** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

** **

**Washington, D.C. 20549**

** **

** **

**FORM 10-Q**

** **

ý**                                 ****Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934**

** **

**For the period ended:  October 1, 2005**

**or**

** **

o**                                 ****Transition Report Pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934**

** **

**For the period from              to            **

** **

** **

**Commission FileNumber:  1-14725**

** **

** **

** **

**MONACO COACHCORPORATION**

 

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

 

**91320 IndustrialWay**

**Coburg, Oregon97408**

(Addressof principal executive offices)

 

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

 

                Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirementsfor the past 90 days.

 

YES ý  NO o

 

                Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

YES ý  NO o

 

                Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 

YES o  NO ý

 

                Thenumber of shares outstanding of common stock, $.01 par value, as of October 1,2005:  29,557,074

 

----

 

**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**October 1, 2005**

 

**INDEX**

 

 

 

 

 
| ** **                                                                                                                       | **Page  Reference** |
|----------------------------------------------------------------------------------------------------------------------------------|---------------------|
| **PART I - FINANCIAL INFORMATION**                                                                                               |                |
|                                                                                                                             |                |
| **Item 1. Financial Statements.**                                                                                                |                |
|                                                                                                                             |                |
| Condensed Consolidated Balance Sheets as of  January 1, 2005 and October 1, 2005.                                                | 4                   |
|                                                                                                                             |                |
| Condensed Consolidated Statements of Income  for the quarters and nine-month periods ended October 2, 2004 and October 1,  2005. | 5                   |
|                                                                                                                             |                |
| Condensed Consolidated Statements of Cash Flows for  the nine-month periods ended October 2, 2004 and October 1, 2005.           | 6                   |
|                                                                                                                             |                |
| Notes to Condensed  Consolidated Financial Statements.                                                                           | 7 - 14              |
|                                                                                                                             |                |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.**                    | **15 - 30**         |
|                                                                                                                             |                |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk.**                                                         | **30**              |
|                                                                                                                             |                |
| **Item 4. Controls and  Procedures.**                                                                                            | **30**              |
|                                                                                                                             |                |
| **PART II - OTHER  INFORMATION**                                                                                                 |                |
|                                                                                                                             |                |
| **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**

 

**Item1.  Financial Statements**

 

3

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**MONACO COACHCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 

 
| ** **                                                                                                                  | ** ** | **January 1,  2005** | ** ** | **October 1,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **ASSETS**                                                                                                                  |       |                 |       |                 |       |
| Current assets:                                                                                                             |       |                 |       |                 |       |
| Trade receivables, net                                                                                                      |       | $                    | 127,380    |                 | $          | 99,376 |   |
| Inventories                                                                                                                 |       | 169,777              |       | 178,437              |       |
| Resort lot inventory                                                                                                        |       | 7,315                |       | 7,887                |       |
| Prepaid expenses                                                                                                            |       | 5,190                |       | 4,450                |       |
| Income taxes receivable                                                                                                     |       | 0                    |       | 5,144                |       |
| Deferred income taxes                                                                                                       |       | 33,188               |       | 32,797               |       |
| Total current assets                                                                                                        |       | 342,850              |       | 328,091              |       |
|                                                                                                                        |       |                 |       |                 |       |
| Property, plant, and  equipment, net                                                                                        |       | 141,563              |       | 143,062              |       |
| Debt issuance costs net of accumulated amortization of $661, and $636,  respectively                                        |       | 571                  |       | 480                  |       |
| Goodwill                                                                                                                    |       | 55,254               |       | 55,254               |       |
| Total assets                                                                                                                |       | $                    | 540,238    |                 | $          | 526,887 |   |
|                                                                                                                        |       |                 |       |                 |       |
| **LIABILITIES**                                                                                                             |       |                 |       |                 |       |
| Current liabilities:                                                                                                        |       |                 |       |                 |       |
| Book overdraft                                                                                                              |       | $                    | 1,587      |                 | $          | 2,888 |   |
| Line of credit                                                                                                              |       | 34,062               |       | 12,715               |       |
| Accounts payable                                                                                                            |       | 79,072               |       | 87,666               |       |
| Product liability reserve                                                                                                   |       | 20,233               |       | 19,676               |       |
| Product warranty reserve                                                                                                    |       | 32,369               |       | 29,279               |       |
| Income taxes payable                                                                                                        |       | 2,087                |       | 0                    |       |
| Accrued expenses and other liabilities                                                                                      |       | 31,533               |       | 38,677               |       |
| Total current liabilities                                                                                                   |       | 200,943              |       | 190,901              |       |
|                                                                                                                        |       |                 |       |                 |       |
| Deferred income taxes                                                                                                       |       | 19,679               |       | 20,193               |       |
| Total liabilities                                                                                                           |       | 220,622              |       | 211,094              |       |
|                                                                                                                        |       |                 |       |                 |       |
| Commitments and  contingencies (Note 7)                                                                                     |       |                 |       |                 |       |
|                                                                                                                        |       |                 |       |                 |       |
| **STOCKHOLDERS’ EQUITY**                                                                                               |       |                 |       |                 |       |
| Preferred stock, $.01 par value; 1,934,783 shares authorized,no  shares outstanding                                         |       |                 |       |                 |       |
| Common stock, $.01 par value; 50,000,000 shares authorized,  29,425,787 and 29,557,074 issued and outstanding, respectively |       | 294                  |       | 296                  |       |
| Additional paid-in capital                                                                                                  |       | 57,454               |       | 58,826               |       |
| Retained earnings                                                                                                           |       | 261,868              |       | 256,671              |       |
| Total stockholders’ equity                                                                                             |       | 319,616              |       | 315,793              |       |
| Total liabilities and stockholders’ equity                                                                             |       | $                    | 540,238    |                 | $          | 526,887 |   |

 

 

Seeaccompanying notes.

 

4

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**MONACO COACHCORPORATION**

** CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 

 

 
| ** **                                                    | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                     |       | $                    | 357,762    |                  | $          | 296,953 |   | $ | 1,064,756 |   | $ | 930,278 |   |
| Cost of sales                                                 |       | 314,335              |       | 272,334               |       | 931,830 |   | 836,776 |   |
| Gross profit                                                  |       | 43,427               |       | 24,619                |       | 132,926 |   | 93,502 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general, and  administrative expenses                |       | 30,805               |       | 30,514                |       | 81,733 |   | 86,451 |   |
| Plant relocation costs                                        |       | 0                    |       | 1,480                 |       | 0 |   | 3,832 |   |
| Operating income (loss)                                       |       | 12,622               |       | (7,375                | )          | 51,193 |   | 3,219 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other income, net                                             |       | 43                   |       | 15                    |       | 256 |   | 155 |   |
| Interest expense                                              |       | (370                 | )          | (271                  | )          | (1,147 | ) | (943 | ) |
| Income (loss) before income taxes and discontinued operations |       | 12,295               |       | (7,631                | )          | 50,302 |   | 2,431 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for income  taxes, continuing operations            |       | 4,709                |       | (3,227                | )          | 18,869 |   | 458 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) from  continuing operations                 |       | 7,586                |       | (4,404                | )          | 31,433 |   | 1,973 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from discontinued  operations, net of tax provision      |       | (150                 | )          | (1,559                | )          | (126 | ) | (1,858 | ) |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                             |       | $                    | 7,436      |                  | $          | (5,963 | ) | $ | 31,307 |   | $ | 115 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings (loss) per common  share:                            | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic from continued operations                               |       | $                    | 0.26       |                  | $          | (0.15 | ) | $ | 1.07 |   | $ | 0.06 |   |
| Basic from discontinued operations                            |       | $                    | (0.01      | )                     | $          | (0.05 | ) | $ | 0.00 |   | $ | (0.06 | ) |
| Basic                                                         |       | $                    | 0.25       |                  | $          | (0.20 | ) | $ | 1.07 |   | $ | 0.00 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted from continued operations                             |       | $                    | 0.25       |                  | $          | (0.15 | ) | $ | 1.04 |   | $ | 0.06 |   |
| Diluted from discontinued operations                          |       | $                    | 0.00       |                  | $          | (0.05 | ) | $ | 0.00 |   | $ | (0.06 | ) |
| Diluted                                                       |       | $                    | 0.25       |                  | $          | (0.20 | ) | $ | 1.04 |   | $ | 0.00 |   |
| ** **                                                    | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common  shares outstanding:                  | ** ** | ** **           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                         |       | 29,410,086           |       | 29,545,315            |       | 29,354,598 |   | 29,502,539 |   |
| Diluted                                                       |       | 29,962,722           |       | 29,868,628            |       | 29,981,063 |   | 29,862,363 |   |
|                                                               |            |                      |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes.

 

5

----

 

**MONACO COACHCORPORATION**

** CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:dollars in thousands)**

 

 
| ** **                                                                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **October 2,  2004**  | ** ** | **October 1,  2005** | ** ** |
|                                                                                      |       |                  |       |   |   |
| **Increase (Decrease) in Cash:**                                                          |       |                  |       |   |   |
|                                                                                      |       |                  |       |   |   |
| Cash flows from operating  activities:                                                    |       |                  |       |   |   |
| Net income from continuing operations                                                     |       | $                     | 31,433     |   | $ | 1,973 |   |
| Adjustments to reconcile net income to net cash (used) provided by  operating activities: |       |                  |       |   |   |
| Loss on sale of assets                                                                    |       | 240                   |       | 12 |   |
| Depreciation and amortization                                                             |       | 8,006                 |       | 7,764 |   |
| Deferred income taxes                                                                     |       | 832                   |       | 905 |   |
| Changes in working capital accounts:                                                      |       |                  |       |   |   |
| Trade receivables, net                                                                    |       | (40,134               | )          | 29,372 |   |
| Inventories                                                                               |       | (32,314               | )          | (4,891 | ) |
| Resort lot inventory                                                                      |       | 5,737                 |       | 1,219 |   |
| Prepaid expenses                                                                          |       | (2,678                | )          | 732 |   |
| Accounts payable                                                                          |       | 31,857                |       | 11,727 |   |
| Product liability reserve                                                                 |       | (128                  | )          | (557 | ) |
| Product warranty reserve                                                                  |       | 4,350                 |       | (3,025 | ) |
| Income taxes payable                                                                      |       | 3,508                 |       | (6,612 | ) |
| Accrued expenses and other liabilities                                                    |       | 6,284                 |       | 6,046 |   |
| Net cash provided by operating activities                                                 |       | 16,993                |       | 44,665 |   |
| Cash flows from investing  activities:                                                    |       |                  |       |   |   |
| Additions to property, plant, and equipment                                               |       | (7,060                | )          | (11,009 | ) |
| Proceeds from sale of assets                                                              |       | 1,927                 |       | 72 |   |
| Net cash used in investing activities                                                     |       | (5,133                | )          | (10,937 | ) |
| Cash flows from financing  activities:                                                    |       |                  |       |   |   |
| Book overdraft                                                                            |       | 0                     |       | 1,301 |   |
| Payments on lines of credit, net                                                          |       | 0                     |       | (21,347 | ) |
| Payments on long-term notes payable                                                       |       | (11,250               | )          | 0 |   |
| Debt issuance costs                                                                       |       | (66                   | )          | (39 | ) |
| Dividends paid                                                                            |       | (4,404                | )          | (5,312 | ) |
| Issuance of common stock                                                                  |       | 1,912                 |       | 1,374 |   |
| Net cash used by financing activities                                                     |       | (13,808               | )          | (24,023 | ) |
| Net cash used by  discontinued operations                                                 |       | (2,712                | )          | (9,705 | ) |
| Net change in cash                                                                        |       | (4,660                | )          | 0 |   |
| Cash at beginning of  period                                                              |       | 13,066                |       | 0 |   |
| Cash at end of period                                                                     |       | $                     | 8,406      |   | $ | 0 |   |

 

Seeaccompanying notes.

