** **

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                                                                                                                              | ** ** | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                    |
| **For the period  ended: ****July 3, 2004**                                                                                                                                                                                                                                                                                        |
| **or**                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                    |
| **o**                                                                                                                                                                                                                                                                                                                                   | ** ** | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                                                                                                    |
| **For the period from                           to                         ** |
| ** **                                                                                                                                                                                                                                                                                                                              |
| **Commission File  Number:  1-14725**                                                                                                                                                                                                                                                                                              |

 

**MONACO COACH CORPORATION**

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

 

**91320 IndustrialWayCoburg, Oregon 97408**

(Address of principal executiveoffices)

 

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

 

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

 

YES  ý                 NO  o

 

The number of shares outstanding of commonstock, $.01 par value, as of July 3, 2004: 29,388,432

 

** **

----

----

 

**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**July 3, 2004**

 

**INDEX**

 
| **PART I - FINANCIAL  INFORMATION**                                                                                        |       |
|----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                       |       |
| **Item 1.  Financial Statements.**                                                                                    | ** ** |
|                                                                                                                       |       |
| Condensed  Consolidated Balance Sheets as of January 3, 2004 and July 3, 2004.                                             |       |
|                                                                                                                       |       |
| Condensed  Consolidated Statements of Income for the quarters and six-month periods  ended June 28, 2003 and July 3, 2004. |       |
|                                                                                                                       |       |
| Condensed Consolidated Statements  of Cash Flows for the six-month periods ended June 28, 2003 and July 3, 2004.           |       |
|                                                                                                                       |       |
| 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 5.   Submission of Matters to a Vote of Security Holders.**                                                    |       |
|                                                                                                                       |       |
| **Item 6.   Exhibits and Reports on Form 8-K.**                                                                       | ** ** |
|                                                                                                                       |       |
| **Signatures.**                                                                                                            |       |
|                                                                                                                       |       |
| **Certifications under Section  302(a) and 906 of the Sarbanes-Oxley Act of 2002**                                         |       |

 

2

----

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

3

----

----

 

**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                   | ** ** | **January 3,  2004** | ** ** | **July 3,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| **ASSETS**                                                                                                                   | ** ** | ** **           | ** ** | ** **        | ** ** |
| Current assets:                                                                                                              |       |                 |       |              |       |
| Cash                                                                                                                         |       | $                    | 13,398     |              | $          | 11,985 |   |
| Trade receivables, net                                                                                                       |       | 89,170               |       | 115,012           |       |
| Inventories                                                                                                                  |       | 127,746              |       | 158,631           |       |
| Resort lot inventory                                                                                                         |       | 13,978               |       | 8,136             |       |
| Prepaid expenses                                                                                                             |       | 3,029                |       | 6,877             |       |
| Deferred income taxes                                                                                                        |       | 33,836               |       | 33,555            |       |
| Total current assets                                                                                                         |       | 281,157              |       | 334,196           |       |
|                                                                                                                         |       |                 |       |              |       |
| Property, plant, and equipment, net                                                                                          |       | 141,662              |       | 140,459           |       |
| Debt issuance costs net of accumulated  amortization of $815, and $1,073, respectively                                       |       | 596                  |       | 338               |       |
| Goodwill                                                                                                                     |       | 55,254               |       | 55,254            |       |
| Total assets                                                                                                                 |       | $                    | 478,669    |              | $          | 530,247 |   |
|                                                                                                                         |       |                 |       |              |       |
| **LIABILITIES**                                                                                                              |       |                 |       |              |       |
| Current liabilities:                                                                                                         |       |                 |       |              |       |
| Current portion of long-term note payable                                                                                    |       | $                    | 15,000     |              | $          | 15,000 |   |
| Accounts payable                                                                                                             |       | 64,792               |       | 92,763            |       |
| Product liability reserve                                                                                                    |       | 20,723               |       | 20,806            |       |
| Product warranty reserve                                                                                                     |       | 29,643               |       | 33,225            |       |
| Income taxes payable                                                                                                         |       | 3,395                |       | 3,369             |       |
| Accrued expenses and other liabilities                                                                                       |       | 26,373               |       | 31,495            |       |
| Total current liabilities                                                                                                    |       | 159,926              |       | 196,658           |       |
|                                                                                                                         |       |                 |       |              |       |
| Long-term note payable                                                                                                       |       | 15,000               |       | 7,500             |       |
| Deferred income taxes                                                                                                        |       | 17,495               |       | 17,488            |       |
|                                                                                                                         |       | 192,421              |       | 221,646           |       |
|                                                                                                                         |       |                 |       |              |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                |       |                 |       |              |       |
| Preferred stock, $.01 par, 1,934,783 shares  authorized, no shares outstanding                                               |       |                 |       |              |       |
| Common stock, $.01 par value; 50,000,000  shares authorized, 29,246,143 and 29,388,432 issued and outstanding,  respectively |       | 292                  |       | 294               |       |
| Additional paid-in capital                                                                                                   |       | 54,919               |       | 56,333            |       |
| Retained earnings                                                                                                            |       | 231,037              |       | 251,974           |       |
| Total stockholders’ equity                                                                                              |       | 286,248              |       | 308,601           |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                    | 478,669    |              | $          | 530,247 |   |

 

See accompanying notes.

