 

Net interest expense was $1.3 million inthe first quarter of 2006 compared to $485,000 in the comparable 2005 period,reflecting a higher level of borrowing during the first quarter of 2006.

 

The Company reported a provision forincome taxes of $5.1 million from continuing operations, or an effective taxrate of 37.9% in the first quarter of 2006, compared to $3.2 million, or aneffective tax rate of 37.4% for the comparable 2005 period. The decrease in theeffective tax rate was due primarily to benefits received from foreign salesactivities, as well as favorable tax law changes at certain state levels.

 

Net income for the first quarter of 2006was $8.3 million, compared to $5.3 million for the first quarter of 2005(including losses from discontinued operations of $41,000, net of taxes,related to the closure of the Royale Coach facility) due to an increase insales combined with a higher operating margin that was partially offset byincreases in S,G&A expenses. The Company did not expense stock optiongrants in 2005 and earlier periods, however, if option expensing had beenrequired, the effect on net income for 2005 for all previously granted optionswould have been a decrease of $3.2 million. See Note 7 of the Company’sconsolidated financial statements for information regarding the calculation ofthe impact of expensing stock options. The Company has reflected the cost ofstock options in its results of operations beginning in 2006.

 

19

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*First Quarter 2006versus First Quarter 2005 for the Motorized Recreational Vehicle Segment*

 

The following table illustrates theresults of the MRV Segment for the quarters ended April 2, 2005, and April 1,2006 (dollars in thousands):

 
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **April 2, 2005** | ** ** | **of Sales** | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net  sales                                     |       | $                 | 290,166    |         | 100.0      | %                 | $          | 254,954      |       | 100.0      | %          | $          | (35,212    | ) | -12.1 | % |
| Cost  of sales                                 |       | 259,315           |       | 89.4         | %          | 230,001           |       | 90.2         | %          | 29,314     |       | 11.3       | %          |
| Gross  profit                                  |       | 30,851            |       | 10.6         | %          | 24,953            |       | 9.8          | %          | (5,898     | )          | -19.1      | %          |
| Selling,  general, and administrative expenses |       | 10,256            |       | 3.5          | %          | 8,530             |       | 3.3          | %          | 1,726      |       | 16.8       | %          |
| Corporate  overhead allocation                 |       | 11,566            |       | 4.0          | %          | 11,603            |       | 4.6          | %          | (37        | )          | -0.3       | %          |
| Operating  income                              |       | $                 | 9,029      |         | 3.1        | %                 | $          | 4,820        |       | 1.9        | %          | $          | (4,209     | ) | -46.6 | % |

 

Total net sales for the MRV segment weredown from $290.2 million in the first quarter of 2005, to $255.0 million in thefirst quarter of 2006. Gross diesel motorized revenues were down 12.4% and gasmotorized revenues were down 4.0%. Diesel products accounted for 85.9% of theMRVsegment’s first quarter of 2006 gross revenues while gas products were14.1%. The overall decrease in revenues reflected continuing challenges in themarketplace as dealers sought to lower their current inventories because ofsoftened retail demand and higher interest costs associated with theirfloorplan borrowings. Our MRV segment unit sales were down 9.9% year over yearfrom 1,793 units in the first quarter of 2005 to 1,615 units in the firstquarter of 2006. Diesel motorized unit sales were down 13.1% to 1,143 units andgas motorized unit sales were down 1.3% to 472 units.

 

Gross profit for the first quarter of 2006decreased to $25.0 million, down from $30.9 million in the first quarter of2005, and gross margin decreased from 10.6% in the first quarter of 2005 to9.8% in the first quarter of 2006. Gross profit reductions were the result oflower sales volumes in the first quarter of 2006 versus the comparable periodin 2005. Changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended** | ** ** | ** **     | ** ** | **Quarter Ended** | ** ** | ** **     | ** ** | **Change in**  | ** ** |
|----------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|----------------|------------|----------------|------------|
| ** **           | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **April 1, 2006** | ** ** | **% of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                 | 181,892    |           | 62.7       | %                 | $          | 157,272        |       | 61.7           | %          | -1.0 | % |
| Direct labor         |       | 27,868            |       | 9.6            | %          | 25,536            |       | 10.0           | %          | 0.4            | %          |
| Warranty             |       | 6,558             |       | 2.3            | %          | 7,568             |       | 3.0            | %          | 0.7            | %          |
| Other direct         |       | 14,794            |       | 5.1            | %          | 13,454            |       | 5.3            | %          | 0.2            | %          |
| Indirect             |       | 28,203            |       | 9.7            | %          | 26,171            |       | 10.2           | %          | 0.5            | %          |
| Total  cost of sales |       | $                 | 259,315    |           | 89.4       | %                 | $          | 230,001        |       | 90.2           | %          | 0.8 | % |

 

•      Direct material decreases, in 2006 as apercent of sales, were mostly due to increases in products that have a lowermaterial cost as a percentage of sales, due to changes in product mix, as wellas to a favorable physical inventory adjustment in the first quarter of 2006.

