**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

** **

**For the quarterly periodended:  March 29, 2008**

 

**or**

 
| **o** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                     to**

 

**Commission File Number:  1-14725**

 

**MONACO COACH CORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

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

(Zip code)

 

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

 

Indicate bycheck mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 
| YES  x | NO  o |
|------------------|-----------------|

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 
| Large accelerated filer o | Accelerated filer x | Non-Accelerated filer o | Smaller reporting company o |
|--------------------------------|--------------------------|------------------------------|----------------------------------|

(Do notcheck if a smaller reporting company)

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).            YES  o NO  x

 

The number ofshares outstanding of common stock, $.01 par value, as of March 29, 2008:29,814,141

 

 

----

 

**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**March 29,2008**

 

**INDEX**

 
| ** **                                                                                                           | **Page**   |
|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                           | ** ** |
| **PART I - FINANCIAL INFORMATION**                                                                              | 3          |
|                                                                                                                 |       |
| **Item 1. Financial  Statements (unaudited)**                                                                        | 3          |
|                                                                                                                 |       |
| Condensed  Consolidated Balance Sheets as of December 29, 2007 and March 29, 2008                          | 4          |
|                                                                                                                 |       |
| Condensed  Consolidated Statements of Income for the quarters ended March 31, 2007  and March 29, 2008     | 5          |
|                                                                                                                 |       |
| Condensed  Consolidated Statements of Cash Flows for the quarters ended March 31,  2007 and March 29, 2008 | 6          |
|                                                                                                                 |       |
| Notes to  Condensed Consolidated Financial Statements                                                                | 7          |
|                                                                                                                 |       |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations**              | 15         |
|                                                                                                                 |       |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                              | 25         |
|                                                                                                                 |       |
| **Item 4. Controls  and Procedures**                                                                                 | 25         |
|                                                                                                                 |       |
| **PART II - OTHER  INFORMATION**                                                                                | 26         |
|                                                                                                                 |       |
| **Item 1A. Risk Factors**                                                                                            | 26         |
|                                                                                                                 |       |
| **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                             | 30         |
|                                                                                                                 |       |
| **Item 6. Exhibits**                                                                                                 | 31         |
|                                                                                                                 |       |
| **Signatures**                                                                                                       | 32         |
|                                                                                                                 |       |
| **Certifications  under Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002**                         |       |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

3

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands of dollars, except share and per share data)**

 
| ** **                                                                                                                                                                                                        | ** ** | **December 29,** | ** ** | **March 29,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | ** **            | ** ** | **(unaudited)**    | ** ** |
| **ASSETS**                                                                                                                                                                                                        |       |                  |       |               |       |
| Current assets:                                                                                                                                                                                                   |       |                  |       |               |       |
| Cash                                                                                                                                                                                                              |       | $                     | 6,282      |               | $          | 8,081 |   |
| Trade  receivables, net                                                                                                                                                                                           |       | 88,170                |       | 72,570             |       |
| Inventories, net                                                                                                                                                                                                  |       | 158,236               |       | 161,191            |       |
| Resort lot  inventory                                                                                                                                                                                             |       | 8,838                 |       | 17,010             |       |
| Prepaid expenses                                                                                                                                                                                                  |       | 5,142                 |       | 4,336              |       |
| Income taxes  receivable                                                                                                                                                                                          |       | 0                     |       | 5,018              |       |
| Debt issuance  costs, net                                                                                                                                                                                         |       | 0                     |       | 423                |       |
| Deferred income  taxes                                                                                                                                                                                            |       | 37,608                |       | 36,446             |       |
| Total current  assets                                                                                                                                                                                             |       | 304,276               |       | 305,075            |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| Property, plant,  and equipment, net                                                                                                                                                                              |       | 144,291               |       | 141,368            |       |
| Land held for development                                                                                                                                                                                         |       | 24,321                |       | 19,136             |       |
| Investment in  joint venture                                                                                                                                                                                      |       | 4,059                 |       | 4,184              |       |
| Debt issuance  costs, net                                                                                                                                                                                         |       | 498                   |       | 0                  |       |
| Goodwill                                                                                                                                                                                                          |       | 86,323                |       | 86,323             |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| Total assets                                                                                                                                                                                                      |       | $                     | 563,768    |               | $          | 556,086 |   |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| **LIABILITIES**                                                                                                                                                                                                   | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current  liabilities:                                                                                                                                                                                             |       |                  |       |               |       |
| Book overdraft                                                                                                                                                                                                    |       | $                     | 1,601      |               | $          | 2,402 |   |
| Current portion  of long-term debt                                                                                                                                                                                |       | 5,714                 |       | 27,143             |       |
| Line of credit                                                                                                                                                                                                    |       | 0                     |       | 31,592             |       |
| Income taxes  payable                                                                                                                                                                                             |       | 3,726                 |       | 0                  |       |
| Accounts payable                                                                                                                                                                                                  |       | 82,833                |       | 68,405             |       |
| Product  liability reserve                                                                                                                                                                                        |       | 14,625                |       | 15,489             |       |
| Product warranty  reserve                                                                                                                                                                                         |       | 35,171                |       | 34,252             |       |
| Accrued expenses  and other liabilities                                                                                                                                                                           |       | 48,609                |       | 39,251             |       |
| Total current  liabilities                                                                                                                                                                                        |       | 192,279               |       | 218,534            |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| Long-term debt,  less current portion                                                                                                                                                                             |       | 23,357                |       | 500                |       |
| Deferred income  taxes                                                                                                                                                                                            |       | 21,506                |       | 21,556             |       |
| Deferred revenue                                                                                                                                                                                                  |       | 683                   |       | 633                |       |
| Total  liabilities                                                                                                                                                                                                |       | 237,825               |       | 241,223            |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| Commitments and  contingencies (Note 12)                                                                                                                                                                          |       |                  |       |               |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** **         | ** ** |
| Preferred stock,  $.01 par value; 1,934,783 shares authorized, no shares outstanding Common  stock, $.01 par value; 50,000,000 shares authorized, 29,989,534 and 29,814,141  issued and outstanding, respectively |       | 300                   |       | 298                |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 69,514                |       | 70,776             |       |
| Retained  earnings                                                                                                                                                                                                |       | 256,129               |       | 243,789            |       |
| Total  stockholders’ equity                                                                                                                                                                                  |       | 325,943               |       | 314,863            |       |
|                                                                                                                                                                                                              |       |                  |       |               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                  |       | $                     | 563,768    |               | $          | 556,086 |   |

 

See accompanying notes.

 

4

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited: in thousands ofdollars, except share and per share data)**

** **
| ** **                                      | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                                      | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net sales                                       |       | $                      | 322,244    |   | $ | 252,377 |   |
| Cost of sales                                   |       | 286,248                |       | 236,571 |   |
| Gross profit                                    |       | 35,996                 |       | 15,806 |   |
|                                            |       |                   |       |   |   |
| Selling,  general, and administrative expenses  |       | 32,358                 |       | 28,636 |   |
| Operating income  (loss)                        |       | 3,638                  |       | (12,830 | ) |
|                                            |       |                   |       |   |   |
| Other income,  net                              |       | 113                    |       | 87 |   |
| Interest expense                                |       | (967                   | )          | (725 | ) |
| Income (loss)  from investment in joint venture |       | (278                   | )          | 126 |   |
| Income (loss)  before income taxes              |       | 2,506                  |       | (13,342 | ) |
|                                            |       |                   |       |   |   |
| Provision for  (benefit from) income taxes      |       | 1,007                  |       | (4,885 | ) |
| Net income  (loss)                              |       | $                      | 1,499      |   | $ | (8,457 | ) |
|                                            |       |                   |       |   |   |
| Earnings (loss)  per common share:              |       |                   |       |   |   |
| Basic                                           |       | $                      | 0.05       |   | $ | (0.28 | ) |
| Diluted                                         |       | $                      | 0.05       |   | $ | (0.28 | ) |
|                                            |       |                   |       |   |   |
| Weighted-average  common shares outstanding:    |       |                   |       |   |   |
| Basic                                           |       | 29,829,697             |       | 29,746,479 |   |
| Diluted                                         |       | 30,405,671             |       | 30,127,263 |   |

 

See accompanying notes.

 

5

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited: in thousands of dollars)**

 
| ** **                                                                                   | ** ** | **Quarter Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                                                                                   | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                            |       |                   |       |   |   |
|                                                                                         |       |                   |       |   |   |
| Cash flows from  operating activities:                                                       |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 1,499      |   | $ | (8,457 | ) |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Loss (gain) on  sale of assets                                                               |       | (113                   | )          | 164 |   |
| Depreciation and  amortization                                                               |       | 3,537                  |       | 3,457 |   |
| Deferred income  taxes                                                                       |       | (2,223                 | )          | 1,212 |   |
| Stock-based  compensation expense                                                            |       | 1,826                  |       | 2,098 |   |
| Net income from equity  investment                                                           |       | 0                      |       | (126 | ) |
| Changes in  working capital accounts:                                                        |       |                   |       |   |   |
| Trade  receivables, net                                                                      |       | (6,811                 | )          | 15,600 |   |
| Inventories                                                                                  |       | (2,134                 | )          | (2,955 | ) |
| Resort lot  inventory                                                                        |       | 1,214                  |       | (150 | ) |
| Prepaid expenses                                                                             |       | 361                    |       | 806 |   |
| Land held for  development                                                                   |       | 0                      |       | (2,836 | ) |
| Accounts payable                                                                             |       | 35,345                 |       | (14,428 | ) |
| Product  liability reserve                                                                   |       | 745                    |       | 864 |   |
| Product warranty  reserve                                                                    |       | 743                    |       | (919 | ) |
| Income taxes  payable (receivable)                                                           |       | 9,458                  |       | (8,744 | ) |
| Accrued expenses  and other liabilities                                                      |       | 3,019                  |       | (9,702 | ) |
| Deferred revenue                                                                             |       | (50                    | )          | (50 | ) |
| Discontinued  operations                                                                     |       | (10                    | )          | 0 |   |
| Net cash  provided by (used in) operating activities                                         |       | 46,406                 |       | (24,166 | ) |
|                                                                                         |       |                   |       |   |   |
| Cash flows from  investing activities:                                                       |       |                   |       |   |   |
| Additions to  property, plant, and equipment                                                 |       | (1,770                 | )          | (637 | ) |
| Investment in  joint venture                                                                 |       | (88                    | )          | 0 |   |
| Proceeds from  sale of assets                                                                |       | 505                    |       | 11 |   |
| Net cash used in  investing activities                                                       |       | (1,353                 | )          | (626 | ) |
|                                                                                         |       |                   |       |   |   |
| Cash flows from  financing activities:                                                       |       |                   |       |   |   |
| Book overdraft                                                                               |       | (16,626                | )          | 801 |   |
| Advance  (payments) on lines of credit, net                                                  |       | (2,036                 | )          | 31,592 |   |
| Payments on  long-term notes payable                                                         |       | (1,428                 | )          | (1,428 | ) |
| Debt issuance  costs                                                                         |       | (193                   | )          | (8 | ) |
| Dividends paid                                                                               |       | (1,791                 | )          | (1,810 | ) |
| Issuance of  common stock                                                                    |       | 927                    |       | 625 |   |
| Repurchase of  common stock                                                                  |       | 0                      |       | (2,829 | ) |
| Tax effect of  stock-based award activity                                                    |       | 136                    |       | (352 | ) |
| Net cash  provided by (used in) financing activities                                         |       | (21,011                | )          | 26,591 |   |
|                                                                                         |       |                   |       |   |   |
| Net change in  cash                                                                          |       | 24,042                 |       | 1,799 |   |
| Cash at  beginning of period                                                                 |       | 4,984                  |       | 6,282 |   |
|                                                                                         |       |                   |       |   |   |
| Cash at end of  period                                                                       |       | $                      | 29,026     |   | $ | 8,081 |   |

 

See accompanying notes.