 

4

----

----

 

**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                     | ** ** | **Quarter Ended**  | ** ** | **Six-Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 28,  2003** | ** ** | **July 3,  2004**    | ** ** | **June 28,  2003** | ** ** | **July 3,  2004** | ** ** |
|                                           |       |               |       |                 |       |   |   |   |   |
| Net sales                                      |       | $                  | 268,456    |                 | $          | 357,774 |   | $ | 542,217 |   | $ | 712,750 |   |
| Cost of sales                                  |       | 241,108            |       | 312,125              |       | 481,076 |   | 622,618 |   |
| Gross profit                                   |       | 27,348             |       | 45,649               |       | 61,141 |   | 90,132 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Selling, general, and administrative  expenses |       | 25,744             |       | 26,721               |       | 51,393 |   | 51,521 |   |
| Operating income                               |       | 1,604              |       | 18,928               |       | 9,748 |   | 38,611 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Other income, net                              |       | 137                |       | 127                  |       | 156 |   | 213 |   |
| Interest expense                               |       | (779               | )          | (372                 | )          | (1,791 | ) | (777 | ) |
| Income before income taxes                     |       | 962                |       | 18,683               |       | 8,113 |   | 38,047 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Provision for income taxes                     |       | 380                |       | 6,735                |       | 3,205 |   | 14,176 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Net income                                     |       | $                  | 582        |                 | $          | 11,948 |   | $ | 4,908 |   | $ | 23,871 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Earnings per common share:                     |       |               |       |                 |       |   |   |   |   |
| Basic                                          |       | $                  | .02        |                 | $          | .41 |   | $ | .17 |   | $ | .81 |   |
| Diluted                                        |       | $                  | .02        |                 | $          | .40 |   | $ | .17 |   | $ | .80 |   |
|                                           |       |               |       |                 |       |   |   |   |   |
| Weighted average common shares outstanding:    |       |               |       |                 |       |   |   |   |   |
| Basic                                          |       | 29,027,603         |       | 29,357,514           |       | 28,992,255 |   | 29,326,855 |   |
| Diluted                                        |       | 29,469,777         |       | 30,013,014           |       | 29,405,286 |   | 29,990,241 |   |

 

See accompanying notes.

 

5

----

----

 

**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited: dollars in thousands)**

 
| ** **                                                                                | ** ** | **Six-Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **June 28,  2003**   | ** ** | **July 3,  2004** | ** ** |
|                                                                                      |       |                 |       |   |   |
| **Increase (Decrease) in Cash:**                                                          |       |                 |       |   |   |
|                                                                                      |       |                 |       |   |   |
| Cash flows from operating activities:                                                     |       |                 |       |   |   |
| Net income                                                                                |       | $                    | 4,908      |   | $ | 23,871 |   |
| Adjustments to reconcile net income to net  cash (used) provided by operating activities: |       |                 |       |   |   |
| Loss on sale of assets                                                                    |       | 287                  |       | 43 |   |
| Depreciation and amortization                                                             |       | 4,677                |       | 5,388 |   |
| Deferred income taxes                                                                     |       | 2,158                |       | 274 |   |
| Changes in working capital accounts:                                                      |       |                 |       |   |   |
| Trade receivables, net                                                                    |       | 11,857               |       | (25,842 | ) |
| Inventories                                                                               |       | 14,433               |       | (30,885 | ) |
| Resort lot inventory                                                                      |       | 4,261                |       | 5,842 |   |
| Prepaid expenses                                                                          |       | 80                   |       | (3,853 | ) |
| Accounts payable                                                                          |       | (10,659              | )          | 27,971 |   |
| Product liability reserve                                                                 |       | 169                  |       | 83 |   |
| Product warranty reserve                                                                  |       | (2,416               | )          | 3,582 |   |
| Income taxes payable                                                                      |       | (4,536               | )          | (26 | ) |
| Accrued expenses and other liabilities                                                    |       | (1,088               | )          | 5,122 |   |
| Net cash provided by operating activities                                                 |       | 24,131               |       | 11,570 |   |
| Cash flows from investing activities:                                                     |       |                 |       |   |   |
| Additions to property, plant, and equipment                                               |       | (14,272              | )          | (4,110 | ) |
| Proceeds from sale of assets                                                              |       | 1,789                |       | 145 |   |
| Net cash used in investing activities                                                     |       | (12,483              | )          | (3,965 | ) |
| Cash flows from financing activities:                                                     |       |                 |       |   |   |
| Book overdraft                                                                            |       | 5,968                |       | 0 |   |
| Payments on lines of credit, net                                                          |       | (9,628               | )          | 0 |   |
| Payments on long-term notes payable                                                       |       | (8,666               | )          | (7,500 | ) |
| Debt issuance costs                                                                       |       | (301                 | )          | 0 |   |
| Dividends paid                                                                            |       | 0                    |       | (2,934 | ) |
| Issuance of common stock                                                                  |       | 979                  |       | 1,416 |   |
| Net cash used by financing activities                                                     |       | (11,648              | )          | (9,018 | ) |
| Net change in cash                                                                        |       | 0                    |       | (1,413 | ) |
| Cash at beginning of period                                                               |       | 0                    |       | 13,398 |   |
| Cash at end of period                                                                     |       | $                    | 0          |   | $ | 11,985 |   |

 

See accompanying notes.

 

6

----

----

 

**MONACO COACH CORPORATION**

**NOTES****TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Theinterim condensed consolidated financial statements have been prepared byMonaco Coach Corporation (the “Company”) without audit.  In the opinion of management, theaccompanying unaudited financial statements contain all adjustments necessary,consisting only of normal recurring adjustments, to present fairly thefinancial position of the Company as of January 3, 2004 and July 3, 2004, andthe results of its operations for the quarters and six- month periods endedJune 28, 2003 and July 3, 2004, and cash flows of the Company for the six-monthperiods ended June 28, 2003 and July 3, 2004. The condensed consolidated financial statements include the accounts ofthe Company and its wholly-owned subsidiaries, and all significant intercompanyaccounts and transactions have been eliminated in consolidation.  The balance sheet data as of January 3, 2004was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders.  These interim condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and notes thereto appearing in the Company’s Annual Report toStockholders for the year ended January 3, 2004.

