**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**For the period ended:  September 30, 2006**

**or**

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

**For the transition period from                     to                     **

**Commission File Number:  1-14725**

**MONACO COACH CORPORATION**

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

 

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

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

Indicate bycheck mark whether the registrant:  (1)has filed 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)has been 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, or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.
| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|--------------------------------|--------------------------|------------------------------|

 

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 September 30,2006:  29,754,584

 

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**MONACO COACH CORPORATION**

**FORM10-Q**

**September30, 2006**

**INDEX**
| **PART  I - FINANCIAL INFORMATION**                                                                                                |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                         |   |
| **Item  1. Financial Statements.**                                                                                                 |   |
| ** **                                                                                                                         |   |
| Condensed Consolidated Balance Sheets as of December  31, 2005 and September 30, 2006.                                             |   |
|                                                                                                                               |   |
| Condensed Consolidated Statements of Income for the  quarters and nine month periods ended October 1, 2005 and September 30, 2006. |   |
|                                                                                                                               |   |
| Condensed Consolidated Statements of Cash Flows for  the nine month periods ended October 1, 2005 and September 30, 2006.          |   |
|                                                                                                                               |   |
| Notes to  Condensed Consolidated Financial Statements.                                                                             |   |
|                                                                                                                               |   |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.**                           |   |
| ** **                                                                                                                         |   |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk.**                                                           |   |
| ** **                                                                                                                         |   |
| **Item 4. Controls and Procedures.**                                                                                               |   |
| ** **                                                                                                                         |   |
| **PART  II - OTHER INFORMATION**                                                                                                   |   |
| ** **                                                                                                                         |   |
| **Item  1A. Risk Factors.**                                                                                                        |   |
| ** **                                                                                                                         |   |
| **Item 6.  Exhibits.**                                                                                                             |   |
| ** **                                                                                                                         |   |
| **Signatures.**                                                                                                                    |   |
| ** **                                                                                                                         |   |
| **Certifications  under Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002.**                                                |   |

 

2

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**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

3

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(dollars in thousands)**
| ** **                                                                                                                   | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                                                   | ** ** | ** **                  | ** ** | **(unaudited)**              | ** ** |
| **ASSETS**                                                                                                                   |       |                        |       |                         |       |
| Current assets:                                                                                                              |       |                        |       |                         |       |
| Cash                                                                                                                         |       | $                           | 586        |                         | $          | 920 |   |
| Trade  receivables, net                                                                                                      |       | 102,666                     |       | 87,535                       |       |
| Inventories, net                                                                                                             |       | 183,292                     |       | 173,982                      |       |
| Resort lot  inventory                                                                                                        |       | 9,135                       |       | 9,056                        |       |
| Prepaid expenses                                                                                                             |       | 4,364                       |       | 4,687                        |       |
| Income taxes  receivable                                                                                                     |       | 206                         |       | 2,483                        |       |
| Deferred income  taxes                                                                                                       |       | 36,345                      |       | 42,208                       |       |
| Discontinued  operations                                                                                                     |       | 4,922                       |       | 851                          |       |
| Total current  assets                                                                                                        |       | 341,516                     |       | 321,722                      |       |
|                                                                                                                         |       |                        |       |                         |       |
| Property, plant, and  equipment, net                                                                                         |       | 159,304                     |       | 155,679                      |       |
| Land held for  development                                                                                                   |       | 0                           |       | 16,300                       |       |
| Debt issuance costs net  of accumulated amortization of $678, and $853, respectively                                         |       | 695                         |       | 557                          |       |
| Goodwill                                                                                                                     |       | 85,952                      |       | 86,003                       |       |
| Total assets                                                                                                                 |       | $                           | 587,467    |                         | $          | 580,261 |   |
|                                                                                                                         |       |                        |       |                         |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Current liabilities:                                                                                                         |       |                        |       |                         |       |
| Book overdraft                                                                                                               |       | $                           | 14,550     |                         | $          | 6,009 |   |
| Current portion  of long-term debt                                                                                           |       | 5,714                       |       | 7,143                        |       |
| Line of credit                                                                                                               |       | 25,000                      |       | 9,439                        |       |
| Accounts payable                                                                                                             |       | 78,299                      |       | 89,823                       |       |
| Product  liability reserve                                                                                                   |       | 19,275                      |       | 17,552                       |       |
| Product warranty  reserve                                                                                                    |       | 32,902                      |       | 33,453                       |       |
| Accrued expenses  and other liabilities                                                                                      |       | 37,732                      |       | 45,901                       |       |
| Discontinued  operations                                                                                                     |       | 853                         |       | 601                          |       |
| Total current  liabilities                                                                                                   |       | 214,325                     |       | 209,921                      |       |
|                                                                                                                         |       |                        |       |                         |       |
| Long-term debt, less  current portion                                                                                        |       | 34,786                      |       | 30,500                       |       |
| Deferred income taxes                                                                                                        |       | 21,624                      |       | 21,653                       |       |
| Other long-term  liabilities                                                                                                 |       | 0                           |       | 933                          |       |
| Total  liabilities                                                                                                           |       | 270,735                     |       | 263,007                      |       |
|                                                                                                                         |       |                        |       |                         |       |
| Commitments and  contingencies (Note 10)                                                                                     |       |                        |       |                         |       |
|                                                                                                                         |       |                        |       |                         |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Preferred stock, $.01  par value; 1,934,783 shares authorized, no shares outstanding                                         |       | 0                           |       | 0                            |       |
| Common stock, $.01 par  value; 50,000,000 shares authorized, 29,561,766 and 29,754,584 issued and  outstanding, respectively |       | 296                         |       | 298                          |       |
| Additional paid-in  capital                                                                                                  |       | 59,005                      |       | 63,336                       |       |
| Retained earnings                                                                                                            |       | 257,431                     |       | 253,620                      |       |
| Total  stockholders’ equity                                                                                             |       | 316,732                     |       | 317,254                      |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                           | 587,467    |                         | $          | 580,261 |   |

 

See accompanying notes.

4

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited: dollars inthousands, except share and per share data)**
| ** **                                                            | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| ** **                                                            | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                         | 296,953    |                            | $          | 292,473 |   | $ | 930,278 |   | $ | 998,823 |   |
| Cost of sales                                                         |       | 272,334                   |       | 273,940                         |       | 836,776 |   | 901,351 |   |
| Gross profit                                                          |       | 24,619                    |       | 18,533                          |       | 93,502 |   | 97,472 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Selling, general, and  administrative expenses                        |       | 30,514                    |       | 29,474                          |       | 86,451 |   | 92,882 |   |
| Plant relocation costs                                                |       | 1,480                     |       | 0                               |       | 3,832 |   | 269 |   |
| Operating income  (loss)                                              |       | (7,375                    | )          | (10,941                         | )          | 3,219 |   | 4,321 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Other income, net                                                     |       | 15                        |       | 119                             |       | 155 |   | 507 |   |
| Interest expense                                                      |       | (271                      | )          | (1,306                          | )          | (943 | ) | (3,498 | ) |
| Income (loss)  before income taxes and discontinued operations        |       | (7,631                    | )          | (12,128                         | )          | 2,431 |   | 1,330 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Provision for (benefit  from) income taxes from continuing operations |       | (3,275                    | )          | (5,030                          | )          | 458 |   | (343 | ) |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Net income (loss) from  continuing operations                         |       | (4,356                    | )          | (7,098                          | )          | 1,973 |   | 1,673 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Loss from discontinued  operations, net of tax provision (benefit)    |       | (1,607                    | )          | 0                               |       | (1,858 | ) | (107 | ) |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Net income  (loss)                                                    |       | $                         | (5,963     | )                               | $          | (7,098 | ) | $ | 115 |   | $ | 1,566 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Earnings per common  share:                                           |       |                      |       |                            |       |   |   |   |   |
| Basic from  continuing operations                                     |       | $                         | (0.15      | )                               | $          | (0.24 | ) | $ | 0.06 |   | $ | 0.05 |   |
| Basic from  discontinued operations                                   |       | (0.05                     | )          | 0.00                            |       | (0.06 | ) | 0.00 |   |
| Basic                                                                 |       | $                         | (0.20      | )                               | $          | (0.24 | ) | $ | 0.00 |   | $ | 0.05 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Diluted from  continuing operations                                   |       | $                         | (0.15      | )                               | $          | (0.24 | ) | $ | (0.06 | ) | $ | 0.05 |   |
| Diluted from  discontinued operations                                 |       | (0.05                     | )          | 0.00                            |       | 0.06 |   | 0.00 |   |
| Diluted                                                               |       | $                         | (0.20      | )                               | $          | (0.24 | ) | $ | 0.00 |   | $ | 0.05 |   |
|                                                                  |       |                      |       |                            |       |   |   |   |   |
| Weighted average common  shares outstanding:                          |       |                      |       |                            |       |   |   |   |   |
| Basic                                                                 |       | 29,545,315                |       | 29,745,738                      |       | 29,502,539 |   | 29,696,951 |   |
| Diluted                                                               |       | 29,868,628                |       | 29,865,199                      |       | 29,862,363 |   | 29,859,461 |   |

 

See accompanying notes.

5

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited: dollars inthousands)**
| ** **                                                                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **October 1,  2005**       | ** ** | **September 30,  2006** | ** ** |
| ** **                                                                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Increase (Decrease) in Cash:**                                                          |       |                            |       |   |   |
|                                                                                      |       |                            |       |   |   |
| Cash flows from  operating activities:                                                    |       |                            |       |   |   |
| Net income                                                                                |       | $                               | 115        |   | $ | 1,566 |   |
| Adjustments to  reconcile net income to net cash (used) provided by operating activities: |       |                            |       |   |   |
| (Gain) loss on  sale of assets                                                            |       | 12                              |       | (12 | ) |
| Depreciation and  amortization                                                            |       | 7,764                           |       | 10,581 |   |
| Deferred income  taxes                                                                    |       | 905                             |       | (5,834 | ) |
| Stock based  compensation expense                                                         |       | 0                               |       | 2,538 |   |
| Changes in  working capital accounts:                                                     |       |                            |       |   |   |
| Trade  receivables, net                                                                   |       | 29,372                          |       | 15,131 |   |
| Inventories                                                                               |       | (4,891                          | )          | 9,310 |   |
| Resort lot  inventory                                                                     |       | 1,219                           |       | 79 |   |
| Land held for  development                                                                |       | 0                               |       | (16,300 | ) |
| Prepaid expenses                                                                          |       | 732                             |       | (331 | ) |
| Accounts payable                                                                          |       | 11,728                          |       | 11,524 |   |
| Product  liability reserve                                                                |       | (557                            | )          | (1,723 | ) |
| Product warranty  reserve                                                                 |       | (3,025                          | )          | 551 |   |
| Income taxes  receivable                                                                  |       | (6,612                          | )          | (2,277 | ) |
| Accrued expenses  and other liabilities                                                   |       | 6,046                           |       | 8,688 |   |
| Deferred revenue                                                                          |       | 0                               |       | 933 |   |
| Discontinued  operations                                                                  |       | (7,844                          | )          | 3,723 |   |
| Net cash  provided by operating activities                                                |       | 34,964                          |       | 38,147 |   |
|                                                                                      |       |                            |       |   |   |
| Cash flows from  investing activities:                                                    |       |                            |       |   |   |
| Additions to  property, plant, and equipment                                              |       | (11,009                         | )          | (7,459 | ) |
| Proceeds from  sale of assets                                                             |       | 72                              |       | 127 |   |
| Discontinued  operations                                                                  |       | (4                              | )          | 0 |   |
| Net cash used in  investing activities                                                    |       | (10,941                         | )          | (7,332 | ) |
|                                                                                      |       |                            |       |   |   |
| Cash flows from  financing activities:                                                    |       |                            |       |   |   |
| Book overdraft                                                                            |       | 1,074                           |       | (8,537 | ) |
| Payments on  lines of credit, net                                                         |       | (21,347                         | )          | (15,561 | ) |
| Payments on  long-term notes payable                                                      |       | 0                               |       | (2,857 | ) |
| Debt issuance  costs                                                                      |       | (39                             | )          | (36 | ) |
| Dividends paid                                                                            |       | (5,312                          | )          | (5,377 | ) |
| Issuance of  common stock                                                                 |       | 1,374                           |       | 1,646 |   |
| Tax benefit of  stock options exercised                                                   |       | 0                               |       | 149 |   |
| Discontinued  operations                                                                  |       | 227                             |       | 92 |   |
| Net cash used by  financing activities                                                    |       | (24,023                         | )          | (30,481 | ) |
|                                                                                      |       |                            |       |   |   |
| Net change in cash                                                                        |       | 0                               |       | 334 |   |
| Cash at beginning of  period                                                              |       | 0                               |       | 586 |   |
| Cash at end of period                                                                     |       | $                               | 0          |   | $ | 920 |   |

 

See accompanying notes.

