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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly periodended:  June 28, 2008**

 

**or**

 

**o****                                ****Transition Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934**

 

**For the transition periodfrom                     to                     **

 

**Commission File Number:  1-14725**

 

**MONACO COACH CORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

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

(Zip code)

 

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

 

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

 

YES  x                     NO  o

 

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

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

(Do notcheck if a smaller reporting company)

 

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

 

The number ofshares outstanding of common stock, $.01 par value, as of June 28, 2008:29,816,938

 

 

** **

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**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**June 28,2008**

 

**INDEX**

 
|                                                                                                                                      | **Page**   |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                 |       |
| **PART I -  FINANCIAL INFORMATION**                                                                                             | 3          |
|                                                                                                                                 |       |
| **Item  1. Financial Statements (unaudited)**                                                                                        | 3          |
|                                                                                                                                 |       |
| Condensed  Consolidated Balance Sheets as of December 29, 2007 and June 28,  2008                                          | 4          |
|                                                                                                                                 |       |
| Condensed Consolidated  Statements of Income for the quarters and six month periods ended  June 30, 2007 and June 28, 2008 | 5          |
|                                                                                                                                 |       |
| Condensed  Consolidated Statements of Cash Flows for the six month periods ended  June 30, 2007 and June 28, 2008          | 6          |
|                                                                                                                                 |       |
| Notes to  Condensed Consolidated Financial Statements                                                                                | 7          |
|                                                                                                                                 |       |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                              | 15         |
|                                                                                                                                 |       |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                                              | 31         |
|                                                                                                                                 |       |
| **Item 4. Controls  and Procedures**                                                                                                 | 31         |
|                                                                                                                                 |       |
| **PART II  - OTHER INFORMATION**                                                                                                | 32         |
|                                                                                                                                 |       |
| **Item  1A. Risk Factors**                                                                                                           | 32         |
|                                                                                                                                 |       |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                                                     | 36         |
|                                                                                                                                 |       |
| **Item 6. Exhibits**                                                                                                                 | 37         |
|                                                                                                                                 |       |
| **Signatures**                                                                                                                       | 38         |
|                                                                                                                                 |       |
| **Certifications under  Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002**                                         | ** ** |

 

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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 29,** | ** ** | **June 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                   | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | **(unaudited)**   | ** ** |
| **ASSETS**                                                                                                                   |       |                  |       |              |       |
| Current assets:                                                                                                              |       |                  |       |              |       |
| Cash                                                                                                                         |       | $                     | 6,282      |              | $          | 1,340 |   |
| Trade  receivables, net                                                                                                      |       | 88,170                |       | 69,114            |       |
| Inventories, net                                                                                                             |       | 158,236               |       | 178,343           |       |
| Resort lot  inventory                                                                                                        |       | 8,838                 |       | 23,485            |       |
| Prepaid expenses                                                                                                             |       | 5,142                 |       | 5,001             |       |
| Income taxes  receivable                                                                                                     |       | 0                     |       | 7,857             |       |
| Debt issuance  costs, net                                                                                                    |       | 0                     |       | 542               |       |
| Deferred income  taxes                                                                                                       |       | 37,608                |       | 33,704            |       |
| Total current  assets                                                                                                        |       | 304,276               |       | 319,386           |       |
|                                                                                                                         |       |                  |       |              |       |
| Property, plant,  and equipment, net                                                                                         |       | 144,291               |       | 136,956           |       |
| Land held for  development                                                                                                   |       | 24,321                |       | 16,300            |       |
| Investment in  joint venture                                                                                                 |       | 4,059                 |       | 4,605             |       |
| Debt issuance  costs, net                                                                                                    |       | 498                   |       | 0                 |       |
| Goodwill                                                                                                                     |       | 86,323                |       | 86,323            |       |
|                                                                                                                         |       |                  |       |              |       |
| Total assets                                                                                                                 |       | $                     | 563,768    |              | $          | 563,570 |   |
|                                                                                                                         |       |                  |       |              |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current  liabilities:                                                                                                        |       |                  |       |              |       |
| Book overdraft                                                                                                               |       | $                     | 1,601      |              | $          | 2,884 |   |
| Current portion  of long-term debt                                                                                           |       | 5,714                 |       | 26,214            |       |
| Line of credit                                                                                                               |       | 0                     |       | 53,815            |       |
| Income taxes  payable                                                                                                        |       | 3,726                 |       | 0                 |       |
| Accounts payable                                                                                                             |       | 82,833                |       | 77,001            |       |
| Product  liability reserve                                                                                                   |       | 14,625                |       | 15,195            |       |
| Product warranty  reserve                                                                                                    |       | 35,171                |       | 31,015            |       |
| Accrued expenses  and other liabilities                                                                                      |       | 48,609                |       | 37,126            |       |
| Total current  liabilities                                                                                                   |       | 192,279               |       | 243,250           |       |
|                                                                                                                         |       |                  |       |              |       |
| Long-term debt,  less current portion                                                                                        |       | 23,357                |       | 0                 |       |
| Deferred income  taxes                                                                                                       |       | 21,506                |       | 15,640            |       |
| Deferred revenue                                                                                                             |       | 683                   |       | 583               |       |
| Total  liabilities                                                                                                           |       | 237,825               |       | 259,473           |       |
|                                                                                                                         |       |                  |       |              |       |
| Commitments and  contingencies (Note 12)                                                                                     |       |                  |       |              |       |
|                                                                                                                         |       |                  |       |              |       |
| **STOCKHOLDERS’  EQUITY**                                                                                               | ** ** | ** **            | ** ** | ** **        | ** ** |
| Preferred stock,  $.01 par value; 1,934,783 shares authorized, no shares outstanding                                         |       |                  |       |              |       |
| Common stock,  $.01 par value; 50,000,000 shares authorized, 29,989,534 and 29,816,938  issued and outstanding, respectively |       | 300                   |       | 298               |       |
| Additional  paid-in capital                                                                                                  |       | 69,514                |       | 71,500            |       |
| Retained  earnings                                                                                                           |       | 256,129               |       | 232,299           |       |
| Total  stockholders’ equity                                                                                             |       | 325,943               |       | 304,097           |       |
|                                                                                                                         |       |                  |       |              |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                     | 563,768    |              | $          | 563,570 |   |

 

See accompanying notes.

 

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

** **
| ** **                                      | ** ** | **Quarter Ended**      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2007** | ** ** | **June 28, 2008**    | ** ** | **June 30, 2007** | ** ** | **June 28, 2008** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                       |       | $                           | 335,319    |                           | $          | 201,886 |   | $ | 657,563 |   | $ | 454,264 |   |
| Cost of sales                                   |       | 298,721                     |       | 192,714                        |       | 584,969 |   | 429,285 |   |
| Gross profit                                    |       | 36,598                      |       | 9,172                          |       | 72,594 |   | 24,979 |   |
|                                            |       |                        |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses  |       | 27,866                      |       | 22,256                         |       | 60,223 |   | 50,893 |   |
| Impairment of  assets                           |       | 0                           |       | 1,966                          |       | 0 |   | 1,966 |   |
| Operating income  (loss)                        |       | 8,732                       |       | (15,050                        | )          | 12,371 |   | (27,880 | ) |
|                                            |       |                        |       |                           |       |   |   |   |   |
| Other income,  net                              |       | 379                         |       | 499                            |       | 492 |   | 586 |   |
| Interest expense                                |       | (947                        | )          | (924                           | )          | (1,914 | ) | (1,648 | ) |
| Income (loss)  from investment in joint venture |       | (699                        | )          | 420                            |       | (977 | ) | 546 |   |
| Income (loss)  before income taxes              |       | 7,465                       |       | (15,055                        | )          | 9,972 |   | (28,396 | ) |
|                                            |       |                        |       |                           |       |   |   |   |   |
| Provision for  (benefit from) income taxes      |       | 3,001                       |       | (5,354                         | )          | 4,009 |   | (10,239 | ) |
| Net income  (loss)                              |       | $                           | 4,464      |                           | $          | (9,701 | ) | $ | 5,963 |   | $ | (18,157 | ) |
|                                            |       |                        |       |                           |       |   |   |   |   |
| Earnings (loss)  per common share:              |       |                        |       |                           |       |   |   |   |   |
| Basic                                           |       | $                           | 0.15       |                           | $          | (0.33 | ) | $ | 0.20 |   | $ | (0.61 | ) |
| Diluted                                         |       | $                           | 0.15       |                           | $          | (0.33 | ) | $ | 0.20 |   | $ | (0.61 | ) |
|                                            |       |                        |       |                           |       |   |   |   |   |
| Weighted-average  common shares outstanding:    |       |                        |       |                           |       |   |   |   |   |
| Basic                                           |       | 29,946,436                  |       | 29,816,877                     |       | 29,888,068 |   | 29,781,678 |   |
| Diluted                                         |       | 30,370,432                  |       | 29,816,877                     |       | 30,387,879 |   | 29,781,678 |   |

 

See accompanying notes.

 

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

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

 
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**              | ** ** | **June 28,** | ** ** |
| ** **                                                                                   | ** ** | **2007**                       | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                            |       |                           |       |   |   |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  operating activities:                                                       |       |                           |       |   |   |
| Net income                                                                                   |       | $                              | 5,963      |   | $ | (18,157 | ) |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Loss (gain) on  sale of assets                                                               |       | (111                           | )          | 87 |   |
| Depreciation and  amortization                                                               |       | 7,068                          |       | 6,909 |   |
| Deferred income  taxes                                                                       |       | (2,232                         | )          | (1,961 | ) |
| Stock-based  compensation expense                                                            |       | 2,484                          |       | 2,834 |   |
| Net income  (loss) from joint venture                                                        |       | 977                            |       | (546 | ) |
| Impairment of assets                                                                         |       | 0                              |       | 1,966 |   |
| Changes in  working capital accounts:                                                        |       |                           |       |   |   |
| Trade  receivables, net                                                                      |       | (30,002                        | )          | 19,056 |   |
| Inventories                                                                                  |       | 3,993                          |       | (20,107 | ) |
| Resort lot  inventory                                                                        |       | 846                            |       | (3,789 | ) |
| Prepaid expenses                                                                             |       | 738                            |       | 142 |   |
| Income taxes  receivable                                                                     |       | 9,097                          |       | (11,584 | ) |
| Land held for  development                                                                   |       | (8,021                         | )          | (2,836 | ) |
| Accounts payable                                                                             |       | 25,358                         |       | (5,832 | ) |
| Product  liability reserve                                                                   |       | 69                             |       | 570 |   |
| Product warranty  reserve                                                                    |       | 2,048                          |       | (4,156 | ) |
| Accrued expenses  and other liabilities                                                      |       | 5,717                          |       | (11,848 | ) |
| Deferred revenue                                                                             |       | (100                           | )          | (100 | ) |
| Discontinued  operations                                                                     |       | (18                            | )          | 0 |   |
| Net cash  provided by (used in) operating activities                                         |       | 23,874                         |       | (49,352 | ) |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  investing activities:                                                       |       |                           |       |   |   |
| Additions to  property, plant, and equipment                                                 |       | (2,669                         | )          | (1,551 | ) |
| Investment in  joint venture                                                                 |       | (366                           | )          | 0 |   |
| Proceeds from  sale of assets                                                                |       | 505                            |       | 85 |   |
| Net cash used in  investing activities                                                       |       | (2,530                         | )          | (1,466 | ) |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  financing activities:                                                       |       |                           |       |   |   |
| Book overdraft                                                                               |       | (16,626                        | )          | 1,283 |   |
| Advance  (payments) on lines of credit, net                                                  |       | (2,036                         | )          | 53,815 |   |
| Payments on  long-term notes payable                                                         |       | (2,857                         | )          | (2,857 | ) |
| Debt issuance  costs                                                                         |       | (193                           | )          | (236 | ) |
| Dividends paid                                                                               |       | (3,597                         | )          | (3,599 | ) |
| Issuance of  common stock                                                                    |       | 1,078                          |       | 651 |   |
| Repurchase of  common stock                                                                  |       | 0                              |       | (2,829 | ) |
| Tax effect of  stock-based award activity                                                    |       | 136                            |       | (352 | ) |
| Net cash (used  in) provided by financing activities                                         |       | (24,095                        | )          | 45,876 |   |
|                                                                                         |       |                           |       |   |   |
| Net change in  cash                                                                          |       | (2,751                         | )          | (4,942 | ) |
| Cash at  beginning of period                                                                 |       | 4,984                          |       | 6,282 |   |
|                                                                                         |       |                           |       |   |   |
| Cash at end of  period                                                                       |       | $                              | 2,233      |   | $ | 1,340 |   |

 

See accompanying notes.

 

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 29,2007 and June 28, 2008, and the results of its operations for the quartersand six months ended June 30, 2007 and June 28, 2008 and its cashflows for the six months ended June 30, 2007 and June 28, 2008.  The condensed consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Theconsolidated statement of income for the six months ended June 28, 2008 isnot necessarily indicative of the results to be expected for the fullyear.  The balance sheet data as of December 29,2007 was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders on Form 10-Kfor the year ended December 29, 2007, nor does it include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Theseinterim condensed consolidated financial statements should be read inconjunction with the audited financial statements and notes thereto appearingin the Company’s Annual Report to Stockholders on Form 10-K for the yearended December 29, 2007.