 

**2.****    ****Inventories**

 

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

 
| ** **      | ** ** | **January 3,  2004** | ** ** | **July 3,  2004** | ** ** |
|-----------------|------------|----------------------|------------|-------------------|------------|
| ** **      | ** ** | **(in thousands)**   | ** ** |
| Raw materials   |       | $                    | 60,946     |              | $          | 69,978 |   |
| Work-in-process |       | 60,604               |       | 67,666            |       |
| Finished units  |       | 6,196                |       | 20,987            |       |
|            |       | $                    | 127,746    |              | $          | 158,631 |   |

 

**3.****    ****Line of Credit**

 

TheCompany’s line of credit facility consists of a revolving line of credit of upto $95.0 million (the “Revolving Loan”). At the election of the Company, the Revolving Loan bears interest atvariable rates based on the Prime Rate or LIBOR.  At July 3, 2004, the interest rate was4.25%.  The Revolving Loan is due andpayable in full on June 30, 2005, and requires monthly interest payments.  The balance outstanding under the RevolvingLoan at July 3, 2004 was zero.  Therevolving line of credit is collateralized by all the assets of theCompany.  The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. As of July 3, 2004, the Company was in compliance with these covenants.

 

7

----

----

 

**4.****    ****Long-term Notes Payable**

 

TheCompany has long-term notes payable of $22.5 million outstanding at July 3,2004.  The term notes bear interest atvarying rates that fluctuate based on the Prime rate or LIBOR, and aredetermined based on the Company’s leverage ratio.  The term notes require monthly interestpayments and quarterly principal payments and are collateralized by all theassets of the Company.  Additionalprepayments for portions of the term notes are required in the event theCompany sells substantially all or any motor coach resort locations.  The term notes are due and payable in full onOctober 3, 2005.

 

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

 

| **Year**   | ** ** | **Amount of  Payment  Due** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **(in thousands)**          | ** ** |
| 2004       |       | $                           | 7,500      |   |
| 2005       |       | 15,000                      |       |
|       |       | $                           | 22,500     |   |

 

**5.****    ****Earnings Per Common Share**

 

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

 
| ** **                                        | ** ** | **Quarter Ended**  | ** ** | **Six-Months Ended** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **June 28,  2003** | ** ** | **July 3,  2004**    | ** ** | **June 28,  2003** | ** ** | **July 3,  2004** | ** ** |
| **Basic**                                         |       |               |       |                 |       |   |   |   |   |
| Issued and outstanding shares (weighted  average) |       | 29,027,603         |       | 29,357,514           |       | 28,992,255 |   | 29,326,855 |   |
|                                              |       |               |       |                 |       |   |   |   |   |
| **Effect of Dilutive Securities**                 |       |               |       |                 |       |   |   |   |   |
| Stock Options                                     |       | 442,174            |       | 655,500              |       | 413,031 |   | 663,386 |   |
| **Diluted**                                       |       | 29,469,777         |       | 30,013,014           |       | 29,405,286 |   | 29,990,241 |   |

 

8

----

----

 

**6.****    ****Stock Option Plans**

 

AtJuly 3, 2004, the Company had three stock-based employee compensationplans.  The Company accounts for thoseplans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123, Accounting forStock-based Compensation, to stock-based employee compensation.

 
| ** **                                                                                                                                    | ** ** | **Quarter Ended**  | ** ** | **Six-Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 28,  2003** | ** ** | **July 3,  2004**    | ** ** | **June 28,  2003** | ** ** | **July 3,  2004** | ** ** |
|                                                                                                                                          |       |               |       |                 |       |   |   |   |   |
| Net income - as reported                                                                                                                      |       | $                  | 582        |                 | $          | 11,948 |   | $ | 4,908 |   | $ | 23,871 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 172                |       | 212                  |       | 338 |   | 421 |   |
|                                                                                                                                          |       | $                  | 410        |                 | $          | 11,736 |   | $ | 4,570 |   | $ | 23,450 |   |
|                                                                                                                                          |       |               |       |                 |       |   |   |   |   |
| Earnings per share:                                                                                                                           |       |               |       |                 |       |   |   |   |   |
| Basic - as reported                                                                                                                           |       | $                  | 0.02       |                 | $          | 0.41 |   | $ | 0.17 |   | $ | 0.81 |   |
| Basic - pro forma                                                                                                                             |       | $                  | 0.01       |                 | $          | 0.40 |   | $ | 0.16 |   | $ | 0.80 |   |
|                                                                                                                                          |       |               |       |                 |       |   |   |   |   |
| Diluted - as reported                                                                                                                         |       | $                  | 0.02       |                 | $          | 0.40 |   | $ | 0.17 |   | $ | 0.80 |   |
| Diluted - pro forma                                                                                                                           |       | $                  | 0.01       |                 | $          | 0.39 |   | $ | 0.16 |   | $ | 0.78 |   |

 

**7.****    ****Commitments andContingencies**

 

Repurchase Agreements

 

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in the vehicles.  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.  Theseagreements provide that, for up to 18 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event of a default by adealer to its lender.

 

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

 

9

----

----

 

Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at July 3, 2004 is $539.6 million, with approximately 8.0%concentrated with one dealer.  If theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, its business, operating results, and financial conditioncould be adversely affected.  The Companyhas included the disclosure requirements of FASB Interpretation No. 45 (FIN45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” in its financialstatements, and has determined that the recognition provisions of FIN 45 applyto certain guarantees routinely made by the Company including contingentrepurchase obligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $750,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers.  This estimated liability, is based on the Company’sexperience of losses associated with the repurchase and resale of units inprior years.  If the Company wereobligated to repurchase a significant number of units under any repurchaseagreement, its business, operating results, and financial condition could beadversely affected.

 

Product Liability

 

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

 

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

 

Litigation

 

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

 

Aircraft Lease Commitment

 

TheCompany has an aircraft under an operating lease, with annual renewals for upto three years.  Currently the Companybegan its first year of renewal in February 2004, with two optional yearsremaining.  If at the end of the initiallease period the Company elects to return the aircraft, the Company has guaranteedup to $16 million in the event the lessor’s net sales proceeds are less than$18.5 million.