6

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.     Basis of Presentation**

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 31, 2005  and September 30, 2006, and the results ofits operations and its cash flows for the quarters and nine months endedOctober 1, 2005 and September 30, 2006. The condensed consolidated financial statements include the accounts ofthe Company and its wholly-owned subsidiaries, and all significant intercompanyaccounts and transactions have been eliminated in consolidation.  The balance sheet data as of December 31,2005 was derived from audited financial statements, but does not include alldisclosures contained in the Company’s Annual Report to Stockholders on Form10-K.  These interim condensedconsolidated financial statements should be read in conjunction with theaudited financial statements and notes thereto appearing in the Company’sAnnual Report to Stockholders on Form 10-K for the year ended December 31,2005.

**2.     Acquisition**

**R-Vision**

The Company acquired the Indiana-based R-Visioncompanies and affiliates in an all cash transaction on November 18, 2005.  The R-Vision companies and affiliates consistof R-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, andRoadmaster, LLC, which are collectively referred to herein as “R-Vision”.  R-Vision manufactures towable and motorizedrecreational vehicle products, horse trailers, and specialty cargo trailers.The acquisition was primarily consummated to strengthen the Company’s towablerecreational vehicle segment.  R-Vision’sresults of operations since November 18, 2005 are included in the consolidatedfinancial statements of the Company.

The cash paid for R-Vision, includingtransaction costs of $584,985, totaled $54,601,481, net of cash acquired.  The total R-Vision assets acquired andliabilities assumed based on estimated fair values at November 18, 2005, are asfollows:
|                                                | ** **   | **(in thousands)** | ** **   |
|------------------------------------------------|--------------|-------------------------|--------------|
| *** ***                                   | *** *** | *** ***            | *** *** |
| Receivables                                    |         | $                       | 14,571       |   |
| Inventories                                    |         | 18,160                  |         |
| Prepaids and  other assets                     |         | 618                     |         |
| Property and  equipment                        |         | 12,945                  |         |
| Goodwill                                       |         | 30,749                  |         |
| Total assets acquired                          |         | 77,043                  |         |
|                                           | * *     | * *                | * *     |
| Accounts payable                               |         | 8,769                   |         |
| Accrued  liabilities                           |         | 11,964                  |         |
| Current deferred  tax liability                |         | 868                     |         |
| Long-term  deferred tax liability              |         | 863                     |         |
| Total liabilities assumed                      |         | 22,464                  |         |
|                                           | * *     | * *                | * *     |
| Total assets acquired  and liabilities assumed |         | $                       | 54,579       |   |

 

7

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The purchase price was derived from acalculation of a multiple of earnings before interest, taxes, depreciation andamortization for a trailing 12-month period (adjusted for certain non-recurringexpense items), which exceeded the book value of R-Vision and generatedgoodwill of $30.7 million. The allocation of the purchase price and the relatedgoodwill has been adjusted for the resolution of pre-aquisition contingenciesof $51,000.  The effects of resolution ofpre-aquisition contingencies occurring: (i) within one year of the acquisitiondate will be reflected as an adjustment of the allocation of the purchase priceand goodwill, and (ii) after one year will be recognized in the determinationof net income.

**3.     Inventories, net**

Inventories are stated at lower of cost(first-in, first-out) or market.  Thecomposition of inventory is as follows:
|                        | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **             | ** ** | **2005**                | ** ** | **2006**               | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| Raw materials          |       | $                       | 91,028     |                   | $          | 84,774 |   |
| Work-in-process        |       | 61,393                  |       | 52,724                 |       |
| Finished units         |       | 43,134                  |       | 49,392                 |       |
| Raw material  reserves |       | (12,263                 | )          | (12,908                | )          |
|                   |       | $                       | 183,292    |                   | $          | 173,982 |   |

 

**4.     Land Held for Development**

In June 2006, the Company acquiredundeveloped land near La Quinta, California for $16.3 million.  The 80 acre parcel will be developed into amotorhome resort with approximately 400 lots available for sale beginning late2007 or early 2008.

**5.     Line of Credit**

The Company’s credit facilities consist of arevolving line of credit of up to $105.0 million. As of September 30, 2006,borrowings outstanding on the revolving line of credit (the “Revolving Loan”)were $9.4 million.  At the election ofthe Company, the Revolving Loan bears interest at varying rates that fluctuatebased on the prime rate or LIBOR and are determined based on the Company’sleverage ratio.  At September 30, 2006,the average interest rate was 7.5%.  TheCompany also pays interest quarterly on the unused available portion of theRevolving Loan at varying rates, determined by the Company’s leverageratio.  The Revolving Loan is due andpayable in full on November 17, 2009 and requires monthly interestpayments.  The agreement containsrestrictive covenants as to the Company’s leverage ratio, current ratio, fixedcharge coverage ratio, and tangible net worth. As of September 30, 2006, the Company was in compliance with thesecovenants.

**6.     Long-term Notes Payable**

In November 2005, the Company amended itscredit facilities to borrow $40.0 million of term debt (the “Term Debt”) toeffect the acquisition of R-Vision (see Note 2).  As of September 30, 2006, outstanding TermDebt was $37.1 million.  At the electionof the Company, the Term Debt bears interest at varying rates that fluctuatebased on the prime rate or LIBOR and are determined based on the Company’sleverage ratio.  The Term Debt requiresquarterly interest payments and quarterly principal payments, of $1.4 million,with a final balloon payment of $12.9 million due on November 18, 2010.  At September 30, 2006, the average interestrate on the Term Debt was 6.8%.  The TermDebt is collateralized by all the assets of the Company.  The agreement contains restrictive covenantsas to the Company’s leverage ratio, current ratio, fixed charge coverage ratio,and tangible net worth.  As of September30, 2006, the Company was in compliance with these covenants.

8

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In November 2005, the Company obtained aterm loan of $500,000 from the State of Oregon in connection with therelocation of jobs to the Coburg, Oregon production facilities from the Bend,Oregon facility.  The principal andinterest is due on April 30, 2009.  Theloan bears a 5% annual interest rate.

The following table displays thescheduled principal payments by year that will be due in thousands on all theCompany’s term loans.
|            | ** ** | **Amount of**   | ** ** |
|------------|------------|----------------------|------------|
| **Year**   | ** ** | **Payment Due** | ** ** |
| ** ** | ** ** | ** **           | ** ** |
| 2006       |       | $                    | 2,857      |   |
| 2007       |       | 5,714                |       |
| 2008       |       | 5,714                |       |
| 2009       |       | 6,214                |       |
| 2010       |       | 17,144               |       |
|       |       | $                    | 37,643     |   |

 

**7.    Earnings Per Common Share**

Basic earnings per common share is basedon the weighted average number of shares outstanding during the period.  Diluted earnings per common share is based onthe weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of outstanding stock-based awards.  For the quarter ended September 30, 2006,there were 749,877 anti-dilutive options excluded from the diluted earnings pershare calculation (655,960 for the quarter ended October 1, 2005).  The weighted average number of common sharesused in the computation of earnings per common share were as follows:

|                                    | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| ** **                         | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                          |       |                      |       |                            |       |   |   |   |   |
| Issued and  outstanding shares     |       | 29,545,315                |       | 29,745,738                      |       | 29,502,539 |   | 29,696,951 |   |
| (weighted average)                 |       |                      |       |                            |       |   |   |   |   |
|                               |       |                      |       |                            |       |   |   |   |   |
| **Effect  of Dilutive Securities** | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restricted Stock  Units            |       | 0                         |       | 37,474                          |       | 0 |   | 32,445 |   |
| Performance  Share Awards          |       | 0                         |       | 0                               |       | 0 |   | 12,640 |   |
| Stock Options                      |       | 323,313                   |       | 81,987                          |       | 359,824 |   | 117,425 |   |
| **Diluted**                        |       | 29,868,628                |       | 29,865,199                      |       | 29,862,363 |   | 29,859,461 |   |

 
|                                  | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| ** **                       | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash dividends  per common share |       | $                         | 0.06       |                            | $          | 0.06 |   | $ | 0.06 |   | $ | 0.06 |   |
|                                  |            |                           |            |                                 |            |  |  |  |  |  |  |  |  |

 

9

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**8.****             ****Stock-based Award Plans**

The Company has an Employee StockPurchase Plan (the “Purchase Plan”) - 1993, a non-employee 1993 Director OptionPlan (the “Director Plan”) , and an amended and restated 1993 Stock Plan (the “StockPlan”).

As of January 1, 2006, the Companyadopted the provisions of FAS 123R, “Share-Based Payment” (the “Statement”).  The Statement replaces FAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.”  TheStatement establishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires a fair-value-based measurementmethod in accounting for share-based payments to employees, except for equityinstruments held by employee share ownership plans.   We elected to adopt the modified prospectiveapplication method of the Statement.

Prior to the adoption, the Companyaccounted for the stock-based employee compensation plans under the recognitionand measurement principle of APB Opinion No. 25.  No stock-based employee compensation costrelated to these options was reflected in net income of prior periods, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

**Stock Purchase Plan**

The Purchase Plan qualifies under Section423 of the Internal Revenue Code.  TheCompany has 683,438 shares of Common Stock reserved for issuance under thePurchase Plan, of which 592,878 shares were issued as of September 30,2006.  A total of 35,478 shares wereissued under the Purchase Plan during the quarter ended September 30,2006.  Under the Purchase Plan, aneligible employee may purchase shares of common stock from the Company throughpayroll deductions of up to 10% of base compensation, at a price per shareequal to 85% of the lesser of the fair market value of the Company’s CommonStock as of the first day (grant date) or the last day (purchase date) of eachsix month offering period under the Purchase Plan.

The Purchase Plan is administered by a committeeappointed by the Board of Directors.  Anyemployee who is customarily employed for at least 20 hours per week and morethan five months in a calendar year by the Company, or by any majority-ownedsubsidiary designated from time to time by the Board of Directors, and who doesnot own 5% or more of the total combined voting power or value of all classesof the Company’s outstanding capital stock, is eligible to participate in thePurchase Plan.