 

**2.     Impairment of Assets**

 

In October 2007, the Company ceasedoperations of towable products at a facility located in Elkhart, Indiana.  The manufacturing of these products wasrelocated to plants in Wakarusa and Warsaw, Indiana.  The property was listed for either sale orlease and continues to be marketed as such. Management assessed the fair value of the property at December 29,2007 based on projected cash flows generated from a lease transaction anddetermined there was no impairment. Based on the decline of the real estate market during 2008, managementhas reassessed the fair value of the property as of June 28, 2008 and theCompany has recognized an asset impairment charge of $2.0 million in the secondquarter of 2008.  The fair value wasdetermined based on appraisals performed in 2007 and in May 2008.  The impairment charge is reported under theTowable Recreational Vehicle segment.

 

**3.     Inventory Valuation**

 

Pursuant to FAS No. 151,“Inventory Costs”, overhead costs related to excess manufacturing capacity havebeen expensed, resulting in an $1.5 million charge to the second quarter of2008 cost of sales.

 

**4.     Inventories, net**

 

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

 
| ** **             | ** ** | **December 29,**   | ** ** | **June 28,** | ** ** |
|------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2007**                | ** ** | **2008**          | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **        | ** ** |
| Raw materials          |       | $                       | 79,640     |              | $          | 79,069 |   |
| Work-in-process        |       | 54,760                  |       | 51,285            |       |
| Finished units         |       | 33,241                  |       | 55,219            |       |
| Raw material  reserves |       | (9,405                  | )          | (7,230            | )          |
|                   |       |                    |       |              |       |
|                   |       | $                       | 158,236    |              | $          | 178,343 |   |

 

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**5.     Land Held for Development**

 

On March 19,2008, the Company acquired 25 acres of land near Bay Harbor, Michigan for cashof $2.8 million.  The Company isdeveloping the parcel into a motorhome resort with approximately 130 total lots,some of which are expected to be available for sale to the public in the thirdquarter of 2008.

 

**6.     Credit Facilities**

 

TheCompany’s credit facilities consist of a revolving line of credit (the “Line ofCredit”) of up to $105.0 million and a term loan (“Term Debt”).  As of June 28, 2008, there was $53.8million outstanding under the Line of Credit and $25.7 million outstanding onthe Term Debt.  At the election of theCompany, the credit facilities bear interest at rates that fluctuate based onthe prime rate or LIBOR and are determined based on the Company’s leverageratio.  The Company also pays interestquarterly on the unused available portion of the Line of Credit at varyingrates, determined by the Company’s leverage ratio.  The amounts outstanding under the Line ofCredit are due and payable in full on November 17, 2009 and interest ispaid monthly.  The Term Debt requiresquarterly interest and principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010. At June 28, 2008,the weighted-average interest rate on the Revolving Loan and the Term Debt was5.9% and 5.8%, respectively.  The creditfacilities are collateralized by all of the assets of the Company.  The Company also has four stand-by letters ofcredit outstanding totaling $3.8 million as of June 28, 2008.

 

The credit facilities require the Companyto maintain a maximum leverage ratio, minimum current ratio, minimum debtservice coverage ratio, and minimum tangible net worth.  The Company was in violation of its requiredleverage ratio, debt service coverage ratio, and tangible net worth covenant asof June 28, 2008.  The Company hasobtained an agreement from its lenders, dated July 29, 2008, to waive thecovenant violations as of June 28, 2008. However, management expects that the Company will also violate thesecovenants for the next several quarters. Accordingly, the Company has reclassified its long-term debt and relateddebt issue costs from non-current to current as of June 28, 2008.

 

The Company has a signed commitment letter dated July 29, 2008 withBank of America that contemplates a new three-year syndicated $100 million seniorcredit facility (the “Senior Credit Facility”) with Bank of America acting asthe administrative agent.  The commitmentletter is subject to a number of conditions, including the negotiation andexecution of a definitive credit agreement. One of the conditions requires $40 million of unused availableborrowings under the Senior Credit Facility at the closing date.  In order to meet this requirement, the Companyis seeking approximately $30 to $40 million in subordinated debt financing.

 

There can be no assurance that a definitive agreement for the SeniorCredit Facility will be reached or that our current lenders will agree toadditional waivers, forbearance, or restructuring of the current debt.  Under such circumstances, the Company couldexperience severe liquidity problems resulting in a material adverse effect onour business, results of operations and financial condition. In addition, inthe event of an uncurable default of our credit facilities, our current debtcould become immediately payable and we could be forced to seek more costlyfinancing.

 

Unamortized debt issue costs related to the credit facilities were$542,000 as of June 28, 2008.  Ifthe current credit facility is refinanced, we expect that the transaction wouldbe accounted for as an extinguishment, requiring unamortized debt issue costsat the refinancing date to be required to be expensed in the period ofrefinancing.

 

**7.     Income Taxes**

 

As of June 28, 2008,the Company’s total unrecognized tax benefits were $745,000 and all of thesebenefits, if recognized, would positively affect the Company’s effective taxrate.  The Company also had accruedinterest related to these unrecognized tax benefits of $134,000 as of June 28,2008.  The total amount of unrecognizedfederal and state tax benefits is uncertain due to the subjectivity in themeasurement of certain deductions claimed for United States income tax purposesand certain state income tax apportionment matters.

 

As of June 28, 2008,the Company’s income tax returns that remain subject to examination are taxyears 2004 through 2006 for U.S. federal income tax and tax years 2003 through2006 for major state income tax returns. The statute of limitations for U.S. federal income taxes and some stateincome taxes for the 2003 and 2004 tax years will expire during the third andfourth quarters of 2008.

 

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**7.     Income Taxes, continued**

 

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

 

Due to the loss beforeincome taxes of $28.4 million in the six months ended June 28, 2008,management assessed the need to record a valuation allowance for the deferredtax assets.  It was determined novaluation allowance was necessary at this time. The Company is implementing initiatives to return to profitability,including the restructuring plan discussed in Note 13.  The need for an allowance will be reassessedduring the remainder of fiscal 2008.  Ifthe Company does not return to profitability or there is not evidence thatindicates we will in the near future, it may be necessary to record a valuationallowance.

 

**8.    Earnings Per CommonShare**

 

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

 
| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **June 30,**      | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                        | ** ** | **2007**               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                         |       |                   |       |                           |       |   |   |   |   |
| Issued and  outstanding shares (weighted-average) |       | 29,946,436             |       | 29,816,877                     |       | 29,888,068 |   | 29,781,678 |   |
|                                              |       |                   |       |                           |       |   |   |   |   |
| **Effect  of Dilutive Securities**                | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  awards                               |       | 423,996                |       | —                         |       | 499,811 |   | — |   |
| ** **                                        |       |                   |       |                           |       |   |   |   |   |
| **Diluted**                                       |       | 30,370,432             |       | 29,816,877                     |       | 30,387,879 |   | 29,781,678 |   |

 
| ** **                            | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                            | ** ** | **2007**               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash dividends  per common share      |       | $                      | 0.06       |                           | $          | 0.06 |   | $ | 0.12 |   | $ | 0.12 |   |
| Cash dividends  paid *(in thousands)* |       | $                      | 1,797      |                           | $          | 1,789 |   | $ | 3,597 |   | $ | 3,599 |   |

 

9

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**9.   Repurchase of Common Stock**

 

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

 

**10.   Stock-Based AwardPlans**

 

The Company has anEmployee Stock Purchase Plan (the “Purchase Plan”) – 2007, a non-employee 1993Director Stock Plan (the “Director Plan”), and an amended and restated 1993Stock Plan (the “Stock Plan”).  ThePurchase Plan was approved by the Board of Directors in 2007 and stockholderapproval was obtained at the May 14, 2008 Annual Meeting ofStockholders.  The compensation expenserecognized in the quarters ended June 30, 2007 and June 28, 2008 forthe plans was $657,514 and $697,740, respectively ($2.5 million and $2.8million for the first six months of 2007 and 2008, respectively).  A detailed description of all the plans andthe respective accounting treatment is included in the “Notes to theConsolidated Financial Statements” included in the Company’s Annual Report on Form 10-Kfor the year ended December 29, 2007.

 

**Restricted Stock Units**

** **

During the quarterended June 28, 2008, there were no grants of restricted stock units (RSU’s)under the Stock Plan.  In addition, noRSU’s from previously granted awards vested during the same period.  The compensation expense recognized for RSU’sin the second quarter of 2007 and 2008 was $372,551 and $356,261, respectively($1.4 million and $1.6 million for the first six months of 2007 and 2008,respectively).

 

**Performance Share Awards**

** **

During the quarterended June 28, 2008, there were no grants of performance share awards (PSA’s)under the Stock Plan.  In addition, noPSA’s from a previous award vested during the same period.  A portion of the PSA’s require achievement ofperformance based on Return on Net Assets-adjusted (RONA) compared to a groupof peer companies.  The Companyreassesses at each reporting date whether achievement of this performancecondition is probable.  The assessment atJune 28, 2008 indicates it is not probable the RONA goal will be met forany of the outstanding grants.  Thus, thepreviously recognized compensation expense of $274,100 was reversed.  The net amount recognized for PSA’s duringthe quarter ended June 28, 2008 was a credit of $45,174 ($275,423 ofcompensation expense in the quarter ended June 30, 2007).  The amount recognized for PSA’s in the firstsix months of 2007 and 2008 was $1.0 million and $695,239, respectively.

 

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The following tableprovides the results of operations of the three segments of the Company for thequarters and six months ended June 30, 2007 and June 28, 2008,respectively.  All dollars are inthousands.

 
| ** **                                                            | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**      | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                                            | ** ** | **2007**               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Motorized  Recreational Vehicle Segment**                           | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 250,662    |                           | $          | 148,571 |   | $ | 496,210 |   | $ | 343,308 |   |
| Cost of sales                                                         |       | 224,403                |       | 142,912                        |       | 443,464 |   | 325,826 |   |
| Gross profit                                                          |       | 26,259                 |       | 5,659                          |       | 52,746 |   | 17,482 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 20,035                 |       | 15,672                         |       | 43,189 |   | 36,116 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Operating income  (loss)                                              |       | $                      | 6,224      |                           | $          | (10,013 | ) | $ | 9,557 |   | $ | (18,634 | ) |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| **Towable  Recreational Vehicle Segment**                             | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 80,968     |                           | $          | 53,060 |   | $ | 150,448 |   | $ | 108,268 |   |
| Cost of sales                                                         |       | 72,686                 |       | 49,663                         |       | 137,439 |   | 102,134 |   |
| Gross profit                                                          |       | 8,282                  |       | 3,397                          |       | 13,009 |   | 6,134 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 5,862                  |       | 6,151                          |       | 12,234 |   | 12,351 |   |
| Impairment of  assets                                                 |       | 0                      |       | 1,966                          |       | 0 |   | 1,966 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Operating income  (loss)                                              |       | $                      | 2,420      |                           | $          | (4,720 | ) | $ | 775 |   | $ | (8,183 | ) |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| **Motorhome  Resorts Segment**                                        | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 3,689      |                           | $          | 255 |   | $ | 10,905 |   | $ | 2,688 |   |
| Cost of sales                                                         |       | 1,632                  |       | 139                            |       | 4,066 |   | 1,325 |   |
| Gross profit                                                          |       | 2,057                  |       | 116                            |       | 6,839 |   | 1,363 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 1,969                  |       | 433                            |       | 4,800 |   | 2,426 |   |
|                                                                  |       |                   |       |                           |       |   |   |   |   |
| Operating income  (loss)                                              |       | $                      | 88         |                           | $          | (317 | ) | $ | 2,039 |   | $ | (1,063 | ) |

 

11

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 
| ** **                                      | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                      | ** ** | **2007**               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Reconciliation to Net Income** | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating income  (loss):                       |       |                   |       |                           |       |   |   |   |   |
| Motorized  recreational vehicle segment         |       | $                      | 6,224      |                           | $          | (10,013 | ) | $ | 9,557 |   | $ | (18,634 | ) |
| Towable  recreational vehicle segment           |       | 2,420                  |       | (4,720                         | )          | 775 |   | (8,183 | ) |
| Motorhome  resorts segment                      |       | 88                     |       | (317                           | )          | 2,039 |   | (1,063 | ) |
| Total operating  income (loss)                  |       | 8,732                  |       | (15,050                        | )          | 12,371 |   | (27,880 | ) |
|                                            |       |                   |       |                           |       |   |   |   |   |
| Other income,  net                              |       | 379                    |       | 499                            |       | 492 |   | 586 |   |
| Interest expense                                |       | (947                   | )          | (924                           | )          | (1,914 | ) | (1,648 | ) |
| Income (loss)  from investment in joint venture |       | (699                   | )          | 420                            |       | (977 | ) | 546 |   |
| Income (loss)  before income taxes              |       | 7,465                  |       | (15,055                        | )          | 9,972 |   | (28,396 | ) |
|                                            |       |                   |       |                           |       |   |   |   |   |
| Provision for  (benefit from) income taxes      |       | 3,001                  |       | (5,354                         | )          | 4,009 |   | (10,239 | ) |
|                                            |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss)                              |       | $                      | 4,464      |                           | $          | (9,701 | ) | $ | 5,963 |   | $ | (18,157 | ) |

 

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

 

**Repurchase Agreements**

 

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

 

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

 

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The amount subject to contingent repurchaseobligations arising from these agreements at June 28, 2008 isapproximately $487.9 million, with approximately 4.9% concentrated with onedealer.  If the Company were obligated torepurchase a significant number of units under any repurchase agreement, itsbusiness, operating results and financial condition could be adverselyaffected.  The Company has included thedisclosure requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” in its financial statements, and hasdetermined that the recognition provisions of FIN 45 apply to certainguarantees routinely made by the Company, including contingent repurchaseobligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $362,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers.  This estimated liability is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.

 

**Product Liability**

 

The Company is subject to regulations which mayrequire the Company to recall products with design or safety defects, and suchrecall could have a material adverse effect on the Company’s business, resultsof operations, and financial condition.

