**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly periodended:  September 29, 2007**

 

**or**

 

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

 

**For the transition periodfrom                     to                     **

 

**Commission File Number:  1-14725**

 

**MONACO COACH CORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

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

(Zip code)

 

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

 

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 requirements for the past 90 days.

 

YES  x                     NO  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large Accelerated Filer o |   | Accelerated Filer x |   | Non-Accelerated  Filer o |
|--------------------------------|--------|--------------------------|--------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    YES  o  NO  x

 

Thenumber of shares outstanding of common stock, $.01 par value, as of September29, 2007: 29,981,477

 

 

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**MONACO COACH CORPORATION**

 

**FORM10-Q**

 

**September29, 2007**

 

**INDEX**
| **PART I - FINANCIAL  INFORMATION**                                                                                                   |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                  |   |
| **Item  1. Financial Statements (unaudited)**                                                                                         |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Balance Sheets as of December 30, 2006 and September 29, 2007                                                 |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Statements of Income for the quarters and nine month periods  ended September 30, 2006 and September 29, 2007 |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Statements of Cash Flows for the nine month periods ended  September 30, 2006 and September 29, 2007          |   |
|                                                                                                                                  |   |
| Notes  to Condensed Consolidated Financial Statements                                                                                 |   |
|                                                                                                                                  |   |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**                              |   |
|                                                                                                                                  |   |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                                               |   |
|                                                                                                                                  |   |
| **Item 4. Controls  and Procedures**                                                                                                  |   |
|                                                                                                                                  |   |
| **PART II - OTHER INFORMATION**                                                                                                       |   |
|                                                                                                                                  |   |
| **Item 1A. Risk Factors**                                                                                                             |   |
|                                                                                                                                  |   |
| **Item  6. Exhibits**                                                                                                                 |   |
|                                                                                                                                  |   |
| **Signatures**                                                                                                                        |   |
|                                                                                                                                  |   |
| **Certifications under Section 302(a) and 906 of  the Sarbanes-Oxley Act of 2002**                                                    |   |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

3

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands of dollars, exceptshare and per share data)**

 
| ** **                                                                                                                   | ** ** | **December 30,** | ** ** | **September 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | **(unaudited)**        | ** ** |
| **ASSETS**                                                                                                                   |       |                  |       |                   |       |
| Current assets:                                                                                                              |       |                  |       |                   |       |
| Cash                                                                                                                         |       | $                     | 4,984      |                   | $          | 35,231 |   |
| Trade  receivables, net                                                                                                      |       | 81,588                |       | 79,606                 |       |
| Inventories, net                                                                                                             |       | 155,871               |       | 148,093                |       |
| Resort lot  inventory                                                                                                        |       | 7,997                 |       | 8,397                  |       |
| Prepaid expenses                                                                                                             |       | 5,624                 |       | 5,118                  |       |
| Income taxes  receivable                                                                                                     |       | 6,901                 |       | 0                      |       |
| Deferred income  taxes                                                                                                       |       | 38,038                |       | 38,179                 |       |
| Total current  assets                                                                                                        |       | 301,003               |       | 314,624                |       |
|                                                                                                                         |       |                  |       |                   |       |
| Property, plant,  and equipment, net                                                                                         |       | 153,895               |       | 147,005                |       |
| Land held for  development                                                                                                   |       | 16,300                |       | 24,321                 |       |
| Investment in  joint venture                                                                                                 |       | 0                     |       | 3,406                  |       |
| Debt issuance  costs, net of accumulated amortization of $912 and $1,152, respectively                                       |       | 540                   |       | 557                    |       |
| Goodwill                                                                                                                     |       | 86,412                |       | 86,412                 |       |
|                                                                                                                         |       |                  |       |                   |       |
| Total assets                                                                                                                 |       | $                     | 558,150    |                   | $          | 576,325 |   |
|                                                                                                                         |       |                  |       |                   |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current  liabilities:                                                                                                        |       |                  |       |                   |       |
| Book overdraft                                                                                                               |       | 16,626                |       | 0                      |       |
| Current portion  of long-term debt                                                                                           |       | 5,714                 |       | 5,714                  |       |
| Line of credit                                                                                                               |       | 2,036                 |       | 0                      |       |
| Income taxes  payable                                                                                                        |       | 0                     |       | 2,219                  |       |
| Accounts payable                                                                                                             |       | 72,591                |       | 95,428                 |       |
| Product  liability reserve                                                                                                   |       | 15,764                |       | 15,626                 |       |
| Product warranty  reserve                                                                                                    |       | 33,804                |       | 36,945                 |       |
| Accrued expenses  and other liabilities                                                                                      |       | 44,364                |       | 48,890                 |       |
| Discontinued  operations                                                                                                     |       | 298                   |       | 0                      |       |
| Total current  liabilities                                                                                                   |       | 191,197               |       | 204,822                |       |
|                                                                                                                         |       |                  |       |                   |       |
| Long-term debt,  less current portion                                                                                        |       | 29,071                |       | 24,786                 |       |
| Deferred income  taxes                                                                                                       |       | 21,678                |       | 21,534                 |       |
| Deferred revenue                                                                                                             |       | 883                   |       | 733                    |       |
| Total  liabilities                                                                                                           |       | 242,829               |       | 251,875                |       |
|                                                                                                                         |       |                  |       |                   |       |
| Commitments and  contingencies (Note 11)                                                                                     |       |                  |       |                   |       |
|                                                                                                                         |       |                  |       |                   |       |
| **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, 29,769,356 and 29,981,477  issued and outstanding, respectively |       | 298                   |       | 300                    |       |
| Additional  paid-in capital                                                                                                  |       | 63,722                |       | 68,591                 |       |
| Retained  earnings                                                                                                           |       | 251,301               |       | 255,559                |       |
| Total  stockholders’ equity                                                                                             |       | 315,321               |       | 324,450                |       |
|                                                                                                                         |       |                  |       |                   |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                     | 558,150    |                   | $          | 576,325 |   |

 

See accompanying notes.

 

4

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                                        | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **September 29,** | ** ** |
| ** **                                                        | ** ** | **2006**               | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                         |       | $                      | 292,473    |                            | $          | 322,422 |   | $ | 998,823 |   | $ | 979,985 |   |
| Cost of sales                                                     |       | 273,940                |       | 286,243                         |       | 901,351 |   | 871,212 |   |
| Gross profit                                                      |       | 18,533                 |       | 36,179                          |       | 97,472 |   | 108,773 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expenses                    |       | 29,474                 |       | 29,661                          |       | 92,882 |   | 89,885 |   |
| Plant relocation  costs                                           |       | 0                      |       | 0                               |       | 269 |   | 0 |   |
| Operating income  (loss)                                          |       | (10,941                | )          | 6,518                           |       | 4,321 |   | 18,888 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Other income,  net                                                |       | 119                    |       | 290                             |       | 507 |   | 783 |   |
| Interest expense                                                  |       | (1,306                 | )          | (829                            | )          | (3,498 | ) | (2,743 | ) |
| Loss from  investment in joint venture                            |       | 0                      |       | (290                            | )          | 0 |   | (1,267 | ) |
| Income (loss)  before income taxes, continuing operations         |       | (12,128                | )          | 5,689                           |       | 1,330 |   | 15,661 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Provision for  (benefit from) income taxes, continuing operations |       | (5,030                 | )          | 2,008                           |       | (343 | ) | 6,017 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Income (loss)  from continuing operations                         |       | (7,098                 | )          | 3,681                           |       | 1,673 |   | 9,644 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Loss from  discontinued operations, net of tax benefit            |       | 0                      |       | 0                               |       | (107 | ) | 0 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss)                                                |       | $                      | (7,098     | )                               | $          | 3,681 |   | $ | 1,566 |   | $ | 9,644 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Earnings (loss)  per common share:                                |       |                   |       |                            |       |   |   |   |   |
| Basic from  continuing operations                                 |       | $                      | (0.24      | )                               | $          | 0.12 |   | $ | 0.05 |   | $ | 0.32 |   |
| Basic from  discontinued operations                               |       | 0.00                   |       | 0.00                            |       | 0.00 |   | 0.00 |   |
| Basic                                                             |       | $                      | (0.24      | )                               | $          | 0.12 |   | $ | 0.05 |   | $ | 0.32 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Diluted from  continuing operations                               |       | $                      | (0.24      | )                               | $          | 0.12 |   | $ | 0.05 |   | $ | 0.32 |   |
| Diluted from  discontinued operations                             |       | 0.00                   |       | 0.00                            |       | 0.00 |   | 0.00 |   |
| Diluted                                                           |       | $                      | (0.24      | )                               | $          | 0.12 |   | $ | 0.05 |   | $ | 0.32 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Weighted-average  common shares outstanding:                      |       |                   |       |                            |       |   |   |   |   |
| Basic                                                             |       | 29,745,738             |       | 29,963,223                      |       | 29,696,951 |   | 29,913,118 |   |
| Diluted                                                           |       | 29,865,199             |       | 30,363,621                      |       | 29,859,461 |   | 30,380,470 |   |

 

See accompanying notes.

 

5

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited: in thousands of dollars)**

 
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** |
| ** **                                                                                   | ** ** | **2006**                        | ** ** | **2007** | ** ** |
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                            |       |                            |       |   |   |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  operating activities:                                                       |       |                            |       |   |   |
| Net income                                                                                   |       | $                               | 1,566      |   | $ | 9,644 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Loss (gain) on  sale of assets                                                               |       | (12                             | )          | 289 |   |
| Depreciation and  amortization                                                               |       | 10,581                          |       | 10,613 |   |
| Deferred income  taxes                                                                       |       | (5,834                          | )          | (285 | ) |
| Stock-based  compensation expense                                                            |       | 2,538                           |       | 3,247 |   |
| Net losses in  equity investment                                                             |       | 0                               |       | 1,267 |   |
| Changes in  working capital accounts:                                                        |       |                            |       |   |   |
| Trade  receivables, net                                                                      |       | 15,131                          |       | 1,982 |   |
| Inventories                                                                                  |       | 9,310                           |       | 3,718 |   |
| Resort lot  inventory                                                                        |       | 79                              |       | (400 | ) |
| Prepaid expenses                                                                             |       | (331                            | )          | 504 |   |
| Land held for  development                                                                   |       | (16,300                         | )          | (8,022 | ) |
| Accounts payable                                                                             |       | 11,524                          |       | 22,837 |   |
| Product  liability reserve                                                                   |       | (1,723                          | )          | (138 | ) |
| Product warranty  reserve                                                                    |       | 551                             |       | 2,868 |   |
| Income taxes  payable                                                                        |       | (2,277                          | )          | 9,120 |   |
| Accrued expenses  and other liabilities                                                      |       | 8,688                           |       | 4,643 |   |
| Deferred revenue                                                                             |       | 933                             |       | (150 | ) |
| Discontinued  operations                                                                     |       | 3,723                           |       | (18 | ) |
| Net cash  provided by operating activities                                                   |       | 38,147                          |       | 61,719 |   |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  investing activities:                                                       |       |                            |       |   |   |
| Additions to  property, plant, and equipment                                                 |       | (7,459                          | )          | (4,194 | ) |
| Investment in  joint venture                                                                 |       | 0                               |       | (366 | ) |
| Proceeds from  sale of assets                                                                |       | 127                             |       | 64 |   |
| Net cash used in  investing activities                                                       |       | (7,332                          | )          | (4,496 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  financing activities:                                                       |       |                            |       |   |   |
| Book overdraft                                                                               |       | (8,537                          | )          | (16,626 | ) |
| Payments on  lines of credit, net                                                            |       | (15,561                         | )          | (2,036 | ) |
| Payments on  long-term notes payable                                                         |       | (2,857                          | )          | (4,285 | ) |
| Debt issuance  costs                                                                         |       | (36                             | )          | (257 | ) |
| Dividends paid                                                                               |       | (5,377                          | )          | (5,395 | ) |
| Issuance of  common stock                                                                    |       | 1,646                           |       | 1,429 |   |
| Tax benefit of  stock-based award activity                                                   |       | 149                             |       | 194 |   |
| Discontinued  operations                                                                     |       | 92                              |       | 0 |   |
| Net cash used in  financing activities                                                       |       | (30,481                         | )          | (26,976 | ) |
|                                                                                         |       |                            |       |   |   |
| Net change in  cash                                                                          |       | 334                             |       | 30,247 |   |
| Cash at  beginning of period                                                                 |       | 586                             |       | 4,984 |   |
|                                                                                         |       |                            |       |   |   |
| Cash at end of  period                                                                       |       | $                               | 920        |   | $ | 35,231 |   |

 

See accompanying notes.

 

6

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Theinterim condensed consolidated financial statements have been prepared byMonaco Coach Corporation (the “Company”) without audit. In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 30,2006  and September 29, 2007, and theresults of its operations for the quarters and nine months ended September 30,2006 and September 29, 2007 and its cash flows for the nine months endedSeptember 30, 2006 and September 29, 2007. The condensed consolidated statementof income for the nine months ended September 29, 2007 is not necessarilyindicative of the results to be expected for the full year. The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries, and all significant intercompany accounts andtransactions have been eliminated in consolidation. The balance sheet data asof December 30, 2006 was derived from audited financial statements, but doesnot include all disclosures contained in the Company’s Annual Report toStockholders on Form 10-K for the year ended December 30, 2006, nor does itinclude all the information and footnotes required by generally acceptedaccounting principles for complete financial statements. These interimcondensed consolidated financial statements should be read in conjunction withthe audited financial statements and notes thereto appearing in the Company’sAnnual Report to Stockholders on Form 10-K for the year ended December 30,2006.

