**UNITED STATES 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 quarterly period ended:   March 29, 2003**                                                                                                                                          |
|                                                                                                                                                                                               |
| **or**                                                                                                                                                                                             |
|                                                                                                                                                                                               |
| **o**                                                                                                                                                                                              | **Transition Report Pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                               |
| **For the period  from              to              ** |
|                                                                                                                                                                                               |
| **Commission File Number:   1-14725**                                                                                                                                                         |

 

| **MONACO COACH CORPORATION**                   |
|------------------------------------------------|
|                                           |
| **Delaware**                                   |   | **35-1880244** |
| (State of Incorporation)                       |   | (I.R.S. Employer  Identification No.) |
|                                           |
| **91320 Industrial Way  Coburg, Oregon 97408** |
| (Address of principal executive offices)       |

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES   ý                                                  NO   o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 

YES   ý                                                  NO   o

 

The number ofshares outstanding of common stock, $.01 par value, as of March 29, 2003:  29,018,707

 

 

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**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**March 29, 2003**

 

**INDEX**

 
| **PART I  - FINANCIAL INFORMATION** |
|-------------------------------------|
|                                |
|                                | **Item 1.  Financial Statements.** |
|                                |
|                                | Condensed Consolidated Balance Sheets as of  December 28, 2002 and March 29, 2003. |
|                                |   |
|                                | Condensed Consolidated Statements of Income  for the quarters ended March 30, 2002 and  March 29, 2003. |
|                                |   |
|                                | Condensed  Consolidated Statements of Cash Flows  for the quarters ended March 30, 2002 and  March 29, 2003. |
|                                |   |
|                                | 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 6. Exhibits and Reports on Form 8-K.** |
|                                |   |
|                                | **Signatures.** |
|                                |   |
|                                | **Certifications under Section 302(a) 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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**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited:  dollars in thousands)**

 
|                                                                                                                         |   | **December 28,  2002** |    | **March 29,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|---------------------|--------|
| **ASSETS**                                                                                                                   |   |                   |    |                |   |
| Current assets:                                                                                                              |   |                   |    |                |   |
| Trade receivables, net                                                                                                       |   | $                      | 116,647 |                | $      | 98,826 |   |
| Inventories                                                                                                                  |   | 175,609                |    | 199,901             |   |
| Resort lot inventory                                                                                                         |   | 26,883                 |    | 24,277              |   |
| Prepaid expenses                                                                                                             |   | 3,612                  |    | 2,818               |   |
| Deferred income taxes                                                                                                        |   | 33,379                 |    | 34,965              |   |
| Total current assets                                                                                                         |   | 356,130                |    | 360,787             |   |
|                                                                                                                         |   |                   |    |                |   |
| Property, plant, and equipment, net                                                                                          |   | 135,350                |    | 140,909             |   |
| Debt issuance costs, net of accumulated  amortization of $389, and $471, respectively                                        |   | 683                    |    | 611                 |   |
| Goodwill, net of accumulated amortization  of $5,320 and $5,320, respectively                                                |   | 55,254                 |    | 55,254              |   |
| Total assets                                                                                                                 |   | $                      | 547,417 |                | $      | 557,561 |   |
|                                                                                                                         |   |                   |    |                |   |
| **LIABILITIES**                                                                                                              |   |                   |    |                |   |
| Current liabilities:                                                                                                         |   |                   |    |                |   |
| Book overdraft                                                                                                               |   | $                      | 3,518   |                | $      | 18,216 |   |
| Line of credit                                                                                                               |   | 51,413                 |    | 35,700              |   |
| Current portion of long-term note payable                                                                                    |   | 21,667                 |    | 21,667              |   |
| Accounts payable                                                                                                             |   | 78,055                 |    | 87,916              |   |
| Product liability reserve                                                                                                    |   | 21,322                 |    | 22,413              |   |
| Product warranty reserve                                                                                                     |   | 31,745                 |    | 30,674              |   |
| Income taxes payable                                                                                                         |   | 4,536                  |    | 7,128               |   |
| Accrued expenses and other liabilities                                                                                       |   | 29,633                 |    | 26,969              |   |
| Total current liabilities                                                                                                    |   | 241,889                |    | 250,683             |   |
|                                                                                                                         |   |                   |    |                |   |
| Long-term notes payable                                                                                                      |   | 30,333                 |    | 26,000              |   |
| Deferred income taxes                                                                                                        |   | 14,568                 |    | 15,145              |   |
| Total liabilities                                                                                                            |   | 286,790                |    | 291,828             |   |
|                                                                                                                         |   |                   |    |                |   |
| **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, 28,871,144 and 29,018,707 issued and outstanding,  respectively |   | 289                    |    | 290                 |   |
| Additional paid-in capital                                                                                                   |   | 51,501                 |    | 52,280              |   |
| Retained earnings                                                                                                            |   | 208,837                |    | 213,163             |   |
| Total stockholders’ equity                                                                                              |   | 260,627                |    | 265,733             |   |
| Total liabilities and stockholders’ equity                                                                              |   | $                      | 547,417 |                | $      | 557,561 |   |

 

See accompanyingnotes.