 

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

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **June 30,**       | ** ** | **June 28,** | ** ** |
| ** **           | ** ** | **2007**                | ** ** | **2008** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning  balance   |       | $                       | 16,509     |   | $ | 15,489 |   |
| Expense              |       | 2,580                   |       | 3,505 |   |
| Payments/adjustments |       | (3,256                  | )          | (3,799 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 15,833     |   | $ | 15,195 |   |

 

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M**ONACO COACHCORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

**Product Warranty**

 

Estimated warranty costs are provided for at thetime of sale of products with warranties covering the products for up to oneyear from the date of retail sale (five years for the front and sidewall framestructure, and three years on the Roadmaster chassis).  These estimates are based on historicalaverage repair costs, as well as other reasonable assumptions deemedappropriate by management.  The Companyrefined the estimate of units still under warranty and the improved dataresulted in a one-time reduction to the product warranty reserve of $2.8million in the quarter ended June 28, 2008.  The following table discloses significantchanges in the product warranty reserve:

 
| ** **           | ** ** | **Quarter Ended**  | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **June 30,**       | ** ** | **June 28,** | ** ** |
| ** **           | ** ** | **2007**                | ** ** | **2008** | ** ** |
| ** **           | ** ** | **(in thousands)** | ** ** |
| ** **           | ** ** | ** **              | ** ** | ** ** | ** ** |
| Beginning  balance   |       | $                       | 33,547     |   | $ | 34,252 |   |
| Expense              |       | 11,463                  |       | 7,583 |   |
| Payments/adjustments |       | (8,884                  | )          | (10,820 | ) |
|                 |       |                    |       |   |   |
| Ending balance       |       | $                       | 36,126     |   | $ | 31,015 |   |

 

**Litigation**

 

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

 

The Company settled a dispute with the priorowners of the Indio, California  and LasVegas, Nevada motorcoach resorts related to a profit sharing agreement.  As a result of the settlement, the Companyrecorded a reduction to the resort lot participation accrual expense of $1.2million in the second quarter of 2008.

 

**13.  Subsequent Events**

 

On July 16, 2008,the Company announced plans to relocate all service and production operationsin Wakarusa, Elkhart and Nappanee, Indiana and to permanently cease operationsat these locations.  Production of the majorityof the motorized units currently manufactured in these locations will be relocatedto our Coburg, Oregon operations. Production of the Company’s remaining motorized models, together withproduction of the towable units, will be relocated to our plants in Warsaw,Indiana.  The shutdown is scheduled tobegin on approximately September 17, 2008 and is expected to besubstantially completed by September 30, 2008.

 

The Company anticipatesrecording a one-time charge in the third quarter of 2008 totaling approximately$7.5 million.  All of the chargesrepresent cash expenditures, which are expected to be paid during the third andfourth quarters of 2008.  The estimatedoes not include charges for property impairment or contract termination feesand penalties as these amounts are not determinable at the present time.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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

 

**GENERAL**

 

OVERVIEW

 

*Background*

 

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium recreational vehiclesincluding Class A, B, and C motor coaches, as well as towable recreationalvehicles. The Company also develops and sells luxury motorcoach resortfacilities. These three operations, while closely tied into the recreationallifestyle, are segmented for reporting purposes as the Motorized RecreationalVehicle (MRV) segment, the Towable Recreational Vehicle (TRV) segment, and theMotorhome Resort (MR) segment.

 

*Motorized and TowableRecreational Vehicle Segment Products*

 

Our products range insuggested retail price from $45,000 to $700,000 for motor coaches and from$11,000 to $70,000 for towables. Based upon retail registrations for the firstfive months of 2008, we believe we had a 26.0% share of the market for diesel Class Amotor coaches, a 8.1% share of the market for gas Class A motor coaches, a17.4% share of the market for all Class A motor coaches, a 3.0% share ofthe market for Class C motor coaches, a 4.3% share of the market for traveltrailers and a 2.5% share of the market for fifth wheel towables.

 

The recreational vehicle (“RV”) market inthe second quarter of 2008 continued to decline compared to the second quarterof 2007.  Record fuel prices andshrinking consumer credit markets continue to dampen consumer demand.  The market saw wholesale shipments of Class Aunits decline 50.6% during the quarter compared to the same period lastyear.  We experienced a 42.2% decrease inClass A sales to dealers in the second quarter of 2008 compared to thesame period last year.  The overallwholesale contraction in the RV market continues to put pressure on ourbusiness, and the Class A wholesale market is projected by the RV IndustryAssociation (“RVIA”) to decline by 14% for the full year 2008 compared to2007.*  However, we believe the long-termpotential of the RV market is still rooted in solid demographics.  This is most readily evidenced by the  so-called “baby boomer” generation, which asit ages will continue to expand our target market well into 2015 and shouldprovide a consumer base that is enthusiastic to embrace the RV lifestyle.*

 

The motorized market has beensignificantly impacted by the current market conditions.  The tightening of the retail credit market isplacing pressures on the retail customers and our dealers continue to becautious in the amount of inventory they are willing to carry.  Consequently, we have been very diligent inmonitoring the wholesale versus retail shipments of our products.  The decline in wholesale demand has exertedextreme pressure on our pricing to dealers. This is a major factor in the decrease of our gross margins andpartially offsets the improvements we have made in our plant efficiencies.

 

The towable market has also cooled.  Wholesale shipments of towable recreationalvehicles were down 18.5% in the second quarter of 2008 as compared to the sameperiod in 2007.  In 2007 we introducedseveral new floorplans and new lightweight and inexpensive models to compete inthis market sector.  We believe thatthese new offerings will enable us to compete more effectively in these morechallenging market conditions. *

 

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As in the case of ourmotorized production, we also have excess capacity at our towablefacilities.  As a result, we consolidatedthe Elkhart towable production into our Wakarusa and Warsaw, Indiana productionfacilities during the fourth quarter of 2007. As the market has declined since then, we announced in July 2008,that we will be ceasing all operations in Wakarusa, Elkhart and Nappanee,Indiana.  The operations will berelocated to our facilities in Coburg, Oregon and Warsaw, Indiana.  The shutdown of our operations in Wakarusa,Elkhart and Nappanee, Indiana is expected to be substantially completed by September 30,2008.  We anticipate that this move willincrease plant utilization in the remaining facilities and decrease indirectcosts of sales.*

 

*Motorhome ResortSegment*

 

In addition to themanufacturing of premium recreational vehicles, the Company owns and operatestwo motorhome resort properties (the “Resorts”), located in Las Vegas, Nevada,and Indio, California.  The developmentof motorhome resorts located in Naples, Florida and Bay Harbor, Michigan arenearing completion.  We expect some lotsat the Bay Harbor, Michigan location to be available for sale in the thirdquarter of 2008 and lots at the Naples, Florida location to be available forsale in the fourth quarter of 2008.*  TheCompany also has land to develop a property in La Quinta, California.  The Resorts offer sales of individual lots toowners, and also offer common interests in the amenities at each resort. Lotprices for remaining unsold lots at the two developed resorts range from$114,900 to $329,900. Amenities at the Resorts include:  club house facilities, tennis, swimming, andgolf. The Resorts provide destination locations for premium Class A motorcoach owners, and help to promote the recreational lifestyle.

 

*Business Changes*

 

In March 2007, wecompleted the formation of a joint venture with Navistar, Inc. (NAV) forthe purpose of manufacturing rear diesel chassis.  This joint venture, known as Custom ChassisProducts LLC (CCP), enables us to take advantage of purchasing synergies,access engineering and design expertise from NAV, and improve the utilizationof our Roadmaster chassis manufacturing facility in Elkhart, Indiana.  Our ownership interest is 49%, and we are accountingfor the activity of this operation using the equity method of accounting.

 

In October 2007, theCompany ceased operations of towable products at a facility located in Elkhart,Indiana.  The manufacturing of theseproducts was relocated to our plants in Wakarusa and Warsaw, Indiana.  The property was listed for either sale orlease and continues to be marketed as such. Management assessed the fair value of the property at December 29,2007 based on projected cash flows generated from a lease transaction anddetermined there was no impairment. Based on the decline of the real estate market during 2008, managementhas reassessed the fair value of the property as of June 28, 2008 and theCompany has recognized an asset impairment charge of $2.0 million in the secondquarter of 2008.  The fair value wasdetermined based on appraisals performed in 2007 and in May 2008.  The impairment charge is reported under theTowable Recreational Vehicle segment.

 

On July 17, 2008,the Company announced and the closure of its production and service centeroperations in Wakarusa, Elkhart and Nappanee, Indiana.  Production of the majority of the motorizedunits currently manufactured in these locations will be relocated to ourCoburg, Oregon operations.  Production ofthe remaining motorized units, together with production of towable units, willbe relocated to our Warsaw, Indiana location. The shut down is scheduled to begin on approximately September 17,2008 and is expected to be substantially completed by September 30, 2008.

 

Approximately1,400 hourly and salaried employees will be impacted by the shutdown,representing 33% of the Company’s total workforce.  The Company willcontinue to maintain a significant presence in the northern Indiana area withapproximately 700 employees at its operations in Warsaw, Milford and Goshen,Indiana.

 

Thedecision to reduce operations was made in light of continued deterioratingmarket conditions for the RV industry.  In recent quarters, in order toalign production with retail demand, the Company has reduced production bytaking days and weeks off.  The closure of the Company’s two productionfacilities in Indiana is expected to decrease the Company’s Class Amotorized production capacity from approximately 180 units per week to 90.*

 

TheCompany anticipates recording a one-time charge in the third quarter of 2008totaling approximately $7.5 million.*  This charge is expected to include (i) $2.0million to $2.5 million for expenses associated with the closure of thefacilities; (ii) approximately $4.5 million to $5.1 million for personnelrelated costs, including severance benefits, transfer bonuses, and relocationassistance costs;  and (iii) approximately $0.6 million to $0.9million of charges for the physical relocation of inventory andequipment.  All of these charges represent cash expenditures which areexpected to be paid during the third and fourth quarters of 2008.  The estimate does not include charges forproperty impairment or contract termination fees and penalties as these amountsare not determinable at the present time. We expect these changes to provide a benefitfrom savings in the amount of $12.0 million on a quarterly basis.*

 

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**RESULTS OF CONSOLIDATED OPERATIONS**

 

*Quarter ended June 28, 2008 Compared to Quarter ended June 30,2007*

 

The following table illustrates theresults of consolidated operations for the quarters ended June 30, 2007and June 28, 2008.  All dollaramounts are in thousands.

 
| ** **                                     | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                           | 335,319    |              | 100.0      | %                           | $          | 201,886           |       | 100.0      | %          | $          | (133,433   | ) | (39.8 | )% |
| Cost of sales                                  |       | 298,721                     |       | 89.1              | %          | 192,714                     |       | 95.5              | %          | 106,007    |       | 35.5       | %          |
| Gross profit                                   |       | 36,598                      |       | 10.9              | %          | 9,172                       |       | 4.5               | %          | (27,426    | )          | (74.9      | )%         |
| Selling,  general, and administrative expenses |       | 27,866                      |       | 8.3               | %          | 22,256                      |       | 11.0              | %          | 5,610      |       | 20.1       | %          |
| Impairment of  assets                          |       | 0                           |       | 0.0               | %          | 1,966                       |       | 1.0               | %          | (1,966     | )          | (100.0     | )%         |
| Operating income  (loss)                       |       | $                           | 8,732      |              | 2.6        | %                           | $          | (15,050           | )          | (7.5       | )%         | $          | (23,782    | ) | (272.4 | )% |

 

*Overall Company Performance in the Second Quarter of 2008*

 

Secondquarter net sales decreased 39.8% to $201.9 million compared to $335.3 millionfor the same period last year.  Grossdiesel motorized sales were down 45.3%, gas motorized sales were down 1.7%, andtowables were down 32.9%.  Dieselproducts accounted for 58.0% of our second quarter revenues while gas productswere 13.4%, and towables were 28.6%.  Ouroverall unit sales were down 27.7% in the second quarter of 2008 to 4,865units, with diesel motorized unit sales down 50.7% to 540 units, gas motorizedunit sales down 10.0% to 380 units, and towable unit sales down 24.3% to 3,945units.  Our total gross average unitselling price decreased to $42,700 from $50,100 in the same period last year,reflecting a shift in the mix of products sold.

 

Grossprofit for the second quarter of 2008 decreased to $9.2 million, down from$36.6 million in the second quarter of 2007, and gross margin decreased from10.9% in the second quarter of 2007 to 4.5% in the second quarter of 2008.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 210,495    |              | 62.8       | %                           | $          | 128,514           |       | 63.7                     | %          | 0.9 | % |
| Direct labor         |       | 32,583                      |       | 9.7               | %          | 20,818                      |       | 10.3              | %          | 0.6                      | %          |
| Warranty             |       | 11,463                      |       | 3.4               | %          | 7,583                       |       | 3.8               | %          | 0.4                      | %          |
| Other direct         |       | 16,345                      |       | 4.9               | %          | 12,116                      |       | 6.0               | %          | 1.1                      | %          |
| Indirect             |       | 27,835                      |       | 8.3               | %          | 23,683                      |       | 11.7              | %          | 3.4                      | %          |
| Total cost of  sales |       | $                           | 298,721    |              | 89.1       | %                           | $          | 192,714           |       | 95.5                     | %          | 6.4 | % |

 

·       Directmaterials increases in 2008, as a percent of sales, were 0.9% or $1.8million.  The increase was due mainly tothe impact of increased sales discounts, which caused direct material, as apercent of sales, to increase by 1.3% or $2.8 million.  The negative impact of discounts on directmaterial, as a percent of sales, was offset by decreases in material costs dueto initiatives the Company has implemented during the last twelve months toimprove efficiencies in production plants and obtain better raw materialspricing.