 

6

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**MONACO COACHCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

 

**1.     Basis ofPresentation**

 

The interimcondensed consolidated financial statements have been prepared by Monaco CoachCorporation (the “Company”) without audit. In the opinion of management, the accompanying unaudited financial statementscontain all adjustments necessary, consisting only of normal recurringadjustments, to present fairly the financial position of the Company as ofJanuary 1, 2005 and October 1, 2005, and the results of its operations and itscash flows for the quarters and nine months ended October 2, 2004 and October 1,2005.  The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of January 1, 2005 was derived from audited financialstatements, but does not include all disclosures contained in the Company’sAnnual Report to Stockholders.  Theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto appearingin the Company’s Annual Report to Stockholders for the year ended January 1,2005.

 

 

**2.  Inventories**

 

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

 

| ** **      | ** **   | **January 1,  2005** | ** ** | **October 1, 2005** | ** ** |
|-----------------|--------------|----------------------|------------|--------------------------|------------|
| *** ***    | *** *** | **(in thousands)**   | ** ** |
| Raw materials   |         | $                    | 75,853     |                     | $          | 66,696 |   |
| Work-in-process |         | 71,387               |       | 61,681                   |       |
| Finished units  |         | 22,537               |       | 50,060                   |       |
|            |         | $                    | 169,777    |                     | $          | 178,437 |   |

 

 

**3.     Line ofCredit**

 

The Company’s credit facility consists of a revolving line ofcredit of $105.0 million.  On October 1,2005, borrowings outstanding on the revolving line of credit (the “RevolvingLoan”) were $12.7 million.  At theelection of the Company, the Revolving Loan bears interest at varying ratesthat fluctuate based on the Prime rate or LIBOR, and are determined based onthe Company’s leverage ratio.  At October1, 2005, the interest rate was 5.47%. The Company also pays interest monthly on the unused available portionof the Revolving Loan at varying rates, determined by the Company’s leverageratio.  The Revolving loan is due andpayable in full on November 17, 2009 and requires monthly interestpayments.  The Revolving Loan iscollateralized by all the assets of the Company and includes variousrestrictions and financial covenants.  Asof October 1, 2005, the Company is in compliance with its covenants.

 

7

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**4.     EarningsPer Common Share**

 

Basicearnings per common share is based on the weighted average number of sharesoutstanding during the period.  Dilutedearnings per common share is based on the weighted average number of sharesoutstanding during the period, after consideration of the dilutive effect ofstock options.  For the quarter endedOctober 1, 2005, there were 655,960 non-dilutive options excluded from thediluted earnings per share calculation (zero for the quarter ended October 2,2004).  The weighted average number ofcommon shares used in the computation of earnings per common share are asfollows:

 

 
| ** **                                        | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
| **Basic**                                         |       |                 |       |                  |       |   |   |   |   |
| Issued and outstanding  shares (weighted average) |       | 29,410,086           |       | 29,545,315            |       | 29,354,598 |   | 29,502,539 |   |
|                                              |       |                 |       |                  |       |   |   |   |   |
| **Effect of Dilutive Securities**                 |       |                 |       |                  |       |   |   |   |   |
| Stock Options                                     |       | 552,636              |       | 323,313               |       | 626,465 |   | 359,824 |   |
| **Diluted**                                       |       | 29,962,722           |       | 29,868,628            |       | 29,981,063 |   | 29,862,363 |   |

 

 

**5.**              Stock Option Plans

** **

**  **       At October 1,2005, the Company had three stock-based employee compensation plans.  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123, Accounting forStock-based Compensation, to stock-based employee compensation.  All dollars represented are in thousands,except for per share data.

** **
| ** **                                                                                                                                  | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
|                                                                                                                                        |       |                 |       |                  |       |   |   |   |   |
| Net income - as reported                                                                                                                    |       | $                    | 7,436      |                  | $          | (5,963 | ) | $ | 31,307 |   | $ | 115 |   |
| Deduct: Total stock-based employeecompensation expense determined  under fair value based method for all awards, net of related tax effects |       | 236                  |       | 296                   |       | 574 |   | 750 |   |
|                                                                                                                                        |       | $                    | 7,200      |                  | $          | (6,259 | ) | $ | 30,733 |   | $ | (635 | ) |
|                                                                                                                                        |       |                 |       |                  |       |   |   |   |   |
| Earnings per share:                                                                                                                         |       |                 |       |                  |       |   |   |   |   |
| Basic - as reported                                                                                                                         |       | $                    | 0.25       |                  | $          | (0.20 | ) | $ | 1.07 |   | $ | 0.00 |   |
| Basic - pro forma                                                                                                                           |       | $                    | 0.24       |                  | $          | (0.21 | ) | $ | 1.04 |   | $ | (0.02 | ) |
|                                                                                                                                        |       |                 |       |                  |       |   |   |   |   |
| Diluted - as reported                                                                                                                       |       | $                    | 0.25       |                  | $          | (0.20 | ) | $ | 1.04 |   | $ | 0.00 |   |
| Diluted - pro forma                                                                                                                         |       | $                    | 0.24       |                  | $          | (0.21 | ) | $ | 1.03 |   | $ | (0.02 | ) |

** **

**8**

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** **

** **

**6.**           Segment Reporting

** **

Monaco Coach Corporation is a leading manufacturer of premiumClass A and Class C motor coaches and towable recreational vehicles (“towables”)collectively referred to as the “RV Segment.” Our product line currently consists of a broad line of motor coaches,fifth wheel trailers and travel trailers under the “Monaco,” “Holiday Rambler,”“Beaver,” “Safari,” and “McKenzie” brand names.

 

In addition to the manufacturing of premium recreationalvehicles, the Company also owns and operates two motorhome resort properties(the “Resorts”), located in Las Vegas, Nevada, and Indio, California.  The Resorts offer sales of individual lots toowners, and also offer a common interest in the amenities at the resort.  The Resorts provide destination locations forpremium Class A recreational vehicle owners and help to promote therecreational lifestyle.

 

The following table provides the results of operations of thetwo segments of the Company for the quarters and nine months ended October 2,2004 and October 1, 2005, respectively. All dollars represented are in thousands.

** **

**  **
| ** **                                     | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
| **Recreational Vehicle Segment**               |       |                 |       |                  |       |   |   |   |   |
|                                           |       |                 |       |                  |       |   |   |   |   |
| Net sales                                      |       | $                    | 353,288    |                  | $          | 289,002 |   | $ | 1,047,924 |   | $ | 904,577 |   |
| Cost of sales                                  |       | 311,918              |       | 269,357               |       | 922,106 |   | 827,627 |   |
| Gross profit                                   |       | 41,370               |       | 19,645                |       | 125,818 |   | 76,950 |   |
|                                           |       |                 |       |                  |       |   |   |   |   |
| Selling, general and  administrative expenses  |       | 16,602               |       | 19,594                |       | 41,811 |   | 50,423 |   |
| Other reconciling items                        |       | 12,066               |       | 8,279                 |       | 33,203 |   | 27,249 |   |
| Plant relocation costs                         |       | 0                    |       | 1,480                 |       | 0 |   | 3,832 |   |
| Operating income (loss)                        |       | $                    | 12,702     |                  | $          | (9,708 | ) | $ | 50,804 |   | $ | (4,554 | ) |
|                                           |       |                 |       |                  |       |   |   |   |   |
| **Motorhome Resorts Segment**                  |       |                 |       |                  |       |   |   |   |   |
|                                           |       |                 |       |                  |       |   |   |   |   |
| Net sales                                      |       | $                    | 4,474      |                  | $          | 7,951 |   | $ | 16,832 |   | $ | 25,701 |   |
| Cost of sales                                  |       | 2,417                |       | 2,977                 |       | 9,725 |   | 9,149 |   |
| Gross profit                                   |       | 2,057                |       | 4,974                 |       | 7,107 |   | 16,552 |   |
|                                           |       |                 |       |                  |       |   |   |   |   |
| Selling, general, and  administrative expenses |       | 796                  |       | 1,721                 |       | 3,029 |   | 5,751 |   |
| Other reconciling items                        |       | 1,341                |       | 920                   |       | 3,689 |   | 3,028 |   |
| Operating income (loss)                        |       | $                    | (80        | )                     | $          | 2,333 |   | $ | 389 |   | $ | 7,773 |   |