 

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

 

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

 
| ** **             | ** ** | **December 30,**   | ** ** | **September 29,** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **             | ** ** | **2006**                | ** ** | **2007**               | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Raw materials          |       | $                       | 84,069     |                   | $          | 74,301 |   |
| Work-in-process        |       | 55,473                  |       | 57,876                 |       |
| Finished units         |       | 26,773                  |       | 26,050                 |       |
| Raw material  reserves |       | (10,444                 | )          | (10,134                | )          |
|                   |       |                    |       |                   |       |
|                   |       | $                       | 155,871    |                   | $          | 148,093 |   |

 

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

 

On February 25, 2007, the Company closed atransaction with International Truck and Engine Corporation to form a jointventure to manufacture all of the Company’s rear diesel chassis. The terms ofthe agreement grant the Company a 49% ownership in the joint venture, known asCustom Chassis Products, LLC (CCP). The investment is accounted for under theequity method. The Company contributed $4,060,000 of inventory, $246,000 offixed assets, and $140,000 of cash to CCP and incurred transaction costs of$226,000. The Company’s portion of CCP’s net loss for the quarter and ninemonths ended September 29, 2007 was $290,000 and $1.3 million, respectively.

 

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

 

In June 2006, the Companyacquired an 80 acre piece of undeveloped land near LaQuinta, California for$16.3 million. In addition, on April 20, 2007, the Company acquired a 20 acreparcel near Naples, Florida for the purchase price of $8.0 million. These twoproperties will be developed as motorcoach only resorts.

 

7

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**5.****    ****Line of Credit**

 

TheCompany’s credit facilities consist of a revolving line of credit of up to$105.0 million. As of September 29, 2007, there was no balance outstanding onthe revolving line of credit (the “Revolving Loan”). At the election of theCompany, 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 pays interest quarterly on the unusedavailable portion of the Revolving Loan at varying rates, determined by theCompany’s leverage ratio. The Revolving Loan is due and payable in full onNovember 17, 2009 and requires monthly interest payments. The agreementcontains restrictive covenants as to the Company’s leverage ratio, currentratio, fixed charge coverage ratio, and tangible net worth. As of September 29,2007, the Company was in compliance with these covenants. The Company also hasfour unused letters of credit totaling $4.8 million outstanding as of September29, 2007.

 

**6.****    ****Long-Term Notes Payable**

 

Asof September 29, 2007, outstanding Term Debt under the credit facilities was$30.0 million. At the election of the Company, the Term Debt bears interest atvarying rates that fluctuate based on the prime rate or LIBOR and aredetermined based on the Company’s leverage ratio. The Term Debt requiresquarterly interest and principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010. At September 29, 2007, theweighted-average interest rate on the Term Debt was 7.0%. The Term Debt iscollateralized by all of the assets of the Company. The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. In January 2007, the Companyamended its credit facility to modify certain restrictive covenants. As ofSeptember 29, 2007, the Company was in compliance with these covenants.

 

InNovember 2005, the Company obtained a term loan of $500,000 from the State ofOregon in connection with the relocation of jobs to the Coburg, Oregonproduction facilities from the Bend, Oregon facility. The principal andinterest are due on April 30, 2009. The loan bears a 5% annual interest rate.

 

Thefollowing table displays the scheduled principal payments by fiscal year thatwill be due in thousands on the term loans (in thousands):

 
| ** ** | ** ** | **Amount of**   | ** ** |
|------------|------------|----------------------|------------|
| ** ** | ** ** | **payment due** | ** ** |
| ** ** | ** ** | ** **           | ** ** |
| 2007       |       | $                    | 1,429      |   |
| 2008       |       | 5,714                |       |
| 2009       |       | 6,214                |       |
| 2010       |       | 17,143               |       |
|       |       | $                    | 30,500     |   |

 

8

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

 

The Company adopted FIN 48, “Accounting forUncertainty in Income Taxes – an Interpretation of FAS 109,” (the “Interpretation”)as of the beginning of fiscal year 2007. The Interpretation clarifies theaccounting for uncertainty in income taxes recognized in accordance with FAS109, “Accounting for Income Taxes,” by defining a criteria that an individualtax position must meet for any part of the benefit to be recognized in thefinancial statements.

 

As of the beginning of fiscal 2007, the Company’stotal unrecognized tax benefits were $850,000 and all of these benefits, ifrecognized, would positively affect the Company’s effective tax rate. TheCompany also had accrued interest related to these unrecognized tax benefits of$55,000 as of the date of adoption. The interest expense associated with incometax contingencies is classified as income taxes in the Company’s financialstatements. Penalties associated with income taxes are classified as selling,general, and administrative expenses. The federal, and a portion of the state,uncertainty relates to subjectivity in the measurement of certain deductionsclaimed for United States income tax purposes and the remainder of the stateuncertainty relates to state income tax apportionment matters.

 

As of the date of adoption, the Company’s income taxreturns that remain subject to examination are tax years 2003 through 2006 forU.S. federal income tax and tax years 2002 through 2006 for major state incometax returns. During the quarter ending September 29, 2007, the statute oflimitations expired for U.S. federal income taxes and some state income taxesfor the 2003 tax year.

 

As of September 29, 2007, the total unrecognized taxbenefits have decreased to $790,000 due to the expiration of federal and statestatutes of limitations for the 2003 tax year. Accrued interest related tounrecognized tax benefits has increased to $66,000 as of September 29, 2007.

 

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

 

Basic earnings per common share is based on theweighted-average number of shares outstanding 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 ofoutstanding stock-based awards. The weighted-average number of common sharesused in the computation of earnings per common share were as follows:

 
| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **September 29,** | ** ** |
| ** **                                        | ** ** | **2006**               | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                         |       |                   |       |                            |       |   |   |   |   |
| Issued and  outstanding shares (weighted-average) |       | 29,745,738             |       | 29,963,223                      |       | 29,696,951 |   | 29,913,118 |   |
|                                              |       |                   |       |                            |       |   |   |   |   |
| **Effect  of Dilutive Securities**                | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  awards                               |       | 119,461                |       | 400,398                         |       | 162,510 |   | 467,352 |   |
|                                              |       |                   |       |                            |       |   |   |   |   |
| **Diluted**                                       |       | 29,865,199             |       | 30,363,621                      |       | 29,859,461 |   | 30,380,470 |   |

 

9

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| ** **                            | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **September 29,** | ** ** |
| ** **                            | ** ** | **2006**               | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash dividends  per common share      |       | $                      | 0.06       |                            | $          | 0.06 |   | $ | 0.18 |   | $ | 0.18 |   |
| Cash dividends  paid *(in thousands)* |       | $                      | 1,785      |                            | $          | 1,798 |   | $ | 5,348 |   | $ | 5,395 |   |

 

**9.****    ****Stock-Based Award Plans**

 

The Company has anon-employee 1993 Director Stock Plan (the “Director Plan”), and an amended andrestated 1993 Stock Plan (the “Stock Plan”). The Company also had an EmployeeStock Purchase Plan (the “Purchase Plan”) – 1993, which had expenses recognizedin periods prior to fiscal year 2007. The compensation expense recognized inthe quarters ended September 30, 2006 and September 29, 2007 for the plans was$817,000 and $763,000, respectively. The amount of cash received in thequarters ended September 30, 2006 and September 29, 2007 from the exercise ofstock options, stock issued under the Purchase Plan, and stock issued in lieuof some directors’ cash retainers was $410,000 and $351,000, respectively.There was no tax benefit realized from stock-based awards exercised or vestedin the third quarter of 2006 or 2007.

 

On June 21, 2007, theCompany’s Board of Directors approved the Monaco Coach Corporation 2007Employee Stock Purchase Plan and reserved 400,000 shares of Common Stock forissuance under the plan.  Before the Company will issue any shares underthe plan, it must be approved by the stockholders of the Company.  TheCompany intends to seek such approval at the Annual Meeting in May 2008.

 

**Restricted Stock Unit Grants**

** **

A component of theStock Plan permits the Company to grant restricted stock units (RSU’s). Thesegrants are treated as compensation expense under the rules of FAS 123R,and are required to be recognized in the Company’s consolidated statements ofincome. The valuation of the RSU’s is based on the closing market price of theCommon Stock on the date of grant. The RSU’s vest ratably over four years orvest in full at four years for employees and vest in full at three yearsfor directors. RSU’s held by participants who meet the retirement eligibilityprovision vest upon actual retirement or the normal vesting period, whicheveris earlier. Under Section 162(m) of the Internal Revenue Code of1986, as amended, RSU’s granted to certain employees require performance criteriato be met in order for the units to vest in full at three years. Theperformance criteria are based on the Company’s return on equity. As ofSeptember 29, 2007, there were 132,686 RSU’s outstanding that require theattainment of the performance criteria.

 

The compensationexpense recognized for RSU’s in the third quarters of 2006 and 2007 was$478,000 and $419,000, respectively. A forfeiture rate is applied to themajority of the RSU participants based on the historical forfeiture experiencewith stock options. The total remaining expense to be recognized in futureperiods for outstanding non-vested RSU’s is approximately $3.8 million. Theexpense is expected to be recognized over a weighted-average period of 2.7years.

 

10

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Restricted stock unittransactions under the Stock Plan are summarized with the weighted-averagegrant-date fair value as follows:

 
| ** **                             | ** ** | ** **           | ** ** | **Weighted-**       | ** ** |
|----------------------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** **           | ** ** | **Average**         | ** ** |
| ** **                             | ** ** | **Restricted**       | ** ** | **Grant-Date**      | ** ** |
| ** **                             | ** ** | **Stock Units** | ** ** | **Fair Value** | ** ** |
| ** **                             | ** ** | ** **           | ** ** | ** **          | ** ** |
| Non-vested at December 30,  2006  |       | 279,909              |       | $                   | 12.90      |   |
| Granted                                |       | 198,049              |       | 16.75               |       |
| Vested                                 |       | (38,219              | )          | 12.95               |       |
| Forfeited                              |       | (2,500               | )          | 12.95               |       |
| Non-vested at March 31,  2007     |       | 437,239              |       | 14.64               |       |
| Forfeited                              |       | (1,500               | )          | 14.85               |       |
| Non-vested at June 30,  2007      |       | 435,739              |       | 14.64               |       |
| Granted                                |       | 26,160               |       | 12.37               |       |
| Forfeited                              |       | (3,563               | )          | 14.55               |       |
| Non-vested at September 29,  2007 |       | 458,336              |       | $                   | 14.51      |   |

 

**Performance Share Awards**

** **

A component of the Stock Plan also permits theCompany to grant performance share awards (PSA’s). No awards were granted inthe third quarter of 2007. The plan requires the achievement of performance bythe Company based on Return on Net Assets-adjusted (RONA) and Total ShareholderReturn (TSR) compared to a group of peer companies. Depending on the ranking ofthe Company’s performance against the peer group, the participants could earnfrom 0% up to 200% of the target payout of performance shares. A participantwho retires during a performance period and meets the retirement eligibilityprovision is entitled to receive 100% of the award that would have otherwisebeen earned had the participant remained employed through the end of theperformance period. The award to such a participant will be settled at the endof the normal performance period. Grants are currently outstanding under atwo-year performance period and two three-year performance periods.

 

The fair value of share awards requiringachievement of the goal based on TSR is estimated on the date of grant using alattice-based valuation model. The assumptions used in the model to value theawards granted in the first quarter of 2007 are noted in the following table.Because lattice-based option valuation models incorporate ranges of assumptionsfor inputs, those ranges are disclosed. Expected volatilities were based onhistorical volatility of the Company’s stock and the average of the competitorcompanies’ stock, as well as other factors. The Company used historical data toestimate employee terminations within the valuation model. The expected term ofawards granted was derived from the output of the option valuation model andrepresents the period of time that awards granted are expected to beoutstanding. The risk-free interest rate is based on interest rates on totalconstant maturity U.S. Treasury notes with lives consistent with the expectedlives of the related award. The grant-date fair value of the TSR related awardsgranted in the first quarter of 2007 is $22.25 per award.

 

11

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| ** **                                          | ** ** | **Quarter Ended**           | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **September 29, 2007** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** |
| Risk-free interest rate                             |       | 4.50                             | %          |
| Expected life (in years)                            |       | 2 to 3                           |       |
| Expected volatility of the  Company                 |       | 38.60                            | %          |
| Expected dividend yield                             |       | 1.40                             | %          |
| Peer companies’ average  volatility experience |       | 33.10                            | %          |

 

The fair value of the share awards requiringachievement of the goal based on RONA is the Common Stock market price at grantdate, which was $16.75 for the awards granted in the first quarter of 2007. Therecognition of compensation expense is initially based on the probable outcomeof the performance condition and adjusted for subsequent changes in theestimated or actual outcome. The Company reassesses at each reporting datewhether achievement of the performance condition is probable. The assessmentinvolves comparing the Company’s forecasted RONA for the performance period tothe historical RONA achieved by a group of peer companies.