 

6

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 29,2007 and March 29, 2008, and the results of its operations for thequarters ended March 31, 2007 and March 29, 2008 and its cash flowsfor the quarters ended March 31, 2007 and March 29, 2008.  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.  Theconsolidated statement of income for the three months ended March 29, 2008is not necessarily indicative of the results to be expected for the fullyear.  The balance sheet data as of December 29,2007 was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders on Form 10-Kfor the year ended December 29, 2007, nor does it include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto appearingin the Company’s Annual Report to Stockholders on Form 10-K for the yearended December 29, 2007.

 

**2.****             ****Inventories, net**

 

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

 

| ** **             | ** ** | **December 29,**   | ** ** | **March 29,** | ** ** |
|------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **             | ** ** | **2007**                | ** ** | **2008**           | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **         | ** ** |
| Raw materials          |       | $                       | 79,640     |               | $          | 80,233 |   |
| Work-in-process        |       | 54,760                  |       | 54,364             |       |
| Finished units         |       | 33,241                  |       | 35,481             |       |
| Raw material  reserves |       | (9,405                  | )          | (8,887             | )          |
|                   |       |                    |       |               |       |
|                   |       | $                       | 158,236    |               | $          | 161,191 |   |

 

**3.****             ****Joint Venture**

 

On February 25,2007, the Company closed a transaction with International Truck and EngineCorporation to form a joint venture to manufacture all of the Company’s reardiesel chassis.  The terms of theagreement grant the Company a 49% ownership in the joint venture, known asCustom Chassis Products, LLC (CCP).  Theinvestment is accounted for under the equity method.  The Company contributed $4,060,000 ofinventory, $246,000 of fixed assets, and $140,000 of cash to CCP and incurredtransaction costs of $226,000.  TheCompany’s portion of CCP’s income for the quarter ended March 29, 2008 was$126,000 (compared to the $278,000 loss for the quarter ended March 31,2007).

 

**4.****             ****Land Held for Development**

 

On March 19,2008, the Company acquired 25 acres of land near Bay Harbor, Michigan for $2.8million.  The Company plans to developthe parcel into a motorhome resort with approximately 130 lots expected to beavailable for sale to the public in the third quarter of 2008.

 

7

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**MONACO****COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**5.****              Credit Facilities**

 

TheCompany’s credit facilities consist of a revolving line of credit (the “Line ofCredit”) of up to $105.0 million and a term loan (“Term Debt”).  As of March 29, 2008, there was $31.6million outstanding under the Line of Credit and $27.1 million outstanding onthe Term Debt.  At the election of theCompany, the credit facilities bear interest at rates that fluctuate based onthe prime rate or LIBOR and are determined based on the Company’s leverageratio.  The Company also pays interestquarterly on the unused available portion of the Line of Credit at varyingrates, determined by the Company’s leverage ratio.  The amounts outstanding under the Line ofCredit are due and payable in full on November 17, 2009 and interest ispaid monthly.  The Term Debt requiresquarterly interest and principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010. At March 29, 2008,the weighted-average interest rate on the Revolving Loan and the Term Debt was5.2% and 4.2%, respectively.  The creditfacilities are collateralized by all of the assets of the Company.  The Company also has four stand-by letters ofcredit outstanding totaling $3.8 million as of March 29, 2008.

 

The credit facilities require the Companyto maintain a maximum leverage ratio, minimum current ratio, minimum debtservice coverage ratio, and minimum tangible net worth.  The Company was in violation of its requiredleverage ratio and debt service coverage ratio as of March 29, 2008.  The Company has obtained an agreement fromits lenders, dated April 23, 2008, to waive the covenant violations as of March 29,2008.  However, management expects thatthe Company will also violate these covenants for the next severalquarters.  Accordingly, the Company hasreclassified its long-term debt and related debt issue costs from non-currentto current as of March 29, 2008.

 

Under the waiver agreement, the Companyhas agreed to provide the lenders an updated business plan by May 9,2008.  Management believes it will beable to successfully negotiate revised financial covenants  with its lenders at levels that areattainable by the Company based on its updated business plan.  However, there can be no assurance that anagreement will be reached.  If anagreement cannot be reached or if an agreement is reached but the Companynevertheless violates the revised covenants, the Company could experiencesevere liquidity problems unless the lenders were to agree to additionalwaivers, forbearance, or restructuring of the debt or unless the Company canrefinance the debt.  Failure to obtainsuch agreement or to refinance the debt would have a material adverse effect onthe Company.

 

Unamortized debt issue costs related tothe credit facilities are $423,000 as of March 29, 2008.  If the Company’s current credit facility isrefinanced in a transaction required to be accounted for as an extinguishmentor the outstanding balance is demanded by the lender, unamortized debt issuecosts at the demand or refinancing date would be required to be expensed in theperiod of refinancing or demand.

 

**6.****              Long-Term NotesPayable**

 

In November 2005, the Companyobtained a term loan of $500,000 from the State of Oregon in connection withthe relocation of jobs to the Coburg, Oregon production facilities from theBend, Oregon facility.  The principal andinterest are due on April 30, 2009. The loan bears a 5% annual interest rate.

 

8

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**7.****             ****Income Taxes**

 

As of March 29,2008, the Company’s total unrecognized tax benefits were $745,000 and all ofthese benefits, if recognized, would positively affect the Company’s effectivetax rate.  The Company also had accruedinterest related to these unrecognized tax benefits of $115,000 as of March 29,2008.  The total amount of unrecognizedfederal and state tax benefits is uncertain due to the subjectivity in themeasurement of certain deductions claimed for United States income tax purposesand certain state income tax apportionment matters.

 

As of March 29,2008, the Company’s income tax returns that remain subject to examination aretax years 2004 through 2006 for U.S. federal income tax and tax years 2003through 2006 for major state income tax returns.  The statute of limitations for U.S. federalincome taxes and some state income taxes for the 2003 and 2004 tax years willexpire during fiscal year 2008.

 

Unrecognized tax benefitsare expected to decrease during fiscal 2008 by approximately $100,000 due tothe expiration of federal and state statutes of limitations for the 2004 taxyear.

 

**8.****              Earnings Per****Common Share**

 

Basic earnings per commonshare is based on the weighted-average number of shares outstanding during theperiod.  Diluted earnings per commonshare is based on the weighted-average number of shares outstanding during theperiod, after consideration of the dilutive effect of outstanding stock-basedawards.  The weighted-average number ofcommon shares used in the computation of earnings per common share were asfollows:

 

| ** **                                        | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                                        | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Basic**                                         |       |                   |       |   |   |
| Issued and  outstanding shares (weighted-average) |       | 29,829,697             |       | 29,746,479 |   |
|                                              |       |                   |       |   |   |
| **Effect  of Dilutive Securities**                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Stock-based  awards                               |       | 575,974                |       | 380,784 |   |
|                                              |       |                   |       |   |   |
| **Diluted**                                       |       | 30,405,671             |       | 30,127,263 |   |

 

| ** **                            | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                            | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash dividends  per common share      |       | $                      | 0.06       |   | $ | 0.06 |   |
| Cash dividends  paid*(in  thousands)* |       | $                      | 1,791      |   | $ | 1,810 |   |

 

9

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**9.****                ****Repurchase of CommonStock**

 

In January 2008, the Board of Directors approved a stockrepurchase program whereby up to an aggregate of $30 million worth of theCompany’s outstanding shares of Common Stock may be repurchased from time totime.  There is no time restriction onthis authorization to purchase our Common Stock.  The program provides for the Company torepurchase shares through the open market and other approved transactions atprices deemed appropriate by management. The timing and amount of repurchase transactions under the program willdepend upon market conditions and corporate and regulatory considerations.  During January 2008, the Companyrepurchased 313,400 shares of Common Stock on the open market at an averagepurchase price of $9.03 per share.  TheCompany recognized a reduction to additional paid in capital and retainedearnings of approximately $727,000 and $2.1 million, respectively.

 

**10.****          Stock-****Based Award Plans**

 

The Company has anEmployee Stock Purchase Plan (the “Purchase Plan”) – 2007, a non-employee 1993Director Stock Plan (the “Director Plan”), and an amended and restated 1993Stock Plan (the “Stock Plan”).  ThePurchase Plan was approved by the Board of Directors in 2007 and stockholderapproval will be sought at the May 14, 2008 Annual Meeting ofStockholders.  The compensation expenserecognized in the quarters ended March 31, 2007 and March 29, 2008for the plans was $1.8 million and $2.1 million, respectively.  A detailed description of all the plans andthe respective accounting treatment is included in the “Notes to theConsolidated Financial Statements” included in the Company’s Annual Report on Form 10-Kfor the year ended December 29, 2007.

 

**Restricted Stock Units**

** **

During the quarterended March 29, 2008, the Company granted 357,414 restricted stock units(RSU’s) to employees under the Stock Plan. In addition, 68,879 RSU’s from previously granted awards vested duringthe same period.  The compensationexpense recognized for RSU’s in the first quarter of 2007 and 2008 was $989,000and $1.2 million, respectively.

 

**Performance Share Awards**

** **

During the quarterended March 29, 2008, the Company granted 269,764 performance share awards(PSA’s) to employees under the Stock Plan. In addition, 23,077 PSA’s from a previous award vested during the sameperiod.  The compensation expenserecognized for PSA’s in the first quarter of 2007 and 2008 was $754,000 and$740,000, respectively.