** **

**9**

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** **

**6.**           Segment Reporting (continued)

** **
| ** **                                                    | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
| **Reconciliation to Net Income**                              |       |                 |       |                  |       |   |   |   |   |
| ** **                                                    |       |                 |       |                  |       |   |   |   |   |
| Operating income (loss):                                      |       |                 |       |                  |       |   |   |   |   |
| Recreational vehicle segment                                  |       | $                    | 12,702     |                  | $          | (9,708 | ) | $ | 50,804 |   | $ | (4,554 | ) |
| Motorhome resorts segment                                     |       | (80                  | )          | 2,333                 |       | 389 |   | 7,773 |   |
| Total operating income (loss)                                 |       | 12,622               |       | (7,375                | )          | 51,193 |   | 3,219 |   |
|                                                          |       |                 |       |                  |       |   |   |   |   |
| Other income, net                                             |       | 43                   |       | 15                    |       | 256 |   | 155 |   |
| Interest expense                                              |       | (370                 | )          | (271                  | )          | (1,147 | ) | (943 | ) |
| Income (loss) before income taxes and discontinued operations |       | 12,295               |       | (7,631                | )          | 50,302 |   | 2,431 |   |
|                                                          |       |                 |       |                  |       |   |   |   |   |
| Provision for income taxes,  continuing operations            |       | 4,709                |       | (3,227                | )          | 18,869 |   | 458 |   |
|                                                          |       |                 |       |                  |       |   |   |   |   |
| Net income (loss) from  continuing operations                 |       | 7,586                |       | (4,404                | )          | 31,433 |   | 1,973 |   |
|                                                          |       |                 |       |                  |       |   |   |   |   |
| Loss from discontinued  operations, net of tax provision      |       | (150                 | )          | (1,559                | )          | (126 | ) | (1,858 | ) |
|                                                          |       |                 |       |                  |       |   |   |   |   |
| Net income (loss)                                             |       | $                    | 7,436      |                  | $          | (5,963 | ) | $ | 31,307 |   | $ | 115 |   |

 

| **Assets of the Recreational  Vehicle  and Motorhome Resorts Segments** | ** ** | **January 1,  2005** | ** ** | **October 1,  2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                    |       |                 |       |                 |       |
| Recreational vehicle  segment                                           |       | $                    | 529,826    |                 | $          | 517,703 |   |
| Motorhome resorts segment                                               |       | 10,412               |       | 9,184                |       |
| Total assets                                                            |       | $                    | 540,238    |                 | $          | 526,887 |   |
|                                                                         |            |                      |            |                      |            |  |  |  |

** **

** **

** **

**7.**              Commitments and Contingencies

 

RepurchaseAgreements

 

Many of the Company’s sales toindependent dealers are made on a “floor plan” basis by a bank or financecompany which lends the dealer all or substantially all of the wholesalepurchase price and retains a security interest in the vehicles.  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.  Theseagreements provide that, for up to 18 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event of a default by adealer to its lender.  In addition, on alimited basis, the Company will extend limited guarantees of repayment fordealers to assist in temporary credit constraints.  Guarantees of repayment are offered only towell qualified dealers.  As of October 1,2005, approximately $75,000 worth of product was subject to this arrangement.

 

The Company’s liability underrepurchase agreements is limited to the unpaid balance owed to the lending institution,and to guarantees referred to above, by reason of its extending credit to thedealer to purchase its vehicles, reduced by the resale value of vehicles whichmay be repurchased.  The risk of loss isspread over numerous dealers and financial institutions.

 

10

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**7.****             ****Commitments and Contingencies(continued)**

 

The approximate amount subject tocontingent repurchase obligations arising from these agreements at October 1,2005 is $490.9 million, with approximately 6.0% concentrated with onedealer.  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 $780,000 for potential losses resulting fromguarantees on 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.  If the Companywere obligated to repurchase a significant number of units under any repurchaseagreement, its business, operating results, and financial condition could beadversely affected.

 

Product Liability

 

The Company is subject to regulationswhich may require the Company to recall products with design or safety defects,and such a recall could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

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

 

Litigation

 

The Company is involved in variouslegal proceedings, certain of which may involve material amounts, which areincidental to the industry and for which certain matters are covered in wholeor in part by insurance or, otherwise, the Company has recorded accruals forestimated settlements.  Managementbelieves that any liability which may result from these proceedings will nothave a material adverse effect on the Company’s consolidated financialstatements.

 

AircraftLease Commitment

 

The Company has an aircraft under anoperating lease, with annual renewals for up to three years.  The Company began its second year of renewalin February 2005.  The future minimumrental commitments under the renewal term of this lease is $1.5 million in 2005and $252,000 in 2006. The Company has guaranteed up to $15.1 million of anydeficiency in the event that the Lessor’s net sales proceeds of the aircraftare less than $16.9 million.

 

11

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**8.     Plant Relocation**

 

On April 15, 2005, the Company announced plans to relocatethe Bend, Oregon production operations to the Coburg, Oregon facility.  The Bend, Oregon operations ceased as of June15, 2005.  The Company has recognizedpre-tax charges in the quarter and nine month period ending October 1, 2005 of$1.5 million and $3.8 million, respectively. The charges in the third quarter were primarily for the impairment ofproperty, plant and equipment and rental expense related to the facility.

 

The following table provides a rollforward of amountsincluded in accrued liabilities for restructuring reserves. All dollarsrepresented are in thousands.

 
| ** **                                   | ** ** | **July 2,  2005** | ** ** | **Cash  payments** | ** ** | **Non-cash  adjustments** | ** ** | **October  1,  2005** | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------|------------|---------------------------|------------|----------------------------|------------|
|                                         |       |              |       |               |       |                      |       |                       |       |
| Lease commitment                             |       | $                 | 143        |               | $          | (143                      | )          | $                          | 553        |   | $ | 553 |   |
| Impairment of property,  plant and equipment |       | 0                 |       | 0                  |       | 510                       |       | 510                        |       |
| Other                                        |       | 202               |       | (77                | )          | 0                         |       | 125                        |       |
|                                         |       | $                 | 345        |               | $          | (220                      | )          | $                          | 1,063      |   | $ | 1,188 |   |

 

 

**9.     DiscontinuedOperations**

** **

During the third quarter of 2005, the Company announced thatit planned to close its Royale Coach operations in Elkhart, Indiana.  Royale Coach produces Prevost bus conversionmotor coaches with price points in excess of $1.4 million.  Royale Coach sells approximately 20 coachesper year and is not a significant portion of the Company’s overallbusiness.  One time plant closure costsof approximately $1.6 million (net of tax) have been recognized in the thirdquarter of 2005.  The net loss fromdiscontinued operations for the quarter and nine month period ending October 2,2004 is net of a tax credit of $93,000 and $77,000, respectively.  For the quarter and nine month period endingOctober 1, 2005, is net of a tax credit of $520,000 and $619,000, respectively.

 

The operating results of Royale Coach are presented in theCompany’s Consolidated Statements of Income as discontinued operations, net ofincome tax, and all prior periods have been reclassified.  The components of discontinued operations forthe periods presented are as follows. All dollars represented are in thousands.

 

      
| ** **                                                | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **October 2,  2004** | ** ** | **October 1,  2005**  | ** ** | **October 2,  2004** | ** ** | **October 1,  2005** | ** ** |
|                                                      |       |                 |       |                  |       |   |   |   |   |
| Net sales                                                 |       | $                    | 1,106      |                  | $          | 1,077 |   | $ | 6,863 |   | $ | 5,452 |   |
| Cost of sales                                             |       | 1,119                |       | 2,255                 |       | 6,243 |   | 6,211 |   |
| Gross profit                                              |       | (13                  | )          | (1,178                | )          | 620 |   | (759 | ) |
|                                                      |       |                 |       |                  |       |   |   |   |   |
| Selling, general and  administrative expenses             |       | 230                  |       | 901                   |       | 823 |   | 1,718 |   |
|                                                      |       |                 |       |                  |       |   |   |   |   |
| Net loss from discontinued operations before income taxes |       | (243                 | )          | (2,079                | )          | (203 | ) | (2,477 | ) |
| Income tax credit                                         |       | (93                  | )          | (520                  | )          | (77 | ) | (619 | ) |
| Net loss from discontinued operations                     |       | $                    | (150       | )                     | $          | (1,559 | ) | $ | (126 | ) | $ | (1,858 | ) |

 

12

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**9.    Discontinued Operations (continued)**

 

Thefollowing major classes of assets and liabilities are included in discontinuedoperations in the Consolidated Balance Sheets:

 

| ** **                                      | ** **   | **January 1,  2005** | ** ** | **October 1, 2005** | ** ** |
|-------------------------------------------------|--------------|----------------------|------------|--------------------------|------------|
| *** ***                                    | *** *** | **(in thousands)**   | ** ** |
| Assets of discontinued  operations              |         |                 |       |                     |       |
| Current assets                                  |         | $                    | 8,143      |                     | $          | 13,053 |   |
| Net property, plant and equipment               |         | 101                  |       | 92                       |       |
|                                            |         | $                    | 8,244      |                     | $          | 13,145 |   |
|                                            |         |                 |       |                     |       |
| Current liabilities of  discontinued operations |         | $                    | 4,412      |                     | $          | 1,692 |   |

 

** **

 

**10.   Subsequent Events**

** **

On October 18, 2005, the Company announced plans to reducethe number of administrative and indirect labor employees by approximately 225,or 17 percent of the non-production work force. The reduction will result in annual pre-tax savings of approximately $8million.

 

On November 8, 2005, the Company announced that it had signedan agreement to purchase the Indiana based towable and motorized manufacturerR-Vision, Inc., R-Vision Motorized, LLC, Bison, LLC, and Roadmaster, LLC(collectively referred to as “R-Vision”). The Company will pay $60.0 million for acquiring all of the stockof  R-Vision in a cash transactionfinanced by a combination of long-term debt and borrowings on its existing lineof credit.  The Company expects tocomplete an amendment to its current financing facility concurrently with theexpected closing of the transaction in November 2005.

 

**11.   New AccountingPronouncements**

** **

EITF 04-10

 

In September of 2004, theFinancial Accounting Standards Board (the Board) issued EITF 04-10, “DeterminingWhether to Aggregate Operating Segments That Do Not Meet the QuantitativeThresholds.”  FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” requires public companiesto report financial and descriptive information about its reportable operatingsegments.  EITF 04-10 addresses how todetermine if operating segments that do not meet the quantitative thresholds ofFASB No. 131 are to be reported as separate segments.

 

EITF 04-10 is effective forfiscal years ending after September 15, 2005.

 

We have determined that theprovisions of EITF 04-10 will impact the disclosures to be included in future financialstatements.  Accordingly, we have adoptedsegment reporting for our Motorhome Resorts segment. 

 

13

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**11.   New Accounting Pronouncements (continued)**

 

FAS 151

 

In November 2004, the Board issued FAS 151, “Inventory Costsan amendment of ARM No. 43, Chapter 4,” to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material.  The standard is effective for inventory costsincurred during fiscal years beginning after June 15, 2005.

 

We have not yet determined if the provisions of the Statementwill impact the Company’s financial statements.

 

FAS 123R

 

In December 2004, the Board issued FAS 123R, “Share-BasedPayment.”  The Statement replaces FAS123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees.” The Statement establishes fair value as the measurement objective inaccounting for share-based payment arrangements and requires a fair-value-basedmeasurement method in accounting for share-based payments to employees exceptfor equity instruments held by employee share ownership plans.  The Statement is effective for publicentities as of the beginning of the first annual reporting period that beginsafter June 15, 2005.