 

4

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**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                           |   | **Quarter Ended**   |    |
|------------------------------------------------|--------|---------------------|---------|
|                                           |   | **March 30,  2002** |    | **March 29,  2003** |   |
|                                           |   |                |    |   |   |
| Net sales                                      |   | $                   | 293,600 |   | $ | 273,574 |   |
| Cost of sales                                  |   | 255,855             |    | 239,968 |   |
| Gross profit                                   |   | 37,745              |    | 33,606 |   |
|                                           |   |                |    |   |   |
| Selling, general, and administrative  expenses |   | 21,166              |    | 25,649 |   |
| Operating income                               |   | 16,579              |    | 7,957 |   |
|                                           |   |                |    |   |   |
| Other income, net                              |   | 41                  |    | 206 |   |
| Interest expense                               |   | (698                | )       | (1,012 | ) |
| Income before income taxes                     |   | 15,922              |    | 7,151 |   |
|                                           |   |                |    |   |   |
| Provision for income taxes                     |   | 6,249               |    | 2,825 |   |
|                                           |   |                |    |   |   |
| Net income                                     |   | $                   | 9,673   |   | $ | 4,326 |   |
|                                           |   |                |    |   |   |
| Earnings per common share:                     |   |                |    |   |   |
| Basic                                          |   | $                   | .34     |   | $ | .15 |   |
| Diluted                                        |   | $                   | .33     |   | $ | .15 |   |
|                                           |   |                |    |   |   |
| Weighted average common shares  outstanding:   |   |                |    |   |   |
| Basic                                          |   | 28,712,998          |    | 28,956,906 |   |
| Diluted                                        |   | 29,624,722          |    | 29,340,788 |   |

 

See accompanyingnotes.

 

5

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**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:  dollars in thousands)**

 
|                                                                                      |   | **Quarter Ended**   |   |
|-------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                      |   | **March 30,  2002** |   | **March 29,  2003** |   |
|                                                                                      |   |                |   |   |   |
| **Increase (Decrease) in  Cash:**                                                         |   |                |   |   |   |
|                                                                                      |   |                |   |   |   |
| Cash flows from operating activities:                                                     |   |                |   |   |   |
| Net income                                                                                |   | $                   | 9,673  |   | $ | 4,326 |   |
| Adjustments to reconcile net income to net  cash provided (used) by operating activities: |   |                |   |   |   |
| Gain on sale of assets                                                                    |   | 0                   |   | 16 |   |
| Depreciation and amortization                                                             |   | 2,004               |   | 2,262 |   |
| Deferred income taxes                                                                     |   | 4,628               |   | (1,009 | ) |
| Changes in working capital accounts:                                                      |   |                |   |   |   |
| Trade receivables, net                                                                    |   | (18,334             | )      | 17,821 |   |
| Inventories                                                                               |   | (7,812              | )      | (24,292 | ) |
| Resort lot inventory                                                                      |   |                |   | 2,606 |   |
| Prepaid expenses                                                                          |   | (2,860              | )      | 792 |   |
| Accounts payable                                                                          |   | 24,510              |   | 9,861 |   |
| Product liability reserve                                                                 |   | 125                 |   | 1,091 |   |
| Product warranty reserve                                                                  |   | 182                 |   | (1,071 | ) |
| Income taxes payable                                                                      |   | 545                 |   | 2,592 |   |
| Accrued expenses and other liabilities                                                    |   | 1,925               |   | (2,664 | ) |
| Net cash provided by operating activities                                                 |   | 14,586              |   | 12,331 |   |
| Cash flows from investing activities:                                                     |   |                |   |   |   |
| Additions to property, plant, and  equipment                                              |   | (4,432              | )      | (8,439 | ) |
| Proceeds from sale of assets                                                              |   | 0                   |   | 687 |   |
| Net cash used in investing activities                                                     |   | (4,432              | )      | (7,752 | ) |
| Cash flows from financing activities:                                                     |   |                |   |   |   |
| Book overdraft                                                                            |   | 6,645               |   | 14,698 |   |
| Payments on lines of credit, net                                                          |   | (15,000             | )      | (15,713 | ) |
| Payments on long-term notes payable                                                       |   | (2,500              | )      | (4,333 | ) |
| Debt issuance costs                                                                       |   | 0                   |   | (11 | ) |
| Issuance of common stock                                                                  |   | 701                 |   | 780 |   |
| Net cash used by financing activities                                                     |   | (10,154             | )      | (4,579 | ) |
| Net change in cash                                                                        |   | 0                   |   | 0 |   |
| Cash at beginning of period                                                               |   | 0                   |   | 0 |   |
| Cash at end of period                                                                     |   | $                   | 0      |   | $ | 0 |   |

 

See accompanyingnotes.

 

6

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**MONACO COACH CORPORATION**

**NOTES****TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****              Basis ofPresentation**

 

The interimcondensed consolidated 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 28, 2002 and March 29, 2003,and the results of its operations and its cash flows for the quarters endedMarch 30, 2002, and March 29, 2003. 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 28,2002 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 in conjunctionwith the audited financial statements and notes thereto appearing in theCompany’s Annual Report to Stockholders for the year ended December 28, 2002.

 

**2.****              Acquisition ofOutdoor Resorts**

 

On November27, 2002, the Company completed the acquisition with Outdoor Resorts of America(“ORA”) for all the outstanding stock of Outdoor Resorts of Las Vegas, Inc.(ORLV), Outdoor Resorts of Naples, Inc. (ORN), and Outdoor Resorts MotorcoachCountry Club, Inc. (ORMCC), (“the Projects”). The Projects consist of developedand undeveloped luxury motor coach resorts. Previous to the acquisition, theCompany had provided ORA with loans in the amount of $8.0 million, as well asco-guaranteeing $10 million in bank debt secured by ORA.

 

Asconsideration for the acquisition, Monaco assumed the current debt andliabilities of the projects of approximately $30.8 million, including the $8.0million note payable to the Company, and the $10 million co-guaranteed debt.This acquisition relieves ORA of certain debt pressures associated with resortconstruction, and will allow ORA to continue to focus on development and lotsales, as well as providing management services for the Company on theProjects.