 

The TSR goal is based on the market price of theCompany’s Common Stock as compared to the peer group. This is considered amarket condition under FAS 123R, thus compensation expense recognized is notreversed if the goal is not achieved by the end of the performance period. Thecompensation expense related to share awards that are forfeited is reversed. Ifthe performance goal related to RONA is not met, no compensation expense isrecognized and any recognized compensation expense is reversed as of the end ofthe plan period. The compensation expense recognized for performance shareawards in the third quarter of 2006 and 2007 was $218,000 and $275,000,respectively. As of September 29, 2007, it was not probable that the RONAgoal would be met at the end of the performance periods for the awards grantedin 2006 and thus no compensation expense has been recognized. As of September 29,2007, the expected payout related to the 2007 RONA grants was 25% of the targetpayout, thus expense of $19,000 was recognized in the third quarter of 2007. Thetotal remaining expense expected to be recognized in future periods foroutstanding PSA’s is approximately $1.4 million. The expense is expected to berecognized over a weighted-average period of 1.9 years. The total number ofnon-vested PSA’s as of September 29, 2007 was 468,532 shares at targetpayout. The weighted-average grant-date fair value of these shares is $14.23.

 

12

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**10.****      ****Segment Reporting**

 

Thefollowing table provides the results of operations of the three segments of theCompany for the quarters ended September 30, 2006 and September 29,2007, respectively. All dollars are in thousands.

 
| ** **                                                            | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **September 29,** | ** ** |
| ** **                                                            | ** ** | **2006**               | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Motorized Recreational Vehicle  Segment**                           | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 220,159    |                            | $          | 257,982 |   | $ | 700,728 |   | $ | 754,192 |   |
| Cost of sales                                                         |       | 207,960                |       | 228,565                         |       | 647,910 |   | 672,029 |   |
| Gross profit                                                          |       | 12,199                 |       | 29,417                          |       | 52,818 |   | 82,163 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Selling, general, and  administrative expenses and corporate overhead |       | 19,931                 |       | 22,570                          |       | 58,718 |   | 65,760 |   |
| Plant relocation costs                                                |       | 0                      |       | 0                               |       | 269 |   | 0 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Operating income (loss)                                               |       | $                      | (7,732     | )                               | $          | 6,847 |   | $ | (6,169 | ) | $ | 16,403 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| **Towable Recreational Vehicle  Segment**                             | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 70,450     |                            | $          | 64,221 |   | $ | 274,092 |   | $ | 214,669 |   |
| Cost of sales                                                         |       | 65,346                 |       | 57,531                          |       | 244,839 |   | 194,970 |   |
| Gross profit                                                          |       | 5,104                  |       | 6,690                           |       | 29,253 |   | 19,699 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Selling, general, and  administrative expenses and corporate overhead |       | 7,409                  |       | 5,819                           |       | 24,953 |   | 18,053 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Operating income (loss)                                               |       | $                      | (2,305     | )                               | $          | 871 |   | $ | 4,300 |   | $ | 1,646 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| **Motorhome Resorts Segment**                                         | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 1,864      |                            | $          | 219 |   | $ | 24,003 |   | $ | 11,124 |   |
| Cost of sales                                                         |       | 634                    |       | 147                             |       | 8,602 |   | 4,213 |   |
| Gross profit                                                          |       | 1,230                  |       | 72                              |       | 15,401 |   | 6,911 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Selling, general, and  administrative expenses and corporate overhead |       | 2,134                  |       | 1,272                           |       | 9,211 |   | 6,072 |   |
|                                                                  |       |                   |       |                            |       |   |   |   |   |
| Operating income (loss)                                               |       | $                      | (904       | )                               | $          | (1,200 | ) | $ | 6,190 |   | $ | 839 |   |

 

13

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| ** **                                                        | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **September 29,** | ** ** |
| ** **                                                        | ** ** | **2006**               | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Reconciliation to Net Income**                   | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating income (loss):                                          |       |                   |       |                            |       |   |   |   |   |
| Motorized recreational  vehicle segment                           |       | $                      | (7,732     | )                               | $          | 6,847 |   | $ | (6,169 | ) | $ | 16,403 |   |
| Towable recreational vehicle  segment                             |       | (2,305                 | )          | 871                             |       | 4,300 |   | 1,646 |   |
| Motorhome resorts segment                                         |       | (904                   | )          | (1,200                          | )          | 6,190 |   | 839 |   |
| Total operating income (loss)                                     |       | (10,941                | )          | 6,518                           |       | 4,321 |   | 18,888 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Other income, net                                                 |       | 119                    |       | 290                             |       | 507 |   | 783 |   |
| Interest expense                                                  |       | (1,306                 | )          | (829                            | )          | (3,498 | ) | (2,743 | ) |
| Loss from investment in joint  venture                            |       | 0                      |       | (290                            | )          | 0 |   | (1,267 | ) |
| Income (loss) before income  taxes, continuing operations         |       | (12,128                | )          | 5,689                           |       | 1,330 |   | 15,661 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Provision for (benefit from)  income taxes, continuing operations |       | (5,030                 | )          | 2,008                           |       | (343 | ) | 6,017 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Income (loss) from continuing  operations                         |       | (7,098                 | )          | 3,681                           |       | 1,673 |   | 9,644 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Loss from discontinued  operations, net of tax benefit            |       | 0                      |       | 0                               |       | (107 | ) | 0 |   |
|                                                              |       |                   |       |                            |       |   |   |   |   |
| Net income (loss)                                                 |       | $                      | (7,098     | )                               | $          | 3,681 |   | $ | 1,566 |   | $ | 9,644 |   |

 

**11.****       ****Commitments and Contingencies**

 

**Repurchase Agreements**

 

Most of the Company’s sales to independent dealers aremade on a “floor plan” basis by a bank or finance company which lends thedealer all or substantially all of the wholesale purchase price and retains asecurity 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. These agreements provide that, for up to 15months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

The Company’s liability under repurchase agreements islimited to the unpaid balance owed to the lending institution by reason of itsextending credit to the dealer to purchase its vehicles, reduced by the resalevalue of vehicles which may be repurchased. The risk of loss is spreadover numerous dealers and financial institutions.

 

14

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The approximate amount subject to contingent repurchaseobligations arising from these agreements at September 29, 2007 is $515.5 million,with approximately 5.8% concentrated with one dealer. If the Company wereobligated to repurchase a significant number of units under any repurchaseagreement, its business, operating results, and financial condition could beadversely affected. The Company has included the disclosure requirements ofFASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” in its financial statements, and has determined thatthe recognition provisions of FIN 45 apply to certain guarantees routinely madeby the Company, including contingent repurchase obligations to third partylenders for inventory financing of dealer inventories. The Company has recordeda liability of approximately $362,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers. Thisestimated liability is based on the Company’s experience of losses associatedwith the repurchase and resale of units in prior years.

 

**Product Liability**

 

The Company is subject to regulations which may requirethe Company to recall products with design or safety defects, and such recallcould have a material adverse effect on the Company’s business, results ofoperations, and financial condition.

 

The Company has from time to time been subject toproduct liability claims. To date, the Company has been successful in obtainingproduct liability insurance on terms the Company considers acceptable. Theterms of the policy contain a self-insured retention amount of $500,000 peroccurrence, with a maximum annual aggregate self-insured retention of $3.0million. Overall product liability insurance, including umbrella coverage, isavailable up to a maximum amount of $100.0 million for each occurrence, as wellas in the aggregate. There can be no assurance that the Company will be able toobtain insurance coverage in the future at acceptable levels or that the costof insurance will be reasonable. Furthermore, successful assertion against theCompany of one or a series of large uninsured claims, or of one or a series ofclaims exceeding any insurance coverage, could have a material adverse effecton the Company’s business, results of operations, and financial condition. Thefollowing table discloses significant changes in the product liability reserve:

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **September 30,**  | ** ** | **September 29,** | ** ** |
| ** **           | ** ** | **2006**                | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning balance    |       | $                       | 18,092     |   | $ | 15,833 |   |
| Expense              |       | 3,114                   |       | 3,513 |   |
| Payments/adjustments |       | (3,654                  | )          | (3,720 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 17,552     |   | $ | 15,626 |   |

 

15

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**Product Warranty**

 

Estimated warranty costs are provided for at the timeof sale of products with warranties covering the products for up to one yearfrom the date of retail sale (five years for the front and sidewall framestructure, and three years on the Roadmaster chassis). These estimates arebased on historical average repair costs, as well as other reasonableassumptions deemed appropriate by management. The following table disclosessignificant changes in the product warranty reserve:

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **September 30,**  | ** ** | **September 29,** | ** ** |
| ** **           | ** ** | **2006**                | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning balance    |       | $                       | 34,230     |   | $ | 36,126 |   |
| Expense              |       | 7,952                   |       | 10,540 |   |
| Payments/adjustments |       | (8,729                  | )          | (9,721 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 33,453     |   | $ | 36,945 |   |

 

**Litigation**

 

The Company is involved in various legal proceedingswhich are incidental to the industry and for which certain matters are coveredin whole or in part by insurance or, for those matters not covered byinsurance, the Company has recorded accruals for estimated settlements. Managementbelieves that any liability which may result from these proceedings willnot have a material adverse effect on the Company’s consolidated financialstatements.

 

16

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

 

This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These statements include, but are not limitedto, those in this report that have been marked with an asterisk (*). Inaddition, statements containing words such as “anticipates,” “believes,” “estimates,”“expects,” “intends,” “plans,” “seeks,” and variations of such words andsimilar expressions are intended to identify forward-looking statements. Suchforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performance orachievements to differ materially from those expressed or implied by suchforward-looking statements, including those set forth below in Part II,Item 1A under the caption “Risk Factors” and elsewhere in this Quarterly Reporton Form 10-Q. The reader should carefully consider, together with theother matters referred to herein, the factors set forth in Part II, Item1A under the caption “Risk Factors,” as well as in other documents we file withthe Securities and Exchange Commission. We caution the reader, however, thatthese factors may not be exhaustive. In addition, we do not undertake theobligation to publicly update or revise any “forward-looking statements,”whether as a result of new information, future events or otherwise, except asrequired by law or the rules of the New York Stock Exchange.

 

**GENERAL**

 

OVERVIEW

 

*Background*

 

MonacoCoach Corporation (the “Company”) is a leading manufacturer of premiumrecreational vehicles including Class A, B, and C motor coaches, as wellas towable recreational vehicles. The Company also develops and sells luxurymotorcoach resort facilities. These three operations, while closely tied intothe recreational lifestyle, are segmented for reporting purposes as theMotorized Recreational Vehicle (MRV) segment, the Towable Recreational Vehicle(TRV) segment, and the Motorhome Resort (MR) segment.

 

*Motorized and Towable RecreationalVehicle Segment Products*

 

Ourproducts range in suggested retail price from $45,000 to $700,000 for motorcoaches and from $11,000 to $80,000 for towables. Based upon retailregistrations in the first eight months of 2007, we believe we had a 25.7%share of the market for diesel Class A motor coaches, a 5.9% share of themarket for gas Class A motor coaches, a 16.1% share of the market for all Class Amotor coaches, a 2.8% share of the market for Class C motor coaches, a3.6% share of the market for fifth wheel towables and a 4.6% share of themarket for travel trailers.

 

*Motorhome Resort Segment*

 

Inaddition to the manufacturing of premium recreational vehicles, the Companyalso owns and operates two motorhome resort properties (the “Resorts”), locatedin Las Vegas, Nevada, and Indio, California. In addition, the Company hasacquired land to develop properties in LaQuinta, California, and in Naples,Florida. The Resorts offer sales of individual lots to owners, and also offercommon interests in the amenities at the resort. Lot prices for remainingunsold lots at the two resorts range from $114,900 to $329,900. Amenities atthe Resorts include:  club housefacilities, tennis, swimming, and golf. The Resorts provide destinationlocations for premium Class A motor coach owners, and help to promote therecreational lifestyle.

 

*Business Changes*

 

Duringthe first quarter of 2007, we completed the formation of a joint venture withInternational Truck and Engine Corporation (ITEC) for the purpose ofmanufacturing rear diesel chassis. This joint venture, known as Custom ChassisProducts LLC (CCP), will enable us to take advantage of purchasing synergies,access engineering and design expertise from ITEC, and improve the utilizationof our Roadmaster chassis manufacturing facility in Elkhart, Indiana. Ourownership interest is 49%, and we are accounting for the activity of thisoperation using the equity method of accounting.

 

17

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**RESULTS OF CONSOLIDATED OPERATIONS**

 

*Quarter ended September 29, 2007Compared to Quarter ended September 29, 2006*

 

The following table illustrates the results of consolidated operationsfor the quarters ended September 30, 2006 and September 29, 2007. Alldollar amounts are in thousands.

 
| ** **                                     | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                                | 292,473    |              | 100.0      | %                                | $          | 322,422           |       | 100.0      | %          | $          | 29,949     |   | 10.2 | % |
| Cost of sales                                  |       | 273,940                          |       | 93.7              | %          | 286,243                          |       | 88.8              | %          | (12,303    | )          | (4.5       | )%         |
| Gross profit                                   |       | 18,533                           |       | 6.3               | %          | 36,179                           |       | 11.2              | %          | 17,646     |       | 95.2       | %          |
| Selling, general, and  administrative expenses |       | 29,474                           |       | 10.0              | %          | 29,661                           |       | 9.2               | %          | (187       | )          | (0.6       | )%         |
|                                           |       |                             |       |              |       |                             |       |              |       |       |       |       |       |
| Operating income (loss)                        |       | $                                | (10,941    | )                 | (3.7       | )%                               | $          | 6,518             |       | 2.0        | %          | $          | 17,459     |   | 159.6 | % |

 

*Motorized and Towable RecreationalVehicle Segments*

 

The recreational vehicle (“RV”) market in the thirdquarter of 2007 displayed some signs of modest growth compared to the thirdquarter of 2006. Fuel prices, while still at or near historical highs,experienced a slow down in growth during the third quarter of 2007. However,even though retail sales by our independent dealers on a year-over-year basishave shown some improvement, the overall wholesale contraction in the RVmarket, up 0.3% through August 2007, continues to put pressure on ourbusiness. We believe that this trend will likely continue through most of2007.*  However, we believe the long-termpotential of the RV market is still rooted in solid demographics. This is mostreadily evidenced by the so-called “baby boomer” generation, which as it ageswill continue to expand our target market well into 2015 and should provide aconsumer base that is enthusiastic to embrace the RV lifestyle.