**DirectorPlan**

Effective May 17, 2006, no further awardswill be made under the Director Plan, but it will continue to govern awardspreviously granted thereunder.  Futureequity awards to directors will be made under the Stock Plan.  The Board of Directors and the stockholdershad authorized a total of 352,500 shares of Common Stock for issuance pursuantto the Director Plan.  On May 17, 2006authorization for 76,924 shares were transferred from the Director Plan to theStock Plan, which represented the number of shares reserved under the DirectorPlan that had not been issued pursuant to awards granted under the plan plusthe number of shares reserved that were not subject to any outstanding awardsgranted under the plan.

Options granted under the Director Planto non-employee directors on the date the optionee first became a director vestratably over a five-year period, while subsequent annual grants vest in full onthe fifth anniversary of their grant date. The exercise price of all options granted under the Director Plan wasequal to the fair market value of a share of the Company’s Common Stock on thedate of grant.  The maximum term of theseoptions is 10 years.  As of September 30,2006, 102,000 options had been exercised, and options to purchase 146,550shares of common stock were outstanding. As of September 30, 2006, 15,526 shares of Common Stock had been issuedin lieu of some directors’ cash retainer as allowed by the Director Plan up toMay 17, 2006.

10

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**Stock Plan**

The Stock Plan provides for the grant ofstock based awards to employees, directors and consultants who provide servicesto the Company and its affiliates.  Allowedawards include stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares, performance units, dividendequivalents and other stock awards.  Atotal of 5,534,737 shares of Common Stock have been reserved for issuance underthe Stock Plan, which includes the transfer of unused share authorizationsunder the Director Plan on May 17, 2006. As of September 30, 2006 1,577,666 options had been exercised, andoptions to purchase 1,177,627 shares of Common Stock were outstanding.  These options vest ratably over five yearscommencing with the date of grant. As of September 30, 2006, a total of 2,460shares of common stock had been issued in lieu of some directors’ cash retaineras allowed by the Plan after May 17, 2006.

The exercise price of stock optionsgranted under the Stock Plan must be at least equal to the fair market value ofa share of the Company’s Common Stock on the date of grant.  With respect to any participant possessingmore than 10% of the voting power of the Company’s outstanding capital stock,the exercise price of any incentive stock option granted must equal at least110% of the fair market value on the grant date, and the maximum term of theoption must not exceed five years.  Theterms of all other options granted under the Stock Plan may not exceed tenyears.

Option transactions involving theDirector Plan and the Stock Plan are summarized with correspondingweighted-average exercise prices as follows:

|                                   | ** ** | **Shares** | ** ** | **Price** | ** ** |
|-----------------------------------|------------|------------|------------|-----------|------------|
| Outstanding at July 1,  2006      |       | 1,339,967  |       | $         | 15.27      |   |
| Granted                           |       | —     |       | —    |       |
| Exercised                         |       | (4,100     | )          | 7.74      |       |
| Forfeited                         |       | (11,690    | )          | 18.52     |       |
| Outstanding at September 30, 2006 |       | 1,324,177  |       | $         | 15.27      |   |

 

For various price ranges, weightedaverage characteristics of all outstanding stock options at September 30, 2006were as follows:

|                          | ** **    | ** **                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Options** | ** ** | ** **    | ** ** |
|--------------------------|---------------|------------------------------|------------|---------------|------------|-----------------|------------|-------------|------------|---------------|------------|
| ** **               | ** **    | **Options Outstanding** | ** ** | ** **    | ** ** | **Exercisable** | ** ** | ** **  | ** ** |
| ** **               | ** **    | ** **                   | ** ** | **Remaining** | ** ** | **Weighted-**   | ** ** | ** **  | ** ** | **Weighted-** | ** ** |
| **Range of**        | ** **    | ** **                   | ** ** | **Life**      | ** ** | **Average**     | ** ** | ** **  | ** ** | **Average**   | ** ** |
| **Exercise Prices** | ** **    | **Shares**                   | ** ** | **(years)**   | ** ** | **Price**       | ** ** | **Shares**  | ** ** | **Price**     | ** ** |
| $                        | 2.68 - 5.36   |                         | 60,652     |          | 0.5        |            | $          | 3.52        |       | 60,652        |       | $ | 3.52 |   |
| $                        | 5.3 7 - 8.04  |                         | 101,718    |          | 1.5        |            | $          | 7.72        |       | 101,718       |       | $ | 7.72 |   |
| $                        | 8.05 - 10.72  |                         | 242,024    |          | 4.7        |            | $          | 10.31       |       | 184,204       |       | $ | 10.29 |   |
| $                        | 10.73 - 13.40 |                         | 268,493    |          | 4.1        |            | $          | 12.23       |       | 265,293       |       | $ | 12.24 |   |
| $                        | 13.41 - 16.08 |                         | 47,000     |          | 7.9        |            | $          | 15.04       |       | 16,600        |       | $ | 15.26 |   |
| $                        | 16.09 - 18.76 |                         | 276,470    |          | 7.9        |            | $          | 16.28       |       | 276,470       |       | $ | 16.28 |   |
| $                        | 18.77 - 21.44 |                         | 14,000     |          | 6.0        |            | $          | 20.03       |       | 14,000        |       | $ | 20.03 |   |
| $                        | 21.45 - 24.12 |                         | 24,000     |          | 8.0        |            | $          | 21.65       |       | 24,000        |       | $ | 21.65 |   |
| $                        | 24.13 - 26.80 |                         | 289,820    |          | 6.5        |            | $          | 25.63       |       | 289,820       |       | $ | 25.63 |   |
|                     |          | 1,324,177                    |       |          |       |            |       | 1,232,757   |       |          |       |

 

11

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The following table illustrates theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of FAS 123 to stock-based employee compensation inthe quarter ended October 1, 2005 compared to the fair value recognitionprovisions of FAS 123R that are applied to the stock-based payment arrangementsin the quarter ended September 30, 2006. All dollars represented are in thousands, excluding per share data.
| ** **                                                                                                                                    | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income before  stock-based compensation expense                                                                                           |       | $                         | (5,963     | )                               | $          | (6,759 | ) | $ | 115 |   | $ | 2,240 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 296                       |       | 339                             |       | 750 |   | 674 |   |
| Net income*                                                                                                                                   |       | $                         | (6,259     | )                               | $          | (7,098 | ) | $ | (635 | ) | $ | 1,566 |   |

 

----

* Net income in2005 and prior years are pro-forma for the effect of FAS 123R.

 
| Earnings per share:                       |   |   |   |   |   |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Basic - as  reported                      |   | $      | (0.20  | )      | $      | (0.24  | )      | $      | 0.00   |   | $ | 0.05 |   |
| Basic - with  stock-based compensation    |   | $      | (0.21  | )      | $      | (0.24  | )      | $      | (0.02  | ) | $ | 0.05 |   |
|                                      |   |   |   |   |   |   |   |   |   |
| Diluted - as  reported                    |   | $      | (0.20  | )      | $      | (0.24  | )      | $      | 0.00   |   | $ | 0.05 |   |
| Diluted - with  stock-based compensation. |   | $      | (0.21  | )      | $      | (0.24  | )      | $      | (0.02  | ) | $ | 0.05 |   |

 

For purposes of the above information,the fair value of each option grant was estimated at the date of grant usingthe Black-Scholes option pricing model with the following weighted averageassumptions:
|                           | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|
|                      |       |     |       |
| Risk-free  interest rate  |       | 4.03     | %          |
| Expected life  (in years) |       | 6.69     |       |
| Expected  volatility      |       | 31.25    | %          |
| Expected dividend yield   |       | 1.70     | %          |

 

12

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There was approximately$121,000 of stock option related compensation expense recognized from thecombination of the Stock Plan, the Stock Purchase Plan and the Director Planduring the quarter ended September 30, 2006. The total remaining expense to be recognized in future periods foroutstanding non-vested stock options is approximately $436,000.  This amount will be recognized over thefollowing periods according to the schedule below:
|                      | ** ** | **Stock Option** | ** ** |
|----------------------|------------|-----------------------|------------|
| **Fiscal Year** | ** ** | **Expense**           | ** ** |
| 2006                 |       | $                     | 121,000    |   |
| 2007                 |       | 191,000               |       |
| 2008                 |       | 71,000                |       |
| 2009                 |       | 32,000                |       |
| 2010                 |       | 21,000                |       |
|                 |       | $                     | 436,000    |   |

 

**Restricted Stock UnitGrant**

A component of the Stock Plan permits theCompany to grant shares of restricted stock units (RSU’s).  These grants are compensation expense underthe rules of APB No. 25, and are required to be recognized in the Company’sincome statement.  During the quarterended September 30, 2006, 25,000 restricted stock units were granted;  $478,411 was recorded as compensation expensein the current quarter’s income statement relating to previously awarded RSU’s.  The total number of outstanding RSU’s as ofSeptember 30, 2006 was 305,909 shares.

**Performance Share Awards**

A component of the Stock Plan alsopermits the Company to grant performance share awards (PSA’s).  Grants were effective as of the date ofapproval of the Stock Plan by the shareholders on May 17, 2006 and includedtarget payouts to participants of a total of 164,909 shares under a two-yearperformance plan and 164,909 shares under a three-year performance plan.  Both plans require the achievement of performancebased on Return on Net Assets-adjusted (RONA) and Total Shareholder Return(TSR) compared to a group of peer companies. Depending on the ranking of the Company’s performance against the peergroup, the participants could earn from 0% up to 200% of the target payout ofperformance shares.  A total of $218,328of compensation expense was recorded during the quarter ended September 30,2006 relating to the performance share awards. The total number of outstanding PSA’s was 329,818 shares at targetpayout.

**9.****          ****Segment Reporting**

The Company is a leading manufacturer of premiumClass A, B and C motor coaches (Motorized Recreational Vehicle Segment) andtowable recreational vehicles (Towable Recreational Vehicle Segment).  Our product line currently consists of abroad line of motor coaches, fifth wheel trailers, travel trailers, andspecialty trailers under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie,”“R-Vision,” “Bison,” and “Roadmaster” brand names.

In addition to the manufacturing of premiumrecreational vehicles, the Company also owns and operates two motorhome resortproperties (Motorhome Resort Segment) located in Las Vegas, Nevada, and Indio,California.  In addition to these tworesorts, the Company has also acquired a piece of property in southernCalifornia, and has a second piece of property under contract in southernFlorida.  These properties are planned tobe developed and sold over the next two to five years.  The resorts offer sales of individual lots torecreational vehicle owners and also offer a common interest in the amenitiesat the resort.  The resorts providedestination locations for premium Class A recreational vehicle owners and helpto promote the recreational vehicle lifestyle.