•      Direct labor increases, in 2006 as apercent of sales, were predominantly due to lower production run rates, andshifts in product mix to products that have a higher labor rate as a percent ofsales.

•      Increases in warranty expense, in 2006 asa percent of sales, were due mostly to a return to historical warranty rates.

•      Increases in other direct costs, in 2006as a percent of sales, were due mostly to increases in employee health benefits,and delivery expense for the Company’s products.

•      Increases in indirect costs, in 2006 as apercent of sales, were due mostly to increased overhead costs per unit withinthe production facilities due to lower run rates in the first quarter of 2006 versusthe same period in 2005.

 

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S,G,&A for the MRV Segment, decreasedas a percent of sales and in total dollars due primarily to reductions inexpenditures for marketing and selling expenses which were partially offset bya larger corporate overhead allocation. Corporate overhead allocation increasedin 2006, as a percent of sales, due to higher management bonus levels allocatedto the MRV Segment as well as allocations for incentive stock based compensation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal, and investor relationsexpenses.

 

Operating income decreased as both apercent of sales and in total dollars due to lower sales and gross margins, andincreases in corporate overhead expenses.

* *

*First Quarter 2006versus First Quarter 2005 for the Towable Recreational Vehicle Segment*

 

The following table illustrates theresults of the TRV Segment for the quarters ended April 2, 2005, and April 1,2006 (dollars in thousands):

 
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **April 2, 2005** | ** ** | **of Sales** | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net  sales                                     |       | $                 | 33,354     |         | 100.0      | %                 | $          | 114,413      |       | 100.0      | %          | $          | 81,059     |   | 243.0 | % |
| Cost  of sales                                 |       | 31,729            |       | 95.1         | %          | 100,133           |       | 87.5         | %          | (68,404    | )          | -215.6     | %          |
| Gross  profit                                  |       | 1,625             |       | 4.9          | %          | 14,280            |       | 12.5         | %          | 12,655     |       | 778.8      | %          |
| Selling,  general, and administrative expenses |       | 1,233             |       | 3.7          | %          | 3,630             |       | 3.2          | %          | (2,397     | )          | -194.4     | %          |
| Corporate  overhead allocation                 |       | 1,395             |       | 4.2          | %          | 5,778             |       | 5.0          | %          | (4,383     | )          | -314.2     | %          |
| Operating  income (loss)                       |       | $                 | (1,003     | )            | -3.0       | %                 | $          | 4,872        |       | 4.3        | %          | $          | 5,875      |   | 585.7 | % |

 

Total net sales for the TRV Segment wereup from $33.4 million in the first quarter of 2005, to $114.4 million in thefirst quarter of 2006. The overall increase in revenues reflected both theimpact of the R-Vision acquisition in November 2005 as well as the strong salesto FEMA related to hurricane Katrina. The Company’s unit sales were up 488.2%to 7,217 units. In addition, predominantly due to the FEMA trailers, totalaverage unit selling price decreased to $16,300 in the first quarter of 2006from $28,300 in the same period last year.

 

Gross profit for the first quarter of 2006increased to $14.3 million, up from $1.6 million in the first quarter of 2005,and gross margin increased from 4.9% in the first quarter of 2005 to 12.5% inthe first quarter of 2006. Changes in the components of cost of sales are setforth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended** | ** ** | ** **     | ** ** | **Quarter Ended** | ** ** | ** **     | ** ** | **Change in**  | ** ** |
|----------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|----------------|------------|----------------|------------|
| ** **           | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **April 1, 2006** | ** ** | **% of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                 | 22,335     |           | 66.9       | %                 | $          | 68,829         |       | 60.2           | %          | -6.7 | % |
| Direct labor         |       | 3,897             |       | 11.7           | %          | 12,626            |       | 11.0           | %          | -0.7           | %          |
| Warranty             |       | 959               |       | 2.9            | %          | 3,154             |       | 2.7            | %          | -0.2           | %          |
| Other direct         |       | 2,900             |       | 8.7            | %          | 9,812             |       | 8.6            | %          | -0.1           | %          |
| Indirect             |       | 1,638             |       | 4.9            | %          | 5,712             |       | 5.0            | %          | 0.1            | %          |
| Total  cost of sales |       | $                 | 31,729     |           | 95.1       | %                 | $          | 100,133        |       | 87.5           | %          | -7.6 | % |

 

•      Direct material decreases, in 2006 as apercent of sales, were mostly due to increases in products that have a lowermaterial cost as a percentage of sales (such as for FEMA travel trailers), aswell as a favorable physical inventory adjustment in the first quarter of 2006.

•      Direct labor decreases, in 2006 as apercent of sales, were predominantly due to efficiencies in the productionlines related to increases in output for FEMA orders, as well as for orders forexisting products.

•      Decreases in warranty expense, in 2006 asa percent of sales, were due mostly to the impact of FEMA units which have alower warranty cost. Warranty costs, excluding FEMA units, increased slightlyin 2006 versus the same period in 2005.