 

10

----

----

 

**2.****    ****Management****’s Discussion and Analysis of Financial Condition andResults of Operations**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended.  These statements include, but are not limitedto, those below that have been marked with an asterisk (*).  In addition, statements containing words suchas “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”“seeks,” and variations of such words and similar expressions are intended to identifyforward-looking statements.  Suchforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance or achievements todiffer materially from those expressed or implied by such forward-lookingstatements, including those set forth below under the caption “Factors That MayAffect Future Operating Results” and elsewhere in this Quarterly Report on Form10-Q.  The reader should carefully consider,together with the other matters referred to herein, the factors set forth underthe caption “Factors That May Affect Future Operating Results.”  We caution the reader, however, that thesefactors may not be exhaustive.

 

**GENERAL**

 

MonacoCoach Corporation is a leading manufacturer of premium Class A and Class Cmotor coaches and towable recreational vehicles (“towables”).  Our product line currently consists of abroad line of motor coaches, fifth wheel trailers and travel trailers under the“Monaco,” “Holiday Rambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie”brand names.  Our products, which aretypically priced at the high end of their respective product categories, rangein suggested retail price from $70,000 to $1.4 million for motor coaches andfrom $25,000 to $65,000 for towables.

 

**RESULTS OF OPERATIONS**

 

Thefollowing table illustrates the results of operations for the quarters endedJune 28, 2003, and July 3, 2004.  Alldollars represented are in thousands.

 
| ** **                                    | ** ** | **2003** | ** ** | **%  of Sales** | ** ** | **2004** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|----------|------------|-----------------|------------|----------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                     |       | $        | 268,456    |            | 100.0      | %        | $          | 357,774         |       | 100.0         | %          | $             | 89,318     |   | 33.3 | % |
| Cost of Sales                                 |       | 241,108  |       | 89.8            | %          | 312,125  |       | 87.2            | %          | 71,017        |       | 29.4          | %          |
| Gross Profit                                  |       | 27,348   |       | 10.2            | %          | 45,649   |       | 12.8            | %          | 18,301        |       | 66.9          | %          |
| Selling, general and administrative  expenses |       | 25,744   |       | 9.6             | %          | 26,721   |       | 7.5             | %          | -977          |       | -3.8          | %          |
|                                          |       |     |       |            |       |     |       |            |       |          |       |          |       |
| Operating income                              |       | $        | 1,604      |            | 0.6        | %        | $          | 18,928          |       | 5.3           | %          | $             | 17,324     |   | 1080.04 | % |

 

*Performance in the second quarter of 2004*

 

Weare pleased with the record revenues generated for the second quarter of2004.  Profits for the second quarter of2004 were significantly improved over that of the similar quarter of 2003.  Reduced levels of sales discounting, improvedlabor and warranty expense, as well as improvements in indirect cost of sales,helped to fuel an increase in gross profit of $18 million.  While gross margins have improved, therecontinues to be some pressure from commodity prices in the steel, lumber,petroleum based products, and other related industries.  In response to these rising costs, we passedalong proportional price increases in our products during the first and secondquarters of 2004.  Currently the rate ofprice increases in the commodities markets has slowed down.  Accordingly, we do not anticipate furthercommodities related price increases in the near future in our ownproduct.*  Nevertheless, we will continueto monitor these, as well as other costs, and take appropriate actions to tryand minimize the impact of additional commodity price increases as they presentthemselves.*

 

Inaddition to improved gross margins, we were also successful in reducingselling, general, and administrative (S,G&A) expenses.  The decrease in S,G&A expenses was due toa lower level of retail sales promotions, as

 

11

----

----

 

well as lower show costscompared to the same period last year. These improvements were partially offset by slightly higher litigationsettlement expense as a percentage of sales which were a result of new productliability cases filed against the Company during the quarter.  We expect to see settlement expense to remainconsistent with the second quarter of 2004 for the remainder of the year.*  The reduction in retail sales promotions wasdue to improved demand for our product in the market place, while the showexpense reduction was a result of a continuing effort to streamline showparticipation.

 

*Quarter ended July 3, 2004 Compared to Quarter ended June28, 2003*

 

Secondquarter net sales increased 33.3% to $357.8 million compared to $268.5 millionfor the same period last year. Gross diesel motorized revenues were up 27.4%,gas motorized were up 28.3% and towables were up 90.5%.  Diesel products accounted for 75.2% of oursecond quarter revenues while gas products were 14.8%, and towables were10.0%.  The overall increase in revenuesreflects improving market conditions, continued low interest rates, andincreased interest in the recreational vehicle industry.  Our overall unit sales were up 48.1% in thesecond quarter of 2004 to 3,347 units, with diesel motorized unit sales up24.1% to 1,456 units, gas motorized unit sales up 25.0% to 669 units, andtowable unit sales up 121.4% to 1,222 units. Our total average unit selling price decreased to $106,000 from $119,000in the same period last year, reflecting our strong gains in the sale of lowerpriced gas motor homes and towable products.

 

Grossprofit for the second quarter of 2004 increased to $45.6 million, up from $27.3million in 2003, and gross margin increased from 10.2% in the second quarter of2003 to 12.8% in the second quarter of 2004. The increase in gross margin over the prior year was due to acombination of factors, including a reduction in discounts off of wholesaleinvoices of approximately 0.10% of sales, as well as increases in wholesale sellingprices of the Company’s products. Other direct costs, such as labor, withrelated benefits, and warranty improved by 1.3% of sales, and indirect costsrelated to factory overhead improved by 1.0% of sales.  In addition, the Company also experienced improvementsin other direct cost areas that respectively provided the remaining incrementalmargin improvements.  These benefits wereoffset by a higher material usage rate of .2% due to increases in commodityprices, as well as shifts in product mix. Our overall gross margin may decline in future periods if the mix ofproducts continues to shift from higher to lower gross margin units or if weencounter unexpected manufacturing difficulties or competitive pressures.*

 

Selling,general, and administrative expenses (S,G&A) increased by $977,000 to $26.7million in the second quarter of 2004 and decreased as a percentage of salesfrom 9.6% in 2003 to 7.5% in 2004. S,G&A expenses in the second quarter of 2004 included decreases inretail promotions of 2.0% as a percentage of sales, and a decrease in showexpense of 0.4% as a percentage of sales. These savings were partially offset by higher litigation settlementexpense of 0.2% of sales.  OtherS,G&A expenses increased by 0.1%.