 

The motorized market has been significantly impacted bythe current market conditions. Higher interest rates are placing pressures onour dealers. Floorplan interest charges are a significant cost of carryinginventory, and as interest rates rise, our dealers, whom we share with ourcompetitors, are more cautious in the amount of inventory that they are willingto carry. Consequently, we have been very diligent in monitoring the wholesaleversus retail shipments of our products. This has enabled us to manage ourfinished goods inventory levels without the use of extensive wholesalediscounting. While our gross margins have improved due to the reduced levels ofdiscounting and improvements in our plant efficiencies, they are still not atoptimal levels due to the lower run rates within our production facilities. Wecontinue to research ways to consolidate component manufacturing operations toimprove our indirect costs of sales. We expect that we will have more of theseprojects over the next several quarters.*

 

Despite the current cyclical downturn in the motorizedmarket, we continue to remain optimistic on the prospects for long-term growthin this sector, as the demographics for our customer base show a continuingincrease in the number of new entrants into our target age and economic group.*

 

The towable market in 2007 has slowed somewhat comparedto 2006. During the first eight months of 2007, retail unit sales for theindustry finished up 2.8% from the same period in 2006. However, thelow-to-mid-priced products are performing better than the higher-end products. Werecently introduced several new floorplans and new lightweight and inexpensivemodels to compete in this market sector. We believe that these new offerings,which became available at the end of the second quarter of 2007, will enable usto compete more effectively in these more challenging market conditions. *

 

As in the case of our motorized production, we alsohave excess capacity at our towable facilities. As a result, we announced ourplanned consolidation of the Elkhart towable production into our Wakarusa andWarsaw, Indiana production facilities. This move will increase plantutilization in the remaining facilities and decrease indirect costs ofsales.*  We expect to complete theconsolidation in the fourth quarter of 2007.* Expenses associated with relocation costs should be approximately$900,000, and are being incurred during the fourth quarter of 2007. Synergiesassociated with the relocation are expected to more than offset the relatedcosts in the fourth quarter.*

 

Therecreational vehicle industry is extremely competitive, and retail customershave many choices available to them. To distinguish ourselves within theindustry, we introduced our Franchise For The Future (FFTF) program for ourmotorized products in June of 2005. This program is designed to introducethe concept to our dealer partners that our specific brands have intrinsicvalues as a selling tool. To support this, and to encourage our dealers toparticipate in FFTF, we have worked

 

18

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withoutside marketing consultants to develop brand signage, informational computerkiosks, and brand specific displays that are placed within our variousindependent dealer locations. In 2006, we followed this up with MonacoFinancial Services (MFS). MFS is a branded financing program from GeneralElectric Commercial Distribution Finance (GECDF) and General Electric ConsumerFinance (GECF). Through MFS, our dealer partners earn rebates from GECDF andGECF for wholesale floorplanning and retail financing for customers. We believethat these concepts, along with other features designed to encourage ourdealers to focus selling efforts on our various product offerings, will assistthem in their sales efforts through the strength of improved brand identity. *

 

*Motorhome Resort Segment*

 

We are nearing the end of the resort projects in bothIndio and Las Vegas. Currently we have 68 lots available between the tworesorts. Third quarter sales were slower than the prior year, but this was dueto having fewer lots available for sale, which impacts sales absorption of newlots as they compete with resales of owner lots. In addition, the third quarteris traditionally the slower sales season due to their location in thesouthwestern portion of the United States. While the current troubles in the greaterreal estate market may not directly influence sales of lots, it does havean impact on demand, but we remain confident that these resort properties willcontinue to sell through a majority of their remaining lots by the end of the firstquarter of 2008.*  To ensure thecontinued growth of this segment, we have acquired property in LaQuintaCalifornia, and in Naples, Florida. We have complied with a large amount of thepermitting requirements for both projects, and have begun clearing ground inNaples. We expect that we will begin ground work in LaQuinta during the fourthquarter of 2007. We expect to have completed lots available for sale in bothresorts in the second quarter of 2008.*

 

*Overall Company Performance in theThird Quarter of 2007*

 

Third quarter net sales increased 10.2% to $322.4million compared to $292.5 million for the same period last year. The salesincrease was due to increased MRV segment sales that offset slower sales in theTRV and MR segments. Gross diesel motorized sales were up 10.0%, gas motorizedsales were up 79.8%, and towables were down 8.8%. Diesel products accounted for69.9% of our third quarter revenues while gas products were 8.5%, and towableswere 21.6%. Our overall unit sales were up 1.7% in the third quarter of 2007 to5,410 units, with diesel motorized unit sales down 0.7% to 1,080 units, gasmotorized unit sales up 54.2% to 390 units, and towable unit sales down 0.9% to3,940 units. Our total average unit selling price increased to $59,800 from$55,900 in the same period last year, reflecting a shift in the mix of productssold.

 

Gross profit for the third quarter of 2007 increased to$36.2 million, up from $18.5 million in the third quarter of 2006, and grossmargin increased from 6.3% in the third quarter of 2006 to 11.2% in the thirdquarter of 2007. Changes in the components of cost of sales are set forth inthe following table (dollars in thousands):

 
| ** **          | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|---------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **          | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials    |       | $                                | 187,665    |              | 64.2       | %                                | $          | 200,708           |       | 62.2                     | %          | (2.0 | )% |
| Direct labor        |       | 31,532                           |       | 10.8              | %          | 31,888                           |       | 9.9               | %          | (0.9                     | )%         |
| Warranty            |       | 7,952                            |       | 2.7               | %          | 10,540                           |       | 3.3               | %          | 0.6                      | %          |
| Other direct        |       | 18,068                           |       | 6.2               | %          | 14,688                           |       | 4.6               | %          | (1.6                     | )%         |
| Indirect            |       | 28,723                           |       | 9.8               | %          | 28,419                           |       | 8.8               | %          | (1.0                     | )%         |
|                |       |                             |       |              |       |                             |       |              |       |                     |       |
| Total cost of sales |       | $                                | 273,940    |              | 93.7       | %                                | $          | 286,243           |       | 88.8                     | %          | (4.9 | )% |

 

•       Direct materials decreases in 2007, as a percentof sales, were 2.0% or $6.4 million. Subsequent to the end of the secondquarter of 2006, the Company implemented a series of price increases tocorrect an unfavorable material usage rate. This resulted in a decrease todirect materials of $5.1 million in 2007. The total cost of diesel chassis nowpurchased from the CCP joint venture are included in this line item for 2007whereas in 2006 only the materials portion of the overall chassis cost wasincluded. This increases material usage by $1.1 million for 2007. The remainingdecrease of $2.4 million is due to the change in the product mix of sales.

•       Direct labor decreases in 2007, as a percent ofsales, were 0.9% or $2.9 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand, which included the impact of the joint ventureoperations as discussed above.

•       Increases in warranty expense in 2007, as apercent of sales, were 0.6% or $1.9 million. These increases were due to majorproduction changes that occurred in mid 2006, which involved combining productionlines and shifting the plant locations where units were built. We have beenexperiencing higher warranty claims related to the products produced during theperiod of change.

 

19

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•       Decreases in other direct costs in 2007, as apercent of sales, were 1.6% or $5.2 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expenseand other employee related benefit costs.

•       Decreasesin indirect costs in 2007 were $304,000. These decreases were the result ofimprovements in efficiencies at our plants as a result of consolidation ofcomponent facilities, including the changes due to the joint venture operations.The decrease in total dollars associated with indirect costs resulted in animprovement of 1.0% as a percentage of sales in 2007 compared to 2006.

 

Selling, general, and administrative expenses(S,G,&A) increased by $187,000 in the third quarter of 2007 to $29.7million compared to the third quarter of 2006 and decreased as a percentage ofsales from 10.0% in the third quarter of 2006 to 9.2% in the third quarter of2007. Changes in S,G,&A expenses are set forth in the following table(dollars in thousands):

 
| ** **                             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus, and benefit  expenses |       | $                                | 4,536      |              | 1.6        | %                                | $          | 7,176             |       | 2.2                      | %          | 0.6 | % |
| Selling expenses                       |       | 9,695                            |       | 3.3               | %          | 7,778                            |       | 2.4               | %          | (0.9                     | )%         |
| Settlement expense                     |       | 3,114                            |       | 1.0               | %          | 3,513                            |       | 1.1               | %          | 0.1                      | %          |
| Marketing expenses                     |       | 3,233                            |       | 1.1               | %          | 3,172                            |       | 1.0               | %          | (0.1                     | )%         |
| Other                                  |       | 8,896                            |       | 3.0               | %          | 8,022                            |       | 2.5               | %          | (0.5                     | )%         |
|                                   |       |                             |       |              |       |                             |       |              |       |                     |       |
| Total S,G,&A expenses              |       | $                                | 29,474     |              | 10.0       | %                                | $          | 29,661            |       | 9.2                      | %          | (0.8 | )% |

 

•       Increases in salaries, bonus and benefitexpenses in 2007 were $2.6 million. This increase was due to an increase inmanagement bonus expense of $3.1 million that was partially offset by decreasesin salaries and benefit expenses.

•       Decreases in selling expenses in 2007 were $1.9million. This decrease was due to lower costs for selling programs at ourdealers’ lots of $1.8 million. The remaining difference was comprised ofvarious other related selling expenses.

•       Increase in settlement expense (litigationsettlement expense) in 2007, as a percent of sales, was 0.1% or $322,000. Theincrease was the result of increased litigation related to warranty claims.

•       Decreases in marketing expenses in 2007, as apercent of sales, were 0.1% or 322,000. These reductions were the result ofsavings due to lower expenses associated with shows and rallies as well asreductions in co-op advertising, partially offset by an increase in printedmaterials costs.

•       Decreases in other expenses in 2007 were$874,000. This decrease is predominately a result of reductions in bad debtexpense of $662,000 and contract services of $203,000.

 

Operating income was $6.5 million, or 2.0% of sales, inthe third quarter of 2007 compared to a loss of $10.9 million, or 3.7% ofsales, in the similar 2006 period. The increase in operating income was duepredominantly to increased sales, improved gross margins, and lower S,G&Acosts as a percent of sales.

 

Net interest expense was $829,000 in the third quarterof 2007 versus $1.3 million in the comparable 2006 period, reflecting lowercorporate borrowing during the third quarter of 2007.

 

Wereported a provision for income taxes of $2.0 million, or an effective tax rateof 35.3%, in the third quarter of 2007, compared to a benefit from income taxesof $5.0 million, in the third quarter of 2006. The income tax benefit in thethird quarter of 2006 was due to the favorable outcome of a state income taxaudit that occurred during 2006.

 

Net income for the third quarter of 2007 was $3.7million compared to a loss of $7.1 million for the third quarter of 2006 dueprimarily to higher sales and gross margin.

 

20

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*Third Quarter 2007 versus ThirdQuarter 2006 for the Motorized Recreational Vehicle Segment*

 

Thefollowing table illustrates the results of the MRV segment for the quartersended September 30, 2006, and September 29, 2007 (dollars inthousands):

 
| ** **                                                            | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                                | 220,159    |              | 100.0      | %                                | $          | 257,982           |       | 100.0      | %          | $          | 37,823     |   | 17.2 | % |
| Cost of sales                                                         |       | 207,960                          |       | 94.5              | %          | 228,565                          |       | 88.6              | %          | (20,605    | )          | (9.9       | )%         |
| Gross profit                                                          |       | 12,199                           |       | 5.5               | %          | 29,417                           |       | 11.4              | %          | 17,218     |       | 141.1      | %          |
| Selling, general, and  administrative expenses and corporate overhead |       | 19,931                           |       | 9.0               | %          | 22,570                           |       | 8.7               | %          | (2,639     | )          | (13.2      | )%         |
|                                                                  |       |                             |       |              |       |                             |       |              |       |       |       |       |       |
| Operating income (loss)                                               |       | $                                | (7,732     | )                 | (3.5       | )%                               | $          | 6,847             |       | 2.7        | %          | $          | 14,579     |   | 188.6 | % |

 

Total net sales for the MRV segment were up from $220.2million in the third quarter of 2006 to $258.0 million in the third quarter of2007. Gross diesel motorized revenues were up 10.0% and gas motorized revenueswere up 79.8%, which were due to the introduction of new gas models thatincreased sales as dealers filled shelf space. Diesel products accounted for89.1% of the MRV segment’s third quarter of 2007 gross revenues while gasproducts were 10.9%. The overall increase in revenues is due to the Company’sincrease in retail market share. Our overall MRV segment unit sales were up9.6% year over year from 1,341 units in the third quarter of 2006 to 1,470units in the third quarter of 2007. Diesel motorized unit sales were down 0.7%to 1,080 units and gas motorized unit sales were up 54.2% to 390 units.