·       Directlabor increases in 2008, as a percent of sales, were 0.6% or $1.2 million. Theincrease was partially due to the impact of increased sales discounts, whichresulted in direct labor, as a percent of sales, to increase by 0.2% or$432,000.  The remaining increase was dueto changes in the mix of products sold as gas motorized and towable productswere a larger portion of the sales.

·       Increasesin warranty expense in 2008, as a percent of sales, were 0.4% or $808,000.  The Company refined the estimate of unitsstill under warranty and the improved data resulted in a one-time reduction tothe product warranty reserve of $2.8 million, which offset higher claim volumesin the quarter.

 

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·       Increasesin other direct costs in 2008, as a percent of sales, were 1.1% or $2.2million. This increase was the result of higher compensation and other employeerelated benefit costs of $808,000, out-of-policy warranty repairs of $808,000,and delivery freight expense of $606,000.

·       Decreasesin indirect costs in 2008 were $4.1 million. These decreases were partially the result of consolidation of componentfacilities and consolidation of a towable production line and a motorizedproduction line into one facility in late 2007. In addition, these decreases were due to the decline in the volume ofunits produced, which decreased indirect variable costs.  The decreases were partially offset by acharge in 2008 of $1.5 million related fixed to overhead costs not absorbed, ona percent of sales basis, in certain production facilities as plant utilizationdropped below historical normal capacity levels.

 

Selling, general, and administrativeexpenses (S,G,&A) decreased by $5.6 million in the second quarter of 2008to $22.3 million compared to the second quarter of 2007 and increased as apercentage of sales from 8.3% in the second quarter of 2007 to 11.0% in thesecond quarter of 2008.  Changes inS,G,&A expenses are set forth in the following table (dollars in thousands):

 
| ** **                             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                           | 6,836      |              | 2.0        | %                           | $          | 4,769             |       | 2.4                      | %          | 0.4 | % |
| Selling expenses                       |       | 8,162                       |       | 2.4               | %          | 5,336                       |       | 2.6               | %          | 0.2                      | %          |
| Settlement  expense                    |       | 2,580                       |       | 0.8               | %          | 3,505                       |       | 1.7               | %          | 0.9                      | %          |
| Marketing  expenses                    |       | 1,998                       |       | 0.6               | %          | 2,650                       |       | 1.3               | %          | 0.7                      | %          |
| Other                                  |       | 8,290                       |       | 2.5               | %          | 5,996                       |       | 3.0               | %          | 0.5                      | %          |
| Total S,G,&A  expenses             |       | $                           | 27,866     |              | 8.3        | %                           | $          | 22,256            |       | 11.0                     | %          | 2.7 | % |

 

·       Decreasesin salaries, bonus and benefit expenses in 2008 were $2.1 million. Thisdecrease was due to reductions in management bonus expense of $1.5 million andin wages and benefits of $569,000.

·       Decreasesin selling expenses in 2008 were $2.8 million. This decrease was due to lowercosts for selling programs at our dealers’ lots of $2.3 million, lower sellingcosts for resort lots of $180,000, and a $307,000 reduction in salescommissions as a result of reduced sales. The decrease in selling programs included a reduction to accruals of$3.9 million related to modifications made to the terms of the Company’s salesand promotion programs, offset by an increase of $1.6 million to the accrualsrelated to the current quarter sales.

·       Settlementexpense (litigation settlement expense) in 2008 increased by $925,000.  The total dollar increase was the result ofincreases in the number of litigation cases in 2008 compared to 2007.

·       Increasesin marketing expenses in 2008 were $652,000.  These increases were the result of higherexpenses associated with advertising costs of $513,000 and an increase in showsand rallies expenses of $130,000.

·       Decreasesin other expenses in 2008 were $2.3 million. This decrease was predominately the result of reductions in resort lotparticipation accrual expense of $1.2 million, contract services of $894,000,and rental expenses of $334,000, offset by an increase in depreciation expenseof $108,000. The decrease of the resort lot participation accrual expense was aresult of the Company reaching a settlement related to a profit sharingagreement with the prior owners of the Indio, California and Las Vegas, Nevadaresorts.  The remainder of the change wasdue to decreases in various other expenses.

 

In October 2007 theCompany ceased operations at a production facility in Elkhart, Indiana.  The towable products previously produced atthis location were relocated to facilities in Wakarusa and Warsaw, Indiana.  Based on the declining real estate market inthe second quarter of 2008, the Company reassessed the fair market value of thebuilding and determined it was appropriate to recognize an impairment charge of$2.0 million on the facility.

 

Theoperating loss was $15.1 million, or 7.5% of sales, in the second quarter of2008 compared to an operating income of $8.7 million, or 2.6% of sales, in thesame 2007 period.** **The decrease in operating incomewas due predominantly to decreased sales, lower gross margins, higherS,G,&A costs as a percent of sales, and the asset impairment charge.

 

Netinterest expense was $924,000 in the second quarter of 2008 (net of capitalizedinterest of $217,000) versus $947,000 in the comparable 2007 period, reflectinghigher overall corporate borrowings during the second quarter of 2008 partiallyoffset by lower interest rates as compared to the same period in 2007.

 

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Wereported a benefit from income taxes of $5.4 million, or an effective tax rateof 35.6%, in the second quarter of 2008, compared to a provision for incometaxes of $3.0 million, or an effective tax rate of 40.2%, in the second quarterof 2007.  The income tax benefit in 2008 was due to the loss before incometaxes and a one time tax benefit related to the reduction of the resort lotparticipation accrual as a result of the settlement with the prior owners ofthe properties.  The tax benefit was partiallyoffset by an adjustment to a valuation allowance for state tax credits expectedto expire before being used.

 

Netloss for the second quarter of 2008 was $9.7 million compared to net income of$4.5 million for the second quarter of 2007 due primarily to lower sales, lowergross margin, higher S,G,&A expenses as a percentage of sales, and theasset impairment charge.

 

*Second Quarter 2008 versus Second Quarter 2007 for theMotorized Recreational Vehicle Segment*

 

The following tableillustrates the results of the MRV segment for the quarters ended June 30,2007 and June 28, 2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 250,662    |              | 100.0      | %                           | $          | 148,571           |       | 100.0      | %          | $          | (102,091   | ) | (40.7 | )% |
| Cost of sales                                                         |       | 224,403                     |       | 89.5              | %          | 142,912                     |       | 96.2              | %          | 81,491     |       | 36.3       | %          |
| Gross profit                                                          |       | 26,259                      |       | 10.5              | %          | 5,659                       |       | 3.8               | %          | (20,600    | )          | (78.5      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 20,035                      |       | 8.0               | %          | 15,672                      |       | 10.6              | %          | 4,363      |       | 21.8       | %          |
| Operating income  (loss)                                              |       | $                           | 6,224      |              | 2.5        | %                           | $          | (10,013           | )          | (6.8       | )%         | $          | (16,237    | ) | (260.9 | )% |

 

Totalnet sales for the MRV segment were down from $250.7 million in the secondquarter of 2007 to $148.6 million in the second quarter of 2008.  Gross diesel motorized revenues were down45.3% and gross gas motorized revenues were down 1.7%.  Diesel products accounted for 81.2% of theMRV segment’s second quarter of 2008 gross revenues while gas products were18.8%.  The overall decrease in revenueswas due to the decline in the motorized retail market, as well as the increaseof gas motorized units sold in our overall MRV segment mix.  Our MRV segment unit sales were down 39.4%year over year from 1,518 units in the second quarter of 2007 to 920 units inthe second quarter of 2008.  Dieselmotorized unit sales were down 50.7% to 540 units and gas motorized unit saleswere down 10.0% to 380 units.

 

Grossprofit for the MRV segment for the second quarter of 2008 decreased to $5.7million, down from $26.3 million in the second quarter of 2007, and grossmargin decreased from 10.5% in the second quarter of 2007 to 3.8% in the secondquarter of 2008.  Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):

 
| ** **           | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 159,149    |              | 63.5       | %                           | $          | 95,851            |       | 64.5                     | %          | 1.0 | % |
| Direct labor         |       | 23,233                      |       | 9.3               | %          | 14,560                      |       | 9.8               | %          | 0.5                      | %          |
| Warranty             |       | 8,599                       |       | 3.4               | %          | 5,301                       |       | 3.6               | %          | 0.2                      | %          |
| Other direct         |       | 10,320                      |       | 4.1               | %          | 8,210                       |       | 5.5               | %          | 1.4                      | %          |
| Indirect             |       | 23,102                      |       | 9.2               | %          | 18,990                      |       | 12.8              | %          | 3.6                      | %          |
| Total cost of  sales |       | $                           | 224,403    |              | 89.5       | %                           | $          | 142,912           |       | 96.2                     | %          | 6.7 | % |

 

·       Directmaterials increases in 2008, as a percent of sales, were 1.0% or $1.5million.  The increase was due to theimpact of increased sales discounts, which caused direct material, as a percentof sales, to increase by 1.4% or $2.0 million. The negative impact of discounts on direct material, as a percent ofsales, was offset by decreases in material costs due to initiatives the Companyhas implemented during the last twelve months to obtain better raw materialspricing.

·       Directlabor increases in 2008, as a percent of sales, were 0.5%, or $743,000.  The increase is partially due to the impactof increased sales discounts, which resulted in direct labor increasing, as apercent of sales, by 0.2% or $252,000. The remaining increase is due to achange in the product mix of sales as gas motorized products were a largerportion of the segment sales.

 

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·       Increasein warranty expense in 2008, as a percent of sales, was 0.2% or $297,000.  The Company refined the estimate of unitsstill under warranty and the improved data resulted in a one-time reduction tothe product warranty reserve of $2.8 million, which offset higher claim volumesin the quarter.

·       Increasesin other direct costs in 2008, as a percent of sales, were 1.4% or $2.1million. This change was due to an increase in out-of-warranty repairs of$743,000, compensation and other employee related benefit costs of $594,000 anddelivery expense of $743,000.

·       Decreases in indirect costs in 2008 were $4.1million. These decreases were partially the result of consolidation ofcomponent facilities and consolidation of a towable production line and a motorizedproduction line into one facility in late 2007. In addition, these decreases were due to the decline in the volume ofunits produced, which decreased indirect variable costs.  The decreases were partially offset by acharge in 2008 of $1.4 million related to fixed overhead costs not absorbed, ona percent of sales basis, in certain production facilities as plant utilizationdropped below historical normal capacity levels.

 

S,G,&A expenses forthe MRV segment increased, as a percent of sales, due to lower sales levels andincreases in salaries and benefit expenses, settlement expense, marketingexpenses, and other S,G,&A expenses as a percentage of sales, partiallyoffset by decreases in selling expenses as a percentage of sales.  The decrease in selling expenses includes areduction to accruals of $3.9 million related to modifications made to theterms of the Company’s sales and promotion programs.

 

Theoperating loss was due to lower sales, lower gross margins, and higherS,G,&A expenses as a percent of sales.

 

*Second Quarter 2008 versus Second Quarter 2007 for theTowable Recreational Vehicle Segment*

 

The following table illustrates theresults of the TRV Segment for the quarters ended June 30, 2007 and June 28,2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 80,968     |              | 100.0      | %                           | $          | 53,060            |       | 100.0      | %          | $          | (27,908    | ) | (34.5 | )% |
| Cost of sales                                                         |       | 72,686                      |       | 89.8              | %          | 49,663                      |       | 93.6              | %          | 23,023     |       | 31.7       | %          |
| Gross profit                                                          |       | 8,282                       |       | 10.2              | %          | 3,397                       |       | 6.4               | %          | (4,885     | )          | (59.0      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 5,862                       |       | 7.2               | %          | 6,151                       |       | 11.6              | %          | (289       | )          | (4.9       | )%         |
| Impairment of  assets                                                 |       | 0                           |       | 0.0               | %          | 1,966                       |       | 3.7               | %          | (1,966     | )          | (100.0     | )%         |
| Operating income  (loss)                                              |       | $                           | 2,420      |              | 3.0        | %                           | $          | (4,720            | )          | (8.9       | )%         | $          | (7,140     | ) | (295.0 | )% |

 

Total net sales for the TRV segment weredown from $81.0 million in the second quarter of 2007 to $53.1 million in thesecond quarter of 2008.  This decrease isdue to softer market conditions in the towable sector.  The Company’s unit sales were down 24.3% to3,945 units.  Average unit selling pricedecreased to $15,100 in the second quarter of 2008 from $17,000 in the sameperiod last year.

 

Grossprofit for the second quarter of 2008 decreased to $3.4 million, down from $8.3million in the second quarter of 2007, and gross margin decreased from 10.2% inthe second quarter of 2007 to 6.4% in the second quarter of 2008.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

 
| ** **           | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 49,910     |              | 61.7       | %                           | $          | 32,595            |       | 61.4                     | %          | (0.3 | )% |
| Direct labor         |       | 9,307                       |       | 11.5              | %          | 6,229                       |       | 11.7              | %          | 0.2                      | %          |
| Warranty             |       | 2,864                       |       | 3.5               | %          | 2,282                       |       | 4.3               | %          | 0.8                      | %          |
| Other direct         |       | 6,020                       |       | 7.4               | %          | 3,904                       |       | 7.4               | %          | 0.0                      | %          |
| Indirect             |       | 4,585                       |       | 5.7               | %          | 4,653                       |       | 8.8               | %          | 3.1                      | %          |
| Total cost of  sales |       | $                           | 72,686     |              | 89.8       | %                           | $          | 49,663            |       | 93.6                     | %          | 3.8 | % |

 

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·       Directmaterial decreases in 2008, as a percent of sales, were 0.3% or $159,000. Thedecrease was the result of the change in product mix to units with lowermaterial usage rates.  This was partiallyoffset by an increase in sales discounts, which caused direct material, as apercent of sales, to increase by 1.3% or $635,000.