 

Operatingincome was $18.9 million, or 5.3% of sales, in the second quarter of 2004compared to $1.6 million, or 0.6% of sales, in the similar 2003 period.  The increase in operating margins reflectsimproved gross margin as well as reduced S,G&A as a percentage of sales.

 

Netinterest expense was $372,000 in the second quarter of 2004 versus $779,000 inthe comparable 2003 period, reflecting a lower level of borrowing during thesecond quarter of 2004.

 

Wereported a provision for income taxes of $6.7 million, or an effective tax rateof 36.1%, in the second quarter of 2004, compared to $380,000, or an effectivetax rate of 39.5%, for the comparable 2003 period. The decrease in theeffective tax rate was due primarily to a reduction in the valuation allowancepreviously provided for certain net operating loss carryforward benefits thatwere not expected to be realized. Due to changes in federal income tax rules,the Company determined in second quarter 2004 that it would be able to fullyrealize the future tax benefits from these net operating loss carryforwards andthat the related valuation allowance was no longer necessary. Furtherreductions in the effective tax rate resulted from increases in the Company’sextraterritorial income exclusion benefits on foreign sales and a change in stateincome tax law. The Company expects the current year’s effective tax rate to be38.3% through the remainder of 2004.*

 

Netincome for the second quarter of 2004 was $11.9 million compared to $582,000 in2003 due to an increase in sales combined with a higher operating margin, adecrease in interest expense, and an improvement in the effective tax rate.

 

12

----

----

 

*Six Months ended July 3, 2004 Compared to Six Months endedJune 28, 2003*

 

Netsales increased 31.3% to $712.8 million compared to $542.2 million for the sameperiod last year.  Gross diesel motorizedrevenues were up 27.7%, gas motorized revenues were up 39.5%, and towables wereup 60.1%. Diesel products accounted for 76.4% of our first six months’ revenueswhile gas products were 14.3%, and towables were 9.3%.  The overall increase in revenues was drivenby improving market conditions, continued low interest rates, and continuedinterest in the recreational vehicle industry. Our overall unit sales were up 40.1% in the first six months of 2004compared to the similar period in 2003 with diesel motorized unit sales up23.6% to 2,962 units, gas motorized unit sales up 28.7% to 1,126 units, andtowables units sales up 81.5% to 2,216 . Our average unit selling price decreased in the first six months of 2004compared to the similar 2003 period to $109,000 from $116,000, reflecting ourcontinued emphasis on increasing the sale of lower priced gas motor homes andtowable products.

 

Grossprofit for the six-month period ended July 3, 2004 increased to $90.1 millionfrom $61.1 million in 2003, and gross margin increased to 12.7% in 2004 from11.3% in 2003. The increase in gross margin over the prior year was due to acombination of factors, including a reduction in discounts off of wholesaleinvoices of approximately 0.1% of sales, as well as increases in wholesaleselling prices of the Company’s products. In addition, other direct costs, such as labor, with related benefits,and warranty improved by 1.2% of sales, and indirect cost of sales related tofactory overhead improved by 0.8% of sales. These benefits were offset by a higher material usage rate of 0.6% dueto increases in commodity prices, as well as shifts in product mix. Additionalmargin pressure was experienced due to higher delivery costs of 0.2% ofsales.  Our overall gross margin maydecline in future periods if the mix of products continues to shift from higherto lower gross margin units or if we encounter unexpected manufacturingdifficulties or competitive pressures.*

 

S,G&Aexpenses increased by $128,000 to $51.5 million in the first six months of 2004and decreased as a percentage of sales from 9.5% in 2003 to 7.2% in 2004.  S,G&A in the first six months of 2004included decreases in retail promotions of 2.3% of sales, as well as decreasesin litigation settlement of 0.6% of sales. These decreases were offset by increased wages, salaries, and benefitsof 0.6% of sales related to higher performance based compensation.

 

Operatingincome was $38.6 million, or 5.4% of sales, in the six-month period ended July3, 2004 compared to $9.7 million, or 1.8% of sales, in the similar 2003period.  The increase in operatingmargins reflects improved gross margins as well as reduced S,G&A as apercentage of sales.

 

Netinterest expense was $777,000 in the first six months of 2004 versus $1.8million in the comparable 2003 period, reflecting a lower level of borrowingduring the first half of 2004.

 

Wereported a provision for income taxes of $14.2 million, or an effective taxrate of 37.3%, for the first six months of 2004, compared to $3.2 million, oran effective tax rate of 39.5%, for the comparable 2003 period. The decrease inthe effective tax rate was due primarily to a reduction in the valuationallowance previously provided for certain net operating loss carryforwardbenefits that were not expected to be realized. Due to changes in federalincome tax rules, the Company determined in second quarter 2004 that it wouldbe able to fully realize the future tax benefits from these net operating losscarryforwards and that the related valuation allowance was no longer necessary.Further reductions in the effective tax rate resulted from increases in theCompany’s extraterritorial income exclusion benefits on foreign sales and achange in state income tax law. The Company expects the current year’seffective tax rate to be 38.3% through the remainder of 2004.*

 

Netincome for the first half of 2004 was $23.9 million compared to $4.9 million in2003 due to the increase in sales combined with higher gross margins.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourprimary sources of liquidity are internally generated cash from operations andavailable borrowings under our credit facilities.  During the first six months of 2004, wegenerated cash of $11.6 million from operating activities.  We generated $29.3 million from net incomeand non-cash expenses such as depreciation and amortization. Other sources ofcash included a $28.0 million increase in trade payables, $5.1 million increasein 

 