13

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The following table provides the results ofoperations of the three segments of the Company for the quarters and ninemonths ended October 1, 2005 and September 30, 2006 , respectively.  All dollars represented are in thousands.

|                                                | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| **Motorized  Recreational Vehicle Segment**    | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                         | 245,771    |                            | $          | 220,159 |   | $ | 795,854 |   | $ | 700,728 |   |
| Cost of sales                                  |       | 227,323                   |       | 207,960                         |       | 724,322 |   | 647,910 |   |
| Gross profit                                   |       | 18,448                    |       | 12,199                          |       | 71,532 |   | 52,818 |   |
|                                           |       |                      |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expenses |       | 13,613                    |       | 9,300                           |       | 34,219 |   | 26,559 |   |
| Corporate  overhead allocation                 |       | 10,880                    |       | 10,631                          |       | 34,731 |   | 32,159 |   |
| Plant relocation  costs                        |       | 1,480                     |       | 0                               |       | 3,832 |   | 269 |   |
| Operating loss                                 |       | $                         | (7,525     | )                               | $          | (7,732 | ) | $ | (1,250 | ) | $ | (6,169 | ) |
|                                           |       |                      |       |                            |       |   |   |   |   |
| **Towable  Recreational Vehicle Segment**      | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                         | 43,231     |                            | $          | 70,450 |   | $ | 108,723 |   | $ | 274,092 |   |
| Cost of sales                                  |       | 42,034                    |       | 65,346                          |       | 103,305 |   | 244,839 |   |
| Gross profit                                   |       | 1,197                     |       | 5,104                           |       | 5,418 |   | 29,253 |   |
|                                           |       |                      |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expenses |       | 1,415                     |       | 3,523                           |       | 3,738 |   | 10,711 |   |
| Corporate  overhead allocation                 |       | 1,965                     |       | 3,886                           |       | 4,984 |   | 14,242 |   |
| Operating income (loss)                        |       | $                         | (2,183     | )                               | $          | (2,305 | ) | $ | (3,304 | ) | $ | 4,300 |   |
|                                           |       |                      |       |                            |       |   |   |   |   |
| **Motorhome  Resorts Segment**                 | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                         | 7,951      |                            | $          | 1,864 |   | $ | 25,701 |   | $ | 24,003 |   |
| Cost of sales                                  |       | 2,977                     |       | 634                             |       | 9,149 |   | 8,602 |   |
| Gross profit                                   |       | 4,974                     |       | 1,230                           |       | 16,552 |   | 15,401 |   |
|                                           |       |                      |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expenses |       | 1,721                     |       | 1,145                           |       | 5,751 |   | 5,798 |   |
| Corporate  overhead allocation                 |       | 920                       |       | 989                             |       | 3,028 |   | 3,413 |   |
| Operating income  (loss)                       |       | $                         | 2,333      |                            | $          | (904 | ) | $ | 7,773 |   | $ | 6,190 |   |

** **

14

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| ** **                                                         | ** ** | **Quarter Ended**    | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| **Reconciliation to Net Income**                    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006**    | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Operating income  (loss):                                          |       |                      |       |                            |       |   |   |   |   |
| Motorized  recreational vehicle segment                            |       | $                         | (7,525     | )                               | $          | (7,732 | ) | $ | (1,250 | ) | $ | (6,169 | ) |
| Towable  recreational vehicle segment                              |       | (2,183                    | )          | (2,305                          | )          | (3,304 | ) | 4,300 |   |
| Motorhome  resorts segment                                         |       | 2,333                     |       | (904                            | )          | 7,773 |   | 6,190 |   |
| Total operating  income (loss)                                     |       | (7,375                    | )          | (10,941                         | )          | 3,219 |   | 4,321 |   |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Other income, net                                                  |       | 15                        |       | 119                             |       | 155 |   | 507 |   |
| Interest expense                                                   |       | (271                      | )          | (1,306                          | )          | (943 | ) | (3,498 | ) |
| Income (loss) before  income taxes and discontinued operations     |       | (7,631                    | )          | (12,128                         | )          | 2,431 |   | 1,330 |   |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Provision for  (benefit from) income taxes, continuing operations  |       | (3,275                    | )          | (5,030                          | )          | 458 |   | (343 | ) |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Net income (loss) from  continuing operations                      |       | (4,356                    | )          | (7,098                          | )          | 1,973 |   | 1,673 |   |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Loss from  discontinued operations, net of tax provision (benefit) |       | (1,607                    | )          | 0                               |       | (1,858 | ) | (107 | ) |
|                                                               |       |                      |       |                            |       |   |   |   |   |
| Net income (loss)                                                  |       | $                         | (5,963     | )                               | $          | (7,098 | ) | $ | 115 |   | $ | 1,566 |   |

 

**10.****      ****Commitments and Contingencies**

Repurchase Agreements

Many of the Company’s sales toindependent dealers are made on a “floor plan” basis by a bank or financecompany which lends the dealer all or substantially all of the wholesalepurchase price and retains a security interest in the vehicles.  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.  Theseagreements provide that, for up to 18 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event of a default by adealer to its lender.

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.

15

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The approximate amount subject tocontingent repurchase obligations arising from these agreements at September30, 2006 is $585.2 million, with approximately 4.0% 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 adversely affected.  The Company has included the disclosurerequirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” in its financial statements, and has determined thatthe recognition provisions of FIN 45 apply to certain guarantees routinely madeby the Company, including contingent repurchase obligations to third partylenders for inventory financing of dealer inventories.  The Company has recorded a liability ofapproximately $462,000 for potential losses resulting from guarantees onrepurchase 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 regulationswhich may require the Company to recall products with design or safety defects,and such recall could have a material adverse effect on the Company’s business,results of operations, and financial condition.

The Company has from time to time beensubject to product liability claims.  Todate, the Company has been successful in obtaining product liability insuranceon terms 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 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.

Product Warranty

Estimated warranty costs are provided forat the 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 estimates are based on historicalaverage repair costs, as well as other reasonable assumptions deemedappropriate by management.  The followingtable discloses significant changes in the product warranty reserve:

|                      | ** ** | **Quarter Ended**    | ** ** |
|----------------------|------------|---------------------------|------------|
| ** **           | ** ** | **October 1,  2005** | ** ** | **September 30,  2006** | ** ** |
| Beginning  balance   |       | $                         | 31,900     |   | $ | 34,230 |   |
| Expense              |       | 4,813                     |       | 7,952 |   |
| Payments/adjustments |       | (7,854                    | )          | (8,729 | ) |
| Ending balance       |       | $                         | 28,859     |   | $ | 33,453 |   |

 

16

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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.

17

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

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include, but are not limited to, those in this report that have beenmarked with an asterisk (*).  In addition,statements containing words such as “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “seeks,” and variations of such words and similarexpressions are intended to identify forward-looking statements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements to differ materially from those expressedor implied by such forward-looking statements, including those set forth belowin Part II, Item 1A under the caption “Risk Factors” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth in Part II, Item 1A under the caption “RiskFactors,” as well as in other documents we file with the Securities and ExchangeCommission.  We caution the reader,however, that these factors may not be exhaustive.

**GENERAL**

OVERVIEW

*Background*

Monaco Coach Corporation (the “Company”)is a leading manufacturer of premium recreational vehicles including Class A,B, and C motor coaches, as well as towable recreational vehicles.  The Company also develops and sells luxurymotorcoach resort facilities.  Thesethree operations, while closely tied into the recreational lifestyle, aresegmented for reporting purposes as the Motorized Recreational Vehicle (MRV)segment, the Towable Recreational Vehicle (TRV) segment, and the MotorhomeResort (MR) segment.  

*Motorized and TowableRecreational Vehicle Segment Products*

Our products range in suggested retailprice from $45,000 to $575,000 for motor coaches and from $1,000 to $70,000 fortowables.  Based upon retailregistrations through August 2006, we believe we had a 23.1% share of themarket for diesel Class A motor coaches, a 7.8% share of the market for gasClass A motor coaches, a 15.6% share of the market for all Class A motorcoaches, a 2.3% market for all Class C motor coaches, a 4.2% share of themarket for fifth wheel towables and a 4.6% share of the market for traveltrailers.

*Motorhome ResortSegment*

In addition to manufacturing premiumrecreational vehicles, the Company also owns and operates two motorhome resortproperties (the “Resorts”), located in Las Vegas, Nevada, and Indio,California. In addition to these two resorts, the Company has also acquired apiece of property in southern California, and has a second piece of propertyunder contract in southern Florida. These properties are planned to be developed and sold over the next twoto five years.* The Resorts offer sales of individual lots to owners, and alsooffer a common interest in the amenities at the resort.  Lot prices at the two resorts range from$79,900 to $319,900.  Amenities at theResorts include club house facilities, tennis, swimming, and golf.  The Resorts provide destination locations forpremium Class A recreational vehicle owners and help to promote therecreational lifestyle.

*Business Changes*

We have conducted a series ofacquisitions during our history. Beginning in March 1993, when we commencedoperations by acquiring substantially all of the assets and liabilities of apredecessor company that had been formed in 1968.  In March 1996, we acquired the HolidayRambler Division of Harley-Davidson, Inc., a manufacturer of a full line ofClass A motor coaches and towables.  InAugust 2001, we acquired SMC Corporation, manufacturer of the Beaver and Safaribrand Class A motorhomes.  In November2002, we acquired from Outdoor Resorts of America (“ORA”) three luxurymotorcoach resort properties being developed by ORA in Las Vegas, Nevada,Indio, California, and Naples, Florida. In September 2003, we sold the property in Naples, Florida.  And, in November of 2005, we acquiredR-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, andRoadmaster, LLC (collectively referred to as “R-Vision”), manufacturers ofR-Vision, Bison, and Roadmaster motorized and towable products.  The R-Vision acquisition was accomplished asa cash purchase on November 18, 

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2005 and was accounted for using thepurchase method of accounting .  Alloperations of R-Vision have been incorporated for the period ended September30, 2006 in the consolidated quarterly financial statements of the Companyincluded with this Quarterly Report on Form 10-Q.

During the third quarter of 2005, theCompany announced that it was closing its Royale Coach operations in Elkhart,Indiana.  Royale Coach produced Prevostbus conversion motor coaches with price points in excess of $1.4 million.  Royale Coach sold approximately 20 coachesper year and was not a significant portion of the Company’s overall business.  All closure costs have been accrued for inthe Company’s financial statements.

**RESULTS OF CONSOLIDATEDOPERATIONS**

*Quarter ended September 30 ,2006 Compared to Quarter ended October 1, 2005*

The following table illustrates theresults of consolidated operations for the quarters ended October 1, 2005 andSeptember 30, 2006.  All dollar amountsare in thousands. 
|                                                | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 296,953    |              | 100.0      | %                                | $          | 292,473           |       | 100.0      | %          | $          | (4,480     | ) | (1.5 | )% |
| Cost of sales                                  |       | 272,334                       |       | 91.7              | %          | 273,940                          |       | 93.7              | %          | (1,606     | )          | (0.6       | )%         |
| Gross profit                                   |       | 24,619                        |       | 8.3               | %          | 18,533                           |       | 6.3               | %          | (6,086     | )          | (24.7      | )%         |
| Selling,  general, and administrative expenses |       | 30,514                        |       | 10.3              | %          | 29,474                           |       | 10.1              | %          | 1,040      |       | 3.4        | %          |
| Plant relocation  costs                        |       | 1,480                         |       | 0.5               | %          | 0                                |       | 0.0               | %          | 1,480      |       | (100.0     | )%         |
| Operating loss                                 |       | $                             | (7,375     | )                 | (2.5       | )%                               | $          | (10,941           | )          | (3.8       | )%         | $          | (3,566     | ) | (48.4 | )% |

 

*Motorized and TowableRecreational Vehicle Segments*

The recreational vehicle (“RV”) market in2006, as was the case in 2005, is continuing to experience a period ofcontraction.  Higher fuel prices, risinginterest rates, and uncertainty in consumer confidence related to internationalevents have continued to create challenges within the RV market.  However, recent trends in the lowering offuel prices, and strong performances from the public markets may begin to morepositively impact consumer confidence.  Itis our expectation that improvements in consumer confidence will begin to positivelyimpact demand within the RV industry sometime in 2007.*  This assumption is supported by theunderlying demographics for future expansion, which are still strong as the keybuying groups for recreational vehicles continue to grow in numbers.  The so-called “ baby boomer” generation willcontinue to expand in size well into 2015 and should provide a consumer basethat is enthusiastic to embrace the RV lifestyle.   