 

The cash paidfor the Projects, including transaction costs of $522,000 totaled $21,113,000.The total assets acquired and liabilities assumed of the Projects, based onestimated fair values at November 27, 2002, is as follows:

 
|                                           |   | **(in  thousands)** |   |
|------------------------------------------------|--------|---------------------|--------|
|                                           |   |                |   |
| Cash                                           |   | $                   | 28     |   |
| Resort lot inventory                           |   | 26,784              |   |
| Deferred tax asset                             |   | 272                 |   |
| Property and equipment                         |   | 3,670               |   |
| Total assets acquired                          |   | 30,754              |   |
|                                           |   |                |   |
| Notes payable                                  |   | (8,027              | )      |
| Accounts payable                               |   | (1,165              | )      |
| Accrued liabilities                            |   | (449                | )      |
| Total liabilities assumed                      |   | (9,641              | )      |
|                                           |   |                |   |
| Total assets acquired and liabilities  assumed |   | $                   | 21,113 |   |

 

7

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**3.****              Inventories**

 

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

 
|            |   | **December  28,  2002** |    | **March 29,  2003** |   |
|-----------------|--------|-------------------------|---------|---------------------|--------|
|            |   | ***(in thousands)***    |    |
| Raw materials   |   | $                       | 70,021  |                | $      | 72,779 |   |
| Work-in-process |   | 62,022                  |    | 60,982              |   |
| Finished units  |   | 43,566                  |    | 66,140              |   |
|            |   | $                       | 175,609 |                | $      | 199,901 |   |

 

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

 

The Companyhas a bank line of credit consisting of a revolving line of credit of up to $70million (the “Revolving Loan”). At the election of the Company, the RevolvingLoan bears interest at variable rates that fluctuate based on the Prime rate orLIBOR, and are determined based on the Company’s leverage ratio. The Companyalso pays interest monthly on the unused available portion of the RevolvingLoan at varying rates, determined by the Company’s leverage ratio. TheRevolving Loan is due and payable in full on September 30, 2004, and requiresmonthly interest payments. The balance outstanding under the Revolving Loan atMarch 29, 2003 was $35.7 million. The Revolving Loan is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.

 

**5.****              Long-term NotesPayable**

 

The Companyhas long-term notes payable of $47.7 million outstanding at March 29, 2003. Theterm notes bear interest at varying rates that fluctuate based on the Primerate or LIBOR, and are determined based on the Company’s leverage ratio. Theterm notes require monthly interest payments and quarterly principal payments andare collateralized by all the assets of the Company. Additional prepayments forportions of the term notes are required in the event the Company sellssubstantially all or any motor coach resort location. The term notes are dueand payable in full on September 28, 2005.

 

The followingtable displays the scheduled future principal payments by fiscal year that willbe due on the term loan.

 

| **Year** |   | **Amount of  Payment  Due** |   |
|----------|--------|-----------------------------|--------|
|     |   | ***(in thousands)***        |   |
| 2003     |   | $                           | 17,334 |   |
| 2004     |   | 17,333                      |   |
| 2005     |   | 13,000                      |   |
|     |   | $                           | 47,667 |   |

 

8

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**6.****              Earnings Per CommonShare**

 

Basic earningsper common share is based on the weighted average number of shares outstandingduring the period. Diluted earnings per common share is based on the weightedaverage number of shares outstanding during the period, after consideration ofthe dilutive effect of stock options. The weighted average number of commonshares used in the computation of earnings per common share are as follows:

 
|                                              |   | **Quarter  Ended**  |   |
|---------------------------------------------------|--------|---------------------|--------|
|                                              |   | **March 30,  2002** |   | **March 29,  2003** |   |
| **Basic**                                         |   |                |   |   |   |
| Issued and  outstanding shares (weighted average) |   | 28,712,998          |   | 28,956,906 |   |
|                                              |   |                |   |   |   |
| **Effect of Dilutive Securities**                 |   |                |   |   |   |
| Stock Options                                     |   | 911,724             |   | 383,882 |   |
| **Diluted**                                       |   | 29,624,722          |   | 29,340,788 |   |

 

**7.****              Stock Option Plans**

 

At December28, 2002, the Company had three stock-based employee compensation plans. TheCompany accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated Interpretations. No stock-based employee compensation cost is reflectedin net income, as all options granted under those plans had an exercise priceequal to the market value of the underlying common stock on the date of grant.The following table illustrates the effect on net income and earnings per shareif the Company had applied the fair value recognition provisions of SFAS 123,Accounting for Stock-based Compensation, to stock-based employee compensation.

 
|                                                                                                                                           |   | **Quarter  Ended**                           |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                           |   | **March 30,  2002**                          |   | **March 29,  2003** |   |
|                                                                                                                                           |   | ***(in thousands, except per share  data)*** |   |
| Net income-as reported                                                                                                                         |   | $                                            | 9,673  |   | $ | 4,326 |   |
| Deduct: Total stock-based employee  compensation expense  Determined under fair value based method for all awards, net of related tax  effects |   | 202                                          |   | 168 |   |
|                                                                                                                                           |   |                                         |   |   |   |
|                                                                                                                                           |   | $                                            | 9,471  |   | $ | 4,158 |   |
| Earnings per share:                                                                                                                            |   |                                         |   |   |   |
| Basic - as reported                                                                                                                            |   | $                                            | 0.34   |   | $ | 0.15 |   |
| Basic - pro forma                                                                                                                              |   | $                                            | 0.33   |   | $ | 0.14 |   |
|                                                                                                                                           |   |                                         |   |   |   |
| Diluted - as reported                                                                                                                          |   | $                                            | 0.33   |   | $ | 0.15 |   |
| Diluted - pro forma                                                                                                                            |   | $                                            | 0.32   |   | $ | 0.14 |   |

 

9

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**8.****              Commitments andContingencies**

 

Repurchase Agreements

 

Many of theCompany’s sales to independent dealers are made on a “floor plan” basis by abank or finance 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 theCompany’s product, the Company will execute 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.