13

----

----

 

accrued liabilities, a $5.8million decrease in resort lot inventory, and a $3.6 million increase inwarranty reserve.  Trade payablesincreased primarily due to increased production levels as well as timingassociated with the regularly scheduled shut down of the plants that occurs atquarter end.  Other liabilities increaseddue to increases in various reserves related to employee benefits and performancebased compensation.  Reduced resort lotinventories reflect strong lot sales for the six month period, and the increasein warranty reserve is the result of the strong increase in recreationalvehicles sold .  These sources of cashwere mostly offset by a $25.8 million increase in receivables, a $30.9 millionincrease in inventories, and a $3.9 million increase in prepaid expenses.  Trade receivables increased due to lowershipment levels occurring at the end of the fourth quarter 2003, which were aresult of scheduled plant shut downs, versus shipment levels at the end of thesecond quarter 2004.  Inventory increasesare the result of increased production, as well as the below normal finishedgood levels that existed at the end of 2003. Prepaid expenses were up due to the renewal of certain liabilityinsurance policies that expired during the six month period.

 

Wehave credit facilities consisting of a revolving line of credit of up to $95.0million of which no borrowings were outstanding at July 3, 2004 (the “RevolvingLoan”) and term loans with balances of $22.5 million at July 3, 2004 (the “TermLoans”).  At our election, the RevolvingLoan and Term Loans bear interest at varying rates that fluctuate based on thePrime rate or LIBOR, and are determined based on our leverage ratio.  We also pay interest monthly on the unusedavailable portion of the Revolving Loan at varying rates, determined by ourleverage ratio.  The Revolving loan isdue and payable in full on June 30, 2005, and requires monthly interestpayments.  Additional prepayments forportions of the term notes are required in the event we sell substantially all,or any, motor coach resort location.  TheTerm Loans require monthly interest payments and principal payments that total$3.75 million per quarter.  The RevolvingLoan and Term Loans are collateralized by all of our assets and include variousrestrictions and financial covenants.  Weutilize “zero balance” bank disbursement accounts in which an advance on theline of credit is automatically made for checks clearing each day.  Since the balance of the disbursement accountat the bank returns to zero at the end of each day, our outstanding checks arereflected as a liability.  Theoutstanding check liability is combined with our positive cash balance accountsto reflect a net cash balance for financial reporting.

 

Ourprincipal working capital requirements are for purchases of inventory andfinancing of trade receivables.  Many ofour dealers finance product purchases under wholesale floor plan arrangementswith third parties as described below. At July 3, 2004, we had working capital of approximately $137.5 million,an increase of $16.3 million from working capital of $121.2 million at January3, 2004.  We have been using cash flowfrom operations to finance our capital expenditures.

 

Webelieve that cash flow from operations and funds available under our creditfacilities will be sufficient to meet our liquidity requirements for the next12 months.*  Our capital expenditureswere $4.1 million in the first six months of 2004, which included costs relatedto installation of certain automated machinery, enhancements to the Company’sinformation system infrastructure, as well as various other routine capitalexpenditures.  We anticipate that capitalexpenditures for all of 2004 will be approximately $12 to $15 million, whichincludes expenditures to purchase additional machinery and equipment in bothour Oregon and Indiana facilities, as well as upgrades to existing informationsystems infrastructures.*  We may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if we significantly increase the level of workingcapital assets such as inventory and accounts receivable.  We may also from time to time seek to acquirebusinesses that would complement our current business, and any such acquisitioncould require additional financing. There can be no assurance that additional financing will be available ifrequired or on terms deemed favorable by us.

 

Asis typical in the recreational vehicle industry, many of our retail dealersutilize wholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of our products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  We have agreements with severalinstitutional lenders under which we currently have repurchaseobligations.  Our contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units.  Ourobligations under these repurchase agreements vary from period to period, up to18 months.  At July 3, 2004,approximately $539.6 million of products sold by us to independent dealers weresubject to potential repurchase under existing floor plan financing agreementswith approximately 8.0% concentrated with one dealer.  Historically, we have been successful inmitigating losses associated with repurchase obligations.  During the first six months of 2004, thelosses associated with the exercise of repurchase agreements were less than $100,000.  If we were obligated to repurchase asignificant number of units under any repurchase agreement, our business,operating results, and financial condition could be adversely affected.

 

14

----

----

 

Aspart of the normal course of business, we incur certain contractual obligationsand commitments which will require future cash payments. The following tablessummarize the significant obligations and commitments.

 

PAYMENTSDUE BY PERIOD

 
| **Contractual obligations (in  thousands)** | ** ** | **1 year  or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5  years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------|------------|-------------------|------------|----------------|------------|-----------|------------|
| Long-term Debt (1)                          |       | $                   | 15,000     |             | $          | 7,500             |       | $              | 0          |      | $          | 0 |   | $ | 22,500 |   |
| Operating Leases (2)                        |       | 1,469               |       | 2,479            |       | 1,957             |       | 3,599          |       | 9,504     |       |
| Total Contractual Cash Obligations          |       | $                   | 16,469     |             | $          | 9,979             |       | $              | 1,957      |      | $          | 3,599 |   | $ | 32,004 |   |

 

AMOUNTOF COMMITMENT EXPIRATION BY PERIOD

 
| **Other commitments (in  thousands)** | ** ** | **1 year  or less** | ** ** | **1 to 3  years** | ** ** | **4 to 5  years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|----------------|------------|-----------|------------|
| Lines of Credit (3)                   |       | $                   | 0          |              | $          | 95,000            |       | $              | 0          |      | $          | 0 |   | $ | 95,000 |   |
| Guarantees                            |       |                |       | 16,000            | (2)        | 0                 |       | 0              |       | 16,000    |       |
| Repurchase Obligations (4)            |       | 0                   |       | 539,600           |       | 0                 |       | 0              |       | 539,600   |       |
| Total Commitments                     |       | $                   | 0          |              | $          | 650,600           |       | $              | 0          |      | $          | 0 |   | $ | 650,600 |   |

 

----

(1)  SeeNote 4 to the financials.