The motorized market has beensignificantly impacted by the current market conditions.  Higher interest rates are placing pressureson our dealers.  Floorplan interestcharges are a significant cost of carrying inventory, and as interest ratesrise, our dealers, who we share with our competitors, are more cautious in theamount of inventory that they are willing to carry.  Due to these factors, competition for spaceon dealer lots among manufacturers has increased the discounting of product, asmanufacturers, including ourselves, seek to maintain space on dealer’slots.  As a result, motorized marginshave been impacted negatively, but we have been successful in reducing finishedgoods inventories since the end of the second quarter.  Despite the current cyclical downturn in themotorized market, we continue to remain optimistic on the prospects forlong-term growth in this sector, as the demographics for our customer baseshows a continuing increase in the number of new entrants into our target ageand economic group.* 

The towable market has also shown signsof slowing down.  As in the case of themotorized market, competition for space on dealer lots is increasing and theresult is an increase in discounting necessary to maintain shelf space.  We are carefully monitoring the inventorieson dealer lots as we move into the fourth quarter to ensure that retailinventory levels are matching demand during the slower winter sellingseason.  In spite of these conditions, weremain confident that indicators such as the demographics for our customer baseremain positive and that the market will remain viable well into thefuture.*      

The RV industry is extremely competitive,and independent retail dealers as well as retail customers have many choicesavailable to them.  To distinguishourselves within the industry, we introduced our Franchise For The 

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Future (FFTF) program for our Class Adealers in June of 2005.  This programwas designed to introduce the concept to our dealer partners that our specificbrands have intrinsic values as a selling tool. To support this, and to encourage our dealers to participate in FFTF, weworked with outside marketing consultants to develop brand signage,informational computer kiosks, and brand specific displays that are placedwithin our various independent dealer locations.  We believe that this concept, along withother features designed to entice our dealers to focus selling efforts on ourvarious product offerings, will assist them in their sales efforts through thestrength of improved brand identity.

*Motorhome ResortSegment*

Our motorhome resort properties were instrong demand throughout the first half of the year.  In the third quarter, which is traditionallythe slower season due to their locations in the southwestern portions of theUnited States, sales were lower than in the first half of the year.  In spite of the seasonal nature of theprojects,  we believe that these resortproperties will continue to sell through their respective remaining availableinventories of lots in the fourth quarter of 2006 and into the first and secondquarters of 2007.*  To ensure thecontinued growth of this segment, we have acquired a piece of property insouthern California, and have a second piece of property in Naples, Floridaunder contract.  We expect to begindeveloping these resorts in late 2006 and to continue into 2007, with sales oflots from these resorts to commence in either the fourth quarter of 2007, or inthe first quarter of 2008.*

*Overall CompanyPerformance in the Third Quarter of 200*6  

Third quarter net sales decreased 1.5% to$292.5 million compared to $297.0 million for the same period last year.  Sales decreases were the results of continuedweakness in the RV segments, and slower seasonal results from our recreationalresort properties.  Gross dieselmotorized sales were down 3.2%, gas motorized sales were down 58.2%, andtowables were up 67.7%.  Diesel productsaccounted for 69.1% of our third quarter revenues while gas products were 5.2%,and towables were 25.7%.  Our overallunit sales were up 53.4% in the third quarter of 2006 to 5,318 units, withdiesel motorized unit sales up 2.4% to 1,088 units, gas motorized unit salesdown 42.1% to 253 units, and towable unit sales up 102.2% to 3,977 units.  Towable unit sales increases were dueprimarily to the inclusion of units from the R-Vision acquisition.  Our total average unit selling pricedecreased to $55,900 from $85,000 in the same period last year, reflecting theimpact of the inclusion of R-Vision products.

Gross profit for the third quarter of2006 decreased to $18.5 million, down from $24.6 million in the third quarterof 2005, and gross margin decreased from 8.3% in the third quarter of 2005 to6.3% in the third quarter of 2006. Changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):
|                      | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 188,205    |              | 63.4       | %                                | $          | 187,665           |       | 64.2                     | %          | 0.8 | % |
| Direct labor         |       | 31,344                        |       | 10.6              | %          | 31,532                           |       | 10.8              | %          | 0.2                      | %          |
| Warranty             |       | 4,813                         |       | 1.6               | %          | 7,952                            |       | 2.7               | %          | 1.1                      | %          |
| Other direct         |       | 18,406                        |       | 6.2               | %          | 18,068                           |       | 6.2               | %          | 0.0                      | %          |
| Indirect             |       | 29,566                        |       | 9.9               | %          | 28,723                           |       | 9.8               | %          | (0.1                     | )%         |
| Total cost of  sales |       | $                             | 272,334    |              | 91.7       | %                                | $          | 273,940           |       | 93.7                     | %          | 2.0 | % |

 

·         Directmaterial increases in 2006 as a percent of sales were due mostly to shifts inthe mix toward lower-priced recreational vehicles, which tend to have a highermaterial content as a percent of sales, as well as a result of increases incertain commodity items such as metals and petroleum products.

·         Directlabor increases in 2006 as a percent of sales were predominantly due to changesin product mix to a greater concentration of towable products, which have ahigher labor content as a percent of sales, as well as to inefficienciescreated within our plants related to changes in production processes asproducts were realigned between our Oregon and Indiana facilities.

·         Increasesin warranty expense in 2006 as a percent of sales were due mostly to higherwarranty rates on 2006 model year products.

·         Decreasesin indirect costs in 2006 as a percent of sales were due mostly to reductionsin plant capacity through plant closures that occurred in 2005, as well as inreductions in expenditures for worker’s compensation and general insurance.

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Selling, general, and administrativeexpenses (S,G,&A) decreased by $1.0 million in the third quarter of2006  to $29.5 million compared to thethird quarter of 2005 and decreased as a percentage of sales from 10.3% in thethird quarter of 2005 to 10.1% in the third quarter of 2006.  Changes in S,G,&A expenses are set forthin the following table (dollars in thousands):
|                                        | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                             | 4,357      |              | 1.5        | %                                | $          | 4,536             |       | 1.6                      | %          | 0.1 | % |
| Selling expenses                       |       | 12,717                        |       | 4.3               | %          | 9,695                            |       | 3.3               | %          | (1.0                     | )%         |
| Settlement  expense                    |       | 2,164                         |       | 0.7               | %          | 3,114                            |       | 1.1               | %          | 0.4                      | %          |
| Marketing  expenses                    |       | 3,575                         |       | 1.2               | %          | 3,233                            |       | 1.1               | %          | (0.1                     | )%         |
| Other                                  |       | 7,701                         |       | 2.6               | %          | 8,896                            |       | 3.0               | %          | 0.4                      | %          |
| Total S,G,&A  expenses             |       | $                             | 30,514     |              | 10.3       | %                                | $          | 29,474            |       | 10.1                     | %          | (0.2 | )% |

 

·                  Increasesin salaries, bonus, and benefits expenses in 2006 as a percent of sales weredue primarily to the inclusion of long-term, stock-based compensation in 2006.

·                  Decreasesin selling expenses in 2006 as a percent of sales were due to reductions inexpenditures for selling expenses related to motorized products.

·                  Increasesin settlement expense (litigation settlement expense) in 2006 as a percent ofsales were due to an increase in the number of new cases added in 2006 comparedto the same period in 2005.

·                  Increasesin other expenses in 2006 as a percent of sales were due primarily toconsulting fees for computer services and depreciation expense associated withcomputer software and other equipment.

Plant relocation costs in the thirdquarter of 2005 were related to costs associated with the termination of one ofthe facilities in our vacated Bend, Oregon operations.  In 2005, the Company relocated the Bend operationsto its Coburg, Oregon location.  Allcosts associated with this relocation have already been accrued in previousperiods. The Company does not expect that there will be future costs related tothis relocation that will significantly impact ongoing results of operations.*

Operating loss was $10.9 million, or 3.8%of sales, in the third quarter of 2006 compared to $7.4  million, or 2.5% of sales, in the similar 2005 period.** **The increase in operating loss was due predominantly todecreased gross profit.

Net interest expense was $1.2 million inthe third quarter of 2006 versus $256,000 in the comparable 2005 period,reflecting higher corporate borrowing during the third quarter of 2006.

We reported a benefit from income taxesof $5.0 million in the third quarter of 2006, compared to $3.3 million in thethird quarter of 2005, or an effective tax rate of 41.5% in the third quarterof 2006, compared to 42.9% for the comparable 2005 period.  

Net loss for the third quarter of 2006was $7.1 million compared to $6.0 for the third quarter of 2005 due primarilyto lower sales and gross margin. The Company did not expense stock optiongrants in 2005 and earlier periods.  Ifoption expensing had been required, the effect on net loss for the thirdquarter of 2005 for all previously granted options would have been a increaseof $296,000.  See Note 8 of theCompany’s consolidated financial statements for information regarding thecalculation of the impact of expensing stock options.  The Company has reflected the cost of stockoptions in its results of operations beginning in 2006.

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*Third Quarter 2006 versusThird Quarter 2005 for the Motorized Recreational Vehicle Segment*

The following table illustrates the results of the MRVsegment for the quarters ended October 1, 2005, and September 30, 2006 (dollarsin thousands):

|                                                | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 245,771    |              | 100.0      | %                                | $          | 220,159           |       | 100.0      | %          | $          | (25,612    | ) | (10.4 | )% |
| Cost of sales                                  |       | 227,323                       |       | 92.5              | %          | 207,960                          |       | 94.5              | %          | 19,363     |       | 8.5        | %          |
| Gross profit                                   |       | 18,448                        |       | 7.5               | %          | 12,199                           |       | 5.5               | %          | (6,249     | )          | (33.9      | )%         |
| Selling,  general, and administrative expenses |       | 13,613                        |       | 5.5               | %          | 9,300                            |       | 4.2               | %          | 4,313      |       | 31.7       | %          |
| Corporate  overhead allocation                 |       | 10,880                        |       | 4.4               | %          | 10,631                           |       | 4.8               | %          | 249        |       | 2.3        | %          |
| Plant relocation  costs                        |       | 1,480                         |       | 0.6               | %          | 0                                |       | 0.0               | %          | 1,480      |       | 100.0      | %          |
| Operating loss                                 |       | $                             | (7,525     | )                 | (3.0       | )%                               | $          | (7,732            | )          | (3.5       | )%         | $          | (207       | ) | (2.8 | )% |

 

Total net sales for the MRV segment weredown from $245.8 million in the third quarter of 2005 to $220.2 million in thethird quarter of 2006.  Gross dieselmotorized revenues were down 3.2% and gas motorized revenues were down58.2%.  Diesel products accounted for93.1% of the MRV segment’s third quarter of 2006 gross revenues while gasproducts were 6.9%.  The overall decreasein revenues reflected continuing challenges in the marketplace as dealerssought to lower their current inventories because of softened retail demand andhigher interest costs associated with their floorplan borrowings.  Our MRV segment unit sales were down 10.5%year over year from 1,498 units in the third quarter of 2005 to 1,341 units inthe third quarter of 2006.  Dieselmotorized unit sales were up 2.5% to 1,088 units and gas motorized unit saleswere down 42.1% to 253 units.