 

The Company’sliability under repurchase agreements is limited to the unpaid balance owed tothe lending institution by reason of its extending credit to the dealer topurchase its vehicles, reduced by the resale value of vehicles which may berepurchased. The risk of loss is spread over numerous dealers and financialinstitutions.

 

Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at March 29, 2003 is $495.5 million, with approximately 8.3%concentrated with one dealer. If the Company were obligated to repurchase asignificant number of units under any repurchase agreement, its business, operatingresults, and financial condition could be adversely affected. The Company hasincluded the disclosure requirements of FASB Interpretation No. 45 (FIN 45),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” in its financial statements, andhas determined that the recognition provisions of FIN 45 apply to certainguarantees routinely made by the Company including contingent repurchaseobligations to third party lenders for inventory financing of dealerinventories. As of March 29, 2003, the Company has provided a reserve in theamount of $150,000, and will accordingly record an expense in the next threeconsecutive quarters in the same amount. This estimated liability, is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.

 

Product liability

 

The Company issubject to regulations which may require the Company to recall products withdesign or safety defects, and such recall could have a material adverse effecton the Company’s business, results of operations, and financial condition.

 

The Companyhas from time to time been subject to product liability claims. To date, theCompany has been successful in obtaining product liability insurance on termsthe Company considers acceptable. The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million. 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. There can beno assurance that the Company will be able to obtain insurance coverage in thefuture at acceptable levels or that the cost of insurance will be reasonable.Furthermore, successful assertion against the Company of one or a series oflarge uninsured claims, or of one or a series of claims exceeding any insurancecoverage, could have a material adverse effect on the Company’s business,results of operations, and financial condition.

 

Litigation

 

The Company isinvolved in various legal proceedings which are incidental to the industry andfor which certain matters are covered in whole or in part by insurance or,otherwise, the Company has recorded accruals for estimated settlements.Management believes that any liability which may result from these proceedingswill not have a material adverse effect on the Company’s consolidated financialstatements.

 

Aircraft Lease Commitment 

 

The Companyhas a two-year operating lease for an aircraft, with annual renewals for up tothree additional years. If at the end of the initial lease period the Companyelects to return the aircraft, the Company has guaranteed up to $16 million inthe event the Lessor’s net sales proceeds are less than $18.5 million.

 

10

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

 

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements include, but arenot limited to, those below that have been marked with an asterisk(*). Inaddition, the Company may from time to time make forward-looking statementsthrough statements that include words such as “believes,” “expects,”“anticipates” or similar expressions. Such forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of the Company to differ materially fromthose expressed or implied by such forward-looking statements, including thoseset forth below under the caption “Factors That May Affect Future OperatingResults” and elsewhere in this Quarterly Report on Form 10-Q. The reader shouldcarefully consider, together with the other matters referred to herein, thefactors set forth under the caption “Factors That May Affect Future OperatingResults.” The Company cautions the reader, however, that these factors may notbe exhaustive.

 

**GENERAL**

 

Monaco CoachCorporation is a leading manufacturer of premium Class A and Class C motorcoaches and towable recreational vehicles (“towables”). The Company’s productline currently consists of a broad line of motor coaches, fifth wheel trailersand travel trailers under the “Monaco,” “Holiday Rambler,” “Royale Coach,”“Beaver,” “Safari,” and “McKenzie” brand names. The Company’s products, whichare typically priced at the high end of their respective product categories,range in suggested retail price from $70,000 to $1.1 million for motor coachesand from $25,000 to $65,000 for towables.

 

**RESULTSOF OPERATIONS**

 

**Quarterended March 29, 2003 Compared to Quarter ended March 30, 2002**

 

First quarternet sales decreased 6.8% to $273.6 million compared to $293.6 million for thesame period last year. Gross diesel motorized sales were down 12.6%, while gasmotorized sales were up 18.5%, and towables were down 2.1%. The overalldecrease in revenues has been created by continuing challenging marketconditions, uncertainties arising from the war in Iraq, and a sluggish economy.The Company’s overall unit sales were down 12.1% in the first quarter of 2003with diesel motorized unit sales down 18.4% to 1,223 units, gas motorized unitsales up 11.8% to 475 units, and towable unit sales down 13.0% to 669 units.The Company’s total average unit selling price increased to $114,200 from $109,800in the same period last year.

 

Gross profitfor the first quarter of 2003 decreased to $33.6 million, down from $37.7million in 2002, and gross margin decreased from 12.9% in the first quarter of2002 to 12.3% in the first quarter of 2003. The decrease in gross margin overthe prior year was primarily due to an increase in discounts off of wholesaleinvoices of approximately .6% of sales. The Company’s overall gross margin mayfluctuate in future periods if the mix of products shifts from higher to lowergross margin units or if the Company encounters unexpected manufacturingdifficulties or competitive pressures.

 

Selling,general, and administrative expenses increased by $4.5 million to $25.6 millionin the first quarter of 2003 and increased as a percentage of sales from 7.2%in 2002 to 9.4% in 2003. Selling, general, and administrative expenses in thefirst quarter of 2003 included increases in spending related to retailpromotion efforts of 1.5% as a percentage of sales, increases in litigation settlementcosts of 1.0% as a percentage of sales, as well as various benefits fromslightly lower administrative, selling, and general costs. The Company’sselling, general, and administrative expenses may fluctuate in future periodsdepending on the Company’s strategy of retail promotions as a result ofdifficult market conditions or competitive pressures. The Company expectslitigation settlement costs to trend down throughout the remaining quarters of2003.