·       Directlabor increases in 2008, as a percent of sales, were 0.2% or $106,000. Theincrease was due to the impact of increased sales discounts, which resulted indirect labor, as a percent of sales, to increase by 0.2% or $103,000.

·       Warrantyexpense increases in 2008, as a percent of sales, were 0.8% or $424,000.  The remaining decrease of $1.0 million wasdue to lower sales volumes.

·       Otherdirect costs, as a percent of sales, were consistent with the prior year at7.4%.

·       Increasesin indirect costs in 2008 of $68,000 were partially due to a charge of $125,000related fixed overhead costs not absorbed, as a percent of sales basis, incertain production facilities as plant utilization dropped below historicallynormal levels.

 

S,G,&A expenses forthe TRV segment increased, as a percent of sales, due to lower sales levels andincreased selling expenses, and other S,G,&A expenses as a percentage ofsales, partially offset by decreases in salaries and benefit expenses as apercent of sales.

 

In October 2007 theCompany ceased operations at a production facility in Elkhart, Indiana.  The towable products previously produced atthis location were relocated to facilities in Wakarusa and Warsaw,Indiana.  Based on the declining realestate market in the second quarter of 2008, the Company reassessed the fairmarket value of the building and determined it was appropriate to recognize animpairment charge of $2.0 million on the facility.

 

The operating loss wasdue to lower sales, lower gross margins, higher S,G,&A expenses in totaldollars and as a percent of sales, and the asset impairment charge.

 

*SecondQuarter 2008 versus Second Quarter 2007 for the Motorhome Resort Segment*

 

The following table illustrates theresults of the Motorhome Resort Segment (MR segment) for the quarters ended June 30,2007 and June 28, 2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 3,689      |              | 100.0      | %                           | $          | 255               |       | 100.0      | %          | $          | (3,434     | ) | (93.1 | )% |
| Cost of sales                                                         |       | 1,632                       |       | 44.2              | %          | 139                         |       | 54.5              | %          | 1,493      |       | 91.5       | %          |
| Gross profit                                                          |       | 2,057                       |       | 55.8              | %          | 116                         |       | 45.5              | %          | (1,941     | )          | (94.4      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 1,969                       |       | 53.4              | %          | 433                         |       | 169.8             | %          | 1,536      |       | 78.0       | %          |
| Operating income  (loss)                                              |       | $                           | 88         |              | 2.4        | %                           | $          | (317              | )          | (124.3     | )%         | $          | (405       | ) | (460.2 | )% |

 

Netsales decreased 93.1% to $255,000 compared to $3.7 million for the same periodlast year.  The decline in overall realestate values and the declining sales in the RV market have had an impact onthe demand for resort lots.  The decreasewas also due to fewer lots available for sale in the second quarter of 2008 asthe Indio, California and Las Vegas, Nevada resorts are near the end of thesales cycle.  As our inventories ofavailable lots shrink, there is greater competition within the Company’s ownresorts from owner resales.  We are currentlydeveloping resorts in Naples, Florida and in Bay Harbor, Michigan.  The Bay Harbor location should have lotsavailable for sale in the third quarter of 2008 and the Naples location shouldhave lots available for sale in the fourth quarter of 2008.  The Company still expects that while salesmay remain slower than expected, the need for luxury resort locations withinthe industry will remain strong.*

 

Grossprofit for the MR segment decreased to 45.5% of sales in the second quarter of2008 compared to 55.8% of sales in the same period last year.  The gross margin decrease was due increaseddiscounts given on the lots.

 

S,G,&A expensesincreased, as a percentage of sales, due to lower sales that were not entirelyoffset by a reduction in total S,G,&A expenses.  The expenses included a reduction of $1.2million to the resort lot participation accrual expense as the result of theCompany reaching a settlement related to a profit sharing agreement with theprior owners of the Indio, California and Las Vegas, Nevada resorts.  The operating loss was due to lower lot salesvolumes, a decrease in gross margins, and an increase in S,G&A expenses asa percentage of sales.

 

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*Six Months Ended June 28, 2008 Compared to Six Monthsended June 30, 2007*

 

Thefollowing table illustrates the results of consolidated operations for the sixmonths ended June 30, 2007 and June 28, 2008 (dollars in thousands):

 
| ** **                                     | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                           | 657,563    |              | 100.0      | %                           | $          | 454,264           |       | 100.0      | %          | $          | (203,299   | ) | (30.9 | )% |
| Cost of sales                                  |       | 584,969                     |       | 88.9              | %          | 429,285                     |       | 94.5              | %          | 155,684    |       | 26.6       | %          |
| Gross profit                                   |       | 72,594                      |       | 11.1              | %          | 24,979                      |       | 5.5               | %          | (47,615    | )          | (65.6      | )%         |
| Selling,  general, and administrative expenses |       | 60,223                      |       | 9.2               | %          | 50,893                      |       | 11.2              | %          | 9,330      |       | 15.5       | %          |
| Impairment of  assets                          |       | 0                           |       | 0.0               | %          | 1,966                       |       | 0.4               | %          | (1,966     | )          | (100.0     | )%         |
| Operating income  (loss)                       |       | $                           | 12,371     |              | 1.9        | %                           | $          | (27,880           | )          | (6.1       | )%         | $          | (40,251    | ) | (325.4 | )% |

 

Consolidatedsales for the six months ended June 28, 2008 were $454.3 million versus$657.6 million, representing a 30.9% decrease. This decrease was due to the continued decline in the recreationalvehicle retail market and a decrease in motorhome resort lot sales.  The resort revenues were lower due to thedeclining real estate market, as well as due to shrinking inventories of availablelots and competition within the Company’s own resorts from owner resales in2008.

 

Grossprofit for the first six months of 2008 decreased to $25.0 million, down from$72.6 million in the same period of 2007 and gross margins decreased from 11.1%in 2007 to 5.5% in 2008.  The changes inthe components of cost of sales are set forth in the following table (dollarsin thousands):

 
| ** **           | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 407,439    |              | 62.0       | %                           | $          | 289,532           |       | 63.7                     | %          | 1.7 | % |
| Direct labor         |       | 64,624                      |       | 9.8               | %          | 46,350                      |       | 10.2              | %          | 0.4                      | %          |
| Warranty             |       | 21,346                      |       | 3.2               | %          | 16,894                      |       | 3.7               | %          | 0.5                      | %          |
| Other direct         |       | 33,245                      |       | 5.0               | %          | 25,749                      |       | 5.7               | %          | 0.7                      | %          |
| Indirect             |       | 58,315                      |       | 8.9               | %          | 50,760                      |       | 11.2              | %          | 2.3                      | %          |
| Total cost of  sales |       | $                           | 584,969    |              | 88.9       | %                           | $          | 429,285           |       | 94.5                     | %          | 5.6 | % |

 

·       Directmaterials increases in 2008, as a percent of sales, were 1.7% or $7.7million.  The increase was due to theimpact of increased sales discounts, which caused direct material, as a percentof sales, to increase by 1.1% or $4.5 million. The remaining increase was due to a change in the product mix, as grosssales of gas motorized units, which have higher material usage rates, were alarger portion of sales.

·       Directlabor increases in 2008, as a percent of sales, were 0.4% or $1.8 million.  Direct labor decreased in total dollars by$262,000 due to the chassis now being purchased from the CCP joint venture asthe direct labor portion of the chassis are included in direct materials versusdirect labor.  Excluding the impact ofthe joint venture, the increase was also due to the impact of increased salesdiscounts, which resulted in direct labor, as a percent of sales, to increaseby 0.2% or $787,000.  The remainingincrease was due to a change in the product mix of sales.

·       Increasesin warranty expense in 2008, as a percent of sales, were 0.5% or $2.2million.  The Company refined theestimate of units still under warranty and the improved data resulted in aone-time reduction to the product warranty reserve of $2.8 million, whichoffset higher claim volumes in the first six months of 2008.

·       Increasesin other direct costs in 2008, as a percent of sales, were 0.7% or $3.2million. This change was the result of increases in out-of-warranty repairs of$1.4 million, compensation and other employee related benefit costs of $909,000and delivery expenses of $909,000.

 

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·       Decreasesin indirect costs in 2008 were $7.6 million. These decreases were partially the result of consolidation of componentfacilities and consolidation of a towable production line and a motorizedproduction line into one facility in late 2007. In addition, these decreases were due to the decline in the volume ofunits produced, which decreased indirect variable costs.  The decreases were partially offset by acharge in 2008 of $1.5 million related to fixed overhead costs not absorbed, ona percent of sales basis, in certain production facilities as plant utilizationdropped below historical normal capacity levels.

 

S,G,&Aexpenses decreased by $9.3 million to $50.9 million for the first six months of2008, but increased as a percentage of sales from 9.2% in 2007 to 11.2% in2008. Changes in S,G,&A expenses are set forth in the following table(dollars in thousands):

 
| ** **                             | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **                             | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                           | 14,733     |              | 2.2        | %                           | $          | 11,981            |       | 2.6                      | %          | 0.4 | % |
| Selling expenses                       |       | 18,006                      |       | 2.8               | %          | 12,152                      |       | 2.7               | %          | (0.1                     | )%         |
| Settlement  expense                    |       | 6,491                       |       | 1.0               | %          | 7,823                       |       | 1.7               | %          | 0.7                      | %          |
| Marketing  expenses                    |       | 3,666                       |       | 0.6               | %          | 4,669                       |       | 1.0               | %          | 0.4                      | %          |
| Other                                  |       | 17,327                      |       | 2.6               | %          | 14,268                      |       | 3.2               | %          | 0.6                      | %          |
| Total S,G,&A  expenses             |       | $                           | 60,223     |              | 9.2        | %                           | $          | 50,893            |       | 11.2                     | %          | 2.0 | % |

 

·       Decreasesin salaries, bonus and benefit expenses in 2008 were $2.8 million. Thisdecrease was due to a reduction in management bonus expense of $2.5 million andwages and other benefits of $522,000, offset by an increase in long-termincentive stock-based program expenses of $308,000.

·       Decreasesin selling expenses in 2008 were $5.9 million. This decrease was due to lowercosts for selling programs at our resort properties of $442,000, higher wagesand other benefits of $297,000, lower sales commissions of $572,000 due toreduced sales, and lower costs of $5.1 million related to sellingprograms.   The decrease in sellingprogram expenses includes a reduction to accruals of $3.9 million related tomodifications made to the terms of the Company’s sales and promotion programs.

·       Settlementexpense (litigation settlement expense) in 2008 increased by $1.3 million. Thetotal dollar increase was the result of increases in the number of litigationcases in 2008 versus 2007 as well as increases in the amounts reserved forcertain pending litigation.

·       Increasesin marketing expenses in 2008 were $1.0 million.  These increases were mostly the result ofhigher expenses associated with shows and rallies of $498,000, advertising andpromotions of $358,000 and magazines of $114,000.

·       Decreasesin other expenses in 2008 were $3.1 million. This decrease was predominately due to reductions in contract servicesexpense of $1.1 million and resort lot participation accrual of $1.2 million.The decrease of the resort lot participation accrual expense as a result of theCompany reaching a settlement related to a profit sharing agreement with theprior owners of the Indio, California and Las Vegas, Nevada resorts.  The remainder of the change was due todecreases in various other expenses.

 

In October 2007 theCompany ceased operations at a production facility in Elkhart, Indiana.  The towable products previously produced atthis location were relocated to facilities in Wakarusa and Warsaw, Indiana.  Based on the declining real estate market inthe second quarter of 2008, the Company reassessed the fair market value of thebuilding and determined it was appropriate to recognize an impairment charge of$2.0 million on the facility.

 

The operating loss was$27.9 million, or 6.1% of sales, for the first six months of 2008 compared tooperating income of $12.4 million, or 1.9% of sales, in the similar 2007period.** **The operatingloss was due to the reduction in sales, lower gross margins, higher andS,G,&A expenses as a percentage of sales, and the asset impairment charge.

 

Net interest expense was$1.6 million for the first six months of 2008 (net of capitalized interest of$361,000) versus $1.9 million in the comparable 2007 period, reflecting higheroverall corporate borrowings during the first six months of 2008, partiallyoffset by lower interest rates as compared to the same period in 2007.

 

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We reported a benefitfrom income taxes of $10.2 million, or an effective tax rate of 36.1% for thefirst six months of 2008, compared to a provision for income taxes of $4.0million, or an effective tax rate of 40.2% for the comparable 2007period.  The income tax benefit in 2008 was due to the loss before incometaxes and a one time tax benefit related to the reduction of the resort lotparticipation accrual as a result of the settlement with the prior owners ofthe properties. The tax benefit was partially offset by an adjustment to avaluation allowance for state tax credits expected to expire before being used.

 

Net loss for the firstsix months of 2008 was $18.2 million compared to net income of $6.0 million forthe comparable period in 2007 due to a reduction in sales, lower operatingmargin, an increase in S,G,&A expenses as a percentage of sales, and theasset impairment charge.