 

10

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**11.****      ****Segment Reporting**

 

The following tableprovides the results of operations of the three segments of the Company for thequarters ended March 31, 2007 and March 29, 2008, respectively.  All dollars are in thousands.

 
| ** **                                                            | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                                                            | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Motorized  Recreational Vehicle Segment**                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 245,548    |   | $ | 194,737 |   |
| Cost of sales                                                         |       | 219,061                |       | 182,914 |   |
| Gross profit                                                          |       | 26,487                 |       | 11,823 |   |
|                                                                  |       |                   |       |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 23,155                 |       | 20,443 |   |
|                                                                  |       |                   |       |   |   |
| Operating income  (loss)                                              |       | $                      | 3,332      |   | $ | (8,620 | ) |
|                                                                  |       |                   |       |   |   |
| **Towable  Recreational Vehicle Segment**                             | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 69,480     |   | $ | 55,208 |   |
| Cost of sales                                                         |       | 64,753                 |       | 52,471 |   |
| Gross profit                                                          |       | 4,727                  |       | 2,737 |   |
|                                                                  |       |                   |       |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 6,372                  |       | 6,200 |   |
|                                                                  |       |                   |       |   |   |
| Operating loss                                                        |       | $                      | (1,645     | ) | $ | (3,463 | ) |
|                                                                  |       |                   |       |   |   |
| **Motorhome  Resorts Segment**                                        | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 7,216      |   | $ | 2,432 |   |
| Cost of sales                                                         |       | 2,434                  |       | 1,186 |   |
| Gross profit                                                          |       | 4,782                  |       | 1,246 |   |
|                                                                  |       |                   |       |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 2,831                  |       | 1,993 |   |
|                                                                  |       |                   |       |   |   |
| Operating income  (loss)                                              |       | $                      | 1,951      |   | $ | (747 | ) |

 

11

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**11.****      ****Segment Reporting, continued**

 
| ** **                                      | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** | **March 29,** | ** ** |
| ** **                                      | ** ** | **2007**               | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Reconciliation to Net Income** | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Operating income  (loss):                       |       |                   |       |   |   |
| Motorized  recreational vehicle segment         |       | $                      | 3,332      |   | $ | (8,620 | ) |
| Towable  recreational vehicle segment           |       | (1,645                 | )          | (3,463 | ) |
| Motorhome  resorts segment                      |       | 1,951                  |       | (747 | ) |
| Total operating  income (loss)                  |       | 3,638                  |       | (12,830 | ) |
|                                            |       |                   |       |   |   |
| Other income,  net                              |       | 113                    |       | 87 |   |
| Interest expense                                |       | (967                   | )          | (725 | ) |
| Income (loss)  from investment in joint venture |       | (278                   | )          | 126 |   |
| Income (loss)  before income taxes              |       | 2,506                  |       | (13,342 | ) |
|                                            |       |                   |       |   |   |
| Provision for  (benefit from) income taxes      |       | 1,007                  |       | (4,885 | ) |
|                                            |       |                   |       |   |   |
| Net income  (loss)                              |       | $                      | 1,499      |   | $ | (8,457 | ) |

 

**12.****      ****Commitments and Contingencies**

 

**Repurchase Agreements**

 

Most of the Company’s sales to independentdealers are made on a “floor plan” basis by a bank or finance company whichlends the dealer all or substantially all of the wholesale purchase price andretains a security interest in the vehicles. Upon request of a lending institution financing a dealer’s purchases ofthe Company’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 15months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

The Company’s liability under repurchaseagreements is limited to the unpaid balance owed to the lending institution byreason of its extending credit to the dealer to purchase its vehicles, reducedby the resale value of vehicles which may be repurchased.  The risk of loss is spread over numerousdealers and financial institutions.

 

12

----

 

**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**12.****      ****Commitments and Contingencies, continued**

 

The approximate amount subject to contingentrepurchase obligations arising from these agreements at March 29, 2008 isapproximately $552.5 million, with approximately 4.6% concentrated with onedealer.  If the Company were obligated torepurchase a significant number of units under any repurchase agreement, itsbusiness, operating results, and financial condition could be adverselyaffected.  The Company has included thedisclosure requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” in its financial statements, and hasdetermined 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.  The Company has recorded aliability of approximately $362,000 for potential losses resulting from guaranteeson repurchase obligations for products shipped to dealers.  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 is subject to regulations which mayrequire the Company to recall products with design or safety defects, and suchrecall could have a material adverse effect on the Company’s business, resultsof operations, and financial condition.

 

The Company has from time to time been subjectto product liability claims.  To date,the Company has been successful in obtaining product liability insurance onterms the Company considers acceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $3.0 million.  Overall productliability insurance, including umbrella coverage, is available up to a maximumamount of $100.0 million for 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.   The following table discloses significantchanges in the product liability reserve:

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **March 31,**      | ** ** | **March 29,** | ** ** |
| ** **           | ** ** | **2007**                | ** ** | **2008** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning  balance   |       | $                       | 15,764     |   | $ | 14,625 |   |
| Expense              |       | 3,911                   |       | 4,317 |   |
| Payments/adjustments |       | (3,166                  | )          | (3,453 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 16,509     |   | $ | 15,489 |   |

 

13

----

 

M**ONACO COACHCORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**12.****      ****Commitments and Contingencies, continued**

 

**Product Warranty**

 

Estimated warranty costs are provided for at thetime of sale of products with warranties covering the products for up to oneyear from the date of retail sale (five years for the front and sidewall framestructure, and three years on the Roadmaster chassis).  These estimates are based on historicalaverage repair costs, as well as other reasonable assumptions deemedappropriate by management.  The followingtable discloses significant changes in the product warranty reserve:

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **March 31,**      | ** ** | **March 29,** | ** ** |
| ** **           | ** ** | **2007**                | ** ** | **2008** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning  balance   |       | $                       | 33,804     |   | $ | 35,171 |   |
| Expense              |       | 9,883                   |       | 9,310 |   |
| Payments/adjustments |       | (9,140                  | )          | (10,229 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 34,547     |   | $ | 34,252 |   |

 

**Litigation**

 

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

 

**13.  New Pronouncements**

 

**FAS 157**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements.” The Statement defines fairvalue, establishes a framework for measuring fair value, and expands fair valuemeasurement disclosure.  SFAS No. 157 waseffective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FASB StaffPosition (“FSP”) 157-1 and FSP 157-2. FSP 157-1 amends SFAS No. 157 toremove certain leasing transactions from its scope.  FSP 157-2 delays the effective date of SFASNo. 157 for non-recurring non-financial assets and liabilities to fiscal yearsbeginning after November 15, 2008.  Theprovisions of FASB No. 157 were adopted as of December 30, 2007, including theprovisions of FSP 157-1.  The adoption ofthe statement had no impact on our consolidated financial position, results ofoperations of cash flows.

 

**FAS 159**

 

In February 2007, theFASB issued SFAS No. 159, “Fair Value Option for Financial Assets and FinancialLiabilities.”  This statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  The provisions ofFASB No. 159 were adopted as of December 30, 2007.  We did not elect the Fair Value Option forany of our financial assets or liabilities, and therefore, the adoption of the statementhad no impact on our consolidated financial position, results of operations orcash flows.

 

14

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

 

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Thesestatements include, but are not limited to, those in this report that have beenmarked with an asterisk (*).  In addition,statements containing words such as “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “seeks,” and variations of such words and similarexpressions are intended to identify forward-looking statements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements to differ materially from those expressedor implied by such forward-looking statements, including those set forth belowin Part II, Item 1A under the caption “Risk Factors” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth in Part II, Item 1A under the caption “RiskFactors,” as well as in other documents we file with the Securities andExchange Commission.  We caution thereader, however, that these factors may not be exhaustive.  In addition, we do not undertake theobligation to publicly update or revise any “forward-looking statements,”whether as a result of new information, future events or otherwise, except asrequired by law or the rules of the New York Stock Exchange.

 

**GENERAL**

 

OVERVIEW

 

*Background*

 

Monaco Coach Corporation (the “Company”) is a leadingmanufacturer of premium recreational vehicles including class A, B, and Cmotor coaches, as well as towable recreational vehicles. The Company alsodevelops and sells luxury motorcoach resort facilities. These three operations,while closely tied into the recreational lifestyle, are segmented for reportingpurposes as the Motorized Recreational Vehicle (MRV) segment, the TowableRecreational Vehicle (TRV) segment, and the Motorhome Resort (MR) segment.

 

*Motorized and TowableRecreational Vehicle Segment Products*

 

Our products range in suggested retail price from$45,000 to $700,000 for motor coaches and from $11,000 to $80,000 for towables.Based upon retail registrations for the first two months of 2008, we believe wehad a 24.8% share of the market for diesel class A motor coaches, a 7.5% shareof the market for gas class A motor coaches, a 17.0% share of the marketfor all class A motor coaches, a 4.5% share of the market for class Cmotor coaches, a 2.5% share of the market for fifth wheel towables and a 4.5%share of the market for travel trailers.

 

*Motorhome ResortSegment*

 

In addition to the manufacturing of premiumrecreational vehicles, the Company also owns and operates two motorhome resortproperties (the “Resorts”), located in Las Vegas, Nevada, and Indio,California.  A resort located in Naples,Florida is currently under development, and the Company has acquired land todevelop properties in La Quinta, California, and in Bay Harbor, Michigan. TheResorts offer sales of individual lots to owners, and also offer commoninterests in the amenities at each resort. Lot prices for remaining unsold lotsat the two developed resorts range from $114,900 to $329,900. Amenities at theResorts include:  club house facilities,tennis, swimming, and golf. The Resorts provide destination locations forpremium class A motor coach owners, and help to promote the recreationallifestyle.

 

*Business Changes*

 

In March 2007, we completed the formation of ajoint venture with International Truck and Engine Corporation (ITEC) for thepurpose of manufacturing rear diesel chassis. This joint venture, known as Custom Chassis Products LLC (CCP), enablesus to take advantage of purchasing synergies, access engineering and designexpertise from ITEC, and improve the utilization of our Roadmaster chassismanufacturing facility in Elkhart, Indiana. Our ownership interest is 49%, and we are accounting for the activity ofthis operation using the equity method of accounting.

 

Based on the results of operations for the firstquarter of 2008 and the decrease in sales, subsequent to the quarter end, wehave undertaken cost reduction strategies within the Company in order to returnto profitability.  The strategies includefurther reduction in production output, which has been ongoing, as well asreductions in our personnel across all departments.  We are also continuing to reducemanufacturing costs through purchasing initiatives and projects designed tofurther improve our manufacturing plant utilization costs.