 

Operatingincome was $8.0 million, or 2.9% of sales in the first quarter of 2003 comparedto $15.9 million, or 5.4% of sales in the similar 2002 period. The decrease inoperating margins reflects lower gross margins and increased selling, general,and administrative costs.

 

11

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Net interestexpense was $1.0 million in the first quarter of 2003 compared to $698,000 inthe comparable 2002 period, reflecting a higher level of borrowing during thefirst quarter of 2003 due to higher inventory and accounts receivable balances.

 

The Companyreported a provision for income taxes of $2.8 million, or an effective tax rateof 39.5% in the first quarter of 2003, compared to $6.2 million, or aneffective tax rate of 39.2% for the comparable 2002 period.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’sprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities. During the first quarter of2003, the Company generated cash of $12.3 million from operating activities.The Company generated $6.6 million from net income and non-cash expenses suchas depreciation and amortization. This amount was mostly offset by net changesin working capital accounts. Sources of cash included a decrease in tradereceivables of $17.8 million, a decrease in resort lot inventory of $2.6million, an increase in trade payables of $9.9 million, an increase in productliability reserve of $1.21 million and an increase in income taxes payable of$2.6 million. The uses of cash included an increase of $24.3 million ininventories, an increase in product warranty reserve of $1.01 million, and anincrease of $2.7 million in accrued expenses. The decrease in trade receivablesreflects decreased shipments in the first quarter compared to the fourthquarter of 2002. Increased inventory levels reflect an increase in finishedgoods due to unanticipated slow downs in demand related to negative market andeconomic conditions. Increased payables and liabilities are reflective ofincreased purchases for higher production run rates over the prior year, modelchange, accruals for current income taxes payable, and various other accruedliabilities.

 

The Companyhas credit facilities consisting of a revolving line of credit of up to $70.0million of which $35.7 million was outstanding at March 29, 2003 (the“Revolving Loan”) and term loans with balances of $47.7 million at March 29,2003 (the “Term Loans”). At the election of the Company, the Revolving Loan andTerm Loans bear interest at varying rates that fluctuate based on the Primerate or LIBOR, and are determined based on the Company’s leverage ratio. TheCompany also pays interest monthly 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 September 30, 2004, andrequires monthly interest payments. Additional prepayments for portions of theterm notes are required in the event the Company sells substantially all of anymotor coach resort location. The Term Loans require monthly interest paymentsand quarterly principal payments that total $4.3 million. The Revolving Loanand Term Loans are collateralized by all the assets of the Company and includevarious restrictions and financial covenants. The Company utilizes “Zerobalance” bank disbursement accounts in which an advance on the line of creditis automatically made for checks clearing each day. Since the balance of thedisbursement account at the bank returns to zero at the end of each day, theoutstanding checks of the Company are reflected as a liability. The outstandingcheck liability is combined with the Company’s positive cash balance accountsto reflect a net book overdraft or a net cash balance for financial reporting.

 

The Company’sprincipal working capital requirements are for purchases of inventory andfinancing of trade receivables. Many of the Company’s dealers finance productpurchases under wholesale floor plan arrangements with third parties asdescribed below. At March 29, 2003, the Company had working capital ofapproximately $110.1 million, a decrease of $4.1 million from working capitalof $114.2 million at December 28, 2002. The Company has been using short-termcredit facilities and cash flow to finance its capital expenditures.

 

The Companybelieves that cash flow from operations and funds available under itsanticipated credit facilities will be sufficient to meet the Company’sliquidity requirements for the next 12 months.*  The Company’s capital expenditures were $8.4 million in the firstquarter of 2003, which included costs related to the construction of a newpaint facility at the Company’s Indiana location, an expansion of the Indianatowable plant, a new service facility in Florida, as well as various other routinecapital expenditures. The Company anticipates that capital expenditures for allof 2003 will be approximately $21 to $22 million, which includes expendituresto complete the Florida service center and Indiana towable plant expansion, anexpansion of the Oregon chassis plant, and routine capital expenditures forcomputer system upgrades and additions, smaller scale plant remodelingprojects, and normal replacement of outdated or worn-out equipment.* TheCompany may require additional equity or debt financing to address workingcapital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable. The Company may also from time to time seek to acquirebusinesses that would complement the Company’s current business, and any such

 

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acquisition could requireadditional financing. There can be no assurance that additional financing willbe available if required or on terms deemed favorable by the Company.

 

As is typicalin the recreational vehicle industry, many of the Company’s retail dealersutilize wholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s 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.  The Company has agreementswith several institutional lenders under which the Company currently hasrepurchase obligations.  The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units. The Company’sobligations under these repurchase agreements vary from period to period.  At March 29, 2003, approximately $495.5million of products sold by the Company to independent dealers were subject to potentialrepurchase under existing floor plan financing agreements with approximately8.3% concentrated with one dealer. Historically, the Company has been successful in mitigating lossesassociated with repurchase obligations. During the first quarter of 2003, there were no losses associated withthe exercise of repurchase agreements. If the Company were obligated to repurchase a significant number ofunits under any repurchase agreement, its business, operating results, andfinancial condition could be adversely affected.