 

Gross profit for the MRV segment for the third quarterof 2007 increased to $29.4 million, up from $12.2 million in the third quarterof 2006, and gross margin increased from 5.5% in the third quarter of 2006 to11.4% in the third quarter of 2007. Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

 
| ** **          | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|---------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **          | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials    |       | $                                | 142,160    |              | 64.6       | %                                | $          | 161,595           |       | 62.6                     | %          | (2.0 | )% |
| Direct labor        |       | 23,248                           |       | 10.6              | %          | 24,346                           |       | 9.5               | %          | (1.1                     | )%         |
| Warranty            |       | 5,876                            |       | 2.7               | %          | 8,612                            |       | 3.3               | %          | 0.6                      | %          |
| Other direct        |       | 12,399                           |       | 5.6               | %          | 10,168                           |       | 4.0               | %          | (1.6                     | )%         |
| Indirect            |       | 24,277                           |       | 11.0              | %          | 23,844                           |       | 9.2               | %          | (1.8                     | )%         |
|                |       |                             |       |              |       |                             |       |              |       |                     |       |
| Total cost of sales |       | $                                | 207,960    |              | 94.5       | %                                | $          | 228,565           |       | 88.6                     | %          | (5.9 | )% |

 

•       Direct materials decreases in 2007, as a percentof sales, were 2.0% or $5.2 million. Subsequent to the end of the secondquarter of 2006, the Company implemented a series of price increases tocorrect an unfavorable material usage rate. This resulted in a decrease todirect materials of $5.1 million in 2007. The total cost of diesel chassis nowpurchased from the CCP joint venture are included in this line item for 2007whereas in 2006 only the materials portion of the overall chassis cost wasincluded. This increases material usage by $1.1 million for 2007. The remainingdecrease of $1.2 million is due to a change in the product mix of sales.

•       Direct labor decreases in 2007, as a percent ofsales, were 1.1% or $2.8 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand, which included the impact of the joint ventureoperations as discussed above.

•       Increases in warranty costs in 2007, as apercent of sales, were 0.6% or $1.5 million. These increases were due to majorproduction changes that occurred in mid 2006, which involved combiningproduction lines and shifting the plant locations where units were built. Wehave been experiencing higher warranty claims related to the products producedduring the period of change.

•       Decreases in other direct costs in 2007, as apercent of sales, were 1.6% or $4.1 million. This decrease was the result ofimprovements of $2.3 million in costs associated with workers’ compensationexpense and other employee related benefit costs. The remainder of thereduction related mostly to costs associated with out-of-warranty repairs of$1.0 million, and delivery expense of $774,000.

•       Decreases in indirect costs in 2007 were$433,000. These decreases were the result of improvements in efficiencies atour plants as a result of consolidation of component facilities, and the impactof the joint venture operations as previously discussed.

 

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S,G,&Aexpenses for the MRV segment decreased as a percent of sales due to highersales levels and decreases in selling expenses. In addition, in the fourthquarter of 2006 we completed a study on the allocation of corporate overhead,and allocated certain costs on an activity basis. These costs are nowclassified in a single line item for S,G,&A expense and corporate overheadallocation. Corporate overhead allocation is comprised of certain sharedservices such as executive, financial, information systems, legal, and investorrelations expenses.

 

Operating income increased due to higher sales, highergross margins, and lower S,G,&A expenses as a percent of sales.

* *

*Third Quarter 2007 versus ThirdQuarter 2006 for the Towable Recreational Vehicle Segment*

 

The followingtable illustrates the results of the TRV Segment for the quarters endedSeptember 30, 2006, and September 29, 2007 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                                | 70,450     |              | 100.0      | %                                | $          | 64,221            |       | 100.0      | %          | $          | (6,229     | ) | (8.8 | )% |
| Cost of sales                                                         |       | 65,346                           |       | 92.8              | %          | 57,531                           |       | 89.6              | %          | 7,815      |       | 11.9       | %          |
| Gross profit                                                          |       | 5,104                            |       | 7.2               | %          | 6,690                            |       | 10.4              | %          | 1,586      |       | 31.1       | %          |
| Selling,  general, and administrative expenses and corporate overhead |       | 7,409                            |       | 10.5              | %          | 5,819                            |       | 9.0               | %          | 1,590      |       | 21.5       | %          |
|                                                                  |       |                             |       |              |       |                             |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                                | (2,305     | )                 | (3.3       | )%                               | $          | 871               |       | 1.4        | %          | $          | 3,176      |   | 137.8 | % |

 

Total net salesfor the TRV segment were down from $70.5 million in the third quarter of 2006 to$64.2 million in the third quarter of 2007. This decrease is mostly due tosofter market conditions in the towable sector, as well as to decreases inmarket share for some of our products. The Company’s unit sales were down 0.9%to 3,940 units. Average unit selling price decreased to $17,700 in the thirdquarter of 2007 from $19,200 in the same period last year.

 

Gross profit for the third quarter of 2007 increased to$6.7 million, up from $5.1 million in the third quarter of 2006, and grossmargin increased from 7.2% in the third quarter of 2006 to 10.4% in the thirdquarter of 2007. Changes in the components of cost of sales are set forth inthe following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                                | 44,747     |              | 63.5       | %                                | $          | 39,055            |       | 60.8                     | %          | (2.7 | )% |
| Direct labor         |       | 8,263                            |       | 11.8              | %          | 7,542                            |       | 11.8              | %          | 0.0                      | %          |
| Warranty             |       | 2,076                            |       | 3.0               | %          | 1,928                            |       | 3.0               | %          | 0.0                      | %          |
| Other direct         |       | 5,667                            |       | 8.0               | %          | 4,520                            |       | 7.0               | %          | (1.0                     | )%         |
| Indirect             |       | 4,593                            |       | 6.5               | %          | 4,486                            |       | 7.0               | %          | 0.5                      | %          |
|                 |       |                             |       |              |       |                             |       |              |       |                     |       |
| Total cost of  sales |       | $                                | 65,346     |              | 92.8       | %                                | $          | 57,531            |       | 89.6                     | %          | (3.2 | )% |

 

•       Direct material decreases in 2007, as a percentof sales, were 2.7% or $1.7 million. Approximately half of this decrease wasdue to changes in the mix of products and half due to improvements incommodities purchasing initiatives in the third quarter of 2007 versus 2006. 

•       Direct labor, as a percent of sales, wasconsistent with the prior year at 11.8%.

•       Warranty expense, as a percent of sales, wasconsistent with the prior year at 3.0%.

•       Decreases in other direct costs, as a percent ofsales, were 1.0% or $642,000. This decrease was the result of improvements of$193,000 in employee benefit and workers’ compensation costs and a decrease of$449,000 in delivery expenses. 

•       Decreases of indirect costs in 2007 of $107,000were due to decreases in the variable portion of costs relative to thereduction in sales.

 

S,G,&Aexpenses for the TRV segment decreased as both a percent of sales and in totaldollars due to decreases in selling expenses. In addition, in the fourthquarter of 2006 we completed a study on the allocation of corporate overhead,and allocated certain costs on an activity basis. These costs are now classifiedin a single line item for S,G,&A expense and corporate overhead allocation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal, and investor relationsexpenses.

 

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Operating income increased due to higher gross marginsand lower S,G,&A expenses as a percent of sales and in total dollars, whichmore than offset the reduction in sales.

 

*Third Quarter 2007 versus ThirdQuarter 2006 for the Motorhome Resort Segment*

 

Thefollowing table illustrates the results of the Motorhome Resort Segment (MRsegment) for the quarters ended September 30, 2006, and September 29, 2007(dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**  | ** ** | **%**             | ** ** | **Quarter Ended**  | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|-------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September  30, 2006** | ** ** | **of Sales** | ** ** | **September  29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                       | 1,864      |              | 100.0      | %                       | $          | 219               |       | 100.0      | %          | $          | (1,645     | ) | (88.3 | )% |
| Cost of sales                                                         |       | 634                     |       | 34.0              | %          | 147                     |       | 67.1              | %          | 487        |       | 76.8       | %          |
| Gross profit                                                          |       | 1,230                   |       | 66.0              | %          | 72                      |       | 32.9              | %          | (1,158     | )          | (94.1      | )%         |
| Selling, general,  and administrative expenses and corporate overhead |       | 2,134                   |       | 114.5             | %          | 1,272                   |       | 580.8             | %          | 862        |       | 40.4       | %          |
|                                                                  |       |                    |       |              |       |                    |       |              |       |       |       |       |       |
| Operating loss                                                        |       | $                       | (904       | )                 | (48.5      | )%                      | $          | (1,200            | )          | (547.9     | )%         | $          | (296       | ) | (32.7 | )% |

 

Netsales decreased 88.3% to $219,000 compared to $1.9 million for the same periodlast year. Slower sales in the second quarter led to fewer lots available inescrow to close in the third quarter, which has seasonally fewer prospectiveowners visiting the southwest desert region during the summer months. To alarge degree, the reductions in sales are a function of shrinking inventoriesof available lots, as well as from competition within the Company’s own resortsfrom owner resales. In addition, while the current troubles in the greater realestate market may not directly influence sales of lots, it does have an impacton demand. The Company still expects that while sales may remain slower thanexpected, the needs for luxury resort locations within the industry will remainstrong.*

 

Grossprofit for the MR segment decreased to 32.9% of sales in the third quarter of2007 compared to 66.0% of sales in the same period last year. This was due tothe mix of lot sales. In the third quarter 2007, all sales were from the LasVegas resort which has a lower gross margin.

 

S,G,&A expenses decreased in total dollars due tothe reduction in sales, as well as to the reduction in participation expenseaccrued, which was a result of lower profits. In addition, in the fourthquarter of 2006 we completed a study on the allocation of corporate overhead,and allocated certain costs on an activity basis. These costs are now locatedin a single line item for S,G,&A expense and corporate overhead allocation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal and investor relationsexpenses.

 

Operatingincome decreased due to lower sales and gross margin, and to higher S,G,&Acosts and corporate overhead allocation as a percent of sales*.*

 

*Nine months EndedSeptember 29,  2007 Compared to Ninemonths ended September 30, 2006*

 

Thefollowing table illustrates the results of consolidated operations for the ninemonths ended September 30, 2006 and September 29, 2007 (dollars in thousands):

 
| ** **                                     | ** ** | **Nine  Months Ended**  | ** ** | **%**             | ** ** | **Nine  Months Ended**  | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------|------------|-------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **September  30, 2006** | ** ** | **of Sales** | ** ** | **September  29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                       | 998,823    |              | 100.0      | %                       | $          | 979,985           |       | 100.0      | %          | $          | (18,838    | ) | (1.9 | )% |
| Cost of sales                                  |       | 901,351                 |       | 90.2              | %          | 871,212                 |       | 88.9              | %          | 30,139     |       | 3.3        | %          |
| Gross profit                                   |       | 97,472                  |       | 9.8               | %          | 108,773                 |       | 11.1              | %          | 11,301     |       | 11.6       | %          |
| Selling, general,  and administrative expenses |       | 92,882                  |       | 9.3               | %          | 89,885                  |       | 9.2               | %          | 2,997      |       | 3.2        | %          |
| Plant relocation  costs                        |       | 269                     |       | 0.0               | %          | 0                       |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                           |       |                    |       |              |       |                    |       |              |       |       |       |       |       |
| Operating income                               |       | $                       | 4,321      |              | 0.5        | %                       | $          | 18,888            |       | 1.9        | %          | $          | 14,567     |   | 337.1 | % |

 

23

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Consolidatedsales for the nine months ended September 29, 2007 were $980.0 million versus$998.8 million, representing a 1.9% decrease. This decrease was due to theimpact of FEMA travel trailer orders filled in the first quarter of 2006, thesofter market conditions in the towable sector in 2007, and a decrease inmotorhome resort lot sales. The resort revenues were lower due to shrinkinginventories of available lots, as well as competition within the Company’s ownresorts from owner resales in the first quarter of 2007. These reductions werepartially offset by an increase of sales in the motorized sector.

 

Grossprofit for the nine month period in 2007 increased to $108.8 million, up from$97.5 million in the same period of 2006 and gross margins increased from 9.8%in 2006 to 11.1% in 2007. The changes in the components of cost of sales areset forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                      | 618,558    |              | 61.9       | %                      | $          | 608,147           |       | 62.1                     | %          | 0.2 | % |
| Direct labor         |       | 103,729                |       | 10.4              | %          | 96,512                 |       | 9.8               | %          | (0.6                     | )%         |
| Warranty             |       | 28,787                 |       | 2.9               | %          | 31,887                 |       | 3.3               | %          | 0.4                      | %          |
| Other direct         |       | 60,687                 |       | 6.1               | %          | 47,933                 |       | 4.9               | %          | (1.2                     | )%         |
| Indirect             |       | 89,590                 |       | 8.9               | %          | 86,733                 |       | 8.8               | %          | (0.1                     | )%         |
|                 |       |                   |       |              |       |                   |       |              |       |                     |       |
| Total cost of  sales |       | $                      | 901,351    |              | 90.2       | %                      | $          | 871,212           |       | 88.9                     | %          | (1.3 | )% |

 

•       Direct materials increases in 2007, as a percentof sales, were 0.2% or $2.0 million. Subsequent to the end of the secondquarter of 2006, the Company implemented a series of price increases to correctan unfavorable material usage rate. This resulted in a decrease to directmaterials of $5.1 million in 2007. The total cost of diesel chassis nowpurchased from the CCP joint venture are included in this line item for 2007whereas in 2006 only the materials portion of the overall chassis cost wasincluded. This increased material usage by $2.2 million for 2007. The remainingincrease of $4.9 million is due to a change in the product mix of sales.

•       Direct labor decreases in 2007, as a percent ofsales, were 0.6% or $5.9 million. This decrease was primarily the result ofimprovements in our plants as we realigned production facilities andconsolidated component facilities to meet demand, which included the jointventure operations as discussed above.