 

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•      Decreases in other direct costs, in 2006as a percent of sales, were due mostly to the addition of R-Vision productswhich have lower direct costs as a percent of sales.

•      Increases in indirect costs, in 2006 as apercent of sales, were due mostly to allocated expenses incurred as a result ofutilizing some motorized production space in Indiana to manufacture FEMA traveltrailers.

 

S,G,&A expenses for the TRV segmentdecreased as a percent of sales due in part to higher sales levels for whichadditional administrative costs were not incurred. Corporate overheadallocation increased slightly due to higher levels allocated to the TRV segmentas a result of the growth in this segment. Corporate overhead allocation iscomprised of certain shared services such as executive, financial, informationsystems, legal, and investor relations expenses.

 

Operating income increased as both apercent of sales and in total dollars due to higher sales and gross profitcombined with decreases in S,G,&A expenses as a percent of sales.

* *

*First Quarter 2006versus First Quarter 2005 for the Motorhome Resorts Segment*

 

The following table illustrates theresults of the MR Segment for the quarters ended April 2, 2005, and April 1,2006 (dollars in thousands):

 
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **Quarter Ended** | ** ** | **%**        | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **April 2, 2005** | ** ** | **of Sales** | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net  sales                                     |       | $                 | 5,293      |         | 100.0      | %                 | $          | 15,701       |       | 100.0      | %          | $          | 10,408     |   | 196.6 | % |
| Cost  of sales                                 |       | 1,873             |       | 35.4         | %          | 6,485             |       | 41.3         | %          | (4,612     | )          | -246.2     | %          |
| Gross  profit                                  |       | 3,420             |       | 64.6         | %          | 9,216             |       | 58.7         | %          | 5,796      |       | 169.5      | %          |
| Selling,  general, and administrative expenses |       | 1,461             |       | 27.6         | %          | 3,072             |       | 19.6         | %          | (1,611     | )          | -110.3     | %          |
| Corporate  overhead allocation                 |       | 1,046             |       | 19.7         | %          | 1,366             |       | 8.7          | %          | (320       | )          | -30.6      | %          |
| Operating  income                              |       | $                 | 913        |         | 17.3       | %                 | $          | 4,778        |       | 30.4       | %          | $          | 3,865      |   | 423.3 | % |

 

Net sales increased 196.6% to $15.7million compared to $5.3 million for the same period last year. This increasewas mostly the result of continued strong demand for our resort properties andthe need within the industry for quality destination locations for RV owners.

 

Gross profit for the MR Segment decreasedto 58.7% of sales compared to 64.6% of sales in the same period last year. Thedecrease was a result of the sales of certain phases of construction that hadmore infrastructure associated with them for amenities such as golf courses,club houses, and swimming pools.

 

S,G,&A expenses decreased due to theincrease in sales that were generated without the need to add additional salesand marketing costs. Corporate overhead allocation is comprised of certainshared services such as executive, financial, information systems, legal andinvestor relations expenses.

 

Operating income increased due toimprovements in sales and gross profit and S,G,&A costs, that were onlyslightly offset by higher corporate overhead allocation*.*

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company's primary sources of liquidityare internally generated cash from operations and available borrowings underits credit facilities. During the first quarter of 2006, the Company generatedcash of $29.1 million from operating activities and had a net cash balance of$8.4 million at April 1, 2006. The Company generated $7.7 million from netincome and non-cash expenses such as depreciation and amortization, gains onsales of assets, changes in deferred income taxes, and expense associated withstock based compensation. Other sources of cash include a $914,000 decrease ininventory levels, a $2.6 million decrease in resort lot inventories, a $400,000decrease in prepaid expenses, a $22.7 million increase in accounts payable, a$963,000 increase in accruals for product warranty, an $8.0 million increase inincome taxes payable, and a $720,000 increase in the net liabilities fromdiscontinued operations. The uses of cash in the first quarter of 2006 includedan increase of $24.1 million in trade receivables and a decrease of $635,000 inaccruals for product liability reserves. Decreases in inventories at

 

22

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our manufacturing facilities and at ourresort properties are a result of inventory management initiatives at ourplants, and a strong sales effort at our resort properties. The decrease inprepaids is due to the timing and expiration of certain insurance policies.Decreases in accounts payable were mostly due to accruals for our Franchise ForThe Future (FFTF) program that will be paid in the second quarter, as well astimings for deliveries of products at our manufacturing facilities. At yearend, as was the case at the end of 2005, we schedule a shutdown of our plantswhich results in a lower amount of inventory being delivered to our facilities.Increases in product warranty reserves are the result of the timing of paymentsfor warranty costs. Increases in income taxes payable are a result of improvedprofits in the first quarter of 2006. Increases in net accrued liabilities fordiscontinued operations are a result of continuing to wind up the remainingopen items for the closure of Royale Coach. Increases in trade receivablesreflect strong shipments near the end of the first quarter of 2006. Thedecrease in accrued product warranty reserves reflect the success of settlingcertain outstanding litigation claims.