 

As part of thenormal course of business, the Company incurs certain contractual obligationsand commitments which will require future cash payments.  The following tables summarize thesignificant obligations and commitments.

 
| PAYMENTS DUE BY PERIOD                     |
|--------------------------------------------|
|                                       |
| **Contractual Obligations (in thousands)** |   | **1 year or  less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
| Long-term Debt(1)                          |   | $ | 21,667 |   | $ | 26,000 |   | $ | 0 |   | $ | 0 |   | $ | 47,667 |   |
| Operating Leases(2)                        |   | 2,598 |   | 2,216 |   | 2,003 |   | 3,828 |   | 10,645 |   |
| Total Contractual Cash Obligations         |   | $ | 24,265 |   | $ | 28,216 |   | $ | 2,003 |   | $ | 3,828 |   | $ | 58,312 |   |
|                                       |
| AMOUNT OF 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 |   | $ | 35,700 |   | $ | 0 |   | $ | 0 |   | $ | 35,700 |   |
| Guarantees                                 |   |   |   | 16,000 | (2) | 0 |   | 0 |   | 16,000 |   |
| Repurchase Obligations(4)                  |   | 0 |   | 495,500 |   | 0 |   | 0 |   | 495,500 |   |
| Total Commitments                          |   | $ | 0 |   | $ | 547,200 |   | $ | 0 |   | $ | 0 |   | $ | 547,200 |   |

 

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(1)  See Note 5 to the financials.

(2)  Various leases including manufacturing facilities, aircraft, andmachinery and equipment. See Note 8 to the financials.

(3)  See Note 4 to the financials. The amount listed represents available borrowings on the line of creditat March 29, 2003.

(4)  Reflects obligations under manufacturer repurchase commitments.See Note 8 to the financials.

 

**INFLATION**

 

The Companydoes not believe that inflation has had a material impact on its results ofoperations for the periods presented.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

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accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financialstatements.

 

WARRANTYCOSTS  The Company provides an estimate for accrued warranty costs atthe time a product is sold.  Thisestimate is based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate by management.

 

PRODUCTLIABILITY  The Company provides an estimate for accrued productliability based on current pending cases, as well as for those cases which areincurred but not reported.  Thisestimate is developed by legal counsel based on professional judgment, as wellas historical experience.

 

IMPAIRMENT OFGOODWILL  The Company assesses the potential impairment of goodwillin accordance with Financial Accounting Standards Board (FASB) Statement No.142.  This analysis involves managementcomparing the market capitalization of the Company, to the carrying amount,including goodwill, of the net book value of the Company, to determine ifgoodwill has been impaired.

 

INVENTORYRESERVES  The Company writes down its inventory for obsolescence, andthe difference between the cost of inventory and its estimated market value.These write-downs are based on assumptions about future sales demand and marketconditions. If actual sales demand or market conditions change from thoseprojected by management, additional inventory write-downs may be required.

 

INCOMETAXES  In conjunction with preparing its consolidated financialstatements, the Company must estimate its income taxes in each of thejurisdictions in which it operates. This process involves estimating actual current tax expense togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred tax assets and liabilities, whichare included in the consolidated balance sheets.  The Company must then assess the likelihood that the deferred taxassets will be recovered from future taxable income, and to the extentmanagement believes that recovery is not likely, a valuation allowance must beestablished.  Significant managementjudgment is required in determining the Company’s provision for income taxes,deferred tax assets and liabilities, and any valuation allowance recordedagainst net deferred tax assets.

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WE MAYEXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OFREASONS  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 marginsassociated with the mix of products we sell in any particular period.

 

•                   Our ability toutilize our manufacturing resources efficiently may be adversely impacted dueto reduced run rates in our plants.

 

•                   Shortages ofmaterials used in our products.

 

•                   A determinationby us that goodwill or other intangible assets are impaired and have to bewritten down to their fair values, resulting in a charge to our results ofoperations.

 

•                   Our ability tointroduce new models that achieve consumer acceptance.

 

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

 

•                   The addition orloss of our dealers.

 

•                   The timing oftrade shows and rallies, which we use to market and sell our products.

 

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

 

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Our overallgross margin may decline in future periods to the extent that we increase thepercentage of sales of lower gross margin towable products or if the mix ofmotor 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.

 

Our overallgross margin may decline in the future to the extent we continue to run atreduced rates in our plants.  Thesereduced rates create inefficiencies in plant overhead and indirect costsassociated with the production process.

 

Demand in therecreational vehicle industry generally declines during the winter months,while sales are generally higher during the spring and summer months.  With the broader range of products we nowoffer, seasonal factors could have a significant impact on our operatingresults in the future.  Additionally,unusually severe weather conditions in certain markets could delay the timingof shipments from one quarter to another.

 

We attempt toforecast orders for our products accurately and commence purchasing andmanufacturing prior to receipt of such orders. However, it is highly unlikely that we will consistently accuratelyforecast the timing, rate, and mix of orders. This aspect of our business makes our planning inexact and, in turn,affects our shipments, costs, inventories, operating results, and cash flow forany given quarter.

 

THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY  The recreationalvehicle industry has been characterized by cycles of growth and contraction inconsumer demand, reflecting prevailing economic, demographic, and politicalconditions that affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 at approximately321,000 units and declined in 2001 to 257,000 units. In 2002, the industryrebounded up to approximately 307,000 units. Our business 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, thelevel of discretionary spending, and availability of credit and overallconsumer confidence.  The recent declinein consumer confidence and slowing of the overall economy has adverselyaffected the recreational vehicle market. An extended continuation of these conditions would materially affect ourbusiness, results of operations, and financial condition.

 

OUR RECENTGROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENTINFORMATION SYSTEMS  In the past fewyears, we have significantly expanded the size and scope of our business, whichhas required us to hire additional employees. Some of these new employeesinclude new management personnel.  Inaddition, our current management personnel have assumed additionalresponsibilities.  The increase in oursize over a relatively short period of time has put pressure on our operating,financial, and management information systems. If we continue to expand, such growth would put additional pressure onthese systems and may cause such systems to malfunction or to experiencesignificant delays.