 

15

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**RESULTS OF CONSOLIDATEDOPERATIONS**

 

*Quarter ended March 29,2008 Compared to Quarter ended March 31, 2007*

 

The following table illustrates theresults of consolidated operations for the quarters ended March 31, 2007and March 29, 2008.  All dollaramounts are in thousands.

 
| ** **                                     | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                            | 322,244    |              | 100.0      | %                            | $          | 252,377           |       | 100.0      | %          | $          | (69,867    | ) | (21.7 | )% |
| Cost of sales                                  |       | 286,248                      |       | 88.8              | %          | 236,571                      |       | 93.7              | %          | 49,677     |       | 17.4       | %          |
| Gross profit                                   |       | 35,996                       |       | 11.2              | %          | 15,806                       |       | 6.3               | %          | (20,190    | )          | (56.1      | )%         |
| Selling,  general, and administrative expenses |       | 32,358                       |       | 10.0              | %          | 28,636                       |       | 11.4              | %          | 3,722      |       | 11.5       | %          |
|                                           |       |                         |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income  (loss)                       |       | $                            | 3,638      |              | 1.2        | %                            | $          | (12,830           | )          | (5.1       | )%         | $          | (16,468    | ) | (452.7 | )% |

 

*Motorized and TowableRecreational Vehicle Segments*

 

The recreational vehicle (“RV”) market inthe first quarter of 2008 continued to decline compared to the first quarter of2007.  Fuel prices reached historicalhighs and consumer credit markets have deteriorated.  The market saw wholesale shipments of class Aunits decline 34% during the quarter compared to the same period lastyear.  We experienced a 21% decrease inclass A sales to dealers in the same period. The overall wholesale contraction in the RV market continues to putpressure on our business, though the class A wholesale market is projected bythe RV Industry Association (“RVIA”) to decline by 19% for the full year 2008compared to 2007.*  However, we believethe long-term potential of the RV market is still rooted in soliddemographics.  This is most readilyevidenced by the  so-called “baby boomer”generation, which as it ages will continue to expand our target market wellinto 2015 and should provide a consumer base that is enthusiastic to embracethe RV lifestyle.*

 

The motorized market has beensignificantly impacted by the current market conditions.  The tightening of the retail credit market isplacing pressures on the retail customers and our dealers continue to becautious in the amount of inventory they are willing to carry.  Consequently, we have been very diligent inmonitoring the wholesale versus retail shipments of our products.  This has enabled us to manage our finished goodsinventory levels.  The decline inwholesale shipments has created extreme pressure on our pricing todealers.  This is a major factor in thedecrease of our gross margins and partially offsets the improvements we havemade in our plant efficiencies.  Wecontinue to research ways to consolidate component manufacturing operations toimprove our indirect costs of sales.  Weexpect that we will have more of these projects over the next severalquarters.*

 

 Despite the current cyclical downturn in themotorized market, we continue to remain optimistic on the prospects forlong-term growth in this sector, as the demographics for our customer base showa continuing increase in the number of new entrants into our targeted agebracket and economic group.*  We continueto be focused on developing new products to augment our business.  We will be introducing a class C model built on a Sprinter chassis in the secondquarter of 2008 and a Super C model in the later part of the third quarter.

 

The towable market has continued to slowdown.  Wholesale shipments of towablerecreational vehicles are down 17.3% in the first quarter of 2008 as comparedto the same period in 2007.  However, thelow-to-mid-priced products are performing better than the higher-endproducts.  We introduced in 2007 severalnew floorplans and new lightweight and inexpensive models to compete in thismarket sector.  We believe that these newofferings will enable us to compete more effectively in these more challengingmarket conditions. *

 

As in the case of our motorizedproduction, we also have excess capacity at our towable facilities.  As a result, we consolidated the Elkharttowable production into our Wakarusa and Warsaw, Indiana production facilitiesduring the fourth quarter of 2007.   Thismove will increase plant utilization in the remaining facilities and decrease indirectcosts of sales.*

 

16

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The recreational vehicle industry is extremelycompetitive, and retail customers have many choices available to them. Todistinguish ourselves within the industry, we introduced our Franchise For TheFuture (FFTF) program for our motorized products in June of 2005. Thisprogram is designed to introduce the concept to our dealer partners that ourspecific brands have intrinsic values as a selling tool. To support this, andto encourage our dealers to participate in FFTF, we have worked with outsidemarketing consultants to develop brand signage, informational computer kiosks,and brand specific displays that are placed within our various independentdealer locations. In 2006, we followed this up with Monaco Financial Services(MFS). MFS is a branded financing program from General Electric CommercialDistribution Finance (GECDF) and General Electric Consumer Finance (GECF).Through MFS, our dealer partners earn rebates from GECDF and GECF for wholesalefloorplanning and retail financing for customers. We believe that theseconcepts, along with other features designed to encourage our dealers to focusselling efforts on our various product offerings, will assist them in theirsales efforts through the strength of improved brand identity. *

 

*Motorhome ResortSegment*

 

We have sold nearly all of our lots atthe resorts in both Indio and Las Vegas. We currently have 51 lots available between the two resorts.  First quarter sales were slower than theprior year.  Sales decreased due tohaving fewer lots available for sale as well as competition with resales ofowner lots.  In addition, recentsoftening in overall real estate values have had an impact on the demand forresort lots.  Nevertheless, we remainconfident that we will continue to sell the remaining lots in these tworesorts.*  As part of our focus tocontinue the growth of this segment, we are currently developing a resort inNaples, Florida and have land to develop properties in La Quinta, Californiaand in Bay Harbor, Michigan.  We expectsome lots at the Naples, Florida and Bay Harbor, Michigan locations to beavailable for sale in the third quarter of 2008.*

 

*Overall CompanyPerformance in the First Quarter of 2008*

 

First quarternet sales decreased 21.7% to $252.4 million compared to $322.2 million for thesame period last year.  Gross dieselmotorized sales were down 26.0%, gas motorized sales were up 32.3%, andtowables were down 18.3%.  Dieselproducts accounted for 63.7% of our first quarter revenues while gas productswere 12.1%, and towables were 24.2%.  Ouroverall unit sales were down 15.8% in the first quarter of 2008 to 4,843 units,with diesel motorized unit sales down 30.5% to 773 units, gas motorized unitsales up 22.7% to 427 units, and towable unit sales down 15.1% to 3,643units.  Our total gross average unitselling price decreased to $53,000 from $55,800 in the same period last year,reflecting a shift in the mix of products sold.

 

Gross profitfor the first quarter of 2008 decreased to $15.8 million, down from $36.0million in the first quarter of 2007, and gross margin decreased from 11.2% inthe first quarter of 2007 to 6.3% in the first quarter of 2008.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                            | 196,944    |              | 61.1       | %                            | $          | 161,018           |       | 63.8                     | %          | 2.7 | % |
| Direct labor         |       | 32,041                       |       | 9.9               | %          | 25,532                       |       | 10.1              | %          | 0.2                      | %          |
| Warranty             |       | 9,883                        |       | 3.1               | %          | 9,310                        |       | 3.7               | %          | 0.6                      | %          |
| Other direct         |       | 16,900                       |       | 5.2               | %          | 13,633                       |       | 5.4               | %          | 0.2                      | %          |
| Indirect             |       | 30,480                       |       | 9.5               | %          | 27,078                       |       | 10.7              | %          | 1.2                      | %          |
|                 |       |                         |       |              |       |                         |       |              |       |                     |       |
| Total cost of  sales |       | $                            | 286,248    |              | 88.8       | %                            | $          | 236,571           |       | 93.7                     | %          | 4.9 | % |

 

·       Direct materials increasesin 2008, as a percent of sales, were 2.7% or $6.8 million.  The increase was due partially to the impactof increased sales discounts, which resulted in direct material increases, as apercent of sales, by 0.8% or $1.9 million. The remaining increase was due to change in mix of products sold.

·       Direct labor increases in2008, as a percent of sales, were 0.2% or $505,000.  Direct labor decreased $262,000 due to thereclassification of chassis purchased from the CCP joint venture as the directlabor portion of these chassis are now included in direct materials.  Other costs more than offset this decrease,such as increased sales discounts, which resulted in direct labor increasing,as a percent of sales, by 0.1% or $302,000. The remaining increase was due to change in mix of products sold.

·       Increases in warrantyexpense in 2008, as a percent of sales, were 0.6% or $1.5 million.  These increases were primarily due to an unusuallylarge claim volume received in the first quarter for 2008 as dealers shortenedtheir claims processing time.

·       Increases in other directcosts in 2008, as a percent of sales, were 0.2% or $505,000. This increase wasprimarily the result of higher out-of-policy warranty repairs.

·       Decreasesin indirect costs in 2008 were $3.4 million. These decreases were the result of improvements in efficiencies at ourplants due to consolidation of component facilities, which occurred in thesecond half of 2007.

 

17

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Selling, general, and administrativeexpenses (S,G,&A) decreased by $3.7 million in the first quarter of 2008 to$28.6 million compared to the first quarter of 2007 and increased as apercentage of sales from 10.0% in the first quarter of 2007 to 11.4% in thefirst quarter of 2008.  Changes inS,G,&A expenses are set forth in the following table (dollars inthousands):

 
| ** **                             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                            | 7,897      |              | 2.4        | %                            | $          | 7,291             |       | 2.9                      | %          | 0.5 | % |
| Selling expenses                       |       | 9,846                        |       | 3.1               | %          | 6,580                        |       | 2.6               | %          | (0.5                     | )%         |
| Settlement  expense                    |       | 3,911                        |       | 1.2               | %          | 4,317                        |       | 1.7               | %          | 0.5                      | %          |
| Marketing  expenses                    |       | 1,667                        |       | 0.5               | %          | 2,175                        |       | 0.9               | %          | 0.4                      | %          |
| Other                                  |       | 9,037                        |       | 2.8               | %          | 8,273                        |       | 3.3               | %          | 0.5                      | %          |
|                                   |       |                         |       |              |       |                         |       |              |       |                     |       |
| Total S,G,&A  expenses             |       | $                            | 32,358     |              | 10.0       | %                            | $          | 28,636            |       | 11.4                     | %          | 1.4 | % |

 

·       Decreases in salaries,bonus and benefit expenses in 2008 were $606,000.  This decrease was due to a decrease inmanagement bonus expense of $1.0 million that was offset by an increase inlong-term stock-based program expenses of $219,000, increases in salaries andbenefit expenses of $216,000, and plus a net decrease of various otherexpenses.

·       Decreases in sellingexpenses in 2008 were $3.3 million. This decrease was due to lower costs forselling programs at our dealers’ lots of $3.0 million, lower selling costs forresort lots of $262,000, and a $265,000 reduction in sales commissions thatwere offset by increases in salaries and benefit expenses.

·       Settlement expense(litigation settlement expense) in 2008 increased by $406,000.  The total dollar increase was the result ofincreases in the number of litigation cases in 2008 compared to 2007.

·       Increases in marketingexpenses in 2008 were $508,000.  Theseincreases were the result of higher expenses associated with shows and ralliesof $369,000 as well as increases in printed material costs and magazines of$139,000.

·       Decreases in other expensesin 2008 were $764,000.  This decrease waspredominately a result of a reduction in resort lot participation accrualexpense of $348,000, decrease in loss on sale of assets of $166,000, decreasein contract services of $203,000, offset by an increase in depreciation expenseof $142,000. The remainder of the change was due to decreases in various otherexpenses.