 

We will adopt the provisions of the Statement for the fiscalyear beginning 2006.  If we had includedthe cost of the employee stock option compensation using the fair value methodin our financial statements, our net income for the first three quarters of2004 and 2005 would have been impacted by approximately $574,000 and $750,000,respectively.

 

14

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**2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

 

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

 

 

**GENERAL**

 

                MonacoCoach Corporation is a leading manufacturer of premium Class A and Class Cmotor coaches and towable recreational vehicles (“towables”) collectivelyreferred to as the “RV Segment.”  Ourproduct line currently consists of a broad line of motor coaches, fifth wheeltrailers and travel trailers under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,”and “McKenzie” brand names.  Ourproducts, which are typically priced at the high end of their respective productcategories, range in suggested retail price from $75,000 to $600,000 for motorcoaches and from $20,000 to $65,000 for towables.

 

          The Company is in the process ofcompleting the closure of its Royale Coach bus conversion operations in Elkhart,Indiana.  Royale Coach has historicallyproduced about 20 bus conversions per year and has operated at break-even formost of the time it has been in operating production.  The Royale Coach operations are not a significantbusiness line for the Company, and its closure is not expected to have asignificant impact on the ongoing operations of the Company as a whole.  For the period ended October 1, 2005, theCompany has recorded a loss from discontinued operations, net of tax, of $1.6million.

 

                In additionto the manufacturing of premium recreational vehicles, the Company also ownsand operates two motorhome resort properties (the “Resorts”), located in LasVegas, Nevada, and Indio, California. The Resorts offer sales of individual lots to owners, and also offer acommon interest in the amenities at the resort. Lot prices at the two resorts range from $119,000 to $259,000.  Amenities at the Resorts include club housefacilities, tennis, swimming, and golf. The Resorts provide destination locations for premium Class Arecreational vehicle owners, and help to promote the recreational lifestyle.

 

                Subsequentto October 1, 2005, the Company announced that it had signed an agreement topurchase the Indiana based towable and motorized manufacturer R-Vision, Inc.,R-Vision Motorized, LLC, Bison, LLC, and Roadmaster, LLC (collectively referredto as “R-Vision”).  The Company will pay$60.0 million for acquiring all of the stock of R-Vision in a cash transaction financed by a combination of long-termdebt and borrowings on its existing line of credit.  The Company expects to complete an amendmentto its current financing facility concurrently with the expected closing of thetransaction in November 2005.  

 

15

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**RESULTS OF CONSOLIDATEDOPERATIONS**

 

*Quarter ended October 1, 2005Compared to Quarter ended October 2, 2004*

 

                Thefollowing table illustrates the results of consolidated operations for thequarters ended October 2, 2004, and October 1, 2005.  All dollars represented are in thousands.

 
| ** **                                    | ** ** | **Quarter Ended  October 2, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter Ended  October 1, 2005** | ** ** | **%  of Sales** | ** ** | **$**   | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------|------------|------------------------------------|------------|-----------------|------------|---------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                  | 357,762    |            | 100.0      | %                                  | $          | 296,953         |       | 100.0   | %          | $          | (60,809       | )          | -17.0 | % |
| Cost of sales                                 |       | 314,335                            |       | 87.9            | %          | 272,334                            |       | 91.7            | %          | 42,001  |       | 13.4       | %             |
| Gross profit                                  |       | 43,427                             |       | 12.1            | %          | 24,619                             |       | 8.3             | %          | (18,808 | )          | -43.3      | %             |
| Selling, general, and administrative expenses |       | 30,805                             |       | 8.6             | %          | 30,514                             |       | 10.3            | %          | (291    | )          | 0.9        | %             |
| Plant relocation costs                        |       | 0                                  |       | 0.0             | %          | 1,480                              |       | 0.5             | %          | 1,480   |       | —     |          |
| Operating income (loss)                       |       | $                                  | 12,622     |            | 3.5        | %                                  | $          | (7,375          | )          | -2.5    | %          | $          | (19,997       | )          | -158.4 | % |

 

 

 

*Performance in the third quarterof 2005*

 

                Thecurrent market continues to be challenging, as we and other manufacturerscontend for space on dealer lots. Industry Class A retail registrations year-to-date through August 2005,compared to the same period in 2004, have decreased by 10.3%.  While our Class A retail market share was up9%, our dealers appear to be reducing inventories on their lots, puttingfurther pressures on our wholesale shipments. In response, we offered additional dealer promotions to maintain marketshare, and slowed production rates to hold finished goods inventory to an acceptablelevel.  We expect that the current trendof dealer inventory reductions may continue into the fourth quarter of 2005.*

 

                Consolidatedsales in the third quarter of 2005 were $297.0 million versus $357.8 million inthe corresponding quarter of 2004, a 17% reduction.  This reduction in consolidated sales waspredominantly due to the softening of wholesale demand in the recreationalvehicle (RV) retail market, as dealers sought to reduce their inventory levels.

 

                Sales inthe third quarter for towable products were bolstered by orders from theFederal Emergency Management Agency (FEMA) for temporary housing for hurricaneKatrina victims.  The Company receivedorders for 2,000 of these units, and for the quarter produced and sold 680 ofthese units.  The preponderance of theremaining units will be produced by the end of 2005.

 

                Cost ofsales decreased by $42.0 million from the third quarter of 2004 to the thirdquarter of 2005, but increased as a percent of sales by 3.8%.  This change was predominantly caused by lowersales volumes which created inefficiencies in our plants as production outputswere reduced, as well as increases in discounting of wholesale sellingprices.  Further pressures on margin werecreated as fixed indirect cost of sales became a larger percentage of the lowersales volume.

 

16

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                Selling,general, and administrative expenses (S,G,&A) decreased by $291,000 in thethird quarter of 2005 to $30.5 million as compared to the third quarter of2004, but increased as a percentage of sales to 10.3% from 8.6% in 2004. Increases in spending over the prior year, as a percentage of sales, areshown in the following table.  Alldollars represented are in thousands, percentages are expressed as percent ofnet sales:

 
| ** **                              | ** ** | **Quarter  Ended  October 2,  2004** | ** ** | **% of  Sales** | ** ** | **Quarter Ended  October 1,  2005** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|---------------------------|------------|
| Salaries, bonus, and  benefits expenses |       | $                                    | 5,494      |            | 1.5        | %                                   | $          | 4,357           |       | 1.5                       | %          | — | % |
| Selling expenses                        |       | 9,714                                |       | 2.7             | %          | 12,717                              |       | 4.3             | %          | 1.6                       | %          |
| Settlement expense                      |       | 4,331                                |       | 1.2             | %          | 2,164                               |       | 0.7             | %          | -0.5                      | %          |
| Marketing expenses                      |       | 4,203                                |       | 1.2             | %          | 3,575                               |       | 1.2             | %          | —                    | %          |
| Other                                   |       | 7,063                                |       | 2.0             | %          | 7,701                               |       | 2.6             | %          | 0.6                       | %          |
| Total S,G,&A expenses               |       | $                                    | 30,805     |            | 8.6        | %                                   | $          | 30,514          |       | 10.3                      | %          | 1.7 | % |

 

The changes noted above, comparing October 2, 2004 to October1, 2005, are discussed below:

 

•                  Decreases in salaries, bonus, andbenefits expenses, as a percent of sales, were due primarily to reducedmanagement bonus.

•                  Increases in selling expenses, as apercent of sales, were due to continued sales efforts to assist dealers indeveloping programs to increase customer awareness of product offerings.

•                  Decreases in settlement expense(litigation settlement expense), in total dollars, were due to continued successin the resolution of outstanding litigation claims.

•                  Increases in other expenses were dueprimarily to costs associated with the installation of new information systems,as well as start up costs for the new franchise program.

 

**               **Plant relocation costs in the thirdquarter of 2005 were associated with the consolidation of our Bend, Oregonmanufacturing facility to our Coburg, Oregon operations.  We relocated these operations in the secondquarter of 2005 to improve utilization of our plants, to improve direct andindirect labor rates, and to reduce warranty and related costs.  Costs associated with the relocation of theBend facility are comprised of employee termination, relocation, and jobassistance programs.  In addition, wehave incurred costs related to various operating leases and disposition ofcertain leasehold improvements and equipment items.  We expect that there will be minimal costsassociated with the relocation in future periods.*

 

**               **Operating loss was $7.4 million, or2.5% of sales, in the third quarter of 2005 compared to income of $12.6million, or 3.5% of sales, in the similar 2004 period.** **Decreases in operating income****were due predominantly to lower sales, decreased grossmargin, and increases in S,G,&A costs.

 

                Netinterest expense was $271,000 in the third quarter of 2005 versus $370,000 inthe comparable 2004 period, reflecting a lower level of borrowing during thethird quarter of 2005.

 

                Wereported a net benefit from income taxes of $3.2 million, or an effective taxrate of 42.3%, in the third quarter of 2005, compared to a $4.7 million taxprovision, or an effective tax rate of 38.3% for the comparable 2004period.  The increase in the effectivetax rate (tax benefit) was due primarily to the impact of certain state incometax credits which have a larger impact on the effective tax rate as apercentage of income, due to the significantly lower income levels expected for2005.

 

                Netlosses for the third quarter of 2005 were $6.0 million (including net of tax losses from discontinued operationsof $1.6 million related to the closure of the Royale Coach facility, and pre-taxcharges of $1.5 million for the relocation of the Beaver facility) compared tonet income of $7.4 million in 2004 due to a decrease in sales combined with alower operating margin, the effects of which were somewhat offset by a decreasein interest expense, and a change in the effective tax rate.

 

17

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*Third Quarter 2005 versus ThirdQuarter 2004 for the Recreational Vehicle Segment*

 

The following table illustrates the resultsof the Recreational Vehicle Segment (RV Segment) for the quarters ended October2, 2004, and October 1, 2005.  Alldollars represented are in thousands.