 

WE MAYEXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES WHEN WE EXPAND OUR MANUFACTURINGCAPACITY  In the past few years, we havesignificantly increased our manufacturing capacity.  In connection with this expansion, we have also integrated someof our manufacturing facilities.  We mayexperience unexpected building and production problems associated with any suchexpansion.  In the past, we have haddifficulties with the manufacturing of new models and increasing the rates ofproduction of our plants.  Our expenseshave increased as a result of the expansion and we will be materially andadversely affected if the expansion does not result in an increase in revenuefrom new or additional products.

 

This expansioninvolves risks, including the following:

 

•                   We must rely ontimely performance by contractors, subcontractors, and government agencies,whose performance we may be unable to control.

 

•                   The developmentof new products involves costs associated with new machinery, training ofemployees, and compliance with environmental, health and other governmentregulations.

 

•                   The newlydeveloped products may not be successful in the marketplace.

 

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•                   We may beunable to complete a planned expansion in a timely manner, which could resultin lower production levels and an inability to satisfy customer demand for ourproducts.

 

WE RELY ON ARELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALESAlthough our products were offered by approximately 420 dealerships locatedprimarily in the United States and Canada as of March 29, 2003, a significantpercentage of our sales are concentrated among a relatively small number ofindependent dealers. For the quarter ended March 29, 2003, sales to one dealer,Lazy Days RV Center, accounted for 12.4% of total sales compared to 14.2% ofsales in the same period ended last year. For the first quarter of 2003, salesto our 10 largest dealers, including Lazy Days RV Center, accounted for a totalof 43.4% of sales, compared to 42.3% of sales for the same period in 2002. Theloss of a significant dealer or a substantial decrease in sales by any of thesedealers could have a material impact on our business, results of operations,and financial condition.

 

WE MAY HAVE TOREPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALERDOES NOT REPAY ITS LENDER As is common in the recreational vehicle industry, weenter into repurchase agreements with the financing institutions used by ourdealers to finance their purchases of our products. These agreements require usto repurchase the dealer’s inventory in the event that the dealer does not repayits lender. Obligations under these agreements vary from period to period, buttotaled approximately $495.5 million as of March 29, 2003, with approximately8.3% concentrated with one dealer. Losses associated with repurchases andsubsequent resales of the Company’s products have historically been immaterialto operations, however the Company has provided a reserve in accordance withFASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, in the amount of $150,000 for the current quarter. Nonetheless, if theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, our business, operating results, and financial conditioncould be adversely affected.

 

OUR ACCOUNTSRECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK We sell our product 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. As of March 29,2003, total trade receivables were $98.8 million, with approximately $85.3million, or 86.3% of the outstanding accounts receivable balance concentratedamong floor plan lenders. The remaining $13.5 million of trade receivables wereconcentrated substantially all with one dealer.

 

WE MAYEXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICEOR A DECREASE IN THE SUPPLY OF FUEL 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 ourbusiness. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain.

 

WE DEPEND ONSINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THATWE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components forcertain of our products are purchased from single or a limited number ofsources. These include turbo diesel engines (Cummins and Caterpillar),substantially all of our transmissions (Allison), axles (Dana and Meritor) forall diesel motor coaches and chassis (Workhorse and Ford) for gas motor coaches.We have no long-term supply contracts with these suppliers or theirdistributors, and we cannot be certain that these suppliers will be able tomeet our future requirements. For example, in 1997, Allison placed all chassismanufacturers on allocation with respect to one of the transmissions that weuse, and again in 1999 Ford placed one of its gasoline powered chassis onallocation. An extended delay or interruption in the supply of any componentsthat we obtain from a single supplier or from a limited number of supplierscould adversely affect our business, results of operations, and financialcondition.

 

OUR INDUSTRYIS VERY COMPETITIVE. WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURESTO REMAIN COMPETITIVE The market for our products is very competitive. Wecurrently compete with a number of manufacturers of motor coaches, fifth wheeltrailers, and travel trailers. Some of these companies have greater financialresources than we have and extensive distribution networks. These companies, ornew competitors in the industry, may develop products that customers in theindustry prefer over our products.

 

We believethat the introduction of new products and new features is critical to oursuccess. Delays in the introduction of new models or product features, qualityproblems associated with these introductions, or a lack of

 

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market acceptance of new modelsor features 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 PRODUCTSCOULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE,CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTINGIN LOSS OF SALES Our customers require demanding specifications for productperformance and reliability. Because our products are complex and often useadvanced components, processes and techniques, undetected errors and designflaws may occur. Product defects result in higher product service and warrantyand replacement costs and may cause serious damage to our customerrelationships and industry reputation, all of which will negatively affect oursales and business.

 

OUR BUSINESSIS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY ANDWARRANTY 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, result of operations, orfinancial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

To date, wehave been successful in obtaining product liability insurance on terms that weconsider acceptable.  The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  We cannot be certain we will be able to obtain insurance coveragein the future at acceptable levels or that the costs of such insurance will bereasonable.  Further, successfulassertion against us of one or a series of large uninsured claims, or of aseries of claims exceeding our insurance coverage, could have a materialadverse effect on our business, results of operations, and financial condition.

 

WE MAY BEUNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT ANDMANUFACTURING  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 tocompete in the industry.

 

WE MAYEXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES WITH OUR INVESTMENT IN THE OUTDOORRESORTS PROJECTS  We acquired fromOutdoor Resorts of America, Inc. (“ORA”) three luxury motor coach resortproperties being developed by ORA in Las Vegas, Nevada; Indio, California; andNaples, Florida.  The resorts offerindividual lots to owners, with undivided interests in the resort amenities.  If we experience difficulties in sellingthese properties, we could incur additional expenses which would adverselyaffect our profits.