(2) Various leases including manufacturing facilities, aircraft, andmachinery and equipment.  See Note 7 tothe financials.

(3)  SeeNote 3 to the financials.  The amountlisted represents available borrowings on the line of credit at July 3, 2004.

(4) Reflects obligations under manufacturer repurchase commitments.  See Note 7 to the financials.

 

**INFLATION**

 

Inthe first half of 2004, we experienced significant increases in the prices ofcertain commodity items that we use in the manufacturing of our products.  These include, but are not limited to, steel,copper, aluminum, petroleum, and wood. While these raw materials are not necessarily indicative of widespreadinflationary trends, they have had a material impact on our production costs,and accordingly, we have passed along price increases to offset these increasedcosts.  However, even though we have beenable to pass along past price increases, there is no guarantee that we will beable to pass along future increases. While we have seen some of these costs begin to level off, potentialfuture increases in raw material costs could have a material adverse impact onour business going forward.

 

**CRITICAL ACCOUNTING POLICIES**

 

Thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  We believe the following critical accountingpolicies and related judgments and estimates affect the preparation of ourconsolidated financial statements.

 

WARRANTYCOSTS Estimated warranty costs are provided for at the time of sale of productswith warranties covering the products for up to one year from the date ofretail sale (five years for the front and sidewall frame structure, and threeyears on the Roadmaster chassis).  Theseestimates are based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate by management.

 

PRODUCTLIABILITY  We provide an estimate foraccrued product liability based on current pending cases, as well as for thosecases which are incurred but not reported. This estimate is developed by legal counsel based on professional judgment,as well as historical experience.

 

15

----

----

 

IMPAIRMENTOF GOODWILL  We assess the potentialimpairment of goodwill in accordance with Financial Accounting Standards Board(FASB) Statement No. 142.  This initialtest involves management comparing our market capitalization, to the carryingamount, including goodwill, of our net book value, to determine if goodwill hasbeen impaired.

 

INVENTORYRESERVES  We write down our 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.

 

INCOMETAXES  In conjunction with preparing ourconsolidated financial statements, we must estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating actualcurrent tax expense together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin the consolidated balance sheets. We must then assess the likelihood that thedeferred tax assets will be recovered from future taxable income, and to theextent management believes that recovery is not likely, a valuation allowancemust be established. Significant management judgment is required in determiningour provision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets.

 

**FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WEMAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETYOF REASONS  Our net sales, gross margin,and operating results may fluctuate significantly from period to period due toa number of factors, many of which are not readily predictable.  These factors include the following:

 

•      The margins associated with themix of products we sell in any particular period.

 

•      Our ability to utilize and expand our manufacturing resourcesefficiently.

 

•      Shortages of materials used in our products.

 

•      A determination by us that goodwill or other intangible assets areimpaired and have to be written down to their fair values, resulting in acharge to our results of operations.

 

•      Our ability to introduce new models that achieve consumer acceptance.

 

•      The introduction, marketing and sale of competing products by others,including significant discounting offered by our competitors.

 

•      The addition or loss of our dealers.

 

•      The timing of trade shows and rallies, which we use to market and sellour products.

 

•      The impact of inflation on the cost of our raw materials.

 

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

 

Ouroverall gross margin may decline in future periods to the extent that weincrease the percentage of sales of lower gross margin towable products or ifthe mix of motor coaches we sell shifts to lower gross margin units.  In addition, a relatively small variation inthe number of recreational vehicles we sell in any quarter can have asignificant impact on total sales and operating results for that quarter.

 

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

 

16

----

----

 

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

 

THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY  The recreational vehicleindustry has been characterized by cycles of growth and contraction in consumerdemand, reflecting prevailing economic, demographic, and political conditionsthat affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry rebounded up toapproximately 321,000 units.  Ourbusiness is subject to the cyclical nature of this industry.  Some of the factors that contribute to thiscyclicality include fuel availability and costs, interest rate levels, the levelof discretionary spending, and availability of credit and overall consumerconfidence.  The recent decline inconsumer confidence and slowing of the overall economy has adversely affectedthe recreational vehicle market.  Anextended continuation of these conditions would materially affect our business,results of operations, and financial condition.

 

WERELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OFOUR SALES  Although our products wereoffered by 339 dealerships located primarily in the United States and Canada asof July 3, 2004, a significant percentage of our sales are concentrated among arelatively small number of independent dealers. For the quarter ended July 3, 2004, sales to one dealer, Lazy Days RVCenter, accounted for 10.3% of total sales compared to 13.6% of sales in thesame period ended last year.  Forquarters ended June 28, 2003 and July 3, 2004, sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 40.0% and 39.6% of totalsales, respectively.  The loss of asignificant dealer or a substantial decrease in sales by any of these dealerscould have a material impact on our business, results of operations, andfinancial condition.

 

WEMAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THATTHE DEALER DOES NOT REPAY ITS LENDER  Asis common in the recreational vehicle industry, we enter into repurchaseagreements with the financing institutions used by our dealers to finance theirpurchases of our products.  Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer does not repay its lender. Obligations under these agreements vary from period to period, buttotaled approximately $539.6 million as of July 3, 2004, with approximately8.0% concentrated with one dealer.  If wewere obligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could beadversely affected.

 

OURACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK  We sell our product to dealers who arepredominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.  As of July 3,2004, total trade receivables were $115.0 million, with approximately $86.7million, or 75.4% of the outstanding accounts receivable balance concentratedamong floor plan lenders. The remaining $28.3 million of trade receivables wereconcentrated substantially all with one dealer.

 

WEMAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THEPRICE OR A DECREASE IN THE SUPPLY OF FUEL An interruption in the supply, or a significant increase in the price ortax on the sale, of diesel fuel or gasoline on a regional or national basiscould significantly affect our business. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain.