•       Increases in warranty expense in 2007, as apercent of sales, were 0.4% or $3.9 million. These increases were due to majorproduction changes that occurred from July 2005 to June 2006, which involvedcombining production lines and shifting the plant locations where units werebuilt. We have been experiencing higher warranty claims related to the productsproduced during the period of change.

•       Decreases in other direct costs in 2007, as apercent of sales, were 1.2% or $11.8 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expenseand other employee benefits of $5.9 million, as well as reductions inout-of-policy goodwill repairs of $2.0 million and delivery expenses of $3.9million.

•       Decreases in indirect costs in 2007 were $2.9million. These decreases were the result of improvements in efficiencies at ourplants due to consolidation of component facilities, including the changes dueto the joint venture operations.

 

S,G,&Adecreased by $3.0 million to $89.9 million for the nine month period of 2007,and decreased as a percentage of sales from 9.3% in 2006 to 9.2% in 2007.Changes in S,G,&A expenses are set forth in the following table (dollars inthousands):

 
| ** **                             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                      | 19,404     |              | 1.9        | %                      | $          | 21,906            |       | 2.3                      | %          | 0.4 | % |
| Selling expenses                       |       | 30,604                 |       | 3.1               | %          | 25,788                 |       | 2.6               | %          | (0.5                     | )%         |
| Settlement  expense                    |       | 9,081                  |       | 0.9               | %          | 10,004                 |       | 1.0               | %          | 0.1                      | %          |
| Marketing  expenses                    |       | 7,514                  |       | 0.8               | %          | 6,837                  |       | 0.7               | %          | (0.1                     | )%         |
| Other                                  |       | 26,279                 |       | 2.6               | %          | 25,350                 |       | 2.6               | %          | 0.0                      | %          |
|                                   |       |                   |       |              |       |                   |       |              |       |                     |       |
| Total S,G,&A  expenses             |       | $                      | 92,882     |              | 9.3        | %                      | $          | 89,885            |       | 9.2                      | %          | (0.1 | )% |

 

•       Increases in salaries, bonus and benefitexpenses in 2007 were $2.5 million. This increase was due to increases inmanagement bonus expense of $2.4 million and long-term incentive stock-basedprogram expenses of $604,000, partially offset by a decrease in wages and otherbenefits of $495,000.

 

24

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•       Decreases in selling expenses in 2007 were $4.8million. This decrease was due to lower costs for selling programs at ourresort properties of $779,000, lower sales commissions of $284,000, and lowercosts of $3.5 million related to sales programs. The remaining difference wascomprised of various other related selling expenses.

•       Settlement expense (litigation settlementexpense) in 2007 increased by $923,000. The total dollar increase was theresult of increases in the number of litigation cases in 2007 versus 2006 aswell as increases in the amounts reserved for certain pending litigation.

•       Decreases in marketing expenses in 2007 were$677,000. These reductions were the result of savings due to lower expensesassociated with shows and rallies.

•       Decreases in other expenses in 2007 were$929,000. This decrease was predominately due to reductions in bad debt expenseof $1.0 million and resort lot participation accrual of $917,000, partiallyoffset by an increase in depreciation of $820,000.

 

Operating income was $18.9 million, or 1.9% of sales,for the nine month period of 2007 compared to $4.3 million, or 0.5% of sales,in the similar 2006 period. Increasesin operating income****were duepredominantly to higher gross margins and improvements in S,G,&A costs,partially offset by a reduction in sales.

 

Net interest expense was $2.7 million for the ninemonth period of 2007 versus $3.5 million in the comparable 2006 period,reflecting a lower level of borrowing during the nine month period of 2006.

 

We reported a provision for income taxes of $6.0million, or an effective tax rate of 38.4% for the nine month period of 2007,compared to a benefit from income taxes of $343,000, or an effective tax rateof 25.8% for the comparable 2006 period.  The increase in the effectivetax rate was due primarily to the lack of certain non-recurring income taxbenefits that were recorded during the first nine months of 2006.  Thesenon-recurring benefits included a favorable outcome from a state income taxaudit and a benefit attributable to certain state income tax law changes.

 

Net income for the nine month period of 2007 was $9.6million compared to $1.6 million for the comparable period in 2006 (includinglosses from discontinued operations of $107,000 in 2006, net of taxes, relatedto the closure of the Royale Coach facility) due to a higher operating margin,and reduction in total S,G,&A expenses, partially offset by a reduction insales. 

 

*Nine Months of 2007versus Nine Months of 2006 for the Motorized Recreational Vehicle Segment*

 

The following tableillustrates the results of the MRV segment for the nine month period endedSeptember 30, 2006 and September 29, 2007 (dollars in thousands):

 
| ** **                                                            | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                                | 700,728    |              | 100.0      | %                                | $          | 754,192           |       | 100.0      | %          | $          | 53,464     |   | 7.6 | % |
| Cost of sales                                                         |       | 647,910                          |       | 92.5              | %          | 672,029                          |       | 89.1              | %          | (24,119    | )          | (3.7       | )%         |
| Gross profit                                                          |       | 52,818                           |       | 7.5               | %          | 82,163                           |       | 10.9              | %          | 29,345     |       | 55.6       | %          |
| Selling,  general, and administrative expenses and corporate overhead |       | 58,718                           |       | 8.4               | %          | 65,760                           |       | 8.7               | %          | (7,042     | )          | (12.0      | )%         |
| Plant relocation  costs                                               |       | 269                              |       | 0.0               | %          | 0                                |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                                                  |       |                             |       |              |       |                             |       |              |       |       |       |       |       |
| Operating income  (loss)                                              |       | $                                | (6,169     | )                 | (0.9       | )%                               | $          | 16,403            |       | 2.2        | %          | $          | 22,572     |   | 365.9 | % |

 

Net sales for the MRV segment were up from $700.7million in the nine month period of 2006 to $754.2 million in the nine monthperiod of 2007. Gross diesel motorized revenues were up 7.3%, and gas motorizedrevenues were down 6.5%. Diesel products accounted for 89.4% of our nine monthsMRV segment revenues while gas products were 10.6%. The overall increase inrevenues reflects the Company’s increase in retail market share in 2007 as wellas an increase in diesel Class A unit sales volume as a percentage of totalmotorized sales. Our overall MRV segment unit sales were up 1.9% in the ninemonth period of 2007 to 4,448 units, with diesel motorized unit sales up 2.4%to 3,288 units, and gas motorized unit sales up 0.6% to 1,160 units. Ouraverage unit selling price increased to $167,800 for the nine month period of2007 from $162,000 in the same period last year.

 

25

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Gross profit for the nine month period of 2007increased to $82.2 million, up from $52.8 million in 2006, and gross marginincreased from 7.5% in the nine month period of 2006 to 10.9% in the nine monthperiod of 2007. The changes in the components of cost of sales are set forth inthe following table (dollars in thousands):

 
| ** **           | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                                | 441,657    |              | 63.1       | %                                | $          | 471,470           |       | 62.5                     | %          | (0.6 | )% |
| Direct labor         |       | 72,440                           |       | 10.3              | %          | 71,717                           |       | 9.5               | %          | (0.8                     | )%         |
| Warranty             |       | 21,320                           |       | 3.1               | %          | 24,785                           |       | 3.3               | %          | 0.2                      | %          |
| Other direct         |       | 38,151                           |       | 5.4               | %          | 31,485                           |       | 4.2               | %          | (1.2                     | )%         |
| Indirect             |       | 74,342                           |       | 10.6              | %          | 72,572                           |       | 9.6               | %          | (1.0                     | )%         |
|                 |       |                             |       |              |       |                             |       |              |       |                     |       |
| Total cost of  sales |       | $                                | 647,910    |              | 92.5       | %                                | $          | 672,029           |       | 89.1                     | %          | (3.4 | )% |

 

•       Direct materials decreases in 2007, as a percentof sales, were 0.6% or $4.5 million. Subsequent to the end of the secondquarter of 2006, the Company implemented a series of price increases to correctan unfavorable material usage rate. This resulted in a decrease to directmaterials of $5.1 million in 2007. The total cost of diesel chassis nowpurchased from the CCP joint venture are included in this line item for 2007whereas in 2006 only the materials portion of the overall chassis cost wasincluded. This increases material usage by $2.2 million for 2007. The remainingdecrease of $1.6 million is due to a change in the product mix of sales.

•       Direct labor decreases in 2007, as a percent ofsales, were 0.8% or $6.0 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand, which included the joint venture operations asdiscussed above.

•       Increases in warranty expense in 2007, as apercent of sales, were 0.2% or $1.5 million. These increases were due to majorproduction changes that occurred from July 2005 to June 2006, which involvedcombining productions lines and shifting the plant locations where units werebuilt. We have been experiencing higher warranty claims related to the productsproduced during the period of change.

•       Decreases in other direct costs in 2007, as apercent of sales, were 1.2% or $9.1 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expenseand employee benefits of $5.3 million, and reductions in out-of-policy goodwillexpenses of $3.0 million.

•       Decreases in indirect costs in 2007 were $1.8million. These decreases were the result of improvements in efficiencies at ourplants as a result of consolidation of component facilities, and the impact ofthe joint venture operations as previously discussed.

 

S,G,&A for the MRV segment increased slightly dueto higher management bonus levels allocated to the MRV segment as a result ofimproved profits for the Company as a whole. In addition, in the fourth quarterof 2006 we completed a study on the allocation of corporate overhead, andallocated certain costs on an activity basis. These costs are now located in asingle line item for S,G,&A expense and corporate overhead allocation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal and investor relationsexpenses.

 

Plant relocation costs were related to the costsincurred to relocate the Bend, Oregon manufacturing facility to the Coburg,Oregon plant in prior years. We believe this relocation will continue to resultin improved margins for the Oregon operations.*

 

Operating income increased as both a percent of salesand in total dollars due to higher sales and higher gross margins, which werepartially offset by higher S,G,&A expenses as a percent of sales.

 

26

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*Nine Months of 2007versus Nine Months of 2006 for the Towable Recreational Vehicle Segment*

 

The following table illustrates the results of the TRVsegment for the nine months ended September 30, 2006 and September 29, 2007(dollars in thousands):

 
| ** **                                                            | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                      | 274,092    |              | 100.0      | %                      | $          | 214,669           |       | 100.0      | %          | $          | (59,423    | ) | (21.7 | )% |
| Cost of sales                                                         |       | 244,839                |       | 89.3              | %          | 194,970                |       | 90.8              | %          | 49,869     |       | 20.4       | %          |
| Gross profit                                                          |       | 29,253                 |       | 10.7              | %          | 19,699                 |       | 9.2               | %          | (9,554     | )          | (32.7      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 24,953                 |       | 9.1               | %          | 18,053                 |       | 8.4               | %          | 6,900      |       | 27.7       | %          |
|                                                                  |       |                   |       |              |       |                   |       |              |       |       |       |       |       |
| Operating income                                                      |       | $                      | 4,300      |              | 1.6        | %                      | $          | 1,646             |       | 0.8        | %          | $          | (2,654     | ) | (61.7 | )% |

 

Net sales for the TRV segment were down from $274.1million in the nine month period of 2006 to $214.7 million in the nine monthperiod of 2007. The overall decrease in revenues reflected the FEMA traveltrailer sales filled in the first quarter or 2006, as well as the softer marketconditions in 2007 and decreases in market share for some of our products. TheCompany’s unit sales were down 20.1% to 13,439 units. The average unit sellingprice increased to $17,500 in the nine month period of 2007 from $17,200 in thesame period last year.

 

Gross profit for the nine month period of 2007decreased to $19.7 million, down from $29.3 million in 2006, and gross margindecreased from 10.7% in the nine month period of 2006 to 9.2% in the nine monthperiod of 2007. The changes in the components of cost of sales are set forth inthe following table (dollars in thousands):

 
| ** **           | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                      | 169,014    |              | 61.7       | %                      | $          | 133,035           |       | 62.0                     | %          | 0.3 | % |
| Direct labor         |       | 30,944                 |       | 11.3              | %          | 24,542                 |       | 11.4              | %          | 0.1                      | %          |
| Warranty             |       | 7,467                  |       | 2.7               | %          | 7,102                  |       | 3.3               | %          | 0.6                      | %          |
| Other direct         |       | 22,497                 |       | 8.2               | %          | 16,416                 |       | 7.6               | %          | (0.6                     | )%         |
| Indirect             |       | 14,917                 |       | 5.4               | %          | 13,875                 |       | 6.5               | %          | 1.1                      | %          |
|                 |       |                   |       |              |       |                   |       |              |       |                     |       |
| Total cost of  sales |       | $                      | 244,839    |              | 89.3       | %                      | $          | 194,970           |       | 90.8                     | %          | 1.5 | % |

 

•       Direct material increases in 2007, as a percentof sales, were 0.3% or $644,000. This increase was a result of the changes inthe mix of products sold. In 2006 versus 2007 there was a substantial amount ofsales to FEMA for travel trailers in the first quarter. These units had a lowerdirect material cost.

•       Direct labor increases in 2007, as a percent ofsales, were 0.1% or $215,000. This increase was the result of inefficiencies inour plants due to lower run rates in 2007 versus 2006.

•       Increases in warranty expense in 2007, as apercent of sales, were 0.6% or $1.3 million. These increases were due to majorproduction changes that occurred from July 2005 to June 2006, which involvedcombining production lines and shifting the plant locations where units werebuilt. We have been experiencing higher warranty claims related to the productsproduced during the period of change.