 

Operating losswas $12.8 million, or 5.1% of sales, in the first quarter of 2008 compared toan operating income of $3.6 million, or 1.2% of sales, in the similar 2007period.** **The decrease in operating income was due predominantly todecreased sales, lower gross margins, and higher S,G&A costs as a percentof sales.

 

Net interestexpense was $725,000 in the first quarter of 2008 (net of capitalized interestof $143,000) versus $967,000 in the comparable 2007 period, reflecting higheroverall corporate borrowings during the first quarter of 2008 partially offsetby lower interest rates as compared to the same period in 2007.

 

We reported a benefit from income taxesof $4.9 million, or an effective tax rate of 36.6%, in the first quarter of2008, compared to a provision for income taxes of $1.0 million, or an effectivetax rate of 40.2%, in the first quarter of 2007.  The income tax benefitin the first quarter of 2008 was due to the loss before income taxes, partiallyoffset by a tax provision for permanent differences and an adjustment to avaluation allowance.

 

Net loss forthe first quarter of 2008 was $8.5 million compared to net income of $1.5million for the first quarter of 2007 due primarily to lower sales, lower grossmargin and higher S,G&A expenses as a percentage of sales.

 

18

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*First  Quarter 2008 versus First Quarter 2007 forthe Motorized Recreational Vehicle Segment*

 

The following table illustrates the results of the MRVsegment for the quarters ended March 31, 2007 and March 29, 2008(dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                            | 245,548    |              | 100.0      | %                            | $          | 194,737           |       | 100.0      | %          | $          | (50,811    | ) | (20.7 | )% |
| Cost of sales                                                         |       | 219,061                      |       | 89.2              | %          | 182,914                      |       | 93.9              | %          | 36,147     |       | 16.5       | %          |
| Gross profit                                                          |       | 26,487                       |       | 10.8              | %          | 11,823                       |       | 6.1               | %          | (14,664    | )          | (55.4      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 23,155                       |       | 9.4               | %          | 20,443                       |       | 10.5              | %          | 2,712      |       | 11.7       | %          |
|                                                                  |       |                         |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                            | 3,332      |              | 1.4        | %                            | $          | (8,620            | )          | (4.4       | )%         | $          | (11,952    | ) | (358.7 | )% |

 

Total net salesfor the MRV segment were down from $245.5 million in the first quarter of 2007to $194.7 million in the first quarter of 2008. Gross diesel motorized revenues were down 26.0% and gross gas motorizedrevenues were up 32.3%.  Diesel productsaccounted for 84.0% of the MRV segment’s first quarter of 2008 gross revenueswhile gas products were 16.0%.  Theoverall decrease in revenues is due to the decline in the motorized retail market,as well as the increase of gas motorized units sold in our overall MRV segmentmix.  Our MRV segment unit sales weredown 17.8% year over year from 1,460 units in the first quarter of 2007 to1,200 units in the first quarter of 2008. Diesel motorized unit sales were down 30.5% to 773 units and gasmotorized unit sales were up 22.7% to 427 units.

 

Gross profitfor the MRV segment for the first quarter of 2008 decreased to $11.8 million,down from $26.5 million in the first quarter of 2007, and gross margindecreased from 10.8% in the first quarter of 2007 to 6.1% in the first quarterof 2008.  Changes in the components ofcost of sales are set forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                            | 150,726    |              | 61.4       | %                            | $          | 125,222           |       | 64.3                     | %          | 2.9 | % |
| Direct labor         |       | 24,138                       |       | 9.8               | %          | 19,007                       |       | 9.8               | %          | 0.0                      | %          |
| Warranty             |       | 7,573                        |       | 3.1               | %          | 7,242                        |       | 3.7               | %          | 0.6                      | %          |
| Other direct         |       | 10,998                       |       | 4.5               | %          | 9,432                        |       | 4.8               | %          | 0.3                      | %          |
| Indirect             |       | 25,626                       |       | 10.4              | %          | 22,011                       |       | 11.3              | %          | 0.9                      | %          |
|                 |       |                         |       |              |       |                         |       |              |       |                     |       |
| Total cost of  sales |       | $                            | 219,061    |              | 89.2       | %                            | $          | 182,914           |       | 93.9                     | %          | 4.7 | % |

 

·  Direct materials increases in2008, as a percent of sales, were 2.9% or $5.6 million.  The increase is due to the impact ofincreased sales discounts, which resulted in direct material increasing, as apercent of sales by, 0.6% or $1.1 million. The remaining increase is due to the change in the product mix, as grosssales of gas motorized units, which have higher material usage rates, increasedsignificantly for the MRV segment compared to the prior year.

·  Direct labor, as a percent ofsales, was consistent with the prior year at 9.8%.  Direct labor decreased $262,000 due to thereclassification of chassis purchased from the CCP joint venture as the directlabor portion of these chassis are now included in direct materials.

·  Increase in warranty costs in2008, as a percent of sales, were 0.6% or $1.2 million.  These increases were primarily due to anusually large claim volume received in the first quarter for 2008 as dealersshortened their claims processing time.

·  Increases in other direct costsin 2008, as a percent of sales, were 0.3% or $584,000. This change is due to anincrease in out-of-warranty repairs of $389,000 and delivery expense of$389,000, offset by decreases in compensation and other employee relatedbenefit costs of $196,000.

·  Decreases in indirect costs in2008 were $3.6 million.   These decreaseswere the result of improvements in efficiencies at our plants as a result ofconsolidation of component facilities, and the impact of the joint ventureoperations as previously discussed.

 

19

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S,G,&A expenses for the MRV segment increased, asa percent of sales, due to lower sales levels and increases in salaries andbenefit expenses, settlement expense, and marketing expenses as a percentage ofsales, partially offset by decreases in other S,G,&A expenses as apercentage of sales.

 

Operatingincome decreased due to lower sales, lower gross margins, and higher S,G,&Aexpenses as a percent of sales.

 

*First Quarter 2008versus First Quarter 2007 for the Towable Recreational Vehicle Segment*

 

The following table illustrates theresults of the TRV Segment for the quarters ended March 31, 2007 and March 29,2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                            | 69,480     |              | 100.0      | %                            | $          | 55,208            |       | 100.0      | %          | $          | (14,272    | ) | (20.5 | )% |
| Cost of sales                                                         |       | 64,753                       |       | 93.2              | %          | 52,471                       |       | 95.0              | %          | 12,282     |       | 19.0       | %          |
| Gross profit                                                          |       | 4,727                        |       | 6.8               | %          | 2,737                        |       | 5.0               | %          | (1,990     | )          | (42.1      | )%         |
| Selling, general,  and administrative expenses and corporate overhead |       | 6,372                        |       | 9.2               | %          | 6,200                        |       | 11.3              | %          | 172        |       | 2.7        | %          |
|                                                                  |       |                         |       |              |       |                         |       |              |       |       |       |       |       |
| Operating loss                                                        |       | $                            | (1,645     | )                 | (2.4       | )%                           | $          | (3,463            | )          | (6.3       | )%         | $          | (1,818     | ) | (110.5 | )% |

 

Total net sales forthe TRV segment were down from $69.5 million in the first quarter of 2007 to$55.2 million in the first quarter of 2008. This decrease is mostly due to softer market conditions in the towablesector, as well as to decreases in market share for some of our products.  The Company’s unit sales were down 15.1% to3,643 units.  Average unit selling pricedecreased to $17,100 in the first quarter of 2008 from $17,800 in the sameperiod last year.

 

Gross profit for thefirst quarter of 2008 decreased to $2.7 million, down from $4.7 million in thefirst quarter of 2007, and gross margin decreased from 6.8% in the firstquarter of 2007 to 5.0% in the first quarter of 2008.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                            | 44,070     |              | 63.4       | %                            | $          | 34,707            |       | 62.9                     | %          | (0.5 | )% |
| Direct labor         |       | 7,693                        |       | 11.1              | %          | 6,488                        |       | 11.7              | %          | 0.6                      | %          |
| Warranty             |       | 2,310                        |       | 3.3               | %          | 2,068                        |       | 3.7               | %          | 0.4                      | %          |
| Other direct         |       | 5,875                        |       | 8.5               | %          | 4,197                        |       | 7.6               | %          | (0.9                     | )%         |
| Indirect             |       | 4,805                        |       | 6.9               | %          | 5,011                        |       | 9.1               | %          | 2.2                      | %          |
|                 |       |                         |       |              |       |                         |       |              |       |                     |       |
| Total cost of  sales |       | $                            | 64,753     |              | 93.2       | %                            | $          | 52,471            |       | 95.0                     | %          | 1.8 | % |

 

·  Direct material decreases in2008, as a percent of sales, were 0.5% or $276,000. The decrease is the resultof the change in product mix to units with lower material usage rates.  This was partially offset by an increase insales discounts, which increased direct material, as a percent of sales, by1.5% or $855,000.

·  Direct labor increases in 2008,as a percent of sales, were 0.6% or $331,000. The increase was due to theimpact of increased sales discounts, which resulted in direct labor increasing,as a percent of sales, by 0.2% or $105,000.

·  Warranty expense increases in2008, as a percent of sales, were 0.4% or $221,000.  The remaining decrease of $463,000 was due tolower sales volumes.

·  Decreases in other direct costs,as a percent of sales, were 0.9% or $497,000. This decrease was the result of improvements in delivery expenses.

·  Increases in indirect costs in2008 of $206,000 were due to increases in the variable portion of costsrelative to the reduction in sales.

 

20

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S,G,&,A expenses for the TRV segment increased, asa percent of sales, due to lower sales levels and increased salaries andbenefit expenses, selling expenses, and other S,G,&A expenses as apercentage of sales.

 

Operating loss increaseddue to lower gross margins and higher S,G,&A expenses as a percent ofsales.