 

NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS

 

SFAS 148

 

In December2002, the Board issued SFAS 148, Accounting for Stock-Based Compensation - Transitionand Disclosure - an amendment of SFAS 123. This statement provides transition guidance for entities that elect tovoluntarily adopt the accounting provisions of SFAS 123.  The statement does not change the provisionsof SFAS 123 that permit entities to continue to apply the intrinsic valuemethod of APB 25, Accounting for Stock Issued to Employees.  The statement also requires certain newdisclosures that are incremental to those required by SFAS 123. The transitionand disclosure provisions are effective for fiscal years ending after December15, 2002.  The Company applies theintrinsic value method of APB 25 in accordance with SFAS 123 and has electedthe disclosure provisions of the fair value method of SFAS 123.  Therefore, the transitional rules foradopting SFAS 123 do not apply, however, the Company has implemented theprovisions and new disclosure requirements of SFAS 148 in its financialstatements.

 

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FIN 45

 

In November2002, the Board issued FASB Interpretation No. 45 (FIN 45), Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others, and Interpretation of SFAS 5, 57 and 107and Rescission of FIN 34.  TheInterpretation requires certain disclosures to be made by a guarantor about itsobligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.

 

The initialrecognition and measurement provisions are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The disclosure requirements are effectivefor financial statements of interim or annual periods ending after December 15,2002.  The Company has implemented theprovisions and included the disclosure requirements of FIN 45 in its financialstatements and has determined that the recognition provisions of FIN 45 applyto certain guarantees routinely made by the Company including repurchaseobligations to third party lenders for inventory financing of dealerinventories.  Pursuant to FIN 45, theCompany has provided a reserve in the amount of $150,000 and will record an expenseof approximately the same amount in each of the next three consecutivequarters.  This estimated liability isbased on the Company's experience of losses associated with the repurchase andresale of units in prior years.

 

FIN 46

 

In January2003, the Board issued FASB Interpretation No. 46 (FIN 46), Consolidation ofVariable Interest Entities - an Interpretation of ARB No. 51, ConsolidatedFinancial Statements.  TheInterpretation addresses how variable interest entities are to be identifiedand how an enterprise assesses its interests in a variable interest entity todecide whether to consolidate that entity. The Interpretation also requires existing unconsolidated variableinterest entities to be consolidated by their primary beneficiaries if the entitiesdo not effectively disperse risks among the parties involved.

 

FIN 46 iseffective in the first fiscal year or interim period beginning after June 15,2003 to variable interest entities (VIE), in which a company holds a variableinterest that is acquired before February 1, 2003.  The Company does not believe it is a primary beneficiary of a VIEor holds any significant interest or involvement in a VIE and therefore therewill be no impact of adopting this standard on the Company's consolidatedfinancial statements.

 

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

 

Not applicable.

 

**Item 4. Controls and Procedures**

 

Evaluation ofDisclosure Controls and Procedures

 

Our chiefexecutive officer and our chief financial officer, after evaluating our“disclosure controls and procedures,” (as defined in Securities Exchange Act of1934 (the “Exchange Act”) Rules 13a-14(c) and 15-d-14(c)) have concluded thatas of a date within 90 days of the filing date of this report (the “EvaluationDate”) our disclosure controls and procedures are effective to ensure thatinformation we are required to disclose in reports that we file or submit underthe Exchange Act is recorded, processed, summarized, and reported within thetime periods specified in Securities and Exchange Commission rules and forms.

 

Ourmanagement, including our chief executive officer and chief financial officer,does not expect that our disclosure controls and procedures will prevent allerror and all fraud.  Because ofinherent limitations in any system of disclosure controls and procedures, noevaluation of controls can provide absolute assurance that all instances oferror or fraud, if any, within the Company will be detected.

 

Changes inInternal Controls

 

Subsequent tothe “Evaluation Date,” there were no significant changes in our internalcontrols or in other factors that could significantly affect our disclosurecontrols and procedures, nor were there any significant deficiencies ormaterial weaknesses in our internal controls.  As a result, no corrective actions were required or undertaken.

 

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**PARTII - OTHER INFORMATION**

 

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

 

(a)                                  Exhibits

 

99.1Certification by CEO and CFO of Financial Statements.

 

(b)                                 Reports on Form 8-K

 

No reports ofForm 8-K were filed during the quarter ended March 29, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | **MONACO COACH CORPORATION**                                                                            |
|--------|---------------------------------------------------------------------------------------------------------|
|   |                                                                                                    |
|   |                                                                                                    |
| Dated: | May 13, 2003                                                                                            |   | /s/: P.  Martin Daley |   |
|   | P. Martin  Daley                                                                                        |
|   | Vice  President and Chief Financial Officer  (Duly Authorized Officer and Principal  Financial Officer) |
|        |                                                                                                         |  |  |  |

 

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**Sarbanes-Oxley Section 302(a) Certification**

 

I, P. Martin Daley, certifythat:

 

1.                                       I have reviewedthis quarterly report on Form 10-Q of Monaco Coach Corporation;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Dated: | May 13, 2003                                |   | /s/: P.  Martin Daley |   |
|--------|---------------------------------------------|--------|-----------------------|--------|
|   | P. Martin  Daley                            |
|   | Vice  President and Chief Financial Officer |

 

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**Sarbanes-Oxley Section 302(a) Certification**

 

I, Kay L. Toolson, certifythat:

 

1.                                       I have reviewedthis quarterly report on Form 10-Q of Monaco Coach Corporation;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Based on myknowledge, the financial statements, and other financial information included inthis quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                                       The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Dated: | May 13, 2003             |   | /s/: Kay L.  Toolson |   |
|--------|--------------------------|--------|----------------------|--------|
|   | Kay L.  Toolson          |
|   | Chief  Executive Officer |

 

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**EXHIBITS INDEX**

** **

**ExhibitNumber****                                                                            Descriptionof Document**

** **

99.1                                                                                                   CertificationsPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

 

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