•       Decreases in other direct costs in 2007, as apercent of sales, were 0.6% or $1.3 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expenseand employee benefits of $429,000, as well as delivery expenses of $1.1million.

•       Decreases of indirect costs in 2007 of $1.0million were due to decreases in the variable portion of costs relative to thereduction in sales.

 

S,G,&A expenses for the TRV segment decreased, asboth a percent of sales and in total dollars due to decreases in sellingexpenses. In addition, in the fourth quarter of 2006 we completed a study onthe allocation of corporate overhead, and allocated certain costs on anactivity basis. These costs are now located in a single line item forS,G,&A expense and corporate overhead allocation. Corporate overheadallocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

 

Operating income decreased as both a percent of salesand in total dollars due to lower sales and gross profit which was onlypartially offset by a decrease in S,G,&A expenses as a percent of sales.

 

27

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*Nine Months of 2007versus Nine Months of 2006 for the Motorhome Resorts Segment*

 

The following tableillustrates the results of the Motorhome Resorts Segment (MR segment) for thenine month period ended September 30, 2006 and September 29, 2007 (dollars inthousands):

 
| ** **                                                            | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **Nine Months Ended**  | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **September 29, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                      | 24,003     |              | 100.0      | %                      | $          | 11,124            |       | 100.0      | %          | $          | (12,879    | ) | (53.7 | )% |
| Cost of sales                                                         |       | 8,602                  |       | 35.8              | %          | 4,213                  |       | 37.9              | %          | 4,389      |       | 51.0       | %          |
| Gross profit                                                          |       | 15,401                 |       | 64.2              | %          | 6,911                  |       | 62.1              | %          | (8,490     | )          | (55.1      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 9,211                  |       | 38.4              | %          | 6,072                  |       | 54.6              | %          | 3,139      |       | 34.1       | %          |
|                                                                  |       |                   |       |              |       |                   |       |              |       |       |       |       |       |
| Operating income                                                      |       | $                      | 6,190      |              | 25.8       | %                      | $          | 839               |       | 7.5        | %          | $          | (5,351     | ) | (86.4 | )% |

 

Net sales decreased 53.7% to $11.1 million compared to$24.0 million for the same period last year. This is due in part to weatherconditions in the first quarter of 2007, as well as a limited number of lotsavailable for sale in the current year. To a large degree, the reductions insales are a function of shrinking inventories of available lots, as well asfrom competition within the Company’s own resorts from owner resales. Inaddition, while the current troubles in the greater real estate market may notdirectly influence sales of lots, it does have an impact on demand. The Companystill expects that while sales may remain slower than expected, that the needsfor luxury resort locations within the industry will remain strong.*

 

Gross profit for the MR segment decreased to 62.1% ofsales compared to 64.2% of sales in the same period last year. Gross margindecreases were due to the additions of some amenities designed to enhance theappeal of the resorts and demand for lots, but also added slightly to the costof sales.

 

S,G,&A expenses increased as a percent of salesdue to lower sales that was not entirely offset by a reduction in totalS,G,&A dollars. In addition, in the fourth quarter of 2006 we completed astudy on the allocation of corporate overhead, and allocated certain costs onan activity basis. These costs are now located in a single line item forS,G,&A expense and corporate overhead allocation. Corporate overhead allocationis comprised of certain shared services such as executive, financial, informationsystems, legal and investor relations expenses.

 

Operating income decreased due to lower lot salesvolumes and an increase in S,G&A expenses as a percentage of sales.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s primary sources of liquidity areinternally generated cash from operations and available borrowings under itscredit facilities. During the first nine months of 2007, the Company generatedcash of $61.7 million from operating activities and had a cash balance of $35.2million at September 29, 2007. The Company generated $24.8 million from netincome and had non-cash expenses such as depreciation and amortization, losseson sales of assets, expenses associated with stock-based compensation, andlosses in equity investment. Other sources of cash included a $22.8 millionincrease in accounts payable, a $2.0 million decrease in trade receivables, adecrease of $3.7 million in inventory levels, a $504,000 decrease in prepaidexpenses, a $2.9 million increase in accruals for product warranty, a $4.6million increase in accrued liabilities, and a $9.1 million increase in incometax payable. The uses of cash in this period included an increase of $400,000in resort inventory, an $8.0 million increase in land held for development, a$138,000 decrease in accruals for product liability reserve, a decrease of$150,000 in deferred revenue, and a decrease in assets from discontinuedoperations of $18,000. Increases in accounts payable are due mostly to timingof shipments of raw materials to our plants. At the end of 2006, we had aregularly scheduled Christmas shutdown, and accordingly the amounts of rawmaterials scheduled for delivery were reduced. At the end of the third quarter2007, we had a normal schedule of deliveries. Decreases in trade accountsreceivable reflect strong collections near the end of the third quarter of2007, versus the end of fiscal year 2006. Decreases in inventories are a resultof the Company continuing to focus on reducing these levels to meet demand. Decreasesin prepaid expenses reflect the amortization of certain prepaid expenses forcosts such as insurance. Increases in warranty reserves were the result ofincreases in experience for warranty costs on some of our current model yearproducts. Increases in accrued expenses and other liabilities are associatedwith increases for accruals for management bonus, and property taxes, offset bydecreases for accruals for promotions and advertising, and interest expense. Increasesin income taxes payable reflect the provision for expected income taxes due. Increasesin resort lot inventories are the result of construction costs at the Company’sresort properties. Increases in land held for development reflect the purchasesof property for resort development in Naples, Florida. Decreases in accruedproduct liability reserves reflect the increase in activity on pendinglitigation claims, and the ultimate

 

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settlement of those claims. Decreases in deferred revenues are relatedto revenue associated with Monaco Financial Services that the Company receivedin 2006 and is amortizing over the length of the contract with GECDF and GECF. Decreasesin assets related to discontinued operations are for the sales of all remainingRoyale Coach discontinued products.

 

On November 18, 2005, the Company amended itscredit facilities to borrow $40.0 million of term debt (the “Term Debt”) tocomplete the acquisition of R-Vision. The revolving line of credit remains at$105.0 million. At September 29, 2007, there were no borrowings outstanding onthe revolving line of credit (the “Revolving Loan”), and Term Debt borrowingswere $30.0 million. At the election of the Company, the Revolving Loan and theTerm Debt bear interest at varying rates that fluctuate based on the prime rateor LIBOR, and are determined based on the Company’s leverage ratio. The Companyalso pays interest quarterly on the unused available portion of the RevolvingLoan at varying rates, determined by the Company’s leverage ratio. TheRevolving Loan is due and payable in full on November 17, 2009 andrequires interest payments quarterly. The Term Debt requires quarterly interestpayments and quarterly principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010. Both the Revolving Loanand Term Debt are collateralized by all the assets of the Company and thecredit facilities include various restrictions and financial covenants. TheCompany was in compliance with these covenants at September 29, 2007. TheCompany utilizes “zero balance” bank disbursement accounts in which an advanceon the line of credit is automatically made for checks clearing each day. Sincethe balance of the disbursement account at the bank returns to zero at the endof each day, the outstanding checks of the Company are reflected as aliability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. At September 29, 2007, cash is a positive netbalance and thus no book overdraft is reported.

 

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

 

The Company’s principal working capital requirementsare for purchases of inventory and financing of trade receivables. Many of theCompany’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below. At September 29, 2007 andDecember 30, 2006, the Company had working capital of approximately $109.8million. The Company has been using short-term credit facilities and operatingcash flow to finance its capital expenditures.

 

The Company believes that cash flow from operationsand funds available under its anticipated credit facilities will be sufficientto meet the Company’s liquidity requirements for the next 12 months.* TheCompany’s capital expenditures were $4.2 million in the first nine months of2007, which included costs related to additions of automated machinery in manyof its production facilities, upgrades to its information systemsinfrastructure, and other various capitalized upgrades to existing facilities.The Company anticipates that capital expenditures for all of 2007 will be approximately$6 to $8 million, which includes expenditures to purchase additional machineryand equipment in both the Company’s Coburg, Oregon and Wakarusa, Indianafacilities, as well as upgrades to existing information systems infrastructures.*The Company may require additional equity or debt financing to address workingcapital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable. The Company may also from time to time seek to acquirebusinesses that would complement the Company’s current business, and any suchacquisition could require additional financing. There can be no assurance thatadditional financing will be available if required or on terms deemed favorableby the Company.

 

As is typical in the recreational vehicle industry,many of the Company’s retail dealers utilize wholesale floor plan financingarrangements with third party lending institutions to finance their purchasesof the Company’s products. Under the terms of these floor plan arrangements,institutional lenders customarily require the recreational vehicle manufacturerto agree to repurchase any unsold units if the dealer defaults on its creditfacility from the lender, subject to certain conditions. The Company hasagreements with several institutional lenders under which the Company currentlyhas repurchase obligations. The Company’s contingent obligations under theserepurchase agreements are reduced by the proceeds received upon the sale of anyrepurchased units. The Company’s obligations under these repurchase agreementsvary from period to period up to 15 months. At September 29, 2007,approximately $515.5 million of products sold by the Company to independentdealers were subject to potential repurchase under existing floor planfinancing agreements with approximately 5.8% concentrated with one dealer.Historically, the Company has been successful in mitigating losses associatedwith repurchase obligations. During the third quarter of 2007, there were nolosses associated with the exercise of repurchase agreements. Dealers for theCompany undergo a credit review prior to becoming a dealer and periodicallythereafter. Financial institutions that provide floor plan financing also performcredit reviews and floor checks on an ongoing basis. We closely monitor salesto dealers that are a higher credit risk. The repurchase period is limited,usually up to a maximum of 15 months. We believe these activities help tominimize the number of required repurchases. Additionally, the repurchaseagreement specifies that the dealer is

 

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required to make principal payments during the repurchase period. Sincethe Company repurchases the units based on the schedule of principal payments,the repurchase amount is typically less than the original invoice amount. Thislower repurchase amount helps mitigate our loss when we offer the inventory toanother dealer at an amount lower than the original invoice as incentive forthe dealer to take the repurchased inventory.

 

**OFF-BALANCE SHEETARRANGEMENTS**

** **

As of September 29, 2007, the Company did not have anyoff-balance sheet arrangements that have, or are reasonably likely to have, acurrent or future material effect on the Company’s consolidated financialcondition, results of operations, liquidity, capital expenditures or capitalresources.

 

**CONTRACTUALOBLIGATIONS**

** **

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

 
| ** **                          | ** ** | **PAYMENTS DUE BY PERIOD**   | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| **Contractual Obligations**    | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt  (1)                 |       | $                                 | 5,714      |   | $ | 11,928 |   | $ | 12,858 |   | $ | 0 |   | $ | 30,500 |   |
| Operating Leases  (2)               |       | 2,271                             |       | 4,154 |   | 3,479 |   | 1,381 |   | 11,285 |   |
|                                |       |                              |       |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations |       | $                                 | 7,985      |   | $ | 16,082 |   | $ | 16,337 |   | $ | 1,381 |   | $ | 41,785 |   |

 
|                        |       | **AMOUNT OF COMMITMENT  EXPIRATION BY PERIOD** |       |
|-----------------------------|------------|----------------------------------------------------------|------------|
| **Other Commitments**  | ** ** | **1 year or less**                        | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit  (3)         |       | $                                                        | 0          |   | $ | 105,000 |   | $ | 0 |   | $ | 0 |   | $ | 105,000 |   |
| Guarantees (4)              |       | 0                                                        |       | 0 |   | 10,930 |   | 0 |   | 10,930 |   |
| Repurchase  Obligations (5) |       | 0                                                        |       | 515,506 |   | 0 |   | 0 |   | 515,506 |   |
|                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Total  Commitments          |       | $                                                        | 0          |   | $ | 620,506 |   | $ | 10,930 |   | $ | 0 |   | $ | 631,436 |   |

 

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| (1) |   | See Note 6 to  the Condensed Consolidated Financial Statements.                                                                                                 |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Various leases  including manufacturing facilities, aircraft, and machinery and equipment.                                                                      |
| (3) |   | See Note 5 to  the Condensed Consolidated Financial Statements. The amount listed represents  available borrowings on the line of credit at September 29, 2007. |
| (4) |   | Guarantees  related to aircraft operating lease.                                                                                                                |
| (5) |   | Reflects  obligations under manufacturer repurchase commitments. See Note 11 to the  Condensed Consolidated Financial Statements.                               |

 

**INFLATION**

 

During2006 and to a lesser extent in the first nine months of 2007, the Companyexperienced increases in the prices of certain commodity items that we use inmanufacturing our products. These include, but are not limited to, steel,copper, aluminum, petroleum, and wood. While price increases for these rawmaterials are not necessarily indicative of widespread inflationary trends,they had an impact on the Company’s production costs. To date, the Company hasbeen successful in passing along most of these increases by increasing theselling prices of its products. However, there is no certainty that the Companywill be able to pass these along successfully in the future. The current trendin these prices, if it continues, could have a materially adverse impact on theCompany’s business going forward.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of

 

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goodwill. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances.Actual results may differ from these estimates under different assumptions orconditions and such differences could be material. We believe the followingcritical accounting policies and related judgments and estimates affect thepreparation of our consolidated financial statements.

 

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

 

**PRODUCT LIABILITY**   TheCompany provides an estimate for accrued product liability based on currentpending cases, as well as for those cases which are incurred but not reported.This estimate is developed by legal counsel based on professional judgment, aswell as historical experience.