 

On November 18, 2005 the Company amendedits credit facilities to borrow $40.0 million of term debt (the “Term Debt”) tocomplete the acquisition of R-Vision. The revolving line of credit remains at$105.0 million. At the end of the first quarter 2006, borrowings outstanding onthe revolving line of credit (the “Revolving Loan”) were $22.5 million, andTerm Debt borrowings were $40.0 million. At the election of the Company, the RevolvingLoan and the Term Debt bear interest at varying rates that fluctuate based onthe prime rate or LIBOR, and are determined by the Company's leverage ratio.The Company also pays interest quarterly on the unused available portion of theRevolving Loan at varying rates, determined by the Company’s leverage ratio.The Revolving loan is due and payable in full on November 17, 2009 and requiresinterest payments quarterly beginning April 3, 2006. The Term Debt requiresquarterly interest payments and quarterly principal payments of $1.4 million,with a final balloon payment of $12.9 million due on November 18, 2010. Boththe Revolving Loan and Term Debt are collateralized by all the assets of theCompany and the credit facilities include various restrictions and financialcovenants. The Company was in compliance with these covenants at April 1, 2006.The Company utilizes “zero balance” bank disbursement accounts in which anadvance on the line of credit is automatically made for checks clearing eachday. Since the balance of the disbursement account at the bank returns to zeroat the end of each day, the outstanding checks of the Company are reflected asa liability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting.

 

In November 2005, the Company obtained aterm loan of $500,000 from the State of Oregon in connection with therelocation of jobs to the Coburg, Oregon production facilities from the Bend,Oregon facility. The principal and interest is due on April 30, 2009. The loanbears a 5% annual interest rate.

 

Our principal working capital requirementsare for purchases of inventory and financing of trade receivables. Many of theCompany’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below. At April 1, 2006, we hadworking capital of approximately $134.5 million, an increase of $7.3 millionfrom working capital of $127.2 million at December 31, 2005. The Company hasbeen using cash flow from operations to finance our capital expenditures.

 

The Company believes that cash flow fromoperations and funds available under its anticipated credit facilities will besufficient to meet the Company's liquidity requirements for the next 12months.* The Company's capital expenditures were $3.7 million in the firstquarter of 2006, which included costs related to additions of automatedmachinery in many of its production facilities, upgrades to its informationsystems infrastructure, and other various capitalized upgrades to existingfacilities. The Company anticipates that capital expenditures for all of 2006will be approximately $15 to $18 million, which includes expenditures topurchase additional machinery and equipment in both the Company’s Coburg,Oregon and Wakarusa, Indiana facilities, as well as upgrades to existinginformation systems infrastructures.* The Company may require additional equityor debt financing to address working capital and facilities expansion needs,particularly if the Company significantly increases the level of workingcapital assets such as inventory and accounts receivable. The Company may alsofrom time to time seek to acquire businesses that would complement theCompany's current business, and any such acquisition could require additionalfinancing. There can be no assurance that additional financing will beavailable if required or on terms deemed favorable by the Company.

 

As is typical in the recreational vehicleindustry, many of the Company’s retail dealers utilize wholesale floor planfinancing arrangements with third party lending institutions to finance theirpurchases of our products. Under the terms of these floor plan arrangements,institutional lenders customarily require the recreational vehicle manufacturerto agree to repurchase any unsold units if the dealer fails to meet itscommitments to the lender, subject to certain conditions. The Company hasagreements with several institutional lenders under which the Company currentlyhas repurchase obligations. The Company’s contingent obligations under theserepurchase agreements are

 

23

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reduced by the proceeds received upon thesale of any repurchased units. The Company’s obligations under these repurchaseagreements vary from period to period up to 18 months. At April 1, 2006,approximately $635.3 million of products sold by the Company to independentdealers were subject to potential repurchase under existing floor planfinancing agreements with approximately 6.1% concentrated with one dealer.Historically, the Company has been successful in mitigating losses associatedwith repurchase obligations. During the first quarter of 2006, the Company didnot repurchase any products under these repurchase obligations, and there wereaccordingly no losses. If the Company were obligated to repurchase asignificant number of units under any repurchase agreement, the Company’sbusiness, operating results, and financial condition could be adverselyaffected. Dealers for the Company undergo credit review prior to becoming adealer and periodically thereafter. Financial institutions that providefloorplan financing also perform credit reviews and floor checks on an ongoingbasis. The Company closely monitors sales to dealers that are a higher creditrisk. The repurchase period is limited, usually to a maximum of 18 months. TheCompany believes these activities minimize the number of required repurchases.Additionally, the repurchase agreement specifies that the dealer is required tomake principal payments during the repurchase period. Since the Companyrepurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount.Therefore, there is already some built in discount when the Company offers theinventory to another dealer at an amount lower than the original invoice asincentive for the dealer to take the repurchased inventory. This helps minimizethe losses the Company incurs on repurchased inventory.

 

As part of the normal course of business,we incur certain contractual obligations and commitments which will requirefuture cash payments. The following tables summarize the significantobligations and commitments.