 

*First Six Months of 2008 versus First Six Months of 2007 forthe Motorized Recreational Vehicle Segment*

 

Thefollowing table illustrates the results of the MRV segment for the six monthperiod ended June 30, 2007 and June 28, 2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 496,210    |              | 100.0      | %                           | $          | 343,308           |       | 100.0      | %          | $          | (152,902   | ) | (30.8 | )% |
| Cost of sales                                                         |       | 443,464                     |       | 89.4              | %          | 325,826                     |       | 94.9              | %          | 117,638    |       | 26.5       | %          |
| Gross profit                                                          |       | 52,746                      |       | 10.6              | %          | 17,482                      |       | 5.1               | %          | (35,264    | )          | (66.9      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 43,189                      |       | 8.7               | %          | 36,116                      |       | 10.5              | %          | 7,073      |       | 16.4       | %          |
| Operating income  (loss)                                              |       | $                           | 9,557      |              | 1.9        | %                           | $          | (18,634           | )          | (5.4       | )%         | $          | (28,191    | ) | (295.0 | )% |

 

Net sales for the MRVsegment were down from $496.2 million in the first six months of 2007 to $343.3million in the first six months of 2008. Gross diesel motorized revenues were down 35.6%, and gas motorizedrevenues were up 13.8%.  Diesel productsaccounted for 82.8% of the MRV segment revenues while gas products were17.2%.  The overall decrease in revenues reflectsa decline in the motorized retail market, as well as the increase of gasmotorized units sold in our overall MRV segment mix.  Our overall MRV segment unit sales were down28.8% in the first six months of 2008 to 2,120 units, with diesel motorizedunit sales down 40.5% to 1,313 units, and gas motorized unit sales up 4.8% to807 units.  Our average unit sellingprice decreased to $161,700 for the first six months of 2008 from $165,500 inthe same period last year.

 

Gross profit for thefirst six months of 2008 decreased to $17.5 million, down from $52.7 million in2007, and gross margin decreased from 10.6% in the first six months of 2007 to5.1% in the first six months of 2008. The changes in the components of cost of sales are set forth in the followingtable (dollars in thousands):

** **
| ** **           | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 309,875    |              | 62.4       | %                           | $          | 221,073           |       | 64.4                     | %          | 2.0 | % |
| Direct labor         |       | 47,371                      |       | 9.6               | %          | 33,567                      |       | 9.8               | %          | 0.2                      | %          |
| Warranty             |       | 16,172                      |       | 3.3               | %          | 12,544                      |       | 3.7               | %          | 0.4                      | %          |
| Other direct         |       | 21,317                      |       | 4.3               | %          | 17,642                      |       | 5.1               | %          | 0.8                      | %          |
| Indirect             |       | 48,729                      |       | 9.8               | %          | 41,000                      |       | 11.9              | %          | 2.1                      | %          |
| Total cost of  sales |       | $                           | 443,464    |              | 89.4       | %                           | $          | 325,826           |       | 94.9                     | %          | 5.5 | % |

 

·       Directmaterials increases in 2008, as a percent of sales, were 2.0% or $6.9 million.The increase was due to the impact of increased sales discounts, which causeddirect materials, as a percent of sales, to increase by 0.9% or $3.3 million.  The remaining increase of $3.6 million wasdue to a change in the product mix, as gross sales of gas motorized units,which have higher material usage rates, were a larger portion of the overallMRV segment sales mix.

 

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·       Directlabor increases in 2008, as a percent of sales, were 0.2% or $687,000. Directlabor decreased in total dollars by $262,000 due to the chassis now beingpurchased from the CCP joint venture as the direct labor portion of thesechassis are included in direct materials versus direct labor.  Excluding the impact of the joint venture,the increase was also due to the impact of increased sales discounts, whichresulted in direct labor, as a percent of sales, to increase by 0.1% or$478,000.  The remaining increase was dueto a change in the product mix of sales as gas motorized products were a largerportion of the segment mix.

·       Increasesin warranty expense in 2008, as a percent of sales, were 0.4% or $1.4million.  The Company refined theestimate of units still under warranty and the improved data resulted in aone-time reduction to the product warranty reserve of $2.8 million, whichoffset higher claim volumes in the first six months of 2008.

·       Increasesin other direct costs in 2008, as a percent of sales, were 0.8% or $2.7million. This change was due to increases in out-of-warranty repairs of $1.0million, delivery expenses of $1.4 million, and compensation and other employeerelated benefit costs of $343,000.

·       Decreasesin indirect costs in 2008 were $7.7 million. These decreases were partially the result of consolidation of componentfacilities and consolidation of a towable production line and a motorizedproduction line into one facility in late 2007. In addition, these decreases were due to the decline in the volume ofunits produced, which decreased indirect variable costs.  The decreases were partially offset by a chargein 2008 of $1.4 million related fixed overhead costs not absorbed, on a percentof sales basis, in certain production facilities as plant utilization droppedbelow historical normal capacity levels.

 

S,G,&A expenses forthe MRV segment increased, as a percent of sales, due to lower sales levels andincreases in salaries and benefit expenses, settlement expense, marketingexpenses, and other S,G,&A expenses as a percentage of sales, partiallyoffset by decreases in selling expenses as a percentage of sales.  The decrease in selling expenses includes areduction to accruals of $3.9 million related to modifications made to theterms of the Company’s sales and promotion programs.

 

The operating loss wasdue to lower sales and gross profit, and higher S,G,&A expenses as apercent of sales.

 

*First Six Months of 2008 versus First Six Months of 2007 forthe Towable Recreational Vehicle Segment*

 

The following tableillustrates the results of the TRV segment for the six months ended June 30,2007 and June 28, 2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 150,448    |              | 100.0      | %                           | $          | 108,268           |       | 100.0      | %          | $          | (42,180    | ) | (28.0 | )% |
| Cost of sales                                                         |       | 137,439                     |       | 91.4              | %          | 102,134                     |       | 94.3              | %          | 35,305     |       | 25.7       | %          |
| Gross profit                                                          |       | 13,009                      |       | 8.6               | %          | 6,134                       |       | 5.7               | %          | (6,875     | )          | (52.9      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 12,234                      |       | 8.1               | %          | 12,351                      |       | 11.4              | %          | (117       | )          | (1.0       | )%         |
| Impairment of  assets                                                 |       | 0                           |       | 0.0               | %          | 1,966                       |       | 1.8               | %          | (1,966     | )          | (100.0     | )%         |
| Operating income  (loss)                                              |       | $                           | 775        |              | 0.5        | %                           | $          | (8,183            | )          | (7.5       | )%         | $          | (8,958     | ) | (1,155.9 | )% |

 

Net sales for the TRVsegment were down from $150.4 million in the first six months of 2007 to $108.3million in the first six months of 2008. The decrease is due to softer market conditions in the towablesector.  The Company’s unit sales weredown 20.1% to 7,588 units.  The averageunit selling price decreased to $16,000 in the first six months of 2008 from$17,300 in the same period last year.

 

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Gross profit for thefirst six months of 2008 decreased to $6.1 million, down from $13.0 million in2007, and gross margin decreased from 8.6% in the first six months of 2007 to5.7% in the first six months of 2008. The changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):

** **
| ** **           | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 93,979     |              | 62.5       | %                           | $          | 67,302            |       | 62.2                     | %          | (0.3 | )% |
| Direct labor         |       | 17,001                      |       | 11.3              | %          | 12,717                      |       | 11.7              | %          | 0.4                      | %          |
| Warranty             |       | 5,174                       |       | 3.4               | %          | 4,350                       |       | 4.0               | %          | 0.6                      | %          |
| Other direct         |       | 11,895                      |       | 7.9               | %          | 8,101                       |       | 7.5               | %          | (0.4                     | )%         |
| Indirect             |       | 9,390                       |       | 6.3               | %          | 9,664                       |       | 8.9               | %          | 2.6                      | %          |
| Total cost of  sales |       | $                           | 137,439    |              | 91.4       | %                           | $          | 102,134           |       | 94.3                     | %          | 2.9 | % |

 

·       Directmaterial decreases in 2008, as a percent of sales, were 0.3% or $325,000. Thisdecrease was a result of the change in product mix to units with lower materialusage rates.  This was partially offsetby an increase in sales discounts, which caused direct materials, as a percentof sales, to increase by 1.4% or $1.5 million.

·       Directlabor increases in 2008, as a percent of sales, were 0.4% or $433,000. Thisincrease was mostly due to the impact of increased sales discounts, whichresulted in direct labor, as a percent of sales, to increase by 0.3% or$229,000.

·       Increasesin warranty expense in 2008, as a percent of sales, were 0.6% or $650,000.  The increase was partially due to the impactof increased sales discounts, which resulted in warranty expense, as a percentof sales, to increase by 0.1% or $108,000.

·       Decreasesin other direct costs in 2008, as a percent of sales, were 0.4% or $433,000.This decrease was primarily the result of improvements in delivery expenses.

·       Increasesin indirect costs in 2008 of $274,000 were partially due to a charge of$125,000 related to fixed overhead costs not absorbed on a percent of salesbasis in certain production facilities as plant utilization dropped belowhistorically normal levels.  Theremaining change was due to increases in the variable portion of costs relativeto the reduction in sales.

 

S,G,&A expenses forthe TRV segment increased, as both a percent of sales and in total dollars dueto increases in salaries and benefit expenses, selling expenses, marketingexpenses, and other S,G,&A expenses.

 

In October 2007 theCompany ceased operations at a production facility in Elkhart, Indiana.  The towable products previously produced atthis location were relocated to facilities in Wakarusa and Warsaw,Indiana.  Based on the declining realestate market in the second quarter of 2008, the Company reassessed the fairmarket value of the building and determined it was appropriate to recognize animpairment charge of $2.0 million on the facility.

 

The operating loss wasdue to lower sales and gross profit, higher S,G,&A expenses in totaldollars and as a percent of sales, and the asset impairment charge.

 

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*First Six Months of 2008 versus First Six Months of 2007 forthe Motorhome Resorts Segment*

 

Thefollowing table illustrates the results of the Motorhome Resorts Segment (MRsegment) for the six month period ended June 30, 2007 and June 28,2008 (dollars in thousands):

 
| ** **                                                            | ** ** | **Six Months**         | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                            | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **June 28, 2008** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                           | 10,905     |              | 100.0      | %                           | $          | 2,688             |       | 100.0      | %          | $          | (8,217     | ) | (75.4 | )% |
| Cost of sales                                                         |       | 4,066                       |       | 37.3              | %          | 1,325                       |       | 49.3              | %          | 2,741      |       | 67.4       | %          |
| Gross profit                                                          |       | 6,839                       |       | 62.7              | %          | 1,363                       |       | 50.7              | %          | (5,476     | )          | (80.1      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 4,800                       |       | 44.0              | %          | 2,426                       |       | 90.3              | %          | 2,374      |       | 49.5       | %          |
| Operating income  (loss)                                              |       | $                           | 2,039      |              | 18.7       | %                           | $          | (1,063            | )          | (39.6      | )%         | $          | (3,102     | ) | (152.1 | )% |

 

Net sales decreased 75.4%to $2.7 million compared to $10.9 million for the same period last year.  The decline in overall real estate values andthe declining sales in the RV market have had an impact on the demand forresort lots.  The decrease was also dueto fewer lots available for sale in the current year as the Indio, Californiaand Las Vegas, Nevada resorts are near the end of the sales cycle. In addition,there is competition within the Company’s own resorts from owner resales.  We are currently developing resorts inNaples, Florida and Bay Harbor, Michigan. The Company still expects that while sales may remain slower thanexpected, that the needs for luxury resort locations within the industry willremain strong.*

 

Gross profit for the MRsegment decreased to 50.7% of sales compared to 62.7% of sales in the sameperiod last year.  Gross margin decreaseswere due to the additions of some amenities designed to enhance the appeal ofthe resorts and demand for lots, but also added to the cost of sales.

 

S,G,&A expensesincreased as a percent of sales due to lower sales that was not entirely offsetby a reduction in total S,G,&A dollars. The expenses included a reduction of $1.2 million to the resort lotparticipation accrual expense as the result of the Company reaching asettlement related to a profit sharing agreement with the prior owners of theIndio, California and Las Vegas, Nevada resorts.

 

The operating loss wasdue to lower lot sales volumes, a decrease in gross margins, and an increase inS,G&A expenses as a percentage of sales.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities. During the first six monthsof 2008, the Company used cash of $49.4 million for operating activities andhad a net cash balance of $1.3 million at June 28, 2008. The Company used$8.9 million of cash from the net loss offset by non-cash expenses such asdepreciation, amortization, stock based compensation, and impairment of assets.Major uses of cash flows for operating activities include an increase of $20.1million in inventories, an increase of $3.8 millions in resort lot inventory,an increase of $2.8 million in land held for development, a decrease of $5.8million in trade accounts payable,  adecrease of $4.2 million in product warranty reserve, an increase in income taxreceivable of $11.6 million, and a decrease in accrued expenses and otherliabilities of $11.8 million.  The majorsource of cash was from a decrease of $19.1 million in trade accountsreceivable. The increase in inventories was from an increase in finished goodsdue to a decline in sales in the first six months of 2008 that was not entirelyanticipated.  The increase in resort lotinventory was due to the construction in progress at the Naples, Florida andBay Harbor, Michigan properties.  Theincrease in land held for development was due to the purchase of the BayHarbor, Michigan property for resort development in March 2008.  The decrease in trade accounts payablerelates to the decline in purchases of raw materials towards the end of the sixmonth period ended June 28, 2008. As the six months progressed, production output was reduced and rawmaterials that had built up towards the beginning of the year were used.  The decrease in product warranty reserve wasdue in part to the one time reduction of $2.8 million related to refining theestimate of units still under warranty. The increase in income tax receivable is due to the net loss recognizedin the first six months of 2008.  Thedecrease in accrued expenses and other liabilities is associated primarily withdecreases of accruals for management bonus earned in 2007, promotions andadvertising, and various miscellaneous accruals.  The decrease in trade accounts receivable isdue to improved collections and the decline in sales experienced in the secondquarter of 2008 as compared to the fourth quarter of 2007.