 

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

 

**INVENTORY ALLOWANCE**   TheCompany writes down its inventory for obsolescence, and the difference betweenthe cost of inventory and its estimated fair market value. These write-downsare based on assumptions about future sales demand and market conditions. Ifactual sales demand or market conditions change from those projected bymanagement, additional inventory write-downs may be required.

 

**INCOME TAXES**   Inconjunction with preparing its consolidated financial statements, the Companymust estimate its income taxes in each of the jurisdictions in which itoperates. This process involves estimating actual current tax expense togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the consolidated balance sheets.The Company must then assess the likelihood that the deferred tax assets willbe recovered from future taxable income, and to the extent management believesthat recovery is not likely, a valuation allowance must be established.Significant management judgment is required in determining the Company’sprovision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets.

 

The Company adopted FIN 48, “Accounting forUncertainty in Income Taxes – an Interpretation of FAS 109,” as of thebeginning of fiscal year 2007. See Note 7 to the Company’s condensedconsolidated quarterly financial statements included in this Quarterly Reporton Form 10-Q.

 

**INCENTIVE STOCK-BASED COMPENSATION**  The Company, like many other companies,sponsors an incentive stock-based compensation plan for key members of theorganization. The related expenses recognized are subject to complex calculationsbased on a variety of assumptions for variables such as risk-free rates ofreturn, stock volatility, expected terminations, and achievements of financialperformance measures. To the extent certain of these variables can not beknown, management uses estimates to calculate the resulting liability.

 

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

 

**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

 

***FIN 48***

* *

In June 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes” (the “Interpretation”). The Interpretationclarifies the accounting for uncertainty in income taxes recognized inaccordance with FASB 109, “Accounting for Income Taxes” by defining a criterionthat an individual tax position must be met for any part of the benefit to berecognized in the financial statements. The Interpretation is effective forfiscal years beginning after December 15, 2006. See Note 7 to the Company’sconsolidated quarterly financial statements included with this Quarterly Reporton Form 10-Q.

 

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We have adopted the Interpretation as of the beginningof fiscal year 2007 and there was no significant impact to the financialstatements.

 

***FAS 157***

* *

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements.” The Statement defines fair value, establishes a frameworkfor measuring fair value, and expands disclosure requirements regarding fairvalue measurements. SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007. While we are still analyzing the effects of SFAS No.157, we believe that the adoption for SFAS No. 157 will not have a materialeffect on our financial position or results of operations.

 

***FAS 159***

* *

In February 2007, the FASB issued SFAS No. 159, “FairValue Option for Financial Assets and Financial Liabilities.” This statementpermits entities to choose to measure many financial instruments and certainother items at fair value. SFAS No. 159 is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. We arecurrently analyzing the effects of adopting SFAS No. 159.

 

**ITEM 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

Nomaterial change since December 30, 2006.

 

**ITEM 4. 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 of the end of the period covered by this Quarterly Report on Form10-Q. Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934, as amended,is accumulated and communicated to our management including our principalexecutive and principal financial officers, as appropriate to allow timelydecisions regarding required disclosure, and that such information is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures will prevent allerror and all fraud. Because of inherent limitations in any system ofdisclosure controls and procedures, no evaluation of controls can provideabsolute assurance that all instances of error or fraud, if any, within the Companymay be detected. However, our management, including our Chief Executive Officerand our Chief Financial Officer, have designed our disclosure controls andprocedures to provide reasonable assurance of achieving their objectives andhave, pursuant to the evaluation discussed above, concluded that our disclosurecontrols and procedures are, in fact, effective at this reasonable assurancelevel.

 

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

 

**PART II - OTHER INFORMATION**

 

**ITEM 1A. Risk Factors**

 

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

 

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

 

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

 

•              The fact that we typically ship a largeamount of products near quarter-end.

 

•              Our ability to utilize and expand ourmanufacturing resources efficiently.

 

•              Shortages of materials used in ourproducts.

 

•              Commodity pricing and the effects ofinflation on the costs of materials used in our products.

 

•              Fuel costs and fuel availability.

 

•              A determination by us that goodwill orother intangible assets are impaired and have to be written down to their fairvalues, resulting in a charge to our results of operations.

 

•              Our ability to introduce new models thatachieve consumer acceptance.

 

•              The introduction, marketing and sale ofcompeting products by others, including significant discounting offered by ourcompetitors.

 

•              The addition or loss of our dealers.

 

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

 

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

 

•              Our inability to acquire and develop keypieces of property for on-going resort activity.

 

•              Fluctuations in demand for our resortlots due to changing economic and other conditions, such as changes in the subprime lending rates, new housing starts, and availability of credit.

 

Our overall gross margin may decline in future periodsto the 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 relatively small variation in the number ofrecreational vehicles we sell in any quarter can have a significant impact ontotal sales and operating results for that quarter.

 

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

 

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

 

**THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL ANDSUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY**   Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic,and political conditions that affect disposable income for leisure-timeactivities. Our business is particularly influenced by cycle swings in theClass A market. While there has been strong secular demand for recreationalvehicles since the early 90’s, it has been driven by demand for towablerecreational products. Since 2004 there has been a notable divergence in growthrates between towable and motorized recreational vehicles.

 

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Class A unit shipments reached approximately37,300 units in 1994 and declined to approximately 33,000 units in 1995. The ClassA segment then went on a steady climb and in 1999 recorded the highest year, inrecent history, of Class A shipments, approximately 49,400. Over the next twoyears, motorhome shipments declined to 33,400 in 2001. Class A shipmentsthen rose for the next 3 years and in 2004 reached 46,300. Over the last twoyears, however, shipments of Class A motorhomes have dropped, reaching a pre-1994level of 32,700 in 2006. Currently, Class A shipments through August 2007, areat 22,800, or an expected annualized rate of 34,600.*

 

The towable segment moved through many of the samecyclical peaks and troughs historically. The shipment level reachedapproximately 201,100 in 1994, dropping-off to 192,200 in 1996 and then growingto 249,600 in 1999. Towable unit shipments suffered a two-year decline in 2000and 2001, dropping to 207,600. Since then the market has expanded significantlyreaching 334,600 in 2006. Like the Class A market, the towables segmenthas also begun to experience a slow down during 2007. Through August 2007,shipments were 213,200, or an expected annualized rate of 296,700.*

 

Our business is subject to the cyclical nature of thisindustry and principally the Class A segment. Some of the factors thatcontribute to this cyclicality include fuel availability and costs, interestrate levels, the level of discretionary spending, and availability of creditand overall consumer confidence. Increasing interest rates and fuel prices overthe last two years have adversely affected the Class A recreational vehiclemarket. An extended continuation of these conditions would materially affectour business, results of operations, and financial condition.

 

**WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERSFOR A SIGNIFICANT PERCENTAGE OF OUR SALES**   Although ourproducts were offered by over 700 dealerships located primarily in the UnitedStates and Canada as of September 29, 2007, a significant percentage of oursales are concentrated among a relatively small number of independent dealers.For the quarter ended September 29, 2007, sales to one dealer, Lazy Days RVCenter, accounted for 6.4% of total sales compared to 5.4% of sales in the sameperiod ended last year. For quarters ended September 30, 2006 and September 29,2007, sales to our 10 largest dealers, including Lazy Days RV Center, accountedfor a total of 30.3% and 31.8% of total sales, respectively. The loss of asignificant dealer or a substantial decrease in sales by any of these dealerscould have a material impact on our business, results of operations, and financialcondition.

 

**WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER**   As is common in the recreational vehicleindustry, we enter into repurchase agreements with the financing institutionsused by our dealers to finance their purchases of our products. Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer defaults on its credit facility with its lender. Obligations underthese agreements vary from period to period, but totaled approximately $515.5million as of September 29, 2007, with approximately 5.8% concentrated with onedealer. If we were obligated to repurchase a significant number of units underany repurchase agreement, our business, operating results, and financialcondition could be adversely affected.

 

**OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**   Wesell our product to dealers who are predominantly located in the United Statesand Canada. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions. Forour RV dealers, terms are net 30 days for units that are financed by a thirdparty lender. Terms of open trade receivables are granted by us, on a verylimited basis, to dealers who have been subjected to evaluative creditprocesses conducted by us. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Agreements for payment termsbeyond 30 days generally require additional collateral, as well as securityinterest in the inventory sold. As of September 29, 2007, total tradereceivables were $79.6 million, with approximately $60.6 million, or 76.2% ofthe outstanding accounts receivable balance concentrated among floor planlenders. The remaining $19.0 million of trade receivables were concentratedsubstantially all with one dealer. For resort lot customers, funds are requiredat the time of closing.

 

**WE MAY EXPERIENCE A DECREASE IN SALES OF OURPRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL**   Aninterruption in the supply, or a significant increase in the price or tax onthe sale, of diesel fuel or gasoline on a regional or national basis couldsignificantly affect our business. Diesel fuel and gasoline have, at varioustimes in the past, been either expensive or difficult to obtain.

 

**WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDEUS WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS**   A number of important components for ourproducts are purchased from a single or a limited number of sources. Theseinclude chassis from Workhorse and Ford for gas motor coaches and dieselchassis from our newly formed joint venture with International Truck and EngineCorporation. The joint venture sources turbo diesel engines from Cummins andCaterpillar, substantially all transmissions from Allison and axles from Dana. Wehave no long-term supply contracts with these suppliers or their distributors,and we

 

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cannot be certain that these suppliers will be able to meet our futurerequirements. Consequently, the Company has periodically been placed onallocation of these and other key components. The last significant allocationoccurred in 1997 from Allison, and in 1999 from Ford. An extended delay orinterruption in the supply of any components that we obtain from a singlesupplier or from a limited number of suppliers could adversely affect ourbusiness, results of operations, and financial condition.

 

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

 

We believe that the introduction of new products andnew features is critical to our success. Delays in the introduction of newmodels or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely. For example, unexpected costs associated with modelchanges have affected our gross margin in the past. Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

 

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

 

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

 

To date, we have been successful in obtaining productliability insurance on terms that we consider acceptable. The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million. Overallproduct liability insurance, including umbrella coverage, is available to amaximum amount of $100.0 million for each occurrence, as well as in theaggregate. We cannot be certain we will be able to obtain insurance coverage inthe future at acceptable levels or that the costs of such insurance will bereasonable. Further, successful assertion against us of one or a series oflarge uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

 

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

 

**OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS**   Inthe past few years, we have significantly expanded the complexity of ourbusiness. As a result, our management personnel have assumed additionalresponsibilities. The increase in complexity over a relatively short period oftime has put pressure on our operating, financial, and management informationsystems. If we continue to expand, such growth would put additional pressure onthese systems and may cause such systems to malfunction or to experiencesignificant delays.

 

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**WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN**   Aswe continue to work towards involving automated machinery and equipment toimprove efficiencies and quality, we will be subject to certain risks involvingimplementing new technologies into our facilities.

 

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

 

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

 

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

 

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

 

•              We may be unable to complete a plannedmachinery and equipment implementation in a timely manner, which could resultin lower production levels and an inability to satisfy customer demand for ourproducts.

 

**WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION**   Throughout 2007, we will continue to implementa new ERP system and will be subject to certain risks including the following:

 

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

 

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

 

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

 

•              We may need to restructure or develop ourinternal processes to adapt to the new system.

 

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

 

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

 

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

 

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

 

36

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**ITEM 6. Exhibits**

 
| 10.1   |   | Form of 1993  Stock Plan Performance Share Agreement revised August 1, 2007.                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                               |
| 10.2   |   | Form of 1993  Stock Plan Restricted Stock Unit Agreement for Kay L. Toolson and John W.  Nepute revised August 1, 2007.                                                            |
|   |   |                                                                                                                                                                               |
| 10.3   |   | Form of 1993  Stock Plan Restricted Stock Unit Agreement for Directors revised August 1,  2007.                                                                                    |
|   |   |                                                                                                                                                                               |
| 10.4   |   | Form of 1993  Stock Plan Restricted Stock Unit Agreement revised August 1, 2007.                                                                                                   |
|   |   |                                                                                                                                                                               |
| 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. |

 

37

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**SIGNATURES**

 

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

 

 
|                          | **MONACO  COACH CORPORATION**     |
|--------------------------|-----------------------------------|
| ** **               | ** **                        |
| ** **               | ** **                        |
| Dated: November  8, 2007 | /s/ P. Martin  Daley              |   |
|                     | P. Martin Daley                   |
|                     | Vice President  and               |
|                     | Chief Financial  Officer (Duly    |
|                     | Authorized  Officer and Principal |
|                     | Financial  Officer)               |

 

38

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**EXHIBITS INDEX**

 
| Exhibit    | ** ** | ** **                                                                                                                                                                         |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description  of Document**                                                                                                                                                       |
|       |       |                                                                                                                                                                               |
| 10.1       |       | Form of 1993  Stock Plan Performance Share Agreement revised August 1, 2007.                                                                                                       |
|       |       |                                                                                                                                                                               |
| 10.2       |       | Form of 1993  Stock Plan Restricted Stock Unit Agreement for Kay L. Toolson and John W.  Nepute revised August 1, 2007.                                                            |
|       |       |                                                                                                                                                                               |
| 10.3       |       | Form of 1993  Stock Plan Restricted Stock Unit Agreement for Directors revised August 1,  2007.                                                                                    |
|       |       |                                                                                                                                                                               |
| 10.4       |       | Form of 1993  Stock Plan Restricted Stock Unit Agreement revised August 1, 2007.                                                                                                   |
|       |       |                                                                                                                                                                               |
| 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. |

 

39

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