 

PAYMENTS DUEBY PERIOD

 
| **Contractual  Obligations (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Lines of Credit (1)                         |       | $                  | 0          |             | $          | 0                |       | $              | 22,500     |      | $          | 0 |   | $ | 22,500 |   |
| Long-Term Debt (2)                          |       | $                  | 5,714      |             | $          | 11,429           |       | $              | 23,357     |      | $          | 0 |   | $ | 40,500 |   |
| Operating Leases (3)                        |       | $                  | 2,647      |             | $          | 2,779            |       | $              | 2,106      |      | $          | 3,588 |   | $ | 11,120 |   |
| Total  Contractual Cash Obligations         |       | $                  | 8,361      |             | $          | 14,208           |       | $              | 47,963     |      | $          | 3,588 |   | $ | 74,120 |   |

 

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 (4)                    |       | $                  | 0          |             | $          | 0                |       | $              | 82,500     |      | $          | 0 |   | $ | 82,500 |   |
| Guarantees (5)                        |       | $                  | 14,302     |             | $          | 0                |       | $              | 0          |      | $          | 0 |   | $ | 14,302 |   |
| Repurchase Obligations  (6)           |       | $                  | 0          |             | $          | 635,273          |       | $              | 0          |      | $          | 0 |   | $ | 635,273 |   |
| Total  Commitments                    |       | $                  | 14,302     |             | $          | 635,273          |       | $              | 82,500     |      | $          | 0 |   | $ | 732,075 |   |

 

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(1)        See Note 4 of Notes to the Condensed Consolidated FinancialStatements. The amount listed represents the outstanding balance at April 1,2006.

(2)        See Note 5 of the Condensed Consolidated FinancialStatements.

(3)        Various leases including manufacturing facilities,aircraft, and machinery and equipment. 

(4)        See Note 4 to the Condensed Consolidated FinancialStatements. The amount listed represents available borrowings on the line ofcredit at April 1, 2006.

(5)        Various leases including manufacturing facilities,aircraft, and machinery and equipment.

(6)        Reflects obligations under manufacturer repurchasecommitments. See Note 9 to the Condensed Consolidated Financial Statements.

 

**INFLATION**

 

During 2005 and in the first quarter of2006, the Company experienced increases in the prices of certain commodityitems that we use in the manufacturing of our products. These include, but arenot limited to, steel, copper, aluminum, petroleum, and wood. While these rawmaterials are not necessarily indicative of widespread inflationary trends,they had an impact on the Company’s production costs. The impact of theseincreases has not caused the Company to increase its selling prices at the currenttime however the Company may need to pass along increases in the future tomaintain an acceptable gross margin on our product. The current trend in theseprices, could have a materially adverse impact on the Company’s business goingforward.* 

 

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**CRITICAL ACCOUNTINGPOLICIES**

 

The discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, the Company evaluates its estimates, including those related towarranty costs, product liability, and impairment of goodwill. The Companybases estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions. TheCompany believes the following critical accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financialstatements.

 

WARRANTY COSTS Estimated warranty costsare provided for at the time of sale of products with warranties covering theproducts for up to one year from the date of retail sale (five years for thefront and sidewall frame structure, and three years on the Roadmaster chassis).These estimates are based on historical average repair costs, feedback from theCompany’s production facilities on new product design changes, technical advicefrom vendors, as well as other reasonable assumptions that have been deemedappropriate by management.

 

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

 

IMPAIRMENT OF GOODWILL  The Company assesses the potential impairmentof goodwill in accordance with Financial Accounting Standards 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 been impaired.If the Company determines that the market capitalization is not representativeof the fair value of the reporting unit as a whole, then the Company will usean estimate of discounted future cash flows to determine fair value.

 

INVENTORY ALLOWANCE  The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated market value. These write-downs are based on assumptions about futuresales demand and market conditions. If actual sales demand or market conditionschange from those projected by management, additional inventory write-downs maybe required.

 

BRAND ELEMENTS AND SIGNAGE  As part of its franchise program for dealers,the Company places certain fixed assets at independent dealerships. Theseassets are comprised of informational computer kiosks, brand island displays,furniture and fixtures, as well as outdoor storefront signage. These assets areleased to dealers over 10 years through an operating lease, and the Company depreciatesthe assets over their respective useful lives.

 

INCOME TAXES  In conjunction with preparing itsconsolidated financial statements, the Company must estimate its income taxesin each of the jurisdictions in which it operates. This process involves estimatingactual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in the consolidated balance sheets. The Company must then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent management believes that recovery is not likely, avaluation allowance must be established. Significant management judgment isrequired in determining the Company’s provision for income taxes, deferred taxassets and liabilities, and any valuation allowance recorded against netdeferred tax assets.

 

REPURCHASE OBLIGATIONS  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.****TheCompany has recorded a liability associated with the disposition of repurchasedinventory. To determine the appropriate liability, the Company calculates areserve, based on an estimate of potential net losses, along with qualitativeand quantitative factors, including dealer inventory turn rates, and thefinancial strength of individual dealers.