 

 
| ** **                                    | ** ** | **Quarter Ended  October 2, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter Ended  October 1, 2005** | ** ** | **%  of Sales** | ** ** | **$**   | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------|------------|------------------------------------|------------|-----------------|------------|---------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                  | 353,288    |            | 100.0      | %                                  | $          | 289,002         |       | 100.0   | %          | $          | (64,286       | )          | -18.2 | % |
| Cost of sales                                 |       | 311,918                            |       | 88.3            | %          | 269,357                            |       | 93.2            | %          | 42,561  |       | 13.6       | %             |
| Gross profit                                  |       | 41,370                             |       | 11.7            | %          | 19,645                             |       | 6.8             | %          | (21,725 | )          | -52.5      | %             |
| Selling, general, and administrative expenses |       | 16,602                             |       | 4.7             | %          | 19,594                             |       | 6.8             | %          | (2,992  | )          | -18.0      | %             |
| Corporate overhead  allocation                |       | 12,066                             |       | 3.4             | %          | 8,279                              |       | 2.9             | %          | 3,787   |       | 31.4       | %             |
| Plant relocation costs                        |       | —                             |       | —          |       | 1,480                              |       | 0.5             | %          | (1,480  | )          | —     |          |
| Operating income (loss)                       |       | $                                  | 12,702     |            | 3.6        | %                                  | $          | (9,708          | )          | -3.4    | %          | $          | (22,410       | )          | 176.4 | % |

 

 

                Totalnet sales for the RV Segment were down from $353.3 million in the third quarterof 2004, to $289.0 million in the third quarter of 2005.  Gross diesel motorized revenues were down17.2%, gas motorized revenues were down 41.2% and towable revenues were up 18.7%.  Diesel products accounted for 72.1% of ourthird quarter RV Segment revenues while gas products were 12.5%, and towableswere 15.5%.  The overall decrease inrevenues reflected continuing challenges in the marketplace as dealers soughtto lower their current inventories because of softened retail demand and higherinterest costs associated with their floorplan borrowings.  Our overall unit sales were up 3.1% in thethird quarter of 2005 to 3,467 units, with diesel motorized unit sales down20.7% to 1,063 units, gas motorized unit sales down 43.2% to 437 units, andtowable unit sales up 56.9% to 1,967 units. Towable unit increases were predominantly the result of orders receivedrelated to FEMA emergency housing for hurricane Katrina victims.   In addition, due to the FEMA trailers, totalaverage unit selling price decreased to $85,000 in the third quarter of 2005from $106,000 in the same period last year.

 

                Grossprofit for the third quarter of 2005 decreased to $19.6 million, down from$41.4 million in the third quarter of 2004, and gross margin decreased from11.7% in the third quarter of 2004 to 6.8% in the third quarter of 2005.  The decrease in gross margin in 2005 isillustrated in the following table.  Alldollars represented are in thousands, percentages are expressed as a percent ofnet sales:

 
| ** **          | ** ** | **Quarter Ended October 2, 2004** | ** ** | **% of Sales** | ** ** | **Quarter Ended October 1, 2005** | ** ** | **% of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|----------------------------------------|------------|----------------|------------|----------------------------------------|------------|----------------|------------|---------------------------|------------|
| Direct materials    |       | $                                      | 223,569    |           | 63.3       | %                                      | $          | 185,228        |       | 64.1                      | %          | 0.8 | % |
| Direct labor        |       | 35,645                                 |       | 10.1           | %          | 31,344                                 |       | 10.9           | %          | 0.8                       | %          |
| Warranty            |       | 7,949                                  |       | 2.2            | %          | 4,813                                  |       | 1.7            | %          | -0.5                      | %          |
| Other direct        |       | 16,924                                 |       | 4.8            | %          | 18,406                                 |       | 6.3            | %          | 1.5                       | %          |
| Indirect            |       | 27,831                                 |       | 7.9            | %          | 29,566                                 |       | 10.2           | %          | 2.3                       | %          |
| Total cost of sales |       | $                                      | 311,918    |           | 88.3       | %                                      | $          | 269,357        |       | 93.2                      | %          | 4.9 | % |

 

                Thechanges noted above, comparing October 2, 2004 to October 1, 2005, arediscussed below.

 

•                  Direct materialincreases, as a percent of sales, were mostly due to increases in products thathave a higher material cost as a percentage of sales (such as for FEMA traveltrailers), as well as an unfavorable physical inventory adjustment in the thirdquarter of 2005.

•                  Direct labor increases, as a percentof sales, were predominantly due to inefficiencies in the production linesrelated to plant consolidations and lower production run rates.

 

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•                  Decreases in warranty expense, as apercent of sales, were due mostly to an improvement in the warranty experienceon current year models.

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

•                  Increases in indirect costs, as apercent of sales, were due mostly to increased overhead costs per unit withinthe production facilities due to lower run rates in the third quarter of 2005versus the same period in 2004.  Inaddition, employee benefits (related to worker’s compensation) and factorysupplies increased, causing an overall increase in total dollars spent.

 

                Selling,general, and administrative expenses (S,G,&A), for the RV Segment,increased both as a percent of sales and in total dollars due in part to lowersales levels, and increases in selling expenses.  Corporate overhead allocation decreased dueto lower management bonus levels allocated to the RV Segment as a result oflower profits.  Corporate overheadallocation is comprised of certain shared services such as executive,financial, information systems, legal, and investor relations expenses.

 

                Plantrelocation costs were related to the costs incurred to relocate the Bend,Oregon manufacturing operations to the Coburg, Oregon plant.  We believe this relocation will ultimatelyresult in improved margins for the Oregon operations.*

 

                Operatingincome (loss) decreased as both a percent of sales and in total dollars due tolower gross margins, increases in S,G,&A expenses, and from the relocationof the Bend, Oregon operations to the Coburg, Oregon facility.

 

*Third Quarter 2005 versus ThirdQuarter 2004 for the Motorhome Resorts Segment*

 

The following table illustrates the resultsof the Motorhome Resorts Segment (Resorts Segment) for the quarters endedOctober 2, 2004, and October 1, 2005. All dollars represented are in thousands.

 
| ** **                                    | ** ** | **Quarter  Ended  October 2, 2004** | ** ** | **%  of Sales** | ** ** | **Quarter  Ended  October 1, 2005** | ** ** | **%  of Sales** | ** ** | **$** | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------------|------------|-----------------|------------|-------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                   | 4,474      |            | 100.0      | %                                   | $          | 7,951           |       | 100.0 | %          | $          | 3,477         |       | 77.7 | % |
| Cost of sales                                 |       | 2,417                               |       | 54.0            | %          | 2,977                               |       | 37.4            | %          | (560  | )          | 23.2       | %             |
| Gross profit                                  |       | 2,057                               |       | 46.0            | %          | 4,974                               |       | 62.6            | %          | 2,917 |       | 141.8      | %             |
| Selling, general, and administrative expenses |       | 796                                 |       | 17.8            | %          | 1,721                               |       | 21.7            | %          | (925  | )          | -116.2     | %             |
| Corporate overhead  allocation                |       | 1,341                               |       | 30.0            | %          | 920                                 |       | 11.6            | %          | 421   |       | 31.4       | %             |
| Operating income (loss)                       |       | $                                   | (80        | )               | -1.8       | %                                   | $          | 2,333           |       | 29.3  | %          | $          | 2,413         |       | 3,016.3 | % |

 

                Netsales increased 77.7% to $8.0 million compared to $4.5 million for the sameperiod last year.  This increase was duein part to a buildup of pending lot sales from the second quarter of 2005, thatwere closed and funded in the third quarter of 2005.  In addition, strong demand addedsignificantly to the sales on a year-over-year basis.

 

                Grossprofit for the Resorts Segment increased to 62.6% of sales compared to 46.0% ofsales in the same period last year.  Thiswas due to a heavier absorption of infrastructure costs in earlier phases.  These costs were expensed in earlier phases,due to uncertainties as to the ultimate completion and sale of the entireprojects. The result was an improvement in the gross margins in the laterphases of the developments, and most particularly in the third quarter of 2005.

 

                Selling,general, and administrative expenses increased due to real estate commissionspaid on the sales of lots.  Additionalincreases were due to accruals for profit sharing payments which will be madeto Outdoor Resorts of America upon completion of the project.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

Operating income increased due to improvements in sales andgross margins that were only slightly offset by higher S,G,&A costs*.*

 

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*Nine months ended October 1, 2005Compared to Nine months ended October 2, 2004*

 

                Thefollowing table illustrates the results of consolidated operations for the ninemonth period ended October 2, 2004, and October 1, 2005.  All dollars represented are in thousands.

 
| ** **                                    | ** ** | **Nine  Months  Ended  October 2,  2004** | ** ** | **%  of Sales** | ** ** | **Nine  Months  Ended  October 1, 2005** | ** ** | **%  of Sales** | ** ** | **$**   | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|------------------------------------------|------------|-----------------|------------|---------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                         | 1,064,756  |            | 100.0      | %                                        | $          | 930,278         |       | 100.0   | %          | $          | (134,478      | )          | -12.6 | % |
| Cost of sales                                 |       | 931,830                                   |       | 87.5            | %          | 836,776                                  |       | 90.0            | %          | 95,054  |       | 10.2       | %             |
| Gross profit                                  |       | 132,926                                   |       | 12.5            | %          | 93,502                                   |       | 10.0            | %          | (39,424 | )          | -29.7      | %             |
| Selling, general, and administrative expenses |       | 81,733                                    |       | 7.7             | %          | 86,451                                   |       | 9.3             | %          | (4,718  | )          | -5.8       | %             |
| Plant relocation costs                        |       | —                                    |       | —          |       | 3,832                                    |       | 0.4             | %          | (3,832  | )          | —     |          |
| Operating income                              |       | $                                         | 51,193     |            | 4.8        | %                                        | $          | 3,219           |       | 0.3     | %          | $          | (47,974       | )          | -93.7 | % |

 

                Consolidatedsales for the nine month period ending October 1, 2005 were $930.3 millionversus $1.1 billion, a 12.6% reduction. This reduction was predominantly due to softening of wholesale demand inthe RV market as dealers sought to reduce their carrying levels of finishedgoods.

 

                Cost ofsales decreased by $95.0 million from the nine month period of 2004 to the ninemonth period of 2005, but increased as a percent of sales by 2.5%.  This change was predominantly caused by lowersales volumes which created inefficiencies in our plants as production outputswere reduced, as well as increases in discounting of wholesale sellingprices.  Further pressures on margin werecreated as fixed indirect cost of sales became a larger percentage of the lowersales volume.