Gross profit for the MRV segment for thethird quarter of 2006 decreased to $12.2 million, down from $18.4 million inthe third quarter of 2005, and gross margin decreased from 7.5% in the thirdquarter of 2005 to 5.5% in the third quarter of 2006.  Gross profit reductions were the result oflower sales volumes in the third quarter of 2006 versus the comparable periodin 2005.  Changes in the components ofcost of sales are set forth in the following table (dollars in thousands):
|                      | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 156,235    |              | 63.6       | %                                | $          | 142,160           |       | 64.6                     | %          | 1.0 | % |
| Direct labor         |       | 25,786                        |       | 10.5              | %          | 23,248                           |       | 10.6              | %          | 0.1                      | %          |
| Warranty             |       | 4,035                         |       | 1.6               | %          | 5,876                            |       | 2.7               | %          | 1.1                      | %          |
| Other direct         |       | 13,849                        |       | 5.6               | %          | 12,399                           |       | 5.6               | %          | 0.0                      | %          |
| Indirect             |       | 27,418                        |       | 11.2              | %          | 24,277                           |       | 11.0              | %          | (0.2                     | )%         |
| Total cost of  sales |       | $                             | 227,323    |              | 92.5       | %                                | $          | 207,960           |       | 94.5                     | %          | 2.0 | % |

 

·         Directmaterial increases in 2006 as a percent of sales were mostly due to increasedsales of products that have a higher material cost as a percentage of sales, aswell as to increases in commodity prices for metals and petroleum products.

·         Directlabor increases in 2006 as a percent of sales were predominantly due to changesin the product mix toward products that have a higher labor cost as a percentof sales, as well as to shifting products between production facilities.

·         Increasesin warranty expense in 2006 as a percent of sales were due mostly to increasesin the warranty experience on current year models.

·         Decreasesin indirect costs in 2006 as a percent of sales were due mostly to moderatelybetter plant efficiencies related to relocations and shut-downs that occurredin 2005.

S,G,&A expenses for the MRV segmentdecreased as a percent of sales and in total dollars due primarily toreductions in marketing and selling expenses. Corporate overhead allocationdecreased by $249,000 in the third quarter of 2006 compared to the same periodin the prior year due to larger allocations to the other segments of theCompany’s operations.  Allocations ofcorporate overhead are weighted based on sales levels.  Corporate overhead 

22

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allocation is comprised of certain sharedservices such as executive, financial, information systems, legal, and investorrelations expenses.

Plant relocation costs are related to thecosts incurred to relocate the Bend, Oregon manufacturing facility to theCoburg, Oregon plant.  We believe thisrelocation will ultimately result in improved margins for the Oregonoperations.*

Operating loss increased as both apercent of sales and in total dollars due to lower gross margins that were onlypartially offset by decreases in S,G,&A expenses.

*Third Quarter 2006 versusThird Quarter 2005 for the Towable Recreational Vehicle Segment*

The following table illustrates theresults of the TRV Segment for the quarters ended October 1, 2005, andSeptember 30, 2006 (dollars in thousands):
|                                                | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 43,231     |              | 100.0      | %                                | $          | 70,450            |       | 100.0      | %          | $          | 27,219     |   | 63.0 | % |
| Cost of sales                                  |       | 42,034                        |       | 97.2              | %          | 65,346                           |       | 92.8              | %          | (23,312    | )          | (55.5      | )%         |
| Gross profit                                   |       | 1,197                         |       | 2.8               | %          | 5,104                            |       | 7.2               | %          | 3,907      |       | 326.4      | %          |
| Selling, general,  and administrative expenses |       | 1,415                         |       | 3.3               | %          | 3,523                            |       | 5.0               | %          | (2,108     | )          | (149.0     | )%         |
| Corporate  overhead allocation                 |       | 1,965                         |       | 4.6               | %          | 3,886                            |       | 5.5               | %          | (1,921     | )          | (97.8      | )%         |
| Operating loss                                 |       | $                             | (2,183     | )                 | (5.1       | )%                               | $          | (2,305            | )          | (3.3       | )%         | $          | (122       | ) | (5.6 | )% |

 

Total net sales for the TRV segment wereup from $43.2 million in the third quarter of 2005 to $70.4 million in thethird quarter of 2006.  The increase inrevenues reflects the impact of the R-Vision acquisition in November 2005.  The Company’s unit sales were up 102.2% to3,977 units.  Due to the addition of thelower-priced R-Vision products, average unit selling price decreased to $19,200in the third quarter of 2006 from $23,200 in the same period last year.

Gross profit for the third quarter of2006 increased to $5.1 million,  up from$1.2 million in the third quarter of 2005, and gross margin increased from 2.8%in the third quarter of 2005 to 7.2 % in the third quarter of 2006.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):
|                      | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 28,993     |              | 67.1       | %                                | $          | 44,747            |       | 63.5                     | %          | (3.6 | )% |
| Direct labor         |       | 5,558                         |       | 12.8              | %          | 8,263                            |       | 11.8              | %          | (1.0                     | )%         |
|  Warranty       |       | 778                           |       | 1.8               | %          | 2,076                            |       | 3.0               | %          | 1.2                      | %          |
| Other direct         |       | 4,557                         |       | 10.5              | %          | 5,667                            |       | 8.0               | %          | (2.5                     | )%         |
| Indirect             |       | 2,148                         |       | 5.0               | %          | 4,593                            |       | 6.5               | %          | 1.5                      | %          |
| Total cost of  sales |       | $                             | 42,034     |              | 97.2       | %                                | $          | 65,346            |       | 92.8                     | %          | (4.4 | )% |

 

·         Directmaterial decreases in 2006 as a percent of sales were mostly due to increasedsales of products that have a lower material cost as a percentage of sales,especially the inclusion of the R-Vision brand of products.

·         Directlabor decreases in 2006 as a percent of sales were predominantly due to changesin the product mix toward products that have a lower labor cost.

·         Increasesin warranty expense in 2006 in total dollars is due mostly to increases inwarranty costs related to acquisition of the R-Vision companies and affiliatesin November, 2005.

·         Decreasesin other direct costs in 2006 as a percent of sales were due mostly to theaddition of R-Vision products, which have lower direct costs as a percent ofsales.

·         Increasesin indirect costs in 2006 as a percent of sales were due mostly to plantinefficiencies from start up costs in one of the Company’s plants.

S,G,&A expenses for the TRV segmentincreased as a percent of sales and in total dollars due to higher sales levelsattributable to the acquisition of the R-Vision companies and affiliates.  Corporate overhead allocation 

23

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increased due to higher levels allocatedto the TRV segment as a result of the growth in this segment.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

Operating loss decreasedas a percent of sales due to higher sales and gross profit that was offset byhigher S,G&A expenses as a percent of sales.

*Third Quarter 2006 versusThird Quarter 2005 for the Motorhome Resorts Segment*

The following table illustrates theresults of the Motorhome Resorts Segment (MR segment) for the quarters endedOctober 1, 2005, and September 30, 2006 (dollars in thousands): 
|                                                | ** ** | **Quarter Ended**        | ** ** | **%**             | ** ** | **Quarter Ended**           | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 7,951      |              | 100.0      | %                                | $          | 1,864             |       | 100.0      | %          | $          | (6,087     | ) | (76.6 | )% |
| Cost of sales                                  |       | 2,977                         |       | 37.4              | %          | 634                              |       | 34.0              | %          | 2,343      |       | 78.7       | %          |
| Gross profit                                   |       | 4,974                         |       | 62.6              | %          | 1,230                            |       | 66.0              | %          | (3,744     | )          | (75.3      | )%         |
| Selling,  general, and administrative expenses |       | 1,721                         |       | 21.7              | %          | 1,145                            |       | 61.4              | %          | 576        |       | 33.5       | %          |
| Corporate  overhead allocation                 |       | 920                           |       | 11.6              | %          | 989                              |       | 53.1              | %          | (69        | )          | (7.5       | )%         |
| Operating income  (loss)                       |       | $                             | 2,333      |              | 29.3       | %                                | $          | (904              | )          | (48.5      | )%         | $          | (3,237     | ) | (138.7 | )% |

 

Net sales decreased 76.6% to $1.9 millioncompared to $8.0 million for the same period last year.  This decrease was due in part to a buildup ofpending lot sales from the first and second quarters of 2005 that were closedand funded in the third quarter of 2005.  In 2006, there was a return to a morenormalized sales level.

Gross profit for the MR segment increasedto 66.0% of sales in the third quarter compared to 62.6% of sales in the sameperiod last year.  This was due to aheavier absorption of infrastructure costs in earlier phases.  These costs were expensed in earlier phasesdue to uncertainties as to the ultimate completion and sell through of theentire projects. The result was an improvement in the gross margins in thelater phases of the developments, and most particularly in the third quarter of2006.

Selling, general, and administrativeexpenses, and corporate overhead allocation, as a percent of sales, increaseddue to lower sales levels in the third quarter of 2006 versus the third quarterof 2005.  Corporate overhead allocationis comprised of certain shared services such as executive, financial,information systems, legal and investor relations expenses.

Operating income decreased due to lowersales and to higher S,G ,&A costs and corporate overhead allocation as apercent of sales*.*

24

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*Nine months ended September30, 2006 Compared to Nine months ended October 1, 2005*

The following table illustrates theresults of consolidated operations for the nine months ended October 1, 2005and September 30, 2006 (dollars in thousands):
|                                                | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 930,278    |              | 100.0      | %                                | $          | 998,823           |       | 100.0      | %          | $          | 68,545     |   | 7.4 | % |
| Cost of sales                                  |       | 836,776                       |       | 89.9              | %          | 901,351                          |       | 90.2              | %          | (64,575    | )          | (7.7       | )%         |
| Gross profit                                   |       | 93,502                        |       | 10.1              | %          | 97,472                           |       | 9.8               | %          | 3,970      |       | 4.3        | %          |
| Selling,  general, and administrative expenses |       | 86,451                        |       | 9.3               | %          | 92,882                           |       | 9.3               | %          | (6,431     | )          | (7.4       | )%         |
| Plant relocation  costs                        |       | 3,832                         |       | 0.4               | %          | 269                              |       | 0.0               | %          | 3,563      |       | 93.0       | %          |
| Operating income                               |       | $                             | 3,219      |              | 0.4        | %                                | $          | 4,321             |       | 0.5        | %          | $          | 1,102      |   | 34.2 | % |

 

Consolidated sales for the nine monthperiod ended September 30, 2006 were $998.8 million versus $930.3 million forthe same period last year, representing a 7.4% increase.   This increase was predominantly due to theimpact of FEMA travel trailer orders filled in the first quarter of 2006, aswell as the inclusion of R-Vision sales for the first nine months of 2006.

Cost of sales increased by $64.6 millionin the first nine months of 2006 compared to the same period in 2005.  This change was predominantly caused byhigher margined sales volumes generated by FEMA orders in the first quarter of2006, as well as sales of R-Vision products that tend to have higher margins.  The changes in the components of cost ofsales are set forth in the following table (dollars in thousands):
|                      | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 582,595    |              | 62.6       | %                                | $          | 618,558           |       | 61.9                     | %          | (0.7 | )% |
| Direct labor         |       | 92,891                        |       | 10.0              | %          | 103,729                          |       | 10.4              | %          | 0.4                      | %          |
| Warranty             |       | 21,575                        |       | 2.3               | %          | 28,787                           |       | 2.9               | %          | 0.6                      | %          |
| Other direct         |       | 52,315                        |       | 5.6               | %          | 60,687                           |       | 6.1               | %          | 0.5                      | %          |
| Indirect             |       | 87,400                        |       | 9.4               | %          | 89,590                           |       | 8.9               | %          | (0.5                     | )%         |
| Total cost of  sales |       | $                             | 836,776    |              | 89.9       | %                                | $          | 901,351           |       | 90.2                     | %          | 0.3 | % |

 

·         Directmaterial decreases in 2006 as a percent of sales were mostly due to increasesin sales of products that have a lower material cost as a percentage of sales.

·         Directlabor increases in 2006 as a percent of sales were predominantly due to changesin the product mix toward products that have a higher labor cost.