 

*FirstQuarter 2008 versus First Quarter 2007 for the Motorhome Resort Segment*

 

The following table illustrates theresults of the Motorhome Resort Segment (MR segment) for the quarters ended March 31,2007 and March 29, 2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **March 29, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                            | 7,216      |              | 100.0      | %                            | $          | 2,432             |       | 100.0      | %          | $          | (4,784     | ) | (66.3 | )% |
| Cost of sales                                                         |       | 2,434                        |       | 33.7              | %          | 1,186                        |       | 48.8              | %          | 1,248      |       | 51.3       | %          |
| Gross profit                                                          |       | 4,782                        |       | 66.3              | %          | 1,246                        |       | 51.2              | %          | (3,536     | )          | (73.9      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 2,831                        |       | 39.3              | %          | 1,994                        |       | 82.0              | %          | 837        |       | 29.6       | %          |
|                                                                  |       |                         |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                            | 1,951      |              | 27.0       | %                            | $          | (748              | )          | (30.8      | )%         | $          | (2,699     | ) | (138.3 | )% |

 

Net salesdecreased 66.3% to $2.4 million compared to $7.2 million for the same periodlast year.  The decrease is due in partto fewer lots available for sale in the first quarter of 2008 as the Indio,California and Las Vegas, Nevada resorts are near the end of the salescycle.  As our inventories of availablelots shrink, there is greater competition within the Company’s own resorts fromowners’ resales.  We are currentlydeveloping resorts in Naples, Florida and in Bay Harbor, Michigan.  Both locations should have lots available forsale in the third quarter of 2008.  Inaddition, recent softening in overall real estate values and the decliningsales in the RV market have had an impact on the demand for resort lots.  The Company still expects that while salesmay remain slower than expected, the need for luxury resort locations withinthe industry will remain strong.*

 

Gross profitfor the MR segment decreased to 51.2% of sales in the first quarter of 2008compared to 66.3% of sales in the same period last year.  The gross margin decrease was due to theaddition of some amenities to certain lots designed to enhance the appeal ofthe resorts and demand for lots, but this also resulted in a higher increase inthe cost of sales.  In addition, discountswere given on other lots.

 

S,G,&A expenses increased, as a percentage ofsales, due to lower sales that were not entirely offset by a reduction in totalS,G,&A.

 

Operatingincome decreased due to lower sales, a decrease in gross margin, and higherS,G,&A as a percent of sales*.*

 

21

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**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s primary sources of liquidity areinternally generated cash from operations and available borrowings under itscredit facilities. During the first quarter of 2008, the Company used cash of$24.2 million for operating activities and had a net cash balance of $8.1million at March 29, 2008. The Company used $1.7 million of cash from thenet loss offset by non-cash expenses such as depreciation, amortization, andstock based compensation. Major uses of cash flows for operating activitiesinclude an increase of $2.9 million in inventories, an increase of $2.8 millionin land held for development, a decrease of $14.4 million in trade accountspayable, an increase in income tax receivable of $8.7 million, and a decreasein accrued expenses and other liabilities of $9.7 million.  The major source of cash was from a decreaseof $15.6 million in trade accounts receivable. The increase in inventories wasfrom an increase in finished goods due to a decline in sales in the firstquarter of 2008 that was not entirely anticipated.  The increase in land held for development isdue to the purchase of the Bay Harbor, Michigan property for resort developmentin March 2008.  The decrease intrade accounts payable relates to the decline in purchases of raw materialstowards the end of the quarter.  As thequarter progressed, production output was reduced and raw materials that hadbuilt up towards the beginning of the quarter were used.  The increase in income tax receivable is dueto the net loss recognized in the first quarter of 2008.  The decrease in accrued expenses and other liabilitiesis associated primarily with decreases of accruals for management bonus earnedin 2007, payroll and employee benefits, promotions and advertising, and variousmiscellaneous accruals.  The decrease intrade accounts receivable is due to the decline in sales experienced in thefirst quarter of 2008 as compared to the fourth quarter of 2007 and increasesin collections.

 

The Company’s credit facilities consist of a revolvingline of credit (the “Line of Credit”) of up to $105.0 million and a term loan (“TermDebt”).  As of March 29, 2008, therewas $31.6 million outstanding under the Line of Credit and $27.1 millionoutstanding on the Term Debt.  At theelection of the Company, the credit facilities bear interest at rates thatfluctuate based on the prime rate or LIBOR and are determined based on theCompany’s leverage ratio.  The Companyalso pays interest quarterly on the unused available portion of the Line ofCredit at varying rates, determined by the Company’s leverage ratio.  The amounts outstanding under the Line ofCredit are due and payable in full on November 17, 2009 and interest ispaid monthly.  The Term Debt requiresquarterly interest and principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010.  The credit facilities are collateralized byall of the assets of the Company.  TheCompany utilizes “zero balance” bank disbursement accounts in which an advanceon the line of credit is automatically made for checks clearing each day. Sincethe balance of the disbursement account at the bank returns to zero at the endof each day, the outstanding checks of the Company are reflected as aliability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. The cash balance at March 29, 2008 is thecash maintained in the R-Vision bank accounts held with different financialinstitutions and thus not combined with the Company’s net book overdraftbalance.

 

The credit facilities require the Company to maintaina maximum leverage ratio, minimum current ratio, minimum debt service coverageratio, and minimum tangible net worth. The Company was in violation of its required leverage ratio and debtservice coverage ratio as of March 29, 2008.  The Company has obtained an agreement fromits lenders, dated April 23, 2008, to waive the covenant violations as of March 29,2008.  However, management expects thatthe Company will also violate these covenants for the next severalquarters.  Accordingly, the Company hasreclassified its long-term debt and related debt issue costs from non-currentto current as of March 29, 2008.

 

Under the waiver agreement, the Company has agreed toprovide the lenders an updated business plan by May 9, 2008.  Management believes it will be able to successfullynegotiate revised financial covenants with its lenders at levels that are attainable by the Company based onits updated business plan.  However,there can be no assurance that an agreement will be reached.  If an agreement cannot be reached or if anagreement is reached but the Company nevertheless violates the revisedcovenants, the Company could experience severe liquidity problems unless thelenders were to agree to additional waivers, forbearance, or restructuring ofthe debt or unless the Company can refinance the debt.  Failure to obtain such agreement or torefinance the debt would have a material adverse effect on the Company.

 

Unamortized debt issue costs related to the creditfacilities are $423,000 as of March 29, 2008.  If the Company’s current credit facility isrefinanced in a transaction required to be accounted for as an extinguishmentor the outstanding balance is demanded by the lender, unamortized debt issuecosts at the demand or refinancing date would be required to be expensed in theperiod of refinancing or demand.

 

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

 

22

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The Company’s principal working capital requirementsare for purchases of inventory and financing of trade receivables. Many of theCompany’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below. At March 29, 2008, theCompany had working capital of approximately $107.9 million, a decrease of $4.2million from working capital of $112.0 million at December 29, 2007. TheCompany has been using short-term credit facilities and operating cash flow tofinance its capital expenditures.

 

Subject to resolving covenant issues previouslydescribed, the Company believes that cash flow from operations and fundsavailable under its anticipated credit facilities will be sufficient to meetthe Company’s liquidity requirements for the next 12 months.* The Company’scapital expenditures were $637,000 in the first quarter of 2008, which includedcosts related to additions of automated machinery in many of its productionfacilities, upgrades to its information systems infrastructure, and othervarious capitalized upgrades to existing facilities. The Company anticipatesthat capital expenditures for all of 2008 will be approximately $7 to $8million, which includes expenditures to purchase additional machinery andequipment in both the Company’s Coburg, Oregon and Wakarusa, Indianafacilities, as well as upgrades to existing information systems infrastructures.*The Company 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 inventory andaccounts receivable. The Company may also from time to time seek to acquirebusinesses that would complement the Company’s current business, and any suchacquisition could require additional financing. There can be no assurance thatadditional financing will be available if required or on terms deemed favorableby the Company.

 

As is typical in the recreational vehicle industry,many of the Company’s retail dealers utilize wholesale floor plan financingarrangements with third party lending institutions to finance their purchasesof the Company’s products. Under the terms of these floor plan arrangements,institutional lenders customarily require the recreational vehicle manufacturerto agree to repurchase any unsold units if the dealer defaults on its creditfacility from the lender, subject to certain conditions. The Company hasagreements with several institutional lenders under which the Company currentlyhas repurchase obligations. The Company’s contingent obligations under theserepurchase agreements are reduced by the proceeds received upon the sale of anyrepurchased units. The Company’s obligations under these repurchase agreementsvary from period to period up to 15 months. At March 29, 2008,approximately $552.5 million of products sold by the Company to independentdealers were subject to potential repurchase under existing floor planfinancing agreements with approximately 4.6% concentrated with one dealer.Historically, the Company has been successful in mitigating losses associatedwith repurchase obligations. During the first quarter of 2008, the lossesassociated with the exercise of repurchase agreements were approximately$126,000. Dealers for the Company undergo a credit review prior to becoming adealer and periodically thereafter. Financial institutions that provide floorplan financing also perform credit reviews and floor checks on an ongoing basis.We closely monitor sales to dealers that are a higher credit risk. Therepurchase period is limited, usually up to a maximum of 15 months. We believethese activities help to minimize the number of required repurchases. Additionally,the repurchase agreement specifies that the dealer is required to makeprincipal payments during the repurchase period. Since the Company repurchasesthe units based on the schedule of principal payments, the repurchase amount istypically less than the original invoice amount. This lower repurchase amounthelps mitigate our loss when we offer the inventory to another dealer at anamount lower than the original invoice as incentive for the dealer to take therepurchased inventory.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

** **

As of March 29, 2008, the Company did not haveany off-balance sheet arrangements that have, or are reasonably likely to have,a current or future material effect on the Company’s consolidated financialcondition, results of operations, liquidity, capital expenditures or capitalresources.

 

23

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**CONTRACTUAL OBLIGATIONS**

** **

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

 
| ** **                          | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**    | ** ** | **1 year or less**         | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt  (1)                 |       | $                                         | 27,143     |   | $ | 500 |   | $ | 0 |   | $ | 0 |   | $ | 27,643 |   |
| Operating Leases  (2)               |       | 2,307                                     |       | 4,205 |   | 3,100 |   | 930 |   | 10,542 |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations |       | $                                         | 29,450     |   | $ | 4,705 |   | $ | 3,100 |   | $ | 930 |   | $ | 38,185 |   |

 
| ** **                  | ** ** | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------|------------|
| **Other Commitments**  | ** ** | **1 year or less**                                      | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit  (3)         |       | $                                                                      | 0          |   | $ | 31,592 |   | $ | 0 |   | $ | 0 |   | $ | 31,592 |   |
| Guarantees (4)              |       | 0                                                                      |       | 0 |   | 10,930 |   | 0 |   | 10,930 |   |
| Repurchase  Obligations (5) |       | 413,796                                                                |       | 138,669 |   | 0 |   | 0 |   | 552,465 |   |
|                        |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Total  Commitments          |       | $                                                                      | 413,796    |   | $ | 170,261 |   | $ | 10,930 |   | $ | 0 |   | $ | 594,987 |   |

 

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| (1) | See Notes 5 and 6 to the Condensed Consolidated  Financial Statements.                                                                                           |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Various leases including manufacturing facilities,  aircraft, and machinery and equipment.                                                                       |
| (3) | See Note 5 to the Condensed Consolidated Financial  Statements. The amount listed represents available borrowings on the line of  credit at March 29, 2008. |
| (4) | Guarantees related to aircraft operating lease.                                                                                                                  |
| (5) | Reflects obligations under manufacturer repurchase  commitments. See Note 12 to the Condensed Consolidated Financial Statements.                                 |

 

**INFLATION**

 

During 2007 and to a lesser extent in the firstquarter of 2008, the Company experienced increases in the prices of certaincommodity items that we use in manufacturing our products.  These include, but are not limited to, steel,copper, aluminum, petroleum, and wood. While price increases for these raw materials are not necessarilyindicative of widespread inflationary trends, they had an impact on the Company’sproduction costs.  To date, the Companyhas been successful in passing along most of these increases by increasing theselling prices of its products.  However,there is no certainty that the Company will be able to pass these alongsuccessfully in the future.  The currenttrend in these prices, if it continues, could have a materially adverse impacton the Company’s business going forward.