 

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**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

 

The Company has adopted all applicableoutstanding financial reporting requirements.

** **

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

 

Not applicable.

 

**Item 4. Controls and Procedures**

 

Evaluation of Disclosure Controls andProcedures

 

Our management evaluated, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 is accumulated and communicated toour management including our principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure, and that such information is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

Our management, including our ChiefExecutive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures will prevent all error and all fraud.Because of inherent limitations in any system of disclosure controls andprocedures, no evaluation of controls can provide absolute assurance that allinstances of error or fraud, if any, within the Company may be detected.However, our management, including our Chief Executive Officer and our ChiefFinancial Officer, have designed our disclosure controls and procedures toprovide reasonable assurance of achieving their objectives and have, pursuantto the evaluation discussed above, concluded that our disclosure controls andprocedures are, in fact, effective at this reasonable assurance level.

 

There was no change in our internalcontrol over financial reporting that occurred during the period covered bythis Quarterly Report on Form 10-Q that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS**

 

We have listed below various risks anduncertainties relating to our businesses. This list is not inclusive of all therisks and uncertainties we face, but any of these could cause our actualresults to differ materially from the results contemplated by theforward-looking statements contained in this report or that we may issue fromtime to time in the future.

 

THE EXPECTED BENEFITS OF OUR RECENTACQUISITION OF R-VISION AND AFFILIATES MAY NOT BE REALIZED  On November 18, 2005 the Company acquiredIndiana based towable and motorhome manufacturer R-Vision, Inc., R-VisionMotorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC (collectively“R-Vision”) to acquire all of the outstanding shares of R-Vision. The processof integrating R-Vision into our company operations may result in unforeseenoperating difficulties and expenditures and may absorb significant managementattention that would otherwise be available for the ongoing development of theCompany’s business. This may cause an interruption or a loss of momentum in theCompany’s operating activities, which in turn, could have a material adverseaffect on the Company’s operating results and financial condition. Moreover,the acquisition involves a number of additional risks, such as the loss of keyemployees of R-Vision as a result of the acquisition, the incorporation ofacquired products into our existing product line, the amortization of debtissuance costs, and the difficulty of integrating disparate corporate cultures.Accordingly, the anticipated benefits may not be realized or the acquisitionmay have a material adverse affect on our operating results and financialcondition.

 

WE MAY EXPERIENCE UNANTICIPATEDFLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS  The Company’s net sales, gross margin, andoperating results may fluctuate significantly from period to period due to anumber of factors, many of which are not readily predictable. These factorsinclude the following:

 

•      The margins associated with the mix ofproducts the Company sells in any particular period.

 

•      The Company ships a large amount ofproducts near quarter end. 

 

•      The Company’s ability to utilize andexpand our manufacturing resources efficiently.

 

•      Shortages of materials used in ourproducts.

 

•      The effects of inflation on the costs ofmaterials used in the Company’s products.

 

•      A determination by the Company thatgoodwill or other intangible assets are impaired and have to be written down totheir fair values, resulting in a charge to the Company’s results ofoperations.

 

•      The Company’s ability to introduce newmodels that achieve consumer acceptance.

 

•      The introduction, marketing and sale ofcompeting products by others, including significant discounting offered by theCompany’s competitors.

 

•      The addition or loss of the Company’sdealers.

 

•      The timing of trade shows and rallies,which the Company uses to market and sell our products.

 

•      Factors affecting the recreationalvehicle industry as a whole, including economic and seasonal factors.

 

•      The Company’s inability to acquire anddevelop key pieces of property for on-going resort activity.

 

•      Fluctuations in demand for the Company’sresort lots due to changing economic and other conditions.

 

The Company’s overall gross margin maydecline in future periods to the extent that the Company increases thepercentage of sales of lower gross margin towable products or if the mix ofmotor coaches the Company sells shifts to lower gross margin units. Inaddition, a relatively small variation in the number of recreational vehiclesthe Company sells in any quarter can have a significant impact on total salesand operating results for that quarter.

 

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Demand in the recreational vehicleindustry generally declines during the winter months, while sales are generallyhigher during the spring and summer months. With the broader range of productswe now offer, seasonal factors could have a significant impact on our operatingresults in the future. Additionally, unusually severe weather conditions incertain markets could delay the timing of shipments from one quarter toanother.

 

The Company attempts to forecast ordersfor our products accurately and commence purchasing and manufacturing prior toreceipt of such orders. However, it is highly unlikely that we willconsistently accurately forecast the timing, rate, and mix of orders. Thisaspect of our business makes our planning inexact and, in turn, affects our shipments,costs, inventories, operating results, and cash flow for any given quarter. 