·         Increasesin warranty expense in 2006 as a percent of sales were due mostly to highercosts associated with current model year products.

·         Increasesin other direct costs in 2006 as a percent of sales were due mostly toincreases in the cost of health benefits for employees and delivery costs forthe Company’s products.

·         Decreasesin indirect costs in 2006 as a percent of sales were due mostly to the impactof the addition of R-Vision products, which typically have a lower indirectcost of sales.

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Selling, general, and administrative expenses(S,G,&A) increased by $6.4 million to $92.9 million for the nine monthperiod of 2006 and remained the same as a percentage of sales at 9.3% for thenine month period in 2005 and 2006. Changes in S,G,&A expenses are setforth in the following table (dollars in thousands):
|                                        | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **                             | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                             | 14,087     |              | 1.5        | %                                | $          | 19,404            |       | 1.9                      | %          | 0.4 | % |
| Selling expenses                       |       | 32,635                        |       | 3.5               | %          | 30,604                           |       | 3.1               | %          | (0.4                     | )%         |
| Settlement  expense                    |       | 7,956                         |       | 0.9               | %          | 9,081                            |       | 1.0               | %          | 0.1                      | %          |
| Marketing  expenses                    |       | 8,690                         |       | 0.9               | %          | 7,514                            |       | 0.7               | %          | (0.2                     | )%         |
| Other                                  |       | 23,083                        |       | 2.5               | %          | 26,279                           |       | 2.6               | %          | 0.1                      | %          |
| Total S,G,&A  expenses             |       | $                             | 86,451     |              | 9.3        | %                                | $          | 92,882            |       | 9.3                      | %          | 0.0 | % |

 

·                  Increasesin salaries, bonus, and benefits expenses in 2006 compared to 2005 as a percentof sales were due primarily to increased management bonuses and long-term stockbased compensation expense.

·                  Decreasedselling expenses in 2006 compared to 2005 as a percent of sales were due to aslight reduction in sales efforts to assist dealers in developing programs toincrease customer awareness of product offerings.

·                  Increasedsettlement expense (litigation settlement expense) in 2006 compared to2005  as a percent of sales was due to increasesin the number of new cases added in the first nine months of 2006.

·                  Decreasedmarketing expenses in 2006 compared to 2005 as a percent of sales were due to areduction in the numbers of shows and rallies as well as in generaladvertising.

·                  Increasesin other expenses in 2006 compared to 2005 as a percent of sales were dueprimarily to costs associated with the installation of new information systems,as well as participation of income on the resort properties by a third party.

Plant relocation costs were associatedwith the consolidation of our Bend, Oregon manufacturing facility to ourCoburg, Oregon operations in 2005.  Werelocated these operations to improve utilization of our plants, to improvedirect and indirect labor rates, and to reduce warranty and related costs.  Costs associated with the relocation of theBend facility are comprised of employee termination, relocation, and jobassistance programs.  In addition weincurred costs related to various operating leases.  We expect that ongoing relocation costs willnot have a significant impact on the results of the Company’s operations.*

Operating income was $4.3 million, or0.5% of sales, for the nine month period of 2006 compared to $3.2 million, or0.4% of sales, in the similar 2005 period.** **Increases in operating income****were due predominantly to higher sales,with improved gross margins that were partially offset by increases inS,G,&A costs.

Net interest expense was $3.0 million forthe nine month period of 2006 versus $788,000 in the comparable 2005 period,reflecting a higher level of borrowing during the first nine months of 2006.

We reported a benefit for income taxes of$ 343,000, compared to an expense of $458,000 for the comparable 2005period.  The tax benefit recorded in 2006is primarily attributable to a favorable outcome from a state income tax auditand a deferred tax benefit associated with an enacted change in state incometax laws.

Net income for thenine month period in 2006 was $1.6 million compared to $115,000 for thecomparable period in 2005 (including losses from discontinued operations of$107,000 and $1.9 million, respectively, net of taxes, related to the closureof the Royale Coach facility) due to an increase in sales combined with ahigher operating margin and a benefit from tax law changes.  The Company did not expense stock optiongrants in 2005 and earlier periods, however, if option expensing had beenrequired, the effect on net income for the nine month period of 2005 for allpreviously granted options would have been a decrease of $750,000.  See Note 8 of the Company’s consolidatedfinancial statements for information regarding the calculation of the impact ofexpensing stock options.  The Company hasreflected the cost of stock options in its results of operations beginning in2006.

26

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*Nine Months of 2006  versus Nine Months 2005 for the MotorizedRecreational Vehicle Segment*

The following table illustrates theresults of the MRV segment for the nine month period ended October 1, 2005 andSeptember 30, 2006 (dollars in thousands):
|                                                | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 795,854    |              | 100.0      | %                                | $          | 700,728           |       | 100.0      | %          | $          | (95,126    | ) | (12.0 | )% |
| Cost of sales                                  |       | 724,322                       |       | 91.0              | %          | 647,910                          |       | 92.5              | %          | 76,412     |       | 10.5       | %          |
| Gross profit                                   |       | 71,532                        |       | 9.0               | %          | 52,818                           |       | 7.5               | %          | (18,714    | )          | (26.2      | )%         |
| Selling,  general, and administrative expenses |       | 34,219                        |       | 4.3               | %          | 26,559                           |       | 3.8               | %          | 7,660      |       | 22.4       | %          |
| Corporate  overhead allocation                 |       | 34,731                        |       | 4.4               | %          | 32,159                           |       | 4.6               | %          | 2,572      |       | 7.4        |       |
| Plant relocation  costs                        |       | 3,832                         |       | 0.5               | %          | 269                              |       | 0.0               | %          | 3,563      |       | 93.0       | %          |
| Operating loss                                 |       | $                             | (1,250     | )                 | (0.2       | )%                               | $          | (6,169            | )          | (0.9       | )%         | $          | (4,919     | ) | (393.4 | )% |

 

Total net sales for the MRV segment weredown from $795.9 million for the nine month period of 2005, to $700.7 millionfor the nine month period of 2006.  Grossdiesel motorized revenues were down 9.4%, and gas motorized revenues were down25.0%.  Diesel products accounted for88.0% of our nine months MRV segment revenues while gas products were 12.0%.  The overall decrease in revenues reflectscontinuing challenges in the marketplace as dealers seek to match their currentinventories with retail demand.  Ouroverall unit sales were down 10.8% in the first nine months of 2006 to 4,364units, with diesel motorized unit sales down 8.2% to 3,211 units,  and gas motorized unit sales down 17.5% to1,153 units.  Our average unit sellingprice decreased to $162,000 for the nine months of 2006 from $163,400 in thesame period last year.

Gross profit for the nine month period of2006 decreased to $52.8 million, down from $71.5 million in 2005, and grossmargin decreased from 9.0% in the first nine months of 2005 to 7.5% in thefirst nine months of 2006.  The changesin the components of cost of sales are set forth in the following table(dollars in thousands):
|                      | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 501,548    |              | 63.0       | %                                | $          | 441,657           |       | 63.1                     | %          | 0.1 | % |
| Direct labor         |       | 79,606                        |       | 10.0              | %          | 72,440                           |       | 10.3              | %          | 0.3                      | %          |
| Warranty             |       | 18,818                        |       | 2.4               | %          | 21,320                           |       | 3.1               | %          | 0.7                      | %          |
| Other direct         |       | 42,056                        |       | 5.3               | %          | 38,151                           |       | 5.4               | %          | 0.1                      | %          |
| Indirect             |       | 82,294                        |       | 10.3              | %          | 74,342                           |       | 10.6              | %          | 0.3                      | %          |
| Total cost of  sales |       | $                             | 724,322    |              | 91.0       | %                                | $          | 647,910           |       | 92.5                     | %          | 1.5 | % |

 

·         Directmaterial increases in 2006 compared to 2005 as a percent of sales were mostlydue to production of more products that have a higher material cost as apercentage of sales, in addition to increases in certain commodity costs for metalsand petroleum products.

·         Direct labor increases in2006 compared to 2005 as a percent of sales were predominantly due to a shiftin product mix to products that have a higher labor cost as a component of costof sales, and to inefficiencies in our plants as we moved products between ourOregon and Indiana operations.

·         Increasesin warranty expense in 2006 compared to 2005 as a percent of sales were duemostly to an increase in the warranty experience on current year models.

·         Increasesin other direct costs in 2006 compared to 2005 as a percent of sales were duemostly to increases in employee health benefits and delivery expense for theCompany’s products.

·   Increases in indirect costs in 2006 comparedto 2005 as a percent of sales were due mostly to inefficiencies within theproduction facilities associated with lower run rates in the first nine monthsof 2006 versus the same period in 2005.

27

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Selling, general, and administrative expenses(S,G,&A) for the MRV segment decreased due to reductions in sellingexpenses.  Corporate overhead allocationdecreased in total dollars as MRV revenues became a smaller component ofoverall Company sales.  Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

Plant relocation costs are related to thecosts incurred to relocate the Bend, Oregon manufacturing facility to theCoburg, Oregon plant.  We believe thisrelocation will ultimately result in improved margins for the Oregonoperations.*

Operating loss increased as both apercent of sales and in total dollars due to lower sales and lower grossmargins.

*Nine Months of 2006 versusNine Months of 2005 for the Towables Recreational Vehicle Segment*

The following table illustrates theresults of the TRV segment for the nine month period ended October 1, 2005 andSeptember 30, 2006 (dollars in thousands):
|                                                | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 108,723    |              | 100.0      | %                                | $          | 274,092           |       | 100.0      | %          | $          | 165,369    |   | 152.1 | % |
| Cost of sales                                  |       | 103,305                       |       | 95.0              | %          | 244,839                          |       | 89.3              | %          | (141,534   | )          | (137.0     | )%         |
| Gross profit                                   |       | 5,418                         |       | 5.0               | %          | 29,253                           |       | 10.7              | %          | 23,835     |       | 439.9      | %          |
| Selling,  general, and administrative expenses |       | 3,738                         |       | 3.4               | %          | 10,711                           |       | 3.9               | %          | (6,973     | )          | (186.5     | )%         |
| Corporate  overhead allocation                 |       | 4,984                         |       | 4.6               | %          | 14,242                           |       | 5.2               | %          | (9,258     | )          | (185.7     | )%         |
| Operating income  (loss)                       |       | $                             | (3,304     | )                 | (3.0       | )%                               | $          | 4,300             |       | 1.6        | %          | $          | 7,604      |   | 230.1 | % |

 

Total net sales for the TRV segment wereup from $108.7 million for the nine month period of 2005 to $274.1 million forthe nine month period of 2006.  Theoverall increase in revenues reflected both the impact of the R-Vision acquisitionin November 2005, as well as the strong sales for FEMA travel trailers relatedto hurricane Katrina in the first quarter of 2006.  The Company’s unit sales were up 288.3% to17,080 units.  In addition, predominantlydue to the addition of R-Vision brand lower-priced units and the FEMA trailers,the average unit selling price decreased to $16,844 in the first nine months of2006 from $26,079 in the same period last year.