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generally acceptedin the United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions and such differences could be material. We believethe following critical accounting policies and related judgments and estimates affectthe preparation of our consolidated financial statements.

 

**WARRANTY COSTS** Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis). These estimates are based on historical average repaircosts, as well as other reasonable assumptions as have been deemed appropriateby management.

 

**PRODUCT LIABILITY** The Companyprovides an estimate for accrued product liability based on current pendingcases, as well as for those cases which are incurred but not reported. Thisestimate is developed by legal counsel based on professional judgment, as wellas historical experience.

 

**IMPAIRMENT OF GOODWILL** TheCompany assesses the potential impairment of goodwill in accordance withFinancial Accounting Standards Board (FASB) Statement No. 142. This annualtest involves management comparing the fair value of each of the Company’sreporting units, to the respective carrying amounts, including goodwill, of thenet book value of the reporting unit, to determine if goodwill has beenimpaired. The Company uses an estimate of discounted future cash flows todetermine fair value for each reporting unit.

** **

**INVENTORY ALLOWANCE** The Companywrites down its inventory for obsolescence, and the difference between the costof inventory and its estimated fair market value. These write-downs are basedon assumptions about future sales demand and market conditions. If actual salesdemand or market conditions change from those projected by management,additional inventory write-downs may be required.

 

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**INCOME TAXES**    Inconjunction with preparing its consolidated financial statements, the Companymust estimate its income taxes in each of the jurisdictions in which itoperates. 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 taxassets and liabilities, which are included in the consolidated balance sheets.The Company must then assess the likelihood that the deferred tax assets willbe recovered from future taxable income, and to the extent management believesthat recovery is not likely, a valuation allowance must be established.Significant management judgment is required in determining the Company’sprovision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets.

 

**INCENTIVE STOCK-BASED COMPENSATION**    TheCompany, like many other companies, sponsors an incentive stock-basedcompensation plan for key members of the organization.  The related expenses recognized are subjectto complex calculations based on a variety of assumptions for variables such asrisk-free rates of return, stock volatility, expected terminations, andachievements of financial performance measures. To the extent certain of these variables can not be known, managementuses estimates to calculate the resulting liability.

 

**REPURCHASE OBLIGATIONS**    Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement. The Company hasrecorded a liability associated with the disposition of repurchased inventory.To determine the appropriate liability, the Company calculates a reserve, basedon an estimate of potential net losses, along with qualitative and quantitativefactors, including dealer inventory turn rates, and the financial strength ofindividual dealers.

 

**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

 

***FAS 157***

* *

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” The Statement defines fair value, establishes aframework for measuring fair value, and expands fair value measurementdisclosure.  SFAS No. 157 waseffective for fiscal years beginning after November 15, 2007. In February 2008,the FASB issued FASB Staff Position (“FSP”) 157-1 and FSP 157-2.  FSP 157-1 amends SFAS No. 157 to removecertain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for non-recurringnon-financial assets and liabilities to fiscal years beginning after November 15,2008.  The provisions of FASB No. 157were adopted as of December 30, 2007, including the provisions of FSP157-1.  The adoption of the statement hadno impact on our consolidated financial position, results of operations or cashflows.

 

***FAS 159***

* *

In February 2007, the FASB issued SFAS No. 159,“Fair Value Option for Financial Assets and Financial Liabilities.” Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value.  Theprovisions of FASB No. 159 were adopted as of December 30, 2007.  We did not elect the Fair Value Option forany of our financial assets or liabilities, and therefore, the adoption of thestatement had no impact on our consolidated financial position, results ofoperations or cash flows.

 

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

 

Nomaterial change since December 29, 2007.

 

**ITEM 4.  Controls andProcedures**

 

**Evaluation of 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 Form 10-Q.  Based on this evaluation, our Chief ExecutiveOfficer and our Chief Financial Officer have concluded that our disclosurecontrols and procedures are effective to ensure that information we arerequired to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934, as amended, is accumulated and communicated to ourmanagement including our principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure, andthat such information is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

 

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Our management, including our ChiefExecutive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures will prevent all error and all fraud.  Because of inherent limitations in any systemof disclosure controls and procedures, no evaluation of controls can provideabsolute assurance that all instances of error or fraud, if any, within theCompany may be detected.  However, ourmanagement, including our Chief Executive Officer and our Chief Financial Officer,have designed our disclosure controls and procedures to provide reasonableassurance of achieving their objectives and have, pursuant to the evaluationdiscussed above, concluded that our disclosure controls and procedures are, infact, effective at this reasonable assurance level.

 

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

 

**PART II - OTHERINFORMATION**

 

**ITEM 1A.  Risk Factors**

 

We have listed belowvarious risks and uncertainties relating to our businesses. This list is notinclusive of all the risks and uncertainties we face, but any of these couldcause our actual results to differ materially from the results contemplated bythe forward-looking statements contained in this report or that we may issuefrom time to time in the future.

 

**WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS**    Ournet sales, gross margin, and operating results may fluctuate significantly fromperiod to period due to a number of factors, many of which are not readilypredictable. These factors include the following:

 

·              Factorsaffecting the recreational vehicle industry as a whole, including economic andseasonal factors, such as fuel prices, interest rates and credit availability.

 

·              Thevarying margins associated with the mix of products we sell in any particularperiod.

 

·              Thefact that we typically ship a large amount of products near quarter end.

 

·              Ourability to utilize and expand our manufacturing resources efficiently.

 

·              Shortagesof materials used in our products.

 

·              Theeffects of inflation on the costs of materials used in our products.

 

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

 

·              Ourability to introduce new models that achieve consumer acceptance.

 

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

 

·              Theaddition or loss of our dealers.

 

·              Thetiming of trade shows and rallies, which we use to market and sell our products.

 

·              Ourinability to acquire and develop key pieces of property for on-going resortactivity.

 

·              Fluctuationsin demand for our resort lots due to changing economic and other conditions.

 

Our overall gross margin may decline in future periodsto the extent that we increase the percent of sales of lower gross margintowable products or if the mix of motor coaches we sell shifts to lower grossmargin units. In addition, a relatively small variation in the number ofrecreational vehicles we sell in any quarter can have a significant impact ontotal sales and operating results for that quarter.

 

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Demand in the recreational vehicle industry generallydeclines during the winter months, while sales are generally higher during thespring and summer months. With the broader range of products we now offer,seasonal factors could have a significant impact on our operating results inthe future. Additionally, unusually severe weather conditions in certainmarkets could delay the timing of shipments from one quarter to another.

 

We attempt to forecast orders for our productsaccurately and commence purchasing and manufacturing prior to receipt of suchorders. However, it is highly unlikely that we will consistently be able toaccurately forecast the timing, rate, and mix of orders. This aspect of ourbusiness makes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results, and cash flow for any given quarter.

 

**OUR BUSINESS SEGMENTS ARE CYCLICAL AND SUSCEPTIBLETO SLOWDOWNS IN THE GENERAL ECONOMY**    Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic,and political conditions that affect disposable income for leisure-timeactivities. Our business is particularly influenced by cycle swings in the classA market. While there has been strong secular demand for recreational vehiclessince the early 90’s it has been driven by demand for towable recreationalproducts. Since 2004, there has been a notable divergence in growth rates betweentowable and motorized recreational vehicles.

 

Class A unit shipments peaked at approximately37,300 units in 1994 and declined to approximately 33,000 units in 1995. The classA segment then went on a steady climb and in 1999 recorded the highest year, inrecent history, of class A shipments, approximately 49,400. Over the next twoyears motorhome shipments declined to 33,400 in 2001.  Class A shipments then rose for the nextthree years and in 2004 reached, 46,300. Over the last three years, however,shipments of class A motorhomes have dropped reaching pre-1994 levels of 32,900in 2007.

 

The towable segment moved through many of the samecyclical peaks and troughs historically. The shipment level peaked in 1994 at201,100 dropping-off to 192,200 in 1996 and then growing to 249,600 in 1999.Towable unit shipments suffered a two-year drop-off like class A motorhomes in2000 and 2001, dropping to 207,600. Since then, the market has expandedsignificantly reaching 334,600 in 2006, but falling in 2007 to 297,900. Unlikethe class A market, the towables segment did not experience a slow down in2005 and 2006, because manufacturers have successfully introduced popular newmodels and the segment was significantly aided by units sold to support thehurricane relief efforts in the gulf coast. The decline in 2007 reflects consumers’ uneasiness surrounding theeconomy, fuel prices and declining real estate values.

 

Our business is subject to the cyclical nature of theRV industry and principally the class A segment. Some of the factors thatcontribute to this cyclicality include fuel availability and costs, interestrate levels, the level of discretionary spending, and availability of creditand overall consumer confidence. Increasing interest rates and fuel prices overthe last three years have adversely affected the class A recreationalvehicle market. An extended continuation of these conditions would materiallyaffect the results of our operations and financial condition.

 

Our recreational vehicle resort properties are alsoimpacted by the overall recreational vehicle industry.  In addition, our real estate investments inthe resort properties are subject to the impacts of lending challenges andgeneral market declines in the real estate market.    As a result, we may experience delays indeveloping and selling our resorts. These delays may result in losses that could materially affect ourresults of operations and financial condition.

 

**WE MAY EXPERIENCE A DECREASE IN SALES OF OURPRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL**   Aninterruption in the supply, or significant continued increases 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, atvarious times in the past, been either expensive or difficult to obtain.

 

**IF WE ARE UNABLE TO RENEGOTIATE THE FINANCIAL COVENANTS IN OUR CREDITFACILITY OR ARE U****NABLE TO COMPLY WITH THERENEGOTIATED FINANCIAL COVENANTS, OUR OUTSTANDING DEBT COULD BECOME IMMEDIATELYPAYABLE**   Asof March 29, 2008, we had $31.6 million outstanding under our $105 millionline of credit and $27.1 million outstanding on our term loan.  As of March 29, 2008, we were inviolation of certain of the financial covenants under this creditfacility.  We obtained an agreement fromour lenders to waive the covenant violations as of March 29, 2008;however, we expect that we will also violate these covenants for the nextseveral quarters unless we are able to renegotiate them with our lenders.  There can be no assurance that an agreementto revise these covenants will be reached and the current uncertainty in thecredit markets may make renegotiation more difficult.  If an agreement cannot be reached or if anagreement is reached but the Company nevertheless violates the revisedcovenants, we could experience severe liquidity problems unless our lenderswere to agree to additional waivers, forbearance, or restructuring of the debtor unless we can refinance the debt with other lenders.  Failure to renegotiate and comply with ourfinancial covenants or any subsequent failure to obtain waivers or to refinanceour debt would have a material adverse effect on our business, results ofoperations, and financial condition.