 

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The Company’s creditfacilities consist of a revolving line of credit (the “Line of Credit”) of upto $105.0 million and a term loan (“Term Debt”).  As of June 28, 2008, there was $53.8million outstanding under the Line of Credit and $25.7 million outstanding onthe Term Debt.  At the election of theCompany, the credit facilities bear interest at rates that fluctuate based onthe prime rate or LIBOR and are determined based on the Company’s leverageratio.  The Company also pays interestquarterly on the unused available portion of the Line of Credit at varyingrates, determined by the Company’s leverage ratio.  The amounts outstanding under the Line ofCredit are due and payable in full on November 17, 2009 and interest ispaid monthly.  The Term Debt requiresquarterly interest and principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010.  The credit facilities are collateralized byall of the assets of the Company.  TheCompany utilizes “zero balance” bank disbursement accounts in which an advanceon the line of credit is automatically made for checks clearing each day. Sincethe balance of the disbursement account at the bank returns to zero at the endof each day, the outstanding checks of the Company are reflected as aliability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. The cash balance at June 28, 2008 is thecash maintained in the R-Vision bank accounts held with different financialinstitutions and thus not combined with the Company’s net book overdraftbalance.

 

The credit facilitiesrequire the Company to maintain a maximum leverage ratio, minimum currentratio, minimum debt service coverage ratio, and minimum tangible networth.  The Company was in violation ofits required leverage ratio, debt service coverage ratio, and tangible networth covenant as of June 28, 2008. The Company has obtained an agreement from its lenders, dated July 29,2008, to waive the covenant violations as of June 28, 2008.  However, management expects that the Companywill also violate these covenants for the next several quarters.  Accordingly, the Company has reclassified itslong-term debt and related debt issue costs from non-current to current as of June 28,2008.

 

The Company has signed acommitment letter dated July 29, 2008 from Bank of America thatcontemplates a new three-year syndicated $100 million senior credit facility(the “Senior Credit Facility”) with Bank of America acting as theadministrative agent.  The commitmentletter is subject to a number of conditions, including the negotiation andexecution of a definitive credit agreement. One of the conditions requires $40 million of unused opening availableborrowings under the Senior Credit Facility at the closing date.  In order to meet this requirement, theCompany is seeking approximately $30 to $40 million in subordinated debt financing.

 

There can be no assurancethat a definitive agreement for the Senior Credit Facility will be reached orthat our current lenders will agree to additional waivers, forbearance, orrestructuring of the current debt.  Undersuch circumstances, the Company could experience severe liquidity problemsresulting in a material adverse effect on our business, results of operationsand financial condition. In addition, in the event of an incurable default ofour current credit facilities, our current debt could become immediatelypayable and we could be forced to seek more costly financing.

 

Unamortized debt issuecosts related to the credit facilities were $542,000 as of June 28,2008.  If the current credit facility is refinanced,we expect that the transaction would be accounted for as an extinguishment, requiringunamortized debt issue costs at the refinancing date to be expensed in theperiod of refinancing.

 

In November 2005,the Company obtained a term loan of $500,000 from the State of Oregon in connectionwith the relocation of jobs to the Coburg, Oregon production facilities fromthe Bend, Oregon facility. The principal and interest is due on April 30,2009. The loan bears a 5% annual interest rate.

 

The Company’s principalworking capital requirements are for purchases of inventory and financing oftrade receivables. Many of the Company’s dealers finance product purchasesunder wholesale floor plan arrangements with third parties as described below.At June 28, 2008, the Company had working capital of approximately $76.1million, a decrease of $35.9 million from working capital of $112.0 million at December 29,2007 due in large part to the reclassification of the total term debt tocurrent. The Company has been using short-term credit facilities and operatingcash flow to finance its capital expenditures.

 

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Subject to therestructuring of the debt previously described, the Company believes that cashflow from operations and funds available under its anticipated credit facilitieswill be sufficient to meet the Company’s liquidity requirements for the next 12months.* The Company’s capital expenditures were $1.6 million in the first sixmonths of 2008, which included, upgrades to its information systemsinfrastructure, hardware and software, relocation of our printing shop,purchase of a small building, and other various capitalized upgrades toexisting facilities. The Company anticipates that capital expenditures for allof 2008 will be approximately $5 million, which includes expenditures topurchase additional machinery and equipment in the Company’s Coburg, Oregonfacilities, moving operations from Indiana to Oregon, purchase of signage andhardware for dealer support programs and upgrades to existing informationsystems infrastructures. The Company may require additional equity or debtfinancing to address working capital needs, particularly if the Company significantlyincreases the level of working capital assets such as inventory and accountsreceivable. There can be no assurance that additional financing will beavailable if required or on terms deemed favorable by the Company.

 

As is typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s products. Under theterms of these floor plan arrangements, institutional lenders customarilyrequire the recreational vehicle manufacturer to agree to repurchase any unsoldunits if the dealer defaults on its credit facility from the lender, subject tocertain conditions. The Company has agreements with several institutionallenders under which the Company currently has repurchase obligations. TheCompany’s contingent obligations under these repurchase agreements are reducedby the proceeds received upon the sale of any repurchased units. The Company’sobligations under these repurchase agreements vary from period to period up to15 months. At June 28, 2008, approximately $487.9 million of products soldby the Company to independent dealers were subject to potential repurchaseunder existing floor plan financing agreements with approximately 4.9%concentrated with one dealer. Historically, the Company has been successful inmitigating losses associated with repurchase obligations. During the secondquarter of 2008, the losses associated with the exercise of repurchase agreementswere approximately $38,000. Dealers for the Company undergo a credit reviewprior to becoming a dealer and periodically thereafter. Financial institutionsthat provide floor plan financing also perform credit reviews and floor checkson an “on- going” basis. We closely monitor sales to dealers that are a highercredit risk. The repurchase period is limited, usually up to a maximum of 15months. We believe these activities help to minimize the number of requiredrepurchases. Additionally, the repurchase agreement specifies that the dealeris required to make principal payments during the repurchase period. Since theCompany repurchases the units based on the schedule of principal payments, therepurchase 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 an incentive forthe dealer to take the repurchased inventory.

 

**OFF-BALANCE SHEETARRANGEMENTS**

** **

As of June 28, 2008,the Company did not have any off-balance sheet arrangements that have, or arereasonably likely to have, a current or future material effect on the Company’sconsolidated financial condition, results of operations, liquidity, capital expendituresor capital resources.

 

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**CONTRACTUALOBLIGATIONS**

** **

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

 
| ** **                          | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**    | ** ** | **1 year or less**         | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt  (1)                 |       | $                                         | 26,214     |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 26,214 |   |
| Operating Leases  (2)               |       | 2,294                                     |       | 4,220 |   | 2,808 |   | 783 |   | 10,105 |   |
| Total  Contractual Cash Obligations |       | $                                         | 28,508     |   | $ | 4,220 |   | $ | 2,808 |   | $ | 783 |   | $ | 36,319 |   |

 
| ** **                  | ** ** | **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)         |       | $                                                                      | 53,815     |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 53,815 |   |
| Guarantees (4)              |       | 0                                                                      |       | 0 |   | 10,930 |   | 0 |   | 10,930 |   |
| Repurchase  Obligations (5) |       | 431,227                                                                |       | 56,642 |   | 0 |   | 0 |   | 487,869 |   |
| Total  Commitments          |       | $                                                                      | 485,042    |   | $ | 56,642 |   | $ | 10,930 |   | $ | 0 |   | $ | 552,614 |   |

 

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| (1) | See Notes 6 to the  Condensed Consolidated Financial Statements.                                                                                                |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Various leases  including manufacturing facilities, aircraft, and machinery and equipment.                                                                      |
| (3) | See Note 6 to the  Condensed Consolidated Financial Statements. The amount listed represents  available borrowings on the line of credit at June 28, 2008. |
| (4) | Guarantees related to  aircraft operating lease.                                                                                                                |
| (5) | Reflects obligations  under manufacturer repurchase commitments. See Note 12 to the Condensed  Consolidated Financial Statements.                               |

 

**INFLATION**

 

During 2007 and to a lesser extent in the secondquarter of 2008, the Company experienced increases in the prices of certaincommodity items that we use in manufacturing our products.  These include, but are not limited to, steel,copper, aluminum, petroleum, and wood. Price increases for these raw materials are indicative of widespreadinflationary trends, and they have had an impact on the Company’s productioncosts.  To date, the Company has beensuccessful in passing along most of these increases by increasing the sellingprices of its products.  However, thereis no certainty that the Company will be able to pass these along successfullyin the future.  The current trend inthese prices, if it continues, could have a materially adverse impact on theCompany’s business going forward.

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to warrantycosts, product liability, and impairment of goodwill. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions and such differences couldbe material. We believe the following critical accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financialstatements.

 

**WARRANTY COSTS**  Estimated warranty costs are provided for atthe time of sale of products with warranties covering the products for up toone year from the date of retail sale (five years for the front and sidewallframe structure, and three years on the Roadmaster chassis). These estimatesare based on historical average repair costs, as well as other reasonableassumptions as have been deemed appropriate by management.

 

**PRODUCT LIABILITY**  The Company provides an estimate foraccrued product liability based on current pending cases, as well as for thosecases which are incurred but not reported. This estimate is developed by legalcounsel based on professional judgment, as well as historical experience.

 

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** **

**IMPAIRMENT OF GOODWILL** The Company assesses the potential impairmentof goodwill in accordance with Financial Accounting Standards Board (FASB)Statement No. 142. This annual test involves management comparing the fairvalue of each of the Company’s reporting units, to the respective carryingamounts, including goodwill, of the net book value of the reporting unit, todetermine if goodwill has been impaired. The Company uses an estimate ofdiscounted future cash flows to determine fair value for each reportingunit.  Due to the occurrence of triggerevents, an interim test was performed as of June 28, 2008.  The assessment  indicated goodwill had not been impaired.

 

**IMPAIRMENT OF LONG-LIVED ASSETS**  The Company assesses the potential impairmentof long-lived assets in accordance with Financial Accounting Standards Board(FASB) Statement No. 144.  This testinvolves management comparing the fair value of long-lived assets to therespective carrying amounts when a triggering event necessitate theassessment.  Management reviewed severalof its long-lived assets at June 28, 2008. The only impairment indicatedat June 28, 2008 was for a production facility located in Elkhart, Indiana thatwas idled in October 2007 and is listed for sale or lease.  Due to the further decline in the real estatevalues in that region during the second quarter of 2008 and an impairmentcharge of $2.0 million was recorded.

 

**INVENTORY ALLOWANCE**  The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated fair market value. These write-downs are based on assumptions aboutfuture sales demand and market conditions. If actual sales demand or marketconditions change from those projected by management, additional inventorywrite-downs may be required.

 

**INCOME TAXES** In conjunction with preparing its consolidatedfinancial statements, the Company must estimate its income taxes in each of thejurisdictions in which it operates. This process involves estimating actualcurrent tax expense together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin the consolidated balance sheets. The Company must then assess the likelihoodthat the deferred tax assets will be recovered from future taxable income, andto the extent management believes that recovery is not likely, a valuation allowancemust be established. Significant management judgment is required in determiningthe Company’s provision for income taxes, deferred tax assets and liabilities,and any valuation allowance recorded against net deferred tax assets.

 

**INCENTIVE STOCK-BASED COMPENSATION**  The Company, like many other companies,sponsors an incentive stock-based compensation plan for key members of theorganization.  The related expensesrecognized are subject to complex calculations based on a variety ofassumptions for variables such as risk-free rates of return, stock volatility,expected terminations, and achievements of financial performance measures.  To the extent certain of these variables cannot be known, management uses estimates to calculate the resulting liability.

 

**REPURCHASE OBLIGATIONS**  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement. The Company has recorded a liability associatedwith the disposition of repurchased inventory. To determine the appropriateliability, the Company calculates a reserve, based on an estimate of potentialnet losses, along with qualitative and quantitative factors, including dealerinventory turn rates, and the financial strength of individual dealers.

 

**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

 

None.

 

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

 

Nomaterial change since December 29, 2007.

 

**ITEM 4.  Controls andProcedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

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

 

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

 

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

 

**PART II - OTHERINFORMATION**

 

**ITEM 1A.  Risk Factors**

 

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

 

**IF WE ARE UNABLE TO NEGOTIATE A NEW CREDIT FACILITY****, OUR OUTSTANDING DEBT COULD BECOME IMMEDIATELYPAYABLE **Asof June 28, 2008, we had $53.8 million outstanding under our $105 millionline of credit and $25.7 million outstanding on our term loan.  As of June 28, 2008, we were inviolation of certain financial covenants under this credit facility.  We obtained an agreement from our lenders towaive the covenant violations as of June 28, 2008; however, we expect thatwe will also violate these covenants for the next several quarters.  We have signed a commitment letter dated July 29,2008 with Bank of America as the administrative agent.  The commitment letter is subject to a numberof conditions including the negotiation and execution of a definitive creditagreement.  There can be no assurance a definitiveagreement will be reached or that our current lenders will agree to additionalwaivers, forbearance, or restructuring of the current debt. Under suchcircumstances, the Company could experience severe liquidity problems resultingin a material adverse effect on our business, results of operations andfinancial condition. In addition, in the event of an incurable default of ourcurrent credit facilities, our current debt could become immediately payableand we could be forced to seek more costly financing.