 

THE RECREATIONAL VEHICLE INDUSTRY ISCYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY  The recreational vehicle industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic, demographic, and political conditions thataffect disposable income for leisure-time activities. For example, unitshipments of recreational vehicles (excluding conversion vehicles) peaked atapproximately 259,000 units in 1994 and declined to approximately 247,000 unitsin 1996. The industry peaked again in 1999 at approximately 321,000 units anddeclined in 2001 to 257,000 units. The industry continued to climb toapproximately 321,000 units in 2003, 370,000 units in 2004, and 384,000 in2005. Our business is subject to the cyclical nature of this industry. Some ofthe factors 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 inconsumer confidence and slowing of the overall economy has adversely affectedthe recreational vehicle market. An extended continuation of these conditionswould materially affect our business, results of operations, and financialcondition.

 

WE RELY ON A RELATIVELY SMALL NUMBER OFDEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although the Company’s products were offeredby 580 dealerships located primarily in the United States and Canada as ofApril 1, 2006, a significant percentage of the Company’s sales are concentratedamong a relatively small number of independent dealers. For the quarter endedApril 1, 2006, sales to one dealer, Lazy Days RV Center, accounted for 9.2% oftotal sales compared to 11.3% of sales in the same period ended last year. Forquarters ended April 2, 2005 and April 1, 2006, sales to our 10 largestdealers, including Lazy Days RV Center, accounted for a total of 44.6% and 36.1%of total sales, respectively. The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on theCompany’s business, results of operations, and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER  As is common in the recreationalvehicle industry, the Company enters into repurchase agreements with thefinancing institutions used by the Company’s dealers to finance their purchasesof our products. These agreements require the Company to repurchase thedealer’s inventory in the event that the dealer does not repay its lender.Obligations under these agreements vary from period to period, but totaledapproximately $635.3 million as of April 1, 2006, with approximately 6.1%concentrated with one dealer. If the Company were obligated to repurchase asignificant number of units under any repurchase agreement, the Company’sbusiness, operating results, and financial condition could be adverselyaffected.

 

OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECTTO RISK  The Company sells products todealers who are predominantly located in the United States and Canada. Theterms and conditions of payment are a combination of open trade receivables,and commitments from dealer floor plan lending institutions. For the Company’sRV dealers, terms are net 30 days for units that are financed by a third partylender. Terms of open trade receivables are granted by us, on a very limited basis,to dealers who have been subjected to evaluative credit processes conducted bythe Company. For open receivables, terms vary from net 30 days to net 180 days,depending on the specific agreement. Agreements for payment terms beyond 30days generally require additional collateral, as well as security interest inthe inventory sold. As of April 1, 2006, total trade receivables were $126.8million, with approximately $99.7 million, or 78.6% of the outstanding accountsreceivable balance concentrated among floor plan lenders. The remaining $27.1million of trade receivables were concentrated substantially all with onedealer. For resort lot customers, funds are required at the time of closing.

 

WE MAY EXPERIENCE A DECREASE IN SALES OFOUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OFFUEL  An interruption in the supply, or asignificant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect the

 

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Company’s business. Diesel fuel andgasoline have, at various times in the past, been either expensive or difficultto obtain, and prices of these commodities are currently at high levels on anhistorical basis.

 

WE DEPEND ON SINGLE OR LIMITED SOURCES TOPROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OFOUR PRODUCTS  A number of importantcomponents for the Company’s products are purchased from a single or a limitednumber of sources. These include turbo diesel engines (Cummins andCaterpillar), substantially all of the Company’s transmissions (Allison), axles(Dana) for all diesel motor coaches, and chassis (Workhorse and Ford) for gasmotor coaches. The Company has no long-term supply contracts with thesesuppliers or their distributors, and the Company cannot be certain that thesesuppliers will be able to meet the Company’s future requirements. Consequently,the Company has periodically been placed on allocation of these and other keycomponents. The last significant allocation occurred in 1997 from Allison, andin 1999 from Ford. An extended delay or interruption in the supply of anycomponents that the Company obtains from a single supplier or from a limitednumber of suppliers could adversely affect the Company’s business, results ofoperations, and financial condition.

 

OUR INDUSTRY IS VERY COMPETITIVE. WE MUSTCONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for the Company’s products is verycompetitive. The Company currently competes with a number of manufacturers ofmotor coaches, fifth wheel trailers, and travel trailers. Some of thesecompanies have greater financial resources than the Company has and extensivedistribution networks. These companies, or new competitors in the industry, maydevelop products that customers in the industry prefer over our products.

 

The Company believes that the introductionof new products and new features is critical to our success. Delays in theintroduction of new models or product features, quality problems associatedwith these introductions, or a lack of market acceptance of new models orfeatures could affect us adversely. For example, unexpected costs associatedwith model changes have affected our gross margin in the past. Further, newproduct introductions can divert revenues from existing models and result infewer sales of existing products. 