 

WEDEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANTCOMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS  A number of important components for certainof our products are purchased from single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana and Meritor) for all diesel motorcoaches and chassis (Workhorse and Ford) for gas motor coaches.  We have no long-term supply contracts withthese suppliers or their distributors, and we cannot be certain that thesesuppliers will be able to meet our future requirements.  Consequently, we have periodically beenplaced on allocation of these

 

17

----

----

 

andother key components.  The lastsignificant allocation occurred in 1997 from Allison, and in 1999 fromFord.  An extended delay or interruptionin the supply of any components that we obtain from a single supplier or from alimited number of suppliers could adversely affect our business, results ofoperations, and financial condition.

 

OURINDUSTRY IS VERY COMPETITIVE.  WE MUSTCONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for our products is verycompetitive.  We currently compete with anumber of manufacturers of motor coaches, fifth wheel trailers, and traveltrailers.  Some of these companies havegreater financial resources than we have and extensive distribution networks.  These companies, or new competitors in theindustry, may develop products that customers in the industry prefer over ourproducts.

 

Webelieve that the introduction of new products and new features is critical toour success.  Delays in the introductionof new models or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely.  For example,unexpected costs associated with model changes have affected our gross marginin the past.  Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

 

OURPRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BEUNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION ANDRESULTING IN LOSS OF SALES  Our customersrequire demanding specifications for product performance and reliability.  Because our products are complex and oftenuse advanced components, processes and techniques, undetected errors and designflaws may occur.  Product defects resultin higher product service and warranty and replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich will negatively affect our sales and business.

 

OURBUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITYAND WARRANTY CLAIMS  We are subject tolitigation arising in the ordinary course of our business, typically forproduct liability and warranty claims that are common in the recreationalvehicle industry.  While we do notbelieve that the outcome of any pending litigation, net of insurance coverage,will materially adversely affect our business, results of operations, orfinancial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

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

 

WEMAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENTAND MANUFACTURING  Our success depends inpart upon attracting and retaining highly skilled professionals.  A number of our employees are highly skilledengineers and other technical professionals, and our failure to continue toattract and retain such individuals could adversely affect our ability to competein the industry.

 

OURRECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL,AND MANAGEMENT INFORMATION SYSTEMS  Inthe past few years, we have significantly expanded the size and scope of ourbusiness, which has required us to hire additional employees.  Some of these new employees include newmanagement personnel.  In addition, ourcurrent management personnel have assumed additional responsibilities.  The increase in our size over a relativelyshort period of time has put pressure on our operating, financial, andmanagement information systems.  If wecontinue to expand, such growth would put additional pressure on these systemsand may cause such systems to malfunction or to experience significant delays.

 

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

 

18

----

----

 

Theexpansion into new machinery and equipment technologies involves risks,including the following:

 

•      We must rely on timely performance by contractors, subcontractors, andgovernment agencies, whose performance we may be unable to control.

 

•      The development of new processes involves costs associated with newmachinery, training of employees, and compliance with environmental, health,and other government regulations.

 

•      The newly developed products may not be successful in the marketplace.

 

•      We may be unable to complete a planned machinery and equipmentimplementation in a timely manner, which could result in lower productionlevels and an inability to satisfy customer demand for our products.

 

**NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS**

 

None.

 

19

----

----

 

**Item 3****.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Not applicable.

 

**Item 4****.  Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures

 

Ourmanagement evaluated, with the participation of our Chief Executive Officer andour Chief Financial Officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report on Form10-Q.  Based on this evaluation, ourChief Executive Officer and our Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective to ensure that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission rules andforms.

 

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

 

Changesin Internal Controls Over Financial Reporting

 

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

 

20

----

----

 

**PART II****- OTHER INFORMATION**

 

**Item 5.  Submission of Matters to a Vote of Security Holders**

 

Atthe Annual Meeting of Stockholders of the Company, held on May 19, 2004 inCoburg, Oregon, the Stockholders (i) elected four Class I directors to serve onthe Company’s Board of Directors, (ii) re-approved the Amendment of theCompany’s Executive Compensation Plan, (iii) ratified the Company’s appointment of PricewaterhouseCoopers LLP asindependent auditors.

 

Thevote for the election of the four Class I directors was as follows:

 
| **Nominee**      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Kay L. Toolson   |       | 26,761,098 |       | 837,592      |       |
| L. Ben Lytle     |       | 26,666,476 |       | 932,214      |       |
| Richard A. Rouse |       | 26,285,951 |       | 1,312,739    |       |
| Daniel C. Ustian |       | 27,170,841 |       | 427,849      |       |

 

The vote for re-approval of the Amendment of the Company’sExecutive Variable Compensation Plan was as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 22,307,380 |       | 1,336,466   |  +    | 684,038       |       |

 

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

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 27,163,104 |       | 425,299     |       | 10,287        |       |

 

----

+Includes 3,270,806 broker nonvotes

 

**Item 6****.****   ****Exhibits and Reports on Form 8-K**

 

(a)           Exhibits

 

31.1         Sarbanes-OxleySection 302(a) Certification.

31.2         Sarbanes-OxleySection 302(a) Certification.

32.1         Certificationof 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.

 

(b)           Reports on Form 8-K

 

OnApril 28, 2004, the Company filed a Form 8-K which furnished a copy of a pressrelease announcing the Company’s results of operations for the first quarterended April 3, 2004.

 

21

----

----

 

**SIGNATURES**

 

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

 

 
| ** ** | ** **       | **MONACO COACH CORPORATION**                                                                             |
|------------|------------------|----------------------------------------------------------------------------------------------------------|
|       |             |                                                                                                     |
|       |             |                                                                                                     |
| Dated:     | August  10, 2004 |                                                                                                     |   | /s/  P. Martin Daley |   |
|       |             | P.  Martin Daley                                                                                         |
|       |             | Vice  President and  Chief Financial Officer (Duly  Authorized Officer and Principal  Financial Officer) |
|            |                  |                                                                                                          |  |  |  |

 

22

----

----

 

**EXHIBITS INDEX**

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

 

23

----

----