 

**THERELOCATION OF OUR INDIANA OPERATIONS MAY COST MORE THAN ORIGINALLYESTIMATED AND MAY NOT PROVIDE THE COST SAVINGS WE ANTICIPATE **As we move operations fromIndiana to our Oregon facility, as described in “Business Changes”, we mayincur additional costs for severance, closure costs or contract terminationfees and penalties. As we make these changes for restructuring the businessoperations during the third quarter, we will be able to determine actual andexpected costs more accurately. For instance, we are currently unable toestimate any impairment charges that may result from the closure of ourproduction facilities in Indiana which have current book values totaling $42.9million. Appraisals are being conducted to analyze market values of theproperties which will be used in our impairment analysis. The restructuringalso may not fully result in the expected cost savings of $12 million eachquarter. In addition, if the restructuring does not provide the expectedon-going future benefits, we may have to record a valuation allowance fordeferred tax assets which currently total $33.7 million. Additional costs andnegative financial results could have a material adverse effect on the Company.

 

**WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS**  Our net sales, gross margin, andoperating results may fluctuate significantly from period to period due to anumber of factors, many of which are not readily predictable. These factorsinclude the following:

 

                    
| · |   | Factors affecting the recreational vehicle industry  as a whole, including economic and seasonal factors, such as fuel prices,  interest rates and credit availability.             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| · |   | The varying margins associated with the mix of  products we sell in any particular period.                                                                                          |
|   |   |                                                                                                                                                                                |
| · |   | The fact that we typically ship a large amount of  products near quarter end.                                                                                                       |
|   |   |                                                                                                                                                                                |
| · |   | Our ability to utilize and expand our manufacturing  resources efficiently.                                                                                                         |
|   |   |                                                                                                                                                                                |
| · |   | Shortages of materials used in our products.                                                                                                                                        |
|   |   |                                                                                                                                                                                |
| · |   | The effects of inflation on the costs of materials  used in our products.                                                                                                           |
|   |   |                                                                                                                                                                                |
| · |   | A determination by us that goodwill or other  intangible assets are impaired and have to be written down to their fair  values, resulting in a charge to our results of operations. |
|   |   |                                                                                                                                                                                |
| · |   | Our ability to introduce new models that achieve  consumer acceptance.                                                                                                              |

 

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| · |   | The introduction, marketing and sale of competing  products by others, including significant discounting offered by our  competitors. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                  |
| · |   | The addition or loss of our dealers.                                                                                                  |
|   |   |                                                                                                                                  |
| · |   | The timing of trade shows and rallies, which we use  to market and sell our products.                                                 |
|   |   |                                                                                                                                  |
| · |   | Our inability to acquire and develop key pieces of  property for on-going resort activity.                                            |
|   |   |                                                                                                                                  |
| · |   | Fluctuations in demand for our resort lots due to  changing economic and other conditions.                                            |

 

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

 

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

 

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

 

**OUR BUSINESS SEGMENTS ARE CYCLICAL AND SUSCEPTIBLETO SLOWDOWNS IN THE GENERAL ECONOMY**  The recreational vehicle industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic, demographic, and political conditions thataffect disposable income for leisure-time activities. Our business is subjectto the cyclical nature of the RV industry and principally the Class Asegment. Some of the factors that contribute to this cyclicality include fuelavailability and costs, interest rate levels, the level of discretionaryspending, and availability of credit and overall consumer confidence.Increasing interest rates and fuel prices over the last three years haveadversely affected the Class A recreational vehicle market. An extendedcontinuation of these conditions would materially affect the results of ouroperations and financial condition.

 

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

 

The towable segment moved through many of the samecyclical peaks and troughs historically. The shipment level peaked in 1994 at201,100 dropping-off to 192,200 in 1996 and then growing to 249,600 in 1999.Towable unit shipments suffered a two-year drop-off like Class Amotorhomes in 2000 and 2001, dropping to 207,600. Since then, the market hasexpanded significantly reaching 334,600 in 2006, but falling in 2007 to297,900. Unlike the Class A market, the towables segment did notexperience a slow down in 2005 and 2006, because manufacturers havesuccessfully introduced popular new models and the segment was significantlyaided by units sold to support the hurricane relief efforts in the gulfcoast.  The decline in 2007 reflectsconsumers’ uneasiness surrounding the economy, fuel prices and declining realestate values.

 

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

 

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**WE MAY EXPERIENCE A DECREASE IN SALES OF OURPRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL**  An interruption in the supply, orsignificant continued increases in the price or tax on the sale, of diesel fuelor gasoline on a regional or national basis could significantly affect ourbusiness. Diesel fuel and gasoline have, at various times in the past, beeneither expensive or difficult to obtain and are currently at an all timehigh.  We can not predict the long-termimpact continued high prices will have on the RV market.

 

**THE EXPECTED BENEFITS OF THE JOINT VENTURE, CCP, MAY NOTBE REALIZED **During thefirst quarter of 2007, we completed the formation of a joint venture (CCP) withNavistar, Inc. (NAV) for the purpose of manufacturing diesel chassis.  The on-going and anticipated advantages of thejoint venture, which are purchasing synergies, access to engineering and designexpertise from NAV, and improvement of the utilization of our Roadmasterchassis manufacturing facility in Elkhart, Indiana, may not be realized, inparticular in light of the restructuring changes we are taking in our Indianaoperations as described in “Business Changes”.

 

**WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDEUS WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS** A number ofimportant components for our products are purchased from a single or a limitednumber of sources. These include chassis from Workhorse and Ford for gas motorcoaches and diesel chassis from our newly formed joint venture withInternational Truck and Engine Corporation. The joint venture sources turbo diesel engines from Cummins andCaterpillar, substantially all transmissions from Allison and axles fromDana.   We have no long-term supplycontracts with these suppliers or their distributors, and we cannot be certainthat these suppliers will be able to meet our future requirements.Consequently, the Company has periodically been placed on allocation of theseand other key components. The last significant allocation occurred in 1997 fromAllison, and in 1999 from Ford. An extended delay or interruption in the supplyof any components that we obtain from a single supplier or from a limitednumber of suppliers could adversely affect our business, results of operations,and financial condition.

 

**WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERSFOR A SIGNIFICANT PERCENTAGE OF OUR SALES**  Although our products were offered by over 700dealerships located primarily in the United States and Canada as of June 28,2008, a significant percentage of our sales are concentrated among a relativelysmall number of independent dealers. For the quarter ended June 28, 2008,sales to one dealer, Lazy Days RV Center, accounted for 10.7% of total salescompared to 9.4% of sales in the same period ended last year.  For quarters ended June 30, 2007 and June 28,2008,  sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 42.7% and 37.0% oftotal sales, respectively. The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on ourbusiness, results of operations, and financial condition.

 

**WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER** As is common inthe recreational vehicle industry, we enter into repurchase agreements with thefinancing institutions used by our dealers to finance their purchases of ourproducts. These agreements require us to repurchase the dealer’s inventory inthe event that the dealer defaults on its credit facility with its lender.Obligations under these agreements vary from period to period, but totaled approximately$487.9 million as of June 28, 2008, with approximately 4.9% concentratedwith one dealer. If we were obligated to repurchase a significant number ofunits under any repurchase agreement, our business, operating results, andfinancial condition could be adversely affected.

 

**OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**  We sell our product to dealers who arepredominantly located in the United States and Canada. The terms and conditionsof payment are a combination of open trade receivables and commitments fromdealer floor plan lending institutions. For our RV dealers, terms are net 30days for units that are financed by a third party lender. Terms of open tradereceivables are granted by us, on a very limited basis, to dealers who havebeen subjected to evaluative credit processes conducted by us. For openreceivables, terms vary from net 30 days to net 180 days, depending on thespecific agreement. Agreements for payment terms beyond 30 days generallyrequire additional collateral, as well as security interest in the inventorysold. As of June 28, 2008, total trade receivables were $69.1 million,with approximately $66.5 million, or 96.2% of the outstanding accountsreceivable balance concentrated among floor plan lenders. The remaining $2.6million of trade receivables were concentrated all with one dealer. For resortlot customers, funds are required at the time of closing.

 

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**OUR INDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUETO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE**  The market for our products is verycompetitive. We currently compete with a number of manufacturers of motorcoaches, fifth wheel trailers, and travel trailers. Some of these companieshave greater financial resources than we have and extensive distributionnetworks. These companies, or new competitors in the industry, may developproducts that customers in the industry prefer over our products due tofeatures of the products or the pricing of the products.

 

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**  Our customers require demandingspecifications for product performance and reliability. Because our productsare complex and often use advanced components, processes and techniques,undetected errors and design flaws may occur. Product defects result in higherproduct service, warranty and replacement costs and may cause serious damage toour customer relationships and industry reputation, all of which wouldnegatively affect our sales and business.

 

**OUR BUSINESS IS SUBJECT TOVARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS**  We are subject to litigation arising inthe ordinary course of our business, typically for product liability andwarranty claims that are common in the recreational vehicle industry. While wedo not believe that the outcome of any pending litigation, net of insurancecoverage, will materially adversely affect our business, results of operations,or financial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

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**  The Company’s future prospects dependupon retaining and motivating key management personnel, including Kay L.Toolson, the Company’s Chairman and Chief Executive Officer, and John W.Nepute, the Company’s President. The loss of one or more of these keymanagement personnel could adversely affect the Company’s business. Theprospects of the Company also depend in part on its ability to attract andretain highly skilled engineers and other qualified technical, manufacturing,financial, managerial, and marketing personnel. Competition for such personnelis intense, and there can be no assurance that the Company will be successfulin attracting and retaining such personnel.

 

**OUR STOCK PRICE HAS HISTORICALLYFLUCTUATED AND MAY CONTINUE TO FLUCTUATE**  The market price of our Common Stock is subjectto wide fluctuations in response to quarter-to-quarter variations in operatingresults, changes in earnings estimates by analysts, announcements of newproducts by us or our competitors, general conditions in the recreationalvehicle market, and other events or factors. In addition, the stocks of manyrecreational vehicle companies have experienced price and volume fluctuationswhich have not necessarily been directly related to the companies’ operatingperformance, and the market price of our Common Stock could experience similarfluctuations.  Most recently we haveexperienced a significant decline in the market price of our Common Stock,which has been consistent with the overall RV market.

 

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**ITEM 4.Submission of Matters to a Vote of Security Holders**

 

At the Annual Meeting ofStockholders of the Company, held on May 14, 2008 in Rosemont, Illinois,the Stockholders (i) elected three Class I directors to serve on theCompany’s Board of Directors, (ii) approved the 2007 Employee StockPurchase Plan (iii) approved the amended and restated Executive VariableCompensation Plan, and, (iv) ratified the appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the 2008 fiscal year.

 

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

 
| **Nominee**      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Kay L. Toolson   |       | 27,239,096 |       | 911,920      |       |
| Richard A. Rouse |       | 25,126,879 |       | 3,024,139    |       |
| Daniel C. Ustian |       | 25,600,354 |       | 2,550,664    |       |

 

Otherdirectors whose terms of office continued after the meeting are:

 
| John F. Cogan                |   |
|------------------------------|--------|
| Richard E.  Colliver         |   |
| Robert P.  Hanafee, Jr. |   |
| Dennis D. Oklak              |   |
| Roger A.  Vandenberg         |   |

 

Thevote for the approval of the 2007 Employee Stock Purchase Plan was as follows:

 
| For:     |   | 22,478,754 |   |
|----------|--------|------------|--------|
| Against: |   | 2,241,418  |   |
| Abstain: |   | 6,994      |   |

 

Thevote for the approval of the amended and restated Executive VariableCompensation Plan was as follows:

 
| For:     |   | 21,822,237 |   |
|----------|--------|------------|--------|
| Against: |   | 473,143    |   |
| Abstain: |   | 9,884      |   |

 

The vote for theratification of the independent auditors was as follows:

 
| For:     |   | 28,143,540 |   |
|----------|--------|------------|--------|
| Against: |   | 3,301      |   |
| Abstain: |   | 4,175      |   |

 

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**ITEM 6.  Exhibits**

 
| 3.1    |   | Amended and Restated Bylaws of Registrant, effective  as of November 12, 2007.                                                                                                                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.1   |   | Waiver Agreement and Fourth Amendment to Third  Amended and Restated Credit Agreement dated July 29, 2008, by and among  the Company, the subsidiaries of the Company party thereto as co-borrowers,  each of the Lenders and US Bank National Association, as the Administrative  Lender. |
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.2   |   | Executive Pay Reduction Program, effective as of  July 21, 2008.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     |

 

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**SIGNATURES**

 

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

 

 
|                       | **MONACO COACH CORPORATION**     |
|----------------------------|----------------------------------|
|                       |                             |
|                       |                             |
| Dated: August 7, 2008 | /s/ P. Martin Daley              |
|                       | P. Martin Daley                  |
|                       | Vice President and               |
|                       | Chief Financial Officer (Duly    |
|                       | Authorized Officer and Principal |
|                       | Financial Officer)               |

 

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**EXHIBITS INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                      |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                            |
| 3.1         |       | Amended and Restated Bylaws of Registrant, effective  as of November 12, 2007.                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.1        |       | Waiver Agreement and Fourth Amendment to Third  Amended and Restated Credit Agreement dated July 29, 2008, by and among  the Company, the subsidiaries of the Company party thereto as co-borrowers,  each of the Lenders and US Bank National Association, as the Administrative  Lender. |
|        |       |                                                                                                                                                                                                                                                                                            |
| 10.2        |       | Executive Pay Reduction Program, effective as of  July 21, 2008.                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                            |
| 31.1        |       | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                            |
| 31.2        |       | Sarbanes-Oxley  Section 302(a) Certification.                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                            |
| 32.1        |       | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     |

 

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