 

OUR PRODUCTS COULD FAIL TO PERFORMACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OURCUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES  The Company’s customers require demandingspecifications for product performance and reliability. Because the Company’sproducts are complex and often use advanced components, processes andtechniques, undetected errors and design flaws may occur. Product defectsresult in higher product service and warranty and replacement costs and maycause serious damage to the Company’s customer relationships and industryreputation, all of which could negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPESOF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  The Company is subject to litigation arisingin the ordinary course of our business, typically for product liability andwarranty claims that are common in the recreational vehicle industry. While theCompany does not believe that the outcome of any pending litigation, net ofinsurance coverage, will materially adversely affect its business, results ofoperations, or financial condition, the Company cannot provide assurances inthis regard because litigation is an inherently uncertain process.*

 

To date, the Company has been successfulin obtaining product liability insurance on terms that the Company considers acceptable.The terms 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 liability insurance, including umbrella coverage, isavailable to a maximum amount of $100.0 million for each occurrence, as well asin the aggregate. The Company cannot be certain they will be able to obtaininsurance coverage in the future at acceptable levels or that the costs of suchinsurance will be reasonable. Further, successful assertion against the Companyof one or a series of large uninsured claims, or of a series of claimsexceeding our insurance coverage, could have a material adverse effect on theCompany’s business, results of operations, and financial condition.

 

IN ORDER TO BE SUCCESSFUL, WE MUSTATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES, ANDOUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OFOPERATIONS  The Company’s future prospectsdepend upon retaining and motivating key management personnel, including Kay L.Toolson, the Company’s Chief Executive Officer, and John W. Nepute, theCompany’s President. The loss of one or more of these key management personnelcould adversely affect the Company’s business. The prospects of the Companyalso depend in part on its ability to attract and retain highly skilledengineers and other qualified technical, manufacturing, financial, managerial,and

 

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marketing personnel. Competition for suchpersonnel is intense, and there can be no assurance that the Company will besuccessful in attracting and retaining such personnel.

 

OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATIONSYSTEMS  In the past few years, theCompany has significantly expanded the size and scope of its business, whichhas required the Company to hire additional employees. Some of these newemployees include new management personnel. In addition, the Company’s currentmanagement personnel have assumed additional responsibilities. The increase insize over a relatively short period of time has put pressure on our operating,financial, and management information systems. If the Company continues to expand,such growth would put additional pressure on these systems and may cause suchsystems to malfunction or to experience significant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN  As the Company continues to work towardsinvolving automated machinery and equipment to improve efficiencies andquality, they will be subject to certain risks involving implementing newtechnologies into our facilities. 

 

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

 

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

 

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

 

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

 

•      We may be unable to complete a planned machineryand equipment implementation in a timely manner, which could result in lowerproduction levels and an inability to satisfy customer demand for our products.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION  We have recently begun toimplement a new ERP system and will be subject to certain risks including thefollowing:

 

•      We must rely on timely performance bycontractors whose performance we may be unable to control.

 

•      The implementation could result insignificant and unexpected increases in our operating expenses and capitalexpenditures, particularly if the project takes longer than we expect.

 

•      The project could complicate and prolongour internal data gathering and analysis processes.

 

•      It could require us to restructure ordevelop our internal processes to adapt to the new system.

 

•      We could require extended work hours fromour employees and use temporary outside resources, resulting in increasedexpenses, to resolve any software configuration issues or to processtransactions manually until issues are resolved.

 

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

 

•      The project could disrupt our operationsif the transition to the ERP system creates new or unexpected difficulties orif the system does not perform as expected.

 

OUR STOCK PRICE HAS HISTORICALLYFLUCTUATED AND MAY CONTINUE TO FLUCTUATE The market price of our Common Stock is subject to wide fluctuations inresponse to quarter-to-quarter variations in operating results, changes inearnings estimates by analysts, announcements of new products by us or ourcompetitors, general conditions in the recreational vehicle market, and otherevents or factors.  In addition, thestocks of many recreational vehicle companies have experienced price and volumefluctuations which have not necessarily been directly related to the companies’operating performance, and the market price of our Common Stock couldexperience similar fluctuations.

 

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**Item 6.  Exhibits**

 
| 31.1 |   | Sarbanes-Oxley Section 302(a)  Certification.                                                                                                                                    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Sarbanes-Oxley Section 302(a)  Certification.                                                                                                                                    |
| 32.1 |   | Certification of Chief Executive Officer  and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| ** ** | **MONACO COACH  CORPORATION**                        |
|------------|------------------------------------------------------|
|       |                                                 |
|       |                                                 |
| Dated:     | May 11, 2006                                         |   | /s/  P. Martin Daley |   |
|       | P. Martin Daley                                      |
|       | Vice President and                                   |
|       | Chief Financial Officer (Duly                        |
|       | Authorized Officer and Principal  Financial Officer) |
|            |                                                      |  |  |  |

 

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**EXHIBITS INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                       |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                      |
|        |       |                                                                                                                                                                             |
| 31.1        |       | Sarbanes-Oxley Section 302(a)  Certification.                                                                                                                                    |
|        |       |                                                                                                                                                                             |
| 31.2        |       | Sarbanes-Oxley Section 302(a)  Certification.                                                                                                                                    |
|        |       |                                                                                                                                                                             |
| 32.1        |       | Certification of Chief Executive Officer  and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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