 

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**THE EXPECTED BENEFITS OF THE JOINT VENTURE, CCP, MAY NOTBE REALIZED**   During the first quarter of2007, we completed the formation of a joint venture (CCP) with InternationalTruck and Engine Corporation (ITEC) for the purpose of manufacturing dieselchassis.  The process of establishing theoperations of the joint venture may result in unforeseen operating difficultiesand may require a significant amount of management’s attention that wouldotherwise be focused on the ongoing development of our business.  The anticipated advantages of the jointventure, which are purchasing synergies, access to engineering and designexpertise from ITEC, and improvement of the utilization of our Roadmasterchassis manufacturing facility in Elkhart, Indiana, may not be realized.

 

**WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDEUS WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS**    A number of important componentsfor our products are purchased from a single or a limited number of sources.These include chassis from Workhorse and Ford for gas motor coaches and dieselchassis from our newly formed joint venture with International Truck and EngineCorporation.  The joint venture sourcesturbo diesel engines from Cummins and Caterpillar, substantially alltransmissions from Allison and axles from Dana.   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, theCompany has periodically been placed on allocation of these and other key components.The last significant allocation occurred in 1997 from Allison, and in 1999 fromFord. An extended delay or interruption in the supply of any components that weobtain from a single supplier or from a limited number of suppliers couldadversely affect our business, results of operations, and financial condition.

 

**WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERSFOR A SIGNIFICANT PERCENTAGE OF OUR SALES**   Althoughour products were offered by over 700 dealerships located primarily in theUnited States and Canada as of March 29, 2008, a significant percentage ofour sales are concentrated among a relatively small number of independentdealers. For the quarter ended March 29, 2008, sales to one dealer, LazyDays RV Center, accounted for 9.0% of total sales compared to 10.3% of sales inthe same period ended last year.  Forquarters ended March 31, 2007 and March 29, 2008,  sales to our 10 largest dealers, includingLazy Days RV Center, accounted for a total of 35.4% and 32.8% of total sales,respectively. The loss of a significant dealer or a substantial decrease insales by any of these dealers could have a material impact on our business,results of operations, and financial condition.

 

**WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER**   As is common in the recreationalvehicle industry, we enter into repurchase agreements with the financinginstitutions used by our dealers to finance their purchases of our products.These agreements require us to repurchase the dealer’s inventory in the eventthat the dealer defaults on its credit facility with its lender. Obligationsunder these agreements vary from period to period, but totaled approximately$552.5 million as of March 29, 2008, with approximately 4.6% concentratedwith one dealer. If we were obligated to repurchase a significant number ofunits under any repurchase agreement, our business, operating results, andfinancial condition could be adversely affected.

 

**OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**   Wesell our product to dealers who are predominantly located in the United Statesand Canada. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions. Forour RV dealers, terms are net 30 days for units that are financed by a thirdparty lender. Terms of open trade receivables are granted by us, on a verylimited basis, to dealers who have been subjected to evaluative creditprocesses conducted by us. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Agreements for payment termsbeyond 30 days generally require additional collateral, as well as securityinterest in the inventory sold. As of March 29, 2008, total tradereceivables were $72.6 million, with approximately $67.2 million, or 92.6% ofthe outstanding accounts receivable balance concentrated among floor planlenders. The remaining $5.4 million of trade receivables were concentrated allwith one dealer. For resort lot customers, funds are required at the time ofclosing.

 

**OUR INDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUETO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE**   Themarket for our products is very competitive. We currently compete with a numberof manufacturers of motor coaches, fifth wheel trailers, and travel trailers.Some of these companies have greater financial resources than we have andextensive distribution networks. These companies, or new competitors in theindustry, may develop products that customers in the industry prefer over ourproducts.

 

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We believe that the introduction of new products andnew features is critical to our success. Delays in the introduction of newmodels 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 modelchanges have affected our gross margin in the past. Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

 

**OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES**   Ourcustomers require demanding specifications for product performance andreliability. Because our products are complex and often use advancedcomponents, processes and techniques, undetected errors and design flaws mayoccur. Product defects result in higher product service, warranty and replacementcosts and may cause serious damage to our customer relationships and industryreputation, all of which would negatively affect our sales and business.

 

**OUR BUSINESS IS SUBJECT TOVARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS**   Weare subject to litigation arising in the ordinary course of our business,typically for product liability and warranty claims that are common in therecreational vehicle industry. While we do not believe that the outcome of anypending litigation, net of insurance coverage, will materially adversely affectour business, results of operations, or financial condition, we cannot provideassurances in this regard because litigation is an inherently uncertainprocess.*

 

To date, we have been successful in obtaining productliability insurance on terms that we consider 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. Overallproduct liability insurance, including umbrella coverage, is available to amaximum amount of $100.0 million for each occurrence, as well as in theaggregate. We cannot be certain we will be able to obtain insurance coverage inthe future at acceptable levels or that the costs of such insurance will bereasonable. Further, successful assertion against us of one or a series oflarge uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

 

**IN ORDER TO BE SUCCESSFUL, WE MUST ATTRACT, RETAINAND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES, AND OUR FAILURE TODO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS**   TheCompany’s future prospects depend upon retaining and motivating key managementpersonnel, including Kay L. Toolson, the Company’s Chairman and Chief ExecutiveOfficer, and John W. Nepute, the Company’s President. The loss of one or moreof these key management personnel could adversely affect the Company’sbusiness. The prospects of the Company also depend in part on its ability toattract and retain highly skilled engineers and other qualified technical,manufacturing, financial, managerial, and marketing personnel. Competition forsuch personnel is intense, and there can be no assurance that the Company willbe successful in attracting and retaining such personnel.

 

**WE MAY EXPERIENCEUNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCEPLANNING SYSTEM (ERP) IMPLEMENTATION**   During2006, we began utilizing a portion of the capabilities of the ERP systeminvolving customer service, parts, and warranty.  The next major implementation of moduleswithin the system will be occurring subsequent to fiscal year 2008 and will besubject to certain risks including the following:

 

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

 

·              Theimplementation could result in significant and unexpected increases in ouroperating expenses and capital expenditures, particularly if the project takeslonger than we expect.

 

·              Theproject could complicate and prolong our internal data gathering and analysisprocesses.

 

·              Wemay need to restructure or develop our internal processes to adapt to the newsystem.

 

·              Wecould require extended work hours from our employees and use temporary outsideresources, resulting in increased expenses, to resolve any softwareconfiguration issues or to process transactions manually until issues areresolved.

 

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·              Asmanagement focuses attention on the implementation, they could be diverted fromother issues.

 

·              Theproject could disrupt our operations if the transition to the ERP systemcreates new or unexpected difficulties or if the system does not perform asexpected.

 

**OUR STOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUETO FLUCTUATE**   The market price of our CommonStock is subject to wide fluctuations in response to quarter-to-quartervariations in operating results, changes in earnings estimates by analysts,announcements of new products by us or our competitors, general conditions inthe recreational vehicle market, and other events or factors. In addition, thestocks of many recreational vehicle companies have experienced price and volumefluctuations which have not necessarily been directly related to the companies’operating performance, and the market price of our Common Stock couldexperience similar fluctuations.

 

**ITEM 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

In January 2008, theBoard of Directors approved a stock repurchase program where by up to anaggregate of $30 million worth of the Company’s outstanding shares of CommonStock may be repurchased from time to time. There is no time restriction on this authorization to purchase ourCommon Stock.  The program provides forthe Company to repurchase shares through the open market and other approvedtransactions at prices deemed appropriate by management.  The timing and amount of repurchasetransactions under the program will depend upon market conditions and corporateand regulatory considerations.

 

The following table setsforth information concerning the number of Common Shares repurchased under ourpublicly announced program since the beginning of fiscal 2008:

 

| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | **Total**             | ** ** | ** **               | ** **  |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|-------------|
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | **Number of**    | ** ** | **Maximum**              | ** **  |
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | **Shares**            | ** ** | **Number of**       | ** **  |
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | **Purchased as** | ** ** | **Shares That**     | ** **  |
| ** **                          | ** ** | **Total**          | ** ** | ** **          | ** ** | **Part of**      | ** ** | **May Yet Be** | ** **  |
| ** **                          | ** ** | **Number of** | ** ** | **Average**         | ** ** | **Publicly**          | ** ** | **Purchased**            | ** **  |
| ** **                          | ** ** | **Shares**         | ** ** | **Price Paid** | ** ** | **Announced**         | ** ** | **Under the**       | ** **  |
| **Period**                          | ** ** | **Purchased**      | ** ** | **Per Share**  | ** ** | **Program**           | ** ** | **Program***             | ** **  |
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **            | ** ** | ** **               | ** **  |
| January 3  through 9, 2008     |       | 313,400            |       | $                   | 9.03       |                  | 313,400    |                     | 254,860,880 |   |
| Quarter ending March 29,  2008 |       | 313,400            |       | $                   | 9.03       |                  | 313,400    |                     | 254,860,880 |   |

 

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* The number of shares isbased upon the remaining funds available under the program times the marketprice of Common Stock at March 29, 2008.

 

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**ITEM 6.  Exhibits**

 
| 10.6.4 |   | Waiver  Agreement and Fourth Amendment to Third Amended and Restated Credit Agreement  dated April 23, 2008, by and among the Company, the subsidiaries of the  Company party thereto as co-borrowers, each of the Lenders and US Bank  National Association, as the Administrative Lender. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                             |
| 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.                                                                                                     |

 

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**SIGNATURES**

 

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

 
|                         | **MONACO COACH CORPORATION**      |
|-------------------------|-----------------------------------|
| ** **              | ** **                        |
| ** **              | ** **                        |
| Dated: May 8, 2008 | /s/ P. Martin Daley               |
|                    | P. Martin Daley                   |
|                    | Vice President and                |
|                    | Chief Financial Officer  (Duly    |
|                    | Authorized Officer and  Principal |
|                    | Financial Officer)                |

 

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**EXHIBITS INDEX**

 
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                             |
| 10.6.4     |       | Waiver Agreement  and Fourth Amendment to Third Amended and Restated Credit Agreement dated  April 23, 2008, by and among the Company, the subsidiaries of the  Company party thereto as co-borrowers, each of the Lenders and US Bank  National Association, as the Administrative Lender. |
|       |       |                                                                                                                                                                                                                                                                                             |
| 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.                                                                                                     |

 

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