 

                Selling,general, and administrative expenses (S,G,&A) increased by $4.7 million to$86.5 million for the  first nine monthsof 2005 and increased as a percentage of sales from 7.7% in 2004 to 9.3% in2005.  Increases in spending over theprior year, as a percentage of sales, are shown in the following table.  All dollars represented are in thousands, percentagesare expressed as a percent of net sales:

 
| ** **                              | ** ** | **Nine Months Ended  October 2, 2004** | ** ** | **% of  Sales** | ** ** | **Nine Months Ended  October 1, 2005** | ** ** | **% of  Sales** | ** ** | **Change in   % of Sales** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|-----------------|------------|----------------------------------------|------------|-----------------|------------|----------------------------|------------|
| Salaries, bonus, and  benefits expenses |       | $                                      | 19,436     |            | 1.8        | %                                      | $          | 14,087          |       | 1.5                        | %          | -0.3 | % |
| Selling expenses                        |       | 25,344                                 |       | 2.4             | %          | 32,635                                 |       | 3.5             | %          | 1.1                        | %          |
| Settlement expense                      |       | 8,863                                  |       | 0.8             | %          | 7,956                                  |       | 0.9             | %          | 0.1                        | %          |
| Marketing expenses                      |       | 9,238                                  |       | 0.9             | %          | 8,690                                  |       | 0.9             | %          | 0.0                        | %          |
| Other                                   |       | 18,852                                 |       | 1.8             | %          | 23,083                                 |       | 2.5             | %          | 0.7                        | %          |
| Total S,G,&A expenses               |       | $                                      | 81,733     |            | 7.7        | %                                      | $          | 86,451          |       | 9.3                        | %          | 1.6 | % |

 

The changes noted above, comparing the nine month period endedOctober 2, 2004 to the nine month period ended October 1, 2005, are discussedbelow.

 

•                  Decreases in salaries, bonus, andbenefits expenses, as a percent of sales, were due primarily to reducedmanagement bonus.

•                  Increases in selling expenses, as apercent of sales, were due to continued sales efforts to assist dealers indeveloping programs  to increase customerawareness of product offerings.

•                  Increases in settlement expense(litigation settlement expense), in total dollars, as a percent of sales weredue to expenses returning to more normalized levels in the first three quartersof 2005 versus the corresponding period in 2004.

•                  Increases in other expenses were dueprimarily to costs associated with the installation of new information systems,as well as start up costs for the new franchise program.

 

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**               **Plant relocation costs wereassociated with the consolidation of our Bend, Oregon manufacturing facility toour Coburg, Oregon operations.  Werelocated these operations to improve utilization of our plants, to improve directand indirect labor rates, and to reduce warranty and related costs.  Costs associated with the relocation of theBend facility are comprised of employee termination, relocation, and jobassistance programs.  In addition, wehave incurred costs related to various operating leases and disposition ofcertain leasehold improvements and equipment items.  We expect that there will be minimal costsassociated with the relocation in future periods.*

 

**               **Operating income was $3.2 million,or 0.3% of sales, for the nine months of 2005 compared to $51.2 million, or4.8% of sales, in the similar 2004 period.** **Decreases in operating income****were due predominantly to lower sales, increases inS,G,&A costs, and inefficiencies from reduced production levels.

 

                Netinterest expense was $943,000 for the nine month period of 2005 versus $1.1million in the comparable 2004 period, reflecting a lower level of borrowingduring the first nine months of 2005.

 

                Wereported a provision for income taxes of $458,000, or an effective tax rate of18.8% for the first nine months of 2005, compared to $18.9 million, or aneffective tax rate of 37.5% for the comparable 2004 period.  The decrease in the effective tax rate as apercentage of income, was due primarily to certain state tax credits which havea larger impact on the effective tax rate due to the significantly lower incomelevels expected for 2005.

 

                Netincome for the nine month period of 2005 was $115,000 (which includes a netloss from discontinued operations of $1.9 million related to the closure of theRoyale Coach facility) compared to $31.3 million in 2004 due to a decrease insales combined with a lower operating margin, the effects of which weresomewhat offset by a decrease in interest expense, and a decrease in theeffective tax rate.

 

*Nine Months of 2005 versus NineMonths 2004 for the Recreational Vehicle Segment*

 

The following table illustrates the resultsof the RV Segment for the nine month period ending October 2, 2004, and October1, 2005.  All dollars represented are inthousands.

 
| ** **                                    | ** ** | **Nine Months Ended  October 2, 2004** | ** ** | **%  of Sales** | ** ** | **Nine Months Ended  October 1,  2005** | ** ** | **%  of Sales** | ** ** | **$**   | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|-----------------|------------|-----------------------------------------|------------|-----------------|------------|---------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                      | 1,047,924  |            | 100.0      | %                                       | $          | 904,577         |       | 100.0   | %          | $          | (143,347      | )          | -13.7 | % |
| Cost of sales                                 |       | 922,105                                |       | 88.0            | %          | 827,627                                 |       | 91.5            | %          | 94,478  |       | 10.2       | %             |
| Gross profit                                  |       | 125,819                                |       | 12.0            | %          | 76,950                                  |       | 8.5             | %          | (48,869 | )          | -38.8      | %             |
| Selling, general, and administrative expenses |       | 41,811                                 |       | 4.0             | %          | 50,423                                  |       | 7.4             | %          | (8,612  | )          | -20.6      | %             |
| Corporate overhead  allocation                |       | 33,204                                 |       | 3.2             | %          | 27,249                                  |       | 1.4             | %          | 5,955   |       | 17.9       | %             |
| Plant relocation costs                        |       | —                                 |       | —          |       | 3,832                                   |       | 0.4             | %          | (3,832  | )          | —     |          |
| Operating income (loss)                       |       | $                                      | 50,804     |            | 4.8        | %                                       | $          | (4,554          | )          | -0.7    | %          | $          | (55,358       | )          | -109.0 | % |
|                                               |            |                                        |            |                 |            |                                         |            |                 |            |         |            |            |               |            |  |  |  |  |

 

                Totalnet sales for the RV Segment were down from $1.0 billion in the first ninemonths of 2004, to $904.6 million in the first nine months of 2005.  Gross diesel motorized  revenues were down 11.3%, gas motorized revenueswere down 36.1% and towable revenues were up 10.3%.  Diesel products accounted for 75.2% of ournine months RV Segment revenues while gas products were 12.3%, and towableswere 12.5%.  The overall decrease inrevenues reflected continuing challenges in the market place as dealers soughtto match their current inventories because of softened retail demand and higherinterest costs for their floorplan borrowings. Our overall unit sales were down 5.5% in the first nine months of 2005to 9,303 units, with diesel motorized unit sales down 15.1% to 3,506 units, gasmotorized unit sales down 37.8% to 1,398 units, and towable unit sales were up26.8% to 4,399 units.  Towable unitincreases were predominantly the result of orders received related to FEMAemergency housing for hurricane Katrina victims.   In addition, due to the FEMA trailers theaverage unit selling prices decreased to $98,900 for the nine months of 2005from $107,800 in the same period last year.

 

                Grossprofit for the nine month period of 2005 decreased to $77.0 million, down from$125.8 million in 2004, and gross margin decreased from 12.0% in the first ninemonths of 2004 to 8.5% in the first nine months of 2005.  The decrease in gross margin

 

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in 2005 is illustrated in the following table.  All numbers represented are in thousands,percentages are expressed as a percent of net sales:

 
| ** **          | ** ** | **Nine Months Ended October 2, 2004** | ** ** | **% of  Sales** | ** ** | **Nine Months Ended October 1, 2005** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|--------------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|-----------------|------------|---------------------------|------------|
| Direct materials    |       | $                                          | 654,895    |            | 62.5       | %                                          | $          | 573,446         |       | 63.4                      | %          | 0.9 | % |
| Direct labor        |       | 105,952                                    |       | 10.1            | %          | 92,891                                     |       | 10.3            | %          | 0.2                       | %          |
| Warranty            |       | 27,674                                     |       | 2.6             | %          | 21,575                                     |       | 2.4             | %          | -0.2                      | %          |
| Other direct        |       | 49,132                                     |       | 4.7             | %          | 52,315                                     |       | 5.8             | %          | 1.1                       | %          |
| Indirect            |       | 84,452                                     |       | 8.1             | %          | 87,400                                     |       | 9.6             | %          | 1.5                       | %          |
| Total cost of sales |       | $                                          | 922,105    |            | 88.0       | %                                          | $          | 827,627         |       | 91.5                      | %          | 3.5 | % |

 

                Thechanges noted above, comparing October 2, 2004 to October 1, 2005, arediscussed below.

 

•                  Direct materialincreases, as a percent of sales, were mostly due to increases in products thathave a higher material cost as a percentage of sales, as well as an unfavorablephysical inventory adjustment in the third quarter of 2005.

•                  Direct labor increases, as a percentof sales, were predominantly due to changes in product mix and inefficienciescreated in the plants for relocation of product lines and lower run rates.

•                  Decreases in warranty expense, as apercent of sales, were due mostly to a slight decrease in the warranty experienceon current year models.

•                  Increases in other direct costs, asa percent of sales, were due mostly to increased overhead costs per unit withinthe production facilities due to lower run rates in 2005 versus the same periodin 2004, as well as increases in employee health benefits, and delivery expensefor the Company’s products.

•                  Increases in indirect costs, as apercent of sales, were due mostly to inefficiencies within the production facilitiesassociated with lower run rates in the first nine months of 2005 versus thesame period in 2004.

 

                Selling,general, and administrative expenses (S,G,&A) for the RV Segment increasedboth as a percent of sales and in total dollars due in part to lower saleslevels and increases in selling expenses. Corporate overhead allocation decreased due to lower management bonuslevels allocated to the RV Segment as a result of lower profits.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

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

 

                Operatingincome decreased as both a percent of sales and in total dollars due to lowergross margins, increases in S,G,&A expenses, and from the relocation of theBend, Oregon operations to the Coburg, Oregon facility.

 

*Nine Months 2005 versus NineMonths 2004 for the Motorhome Resorts Segment*

 

The following table illustrates the resultsof the Motorhome Resorts Segment (Resorts Segment) for the nine month periodended October 2, 2004, and October 1, 2005. All dollars represented are in thousands.

 
| ** **                                    | ** ** | **Nine Months Ended October 2, 2004** | ** ** | **%  of Sales** | ** ** | **Nine Months Ended  October 1, 2005** | ** ** | **%  of Sales** | ** ** | **$**  | **Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|----------------------------------------|------------|-----------------|------------|--------|------------|------------|---------------|------------|
| Net sales                                     |       | $                                          | 16,832     |            | 100.0      | %                                      | $          | 25,701          |       | 100.0  | %          | $          | 8,869         |       | 52.7 | % |
| Cost of sales                                 |       | 9,725                                      |       | 57.8            | %          | 9,149                                  |       | 35.6            | %          | 576    |       | 5.9        | %             |
| Gross profit                                  |       | 7,107                                      |       | 42.2            | %          | 16,552                                 |       | 64.4            | %          | 9,445  |       | 132.9      | %             |
| Selling, general, and administrative expenses |       | 3,029                                      |       | 18.0            | %          | 5,751                                  |       | 22.4            | %          | (2,722 | )          | -89.9      | %             |
| Corporate overhead allocation                 |       | 3,689                                      |       | 21.9            | %          | 3,028                                  |       | 11.8            | %          | 661    |       | 17.9       | %             |
| Operating income                              |       | $                                          | 389        |            | 2.3        | %                                      | $          | 7,773           |       | 30.2   | %          | $          | 7,384         |       | 1,898.2 | % |

 

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                Netsales increased 52.7% to $25.7 million compared to $16.8 million for the sameperiod last year.  This was due to thecontinued strong demand for lots at both of our resort locations.

 

                Grossprofit for the Resorts Segment increased to 64.4% of sales compared to 42.2% ofsales in the same period last year. This was due to a heavier absorption ofinfrastructure costs in earlier phases. These costs were expensed in earlier phases, due to uncertainties as tothe ultimate completion and sale of the entire projects.   The result was an improvement in the grossmargins in the later phases of the developments, and most particularly in thesecond and third quarters of 2005.

 

                Selling,general, and administrative expenses increased due to real estate commissionspaid on the sales of lots.  Additionalincreases were due to accruals for profit sharing payments which will be madeto Outdoor Resorts of America upon completion of the project.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

 

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

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

                Ourprimary sources of liquidity are internally generated cash from operations andavailable borrowings under our credit facilities.  During the first nine months of 2005, wegenerated cash of $44.7 million from continuing operating activities.  We generated $9.7 million from net income andnon-cash expenses such as depreciation and amortization. Other sources of cashincluded a $29.4 million decrease in accounts receivables, an $11.7 million increasein accounts payable, a $6.0 million increase in accrued liabilities, and a $1.2million decrease in resort lot inventory. Accounts receivable decreased due to the decrease in net sales, andimprovements in accounts receivable turns during the third quarter.  Increases in accounts payable and accruedliabilities were due to timing of payments. Decreases in resort lot inventories were the result of strong salesduring the year.  These sources of cashwere offset by a $4.9 million increase in inventories, a $3.0 million decreasein product warranty reserves, a $557,000 decrease in product liability reserve,and a $6.6 million decrease in tax liability.

 

                TheCompany’s credit facility consists of a revolving line of credit of up to$105.0 million.  As of October 1, 2005,borrowings outstanding on the revolving line of credit (the “Revolving Loan”)were $12.7 million.  At the election ofthe Company, the Revolving Loan bears interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’sleverage ratio.  The Company also paysinterest monthly on the unused available portion of the Revolving Loan atvarying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable in fullon November 17, 2009 and requires monthly interest payments.  The Revolving Loan is collateralized by allthe assets of the Company and includes various restrictions and financial covenants.  The Company was in compliance with thesecovenants at October 1, 2005.  The Companyutilizes “zero balance” bank disbursement accounts in which an advance on theline of credit is automatically made for checks clearing each day.  Since the balance of the disbursement accountat the bank returns to zero at the end of each day, the outstanding checks ofthe Company are reflected as a liability. The outstanding check liability is combined with the Company’s positivecash balance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

 

                TheCompany is currently negotiating with its lenders to amend its credit facilityto include the addition of a $40.0 million term note to complete its recentlyannounced agreement for the purchase of R-Vision.  Terms of the note will include quarterlyprincipal payments over five years, with interest rates based either on Primeor LIBOR based on the Company’s leverage ratio. The Company expects to complete the amendment concurrently with theclose of the R-Vision acquisition in the month of November 2005.

 

            Our principal workingcapital requirements are for purchases of inventory and financing of tradereceivables.  Many of our dealers financeproduct purchases under wholesale floor plan arrangements with third parties asdescribed below.  At October 1, 2005, wehad working capital of approximately $137.2 million, a decrease of $4.7 millionfrom working capital of $141.9 million at January 1, 2005.  We have been using cash flow from operationsto finance our capital expenditures.

 

            We believe thatcash flow from operations and funds available under our credit facilities willbe sufficient to meet our liquidity requirements for the next 12 months.*  Our capital expenditures were $11.0 millionin the first nine months of 2005, which included costs related to installationof certain automated machinery, enhancements to the 

 

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Company’s information system infrastructure,as well as various other routine capital expenditures.  We anticipate that capital expenditures forall of 2005 will be approximately $17 to $19 million, which includesexpenditures to purchase additional machinery and equipment in both our Coburg,Oregon and Wakarusa, Indiana facilities, signage and kiosk purchases for ourfranchised dealers, as well as upgrades to existing information systemsinfrastructures.*  We may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if we significantly increase the level of workingcapital assets such as inventory and accounts receivable.  We may also from time to time seek to acquirebusinesses, such as our current planned acquisition of R-Vision, that wouldcomplement our current business, and any such acquisition could requireadditional financing.  There can be noassurance that additional financing will be available if required or on termsdeemed favorable by us.

 

            As is typicalin the recreational vehicle industry, many of our retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of our products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  We have agreements withseveral institutional lenders under which we currently have repurchaseobligations.  Our contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units.  Ourobligations under these repurchase agreements vary from period to period up to18 months.  At October 1, 2005,approximately $490.9 million of products sold by us to independent dealers weresubject to potential repurchase under existing floor plan financing agreementswith approximately 6.0% concentrated with one dealer.  On a limited basis, we may also grant arepurchase agreement that has a component of limited guarantee of payment onbehalf of the dealer in the event of default. At October 1, 2005, we had approximately $75,000 of product subject to arepurchase agreement of this nature. Historically, we have been successful in mitigating losses associatedwith repurchase obligations.  During thethird quarter of 2005, the losses associated with the exercise of repurchaseagreements with institutional lenders was $20,000. If we were obligated torepurchase a significant number of units under any repurchase agreement, ourbusiness, operating results, and financial condition could be adverselyaffected.  Dealers for the Companyundergo credit review prior to becoming a dealer and periodicallythereafter.  Financial institutions thatprovide floor-plan financing also perform credit reviews and floor checks on anongoing basis.  We also closely monitorsales to dealers that we consider a higher credit risk.  The repurchase period is limited, usually toa maximum of 18 months.  We believe theseactivities minimize the number of required repurchases.  Additionally, the repurchase agreementspecifies that the dealer is required to make principal payments during therepurchase period.  Since the Companyrepurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount.  Therefore, there is already some built indiscount when we offer the inventory to another dealer at an amount lower thanthe original invoice as incentive for the dealer to take the repurchasedinventory.  This helps minimize thelosses we incur on repurchased inventory.

 

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

 

PAYMENTS DUE BY PERIOD

 
| **Contractual Obligations (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Operating Leases (1)                       |       | $                  | 897        |             | $          | 3,530            |       | $              | 2,571      |      | $          | 4,488 |   | $ | 11,486 |   |
| Total Contractual Cash Obligations         |       | $                  | 897        |             | $          | 3,530            |       | $              | 2,571      |      | $          | 4,488 |   | $ | 11,486 |   |

 

AMOUNT OF COMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Line of Credit (2)                   |       | $                  | 7,500      |             | $          | 97,500           |       | $              | 0          |      | $          | 0 |   | $ | 105,000 |   |
| Guarantees                           |       | 0                  |       | 19,100  (1       | )          | 0                |       | 0              |       | 19,100    |       |
| Repurchase Obligations (3)           |       | 0                  |       | 490,914          |       | 0                |       | 0              |       | 490,914   |       |
| Total Commitments                    |       | $                  | 7,500      |             | $          | 607,514          |       | $              | 0          |      | $          | 0 |   | $ | 615,014 |   |

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(1)   Various leases including manufacturing facilities, aircraft,  machinery and equipment, and certainguarantees of manufacturers repurchase commitments.  See Note 7 to the Condensed ConsolidatedFinancial Statements.

(2)   See Note 3  to the CondensedConsolidated Financial Statements.  Theamount listed represents available borrowings on the line of credit at October1, 2005.

(3)   Reflects obligations under manufacturer repurchasecommitments.  See Note 7 to the CondensedConsolidated Financial Statements.

 

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**INFLATION**

 

            During 2004 andto a lesser extent in the first nine months of 2005, we experienced increasesin the prices of certain commodity items that we use in the manufacturing ofour products.  These include, but are notlimited to, steel, copper, aluminum, petroleum, and wood.  While these raw materials are not necessarilyindicative of widespread inflationary trends, they had an impact on ourproduction costs.  Accordingly, in 2004we adjusted selling prices to compensate for increases in commoditypricing.  Also, due to increases in fuelprices, particularly in 2005, our cost of delivering coaches to our dealers hasrisen.  Accordingly we have increased ourdelivery charges for the fourth quarter of 2005 to offset these rising costs.  While we do not anticipate additional priceincreases, we may from time to time increase our prices to maintain grossprofit margins.  If we should continue toexperience adverse trends in these prices it could have a materially adverseimpact on our business going forward.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

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

 

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

 

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

 

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

 

            INCOMETAXES  When preparing its consolidatedfinancial statements, the Company must estimate its income taxes in each of thejurisdictions in which it operates. This process involves estimating actualcurrent tax expense and assessing temporary differences resulting fromdiffering treatment of items for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included in theconsolidated balance sheets. The Company must then assess the likelihood thatthe deferred tax assets will be recovered from future taxable income, and, tothe extent management believes that recovery is not likely, a valuationallowance must be established. Significant management judgment is required indetermining the Company’s provision for income taxes, deferred tax assets andliabilities, and any valuation allowance recorded against net deferred taxassets.

 

                REPURCHASEOBLIGATIONS  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement.** **The Company has recorded aliability associated with the disposition of repurchased inventory.  To determine the appropriate liability, theCompany 

 

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calculates a reserve, based on an estimate ofpotential net losses, along with qualitative and quantitative factors,including dealer inventory turn rates, and the financial strength of individualdealers.

 

 

**FACTORS THAT MAY AFFECT FUTUREOPERATING RESULTS**

 

            ACQUISITION OFR-VISION AND AFFILIATES.   We announcedon November 8, 2005 that we had agreed with Indiana based towable and motorhomemanufacturer R-Vision, Inc., R-Vision Motorized, LLC, Bison, LLC, andRoadmaster, LLC (collectively “R-Vision”) to acquire all of the outstandingshares of R-Vision.  The process ofintegration may result in unforeseen operating difficulties and expendituresand may absorb significant management attention that would otherwise beavailable for the ongoing development of our business.  This may cause an interruption or a loss ofmomentum in our operating activities which in turn could have a materialadverse affect on our operating results and financial condition.  Moreover, the acquisition involves a numberof additional risks, such as the loss of key employees of R-Vision as a resultof the acquisition, the incorporation of acquired products into our existingproduct line, the amortization of debt issuance costs, and the difficulty ofintegrating disparate corporate cultures. Accordingly, the anticipated benefits may not be realized or theacquisition may have a material adverse affect on our operating results andfinancial condition.

 

 

WEMAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR AVARIETY OF REASONS.  Our net sales, grossmargin, and operating results may fluctuate significantly from period to perioddue to a number of factors, many of which are not readily predictable.  These factors include the following:

 

•                  The margins associated withthe mix of products we sell in any particular period.

 

•                  Our ability to utilize andexpand our manufacturing resources efficiently.

 

•                  Shortages of materials usedin our products.

 

•                  A determination by us thatgoodwill or other intangible assets are impaired and have to be written down totheir fair values, resulting in a charge to our results of operations.

 

•                  Our ability to introduce newmodels that achieve consumer acceptance.

 

•                  The introduction, marketingand sale of competing products by others, including significant discountingoffered by our competitors.

 

•                  The addition or loss of ourdealers.

 

•                  The timing of trade showsand rallies, which we use to market and sell our products.

 

•                  Factors affecting therecreational vehicle industry as a whole, including economic and seasonalfactors.

 

            Our overall gross margin may decline in future periods tothe extent that we increase the percentage of sales of lower gross margintowable products or if the mix of motor coaches we sell shifts to lower grossmargin units.  In addition, a relativelysmall variation in the number of recreational vehicles we sell in any quartercan have a significant impact on total sales and operating results for thatquarter.

 

            Demand in the recreational vehicle industry generallydeclines during the winter months, while sales are generally higher during thespring and summer months.  With thebroader range of products we now offer, seasonal factors could have asignificant impact on our operating results in the future.  Additionally, unusually severe weatherconditions in certain markets could delay the timing of shipments from onequarter to another.

 

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

 

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THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY.  The recreationalvehicle industry has been characterized by cycles of growth and contraction inconsumer demand, reflecting prevailing economic, demographic, and politicalconditions that affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry climbed to approximately321,000 units, but declined to 286,000 units during 2004.  The decline has continued into 2005.  Our business is subject to the cyclicalnature of this industry.  Some of thefactors that contribute to this cyclicality include fuel availability andcosts, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidence andslowing of the overall economy has adversely affected the recreational vehiclemarket.  An extended continuation ofthese conditions would materially affect our business, results of operations,and financial condition.

 

WERELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OFOUR SALES.  Although our products wereoffered by 332 dealerships located primarily in the United States and Canada asof October 1, 2005, a significant percentage of our sales are concentratedamong a relatively small number of independent dealers.  For the quarter ended October 1, 2005, salesto one dealer, Lazy Days RV Center, accounted for 9.6% of total sales comparedto 6.1% of sales in the same period ended last year.  For quarters ended October 2, 2004 andOctober 1, 2005, sales to our 10 largest dealers, including Lazy Days RV Center,accounted for a total of 32.6% and 36.9% of total sales, respectively.  The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on ourbusiness, results of operations, and financial condition.

 

WEMAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THATTHE DEALER DOES NOT REPAY ITS LENDER.  Asis common in the recreational vehicle industry, we enter into repurchaseagreements with the financing institutions used by our dealers to finance theirpurchases of our products.  Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer does not repay its lender. Obligations under these agreements vary from period to period, buttotaled approximately $490.9 million as of October 1, 2005, with approximately6.0% concentrated with one dealer.  If wewere obligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could beadversely affected.

 

OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO CONCENTRATIONRISK.  We sell our product to dealers whoare predominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.    For our RVdealers, terms are net 30 days for units that are financed by a third partylender.  Open trade receivables aregranted by us, on a very limited basis, to dealers who have been subjected toevaluative credit processes conducted by us. Terms vary from net 30 days to net 180 days, depending on the specificagreement.  As of October 1, 2005, totaltrade receivables were $99.4 million, with approximately $82.7 million, or83.2% of the outstanding accounts receivable balance concentrated among floorplan lenders. The remaining $16.7 million of open trade receivables wereconcentrated substantially all with one dealer. For resort lot customers, funds are required at the time of closing.

 

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

 

WEDEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANTCOMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS.  A number of important components for ourproducts are purchased from a single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana) for all diesel motor coaches, andchassis (Workhorse and Ford) for gas motor coaches.  We have no long-term supply contracts withthese suppliers or their distributors, and we cannot be certain that thesesuppliers will be able to meet our future requirements.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocations occurred in1997 from Allison and in 1999 from Ford. An extended 

 

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delay or interruption in the supply of anycomponents that we obtain from a single supplier or from a limited number of supplierscould adversely affect our business, results of operations, and financialcondition.

 

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

 

We believe that the introduction of new products and newfeatures is critical to our success. Delays in the introduction of new models or product features, qualityproblems associated with these introductions, or a lack of market acceptance ofnew models or features could affect us adversely.  Unexpected costs associated with modelchanges have affected our gross margin in the past.  Further, new product introductions can divertrevenues from existing models and result in fewer sales of existing products.

 

OURPRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BEUNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION ANDRESULTING IN LOSS OF SALES.  Ourcustomers require demanding specifications for product performance andreliability.  Because our products arecomplex and often use advanced components, processes and techniques, undetectederrors and design flaws may occur. Product defects result in higher product service and warranty andreplacement costs and may cause serious damage to our customer relationshipsand industry reputation, all of which could negatively affect our sales andbusiness.

 

OURBUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITYAND WARRANTY CLAIMS.  We are subject tolitigation arising in the ordinary course of our business, typically forproduct liability and warranty claims that are common in the recreational vehicleindustry.  While we do not believe thatthe outcome of any pending litigation, net of insurance coverage, willmaterially adversely affect our business, results of operations, or financialcondition, we cannot provide assurances in this regard because litigation is aninherently uncertain process.*

 

To date, we have been successful in obtaining productliability insurance on terms that we consider acceptable.  The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  We cannot be certain we will be able toobtain insurance coverage in the future at acceptable levels or that the costsof such insurance will be reasonable. Further, successful assertion against us of one or a series of large uninsuredclaims, or of a series of claims exceeding our insurance coverage, could have amaterial adverse effect on our business, results of operations, and financialcondition.

 

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

 

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

 

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

 

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                The expansion into new machinery and equipmenttechnologies involves risks, including the following:

 

•                  We must rely on timelyperformance by contractors, subcontractors, and government agencies, whoseperformance we may be unable to control.

 

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

 

•                  The newly developed productsmay not be successful in the marketplace.

 

•                  We may be unable to completea planned machinery and equipment implementation in a timely manner, whichcould result in lower production levels and an inability to satisfy customerdemand for our products.

 

WE MAYEXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISERESOURCE PLANNING SYSTEM (ERP) IMPLEMENTATION. We are implementing a new ERP system which is subject to certain risksincluding the following:

 

•                  We must rely on timelyperformance by contractors whose performance we may be unable to control.

 

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

 

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

 

•                  It could require us to restructureor develop our internal processes to adapt to the new system.

 

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

 

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

 

•                  The project could disrupt ouroperations if the transition to the ERP system creates new or unexpecteddifficulties or if the system does not perform as expected.

 

 

**NEWLY ISSUEDFINANCIAL REPORTING PRONOUNCEMENTS**

 

EITF 04-10

 

                In September of 2004, the Financial AccountingStandards Board (the Board) issued EITF 04-10, “Determining Whether toAggregate Operating Segments That Do Not Meet the Quantitative Thresholds.”  FASB Statement No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires public companiesto report financial and descriptive information about its reportable operatingsegments.  EITF 04-10 addresses how todetermine if operating segments that do not meet the quantitative thresholds ofFASB No. 131 are to be reported as separate segments.

 

                EITF 04-10 is effective for fiscal years ending afterSeptember 15, 2005.

 

                We have determined that the provisions of EITF 04-10will impact the disclosures to be included in future financial statements.  Accordingly we have adopted segment reportingfor our Motorhome Resorts segment.

 

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FAS 151

 

                In November 2004, the Board issued FAS 151, “InventoryCosts an amendment of ARM No. 43, Chapter 4,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  The standard is effective forinventory costs incurred during fiscal years beginning after June 15, 2005.

 

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

 

FAS 123R

 

                In December 2004, the Board issued FAS 123R, “Share-BasedPayment.”  The Statement replaces FAS123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees.” The Statement establishes fair value as the measurement objective inaccounting for share-based payment arrangements and requires a fair-value-basedmeasurement method in accounting for share-based payments to employees exceptfor equity instruments held by employee share ownership plans.  The Statement is effective for publicentities as of the beginning of the first annual reporting period that beginsafter June 15, 2005.

 

                We will adopt the provisions of the Statement for thefiscal year beginning 2006.  If we hadincluded the cost of the employee stock option compensation using the fairvalue method in our financial statements, our net income for the first threequarters of 2004 and 2005 would have been impacted by $574,000 and $750,000,respectively.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

No changes this quarter.

 

 

**Item4.  Controls and Procedures**

 

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 defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act) as of the end of the period covered by this Quarterly Report onForm 10-Q.  Based on this evaluation, ourChief Executive Officer and our Chief Financial Officer, have concluded thatour disclosure controls and procedures are effective to ensure that informationwe are required to disclose in reports that we file or submit under theSecurities Exchange Act of 1934 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.

 

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

 

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

 

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**PART II - OTHERINFORMATION**

 

 

**Item 6.  Exhibits**

 

                Exhibits

 

31.1                           Sarbanes-Oxley Section 302(a)Certification.

31.2                           Sarbanes-Oxley Section 302(a)Certification.

32.1                           Certification of Chief ExecutiveOfficer and Chief Financial Officer Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

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

 

 
|                     | **MONACO COACH CORPORATION**     |
|--------------------------|----------------------------------|
|                     |                             |   |
| Dated: November 10, 2005 | /s/ P. Martin Daley              |
|                     | P. Martin Daley                  |
|                     | Vice President and               |
|                     | Chief Financial Officer (Duly    |
|                     | Authorized Officer and Principal |
|                     | Financial Officer)               |

 

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**EXHIBITS INDEX**

 

 

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

 

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