Gross profit for the nine month period of2006 increased to $29.3 million, up from $5.4 million in 2005, and gross marginincreased from 5.0% in the first nine months of 2005 to 10.7% in the first ninemonths of 2006.  The changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):
|                      | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                             | 71,898     |              | 66.2       | %                                | $          | 169,014           |       | 61.7                     | %          | (4.5 | )% |
| Direct labor         |       | 13,285                        |       | 12.2              | %          | 30,944                           |       | 11.3              | %          | (0.9                     | )%         |
| Warranty             |       | 2,758                         |       | 2.5               | %          | 7,467                            |       | 2.7               | %          | 0.2                      | %          |
| Other direct         |       | 10,258                        |       | 9.4               | %          | 22,497                           |       | 8.2               | %          | (1.2                     | )%         |
| Indirect             |       | 5,106                         |       | 4.7               | %          | 14,917                           |       | 5.4               | %          | 0.7                      | %          |
| Total cost of  sales |       | $                             | 103,305    |              | 95.0       | %                                | $          | 244,839           |       | 89.3                     | %          | (5.7 | )% |

 

·   Direct materialdecreases in 2006 compared to 2005 as a percent of sales were mostly due to theinclusion of R-Vision brand products, which have a lower material cost as apercentage of sales, as well as the impact of FEMA sales in the first quarterof 2006 that also had a lower material cost.

·   Direct labordecreases in 2006 compared to 2005 as a percent of sales, were predominantlydue to the impact of FEMA orders in the first quarter of 2006 which had a lowerlabor cost as a percent of sales, as well as for the addition of R-Visionproducts, which also have a lower labor cost as a percent of sales.

·   Increases inwarranty expense in 2006 compared to 2005 as a percent of sales were due mostlyto a slight increase in the warranty experience on current year models.

28

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·         Decreasesin other direct costs in 2006 compared to 2005 as a percent of sales were duemostly to sales of R-Vision products that have lower direct costs than otherproducts.

·         Increasesin indirect costs in 2006 compared to 2005 as a percent of sales, were duemostly to allocations for the production of FEMA travel trailers that wereproduced in one of our motorized facilities.

S,G,&A expenses for the TRV segment,as a percent of sales, were higher year to year due to increases in sellingrelated costs.  Corporate overheadallocation increased in total dollars and as a percent of sales due to higherlevels allocated to the TRV segment as a result of the growth in thissegment.  Corporate overhead allocationis comprised of certain shared services such as executive, financial,information systems, legal, and investor relations expenses.

Operating income increased due to highersales and gross profit, which more than offset an increase in corporateoverhead allocation expense as a percent of sales.

*Nine Months of 2006versus Nine Months of 2005 for the Motorhome Resorts Segment*

The following table illustrates theresults of the Motorhome Resorts Segment (MR segment) for the nine month periodended October 1, 2005 and September 30, 2006 (dollars in thousands):
|                                                | ** ** | **Nine Months**          | ** ** | ** **        | ** ** | **Nine Months**             | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                     | ** ** | **%**             | ** ** | **Ended**                        | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **October 1, 2005** | ** ** | **of Sales** | ** ** | **September 30, 2006** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                             | 25,701     |              | 100.0      | %                                | $          | 24,003            |       | 100.0      | %          | $          | (1,698     | ) | (6.6 | )% |
| Cost of sales                                  |       | 9,149                         |       | 35.6              | %          | 8,602                            |       | 35.8              | %          | 547        |       | 6.0        | %          |
| Gross profit                                   |       | 16,552                        |       | 64.4              | %          | 15,401                           |       | 64.2              | %          | (1,151     | )          | (7.0       | )%         |
| Selling,  general, and administrative expenses |       | 5,751                         |       | 22.4              | %          | 5,798                            |       | 24.2              | %          | (47        | )          | (0.8       | )%         |
| Corporate  overhead allocation                 |       | 3,028                         |       | 11.8              | %          | 3,413                            |       | 14.2              | %          | (385       | )          | (12.7      | )%         |
| Operating income                               |       | $                             | 7,773      |              | 30.2       | %                                | $          | 6,190             |       | 25.8       | %          | $          | (1,583     | ) | (20.4 | )% |

 

Net sales decreased 6.6% to $24.0 millioncompared to $25.7 million for the same period last year.  This was due to the impact of closing a largenumber of lots in 2005 that had been waiting final approval from variousinspection agencies.

Gross profit for the MR segment decreasedto 64.2% of sales compared to 64.4% of sales in the same period last year.  Gross margin decreases were due to theadditions of some amenities that enhanced the appeal of the resorts andenhanced demand for lot sales, but also added slightly to the cost of sales.

Selling, general, and administrativeexpenses increased as a percent of sales due to an increase in resortstaff.  Corporate overhead allocationincreased as a percent of sales due to certain fixed allocations that are notbased on sales volumes.  Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

Operating income decreased due to lowersales volumes, lower gross margins, and increases in corporate overhead.

**LIQUIDITY AND CAPITALRESOURCES**

The Company’s primary sources ofliquidity are internally generated cash from operations and available borrowingsunder its credit facilities.  For thefirst nine months of 2006, the Company generated cash of $38.1 million fromoperating activities and had a cash balance of $920,000 at September 30, 2006.  The Company generated $8.8 million from netincome and non-cash expenses such as depreciation and amortization, gains onsales of assets, changes in deferred income taxes, and expenses associated withstock-based compensation.  Other sourcesof cash included an $11.5 million increase in accounts payable, a $15.1 milliondecrease in trade receivables, a $9.3 million decrease in inventory levels, anincrease of $80,000 in resort inventory, a $551,000 increase in accruals forproduct warranty, an $8.7 million increase in accrued liabilities, a $933,000increase in deferred revenue, and a $3.7 million 

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decrease in the net assets fromdiscontinued operations. The uses of cash in the first nine months of 2006included a $331,000 increase in prepaid expenses, an increase of $2.3 millionin income taxes receivable, a decrease of $1.7 million in accruals for productliability reserves, and an increase of $16.3 million in land held fordevelopment.  Decreases in resort lotinventories reflect the sell through of our resort properties.  Increases in trade accounts payables reflectaccruals for dealer Franchise For The Future (FFTF) payments which will be madein the third quarter.  Increases inaccrued product warranty reflect higher warranty costs for current model yearproducts.  Increases in accruedliabilities reflect increases for accruals for certain long-term incentiveprograms.  Increases in deferred revenueswere generated from deferred earnings from Monaco Financial Services(MFS).  The increase in income taxreceivable is the result of estimated tax payments made for the first twoquarters of 2006 that exceed the amount due at September 30, 2006 due to thenet loss incurred during the third quarter of 2006.  Decreases in inventories reflect a sellthrough of finished goods.  Increases inprepaid expenses reflect payments of insurance policies that are expensed overthe next 12 months.  Decreases in productliability reserves reflect payments for settlement of certain litigationclaims.

On November 18, 2005, the Company amendedits credit facilities to borrow $40.0 million of term debt (the “Term Debt”) tocomplete the acquisition of R-Vision.  Inaddition, the Company maintains a revolving line of credit of $105.0million.  At the end of the third quarter2006, borrowings outstanding on the revolving line of credit (the “RevolvingLoan”) were $9.4 million, and Term Debt borrowings were $37.1 million.  At the election of the Company, the RevolvingLoan and the Term Debt bear interest at varying rates that fluctuate based onthe prime rate or LIBOR, and are determined by the Company’s leverageratio.  The Company also pays interestquarterly on the unused available portion of the Revolving Loan at varyingrates, determined by the Company’s leverage ratio.  The Revolving Loan is due and payable in fullon November 17, 2009 and requires interest payments quarterly.  The Term Debt requires quarterly interestpayments and quarterly principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010.  Both the Revolving Loan and Term Debt arecollateralized by all the assets of the Company and the credit facilitiesinclude various restrictions and financial covenants.  The Company was in compliance with thesecovenants at September 30, 2006.  TheCompany utilizes “zero balance” bank disbursement accounts in which an advanceon the line of credit is automatically made for checks clearing each day.  Since the balance of the disbursement accountat the bank returns to zero at the end of each day, the outstanding checks ofthe Company are reflected as a liability. The outstanding check liability is combined with the Company’s positivecash balance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

In November 2005, the Company obtained aterm loan of $500,000 from the State of Oregon in connection with therelocation of jobs to the Coburg, Oregon production facilities from the Bend,Oregon facility.  The principal andinterest is due on April 30, 2009.  Theloan bears a 5% annual interest rate.

Our principal working capitalrequirements are for purchases of inventory and financing of tradereceivables.  Many of the Company’sdealers finance product purchases under wholesale floor plan arrangements withthird parties as described below.  AtSeptember 30, 2006, we had working capital of approximately $111.8 million, adecrease of $15.4 million from working capital of $127.2 million at December31, 2005.  The Company has been usingcash flow from operations to finance capital expenditures.

The Company believes that cash flow fromoperations and funds available under its anticipated credit facilities will besufficient to meet the Company’s liquidity requirements for the next 12months.*  The Company’s capitalexpenditures were $7.5 million for the nine months ended September 30, 2006,which included costs related to additions of automated machinery in many of itsproduction facilities, upgrades to its information systems infrastructure, andother various capitalized upgrades to existing facilities.  The Company anticipates that capitalexpenditures for all of 2006 will be approximately $9.0 to $10.0 million, whichincludes expenditures to purchase additional machinery and equipment in boththe Company’s Coburg, Oregon and Wakarusa, Indiana facilities, as well as upgradesto existing information systems infrastructures.*  The Company may require additional equity ordebt financing to address working capital and facilities expansion needs,particularly if the Company significantly increases the level of working capitalassets such as inventory and accounts receivable.  The Company may also from time to time seekto acquire businesses that would complement the Company’s current business, andany such acquisition could require additional financing.  There can be no assurance that additionalfinancing will be available if required or on terms deemed favorable by theCompany.

As is typical in the recreational vehicleindustry, many of the Company’s retail dealers utilize wholesale floor planfinancing arrangements with third party lending institutions to finance theirpurchases of our products.  Under theterms of these floor plan arrangements, institutional lenders customarilyrequire the recreational vehicle manufacturer to agree to repurchase any unsoldunits if the dealer fails to meet its commitments to the lender, subject 

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to certain conditions.  The Company has agreements with severalinstitutional lenders under which the Company currently has repurchaseobligations.  The Company’s contingentobligations under these repurchase agreements are reduced by the proceedsreceived upon the sale of any repurchased units.  The Company’s obligations under theserepurchase agreements vary from period to period up to 18 months.  At September 30, 2006, approximately $585.2 millionof products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 4.0% concentrated with one dealer.  Historically, the Company has been successfulin mitigating losses associated with repurchase obligations.  During the third quarter of 2006, lossesassociated with the exercise of repurchase agreements with institutionallenders was $125,000.  If the Companywere obligated to repurchase a significant number of units under any repurchaseagreement, the Company’s business, operating results, and financial conditioncould be adversely affected.  Dealers forthe Company undergo credit review prior to becoming a dealer and periodicallythereafter.  Financial institutions thatprovide floorplan financing also perform credit reviews and floor checks on anongoing basis.  The Company closelymonitors sales to dealers that are a higher credit risk.  The repurchase period is limited, usually toa maximum of 18 months.  The Companybelieves these activities minimize the number of required repurchases.  Additionally, the repurchase agreementspecifies that the dealer is required to make principal payments during therepurchase period.  Since the Companyrepurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount.  Therefore, there is already some built indiscount when the Company offers the inventory to another dealer at an amountlower than the original invoice as incentive for the dealer to take therepurchased inventory.  This helpsminimize the losses the Company incurs on repurchased inventory.

As part of the normal course of business,we incur certain contractual obligations and commitments which will requirefuture cash payments. The following tables summarize the significantobligations and commitments.
| ** **                                                | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations (in thousands)** | ** ** | **1 year or less**         | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Lines of Credit (1)                                       |       | $                                         | 0          |   | $ | 0 |   | $ | 9,439 |   | $ | 0 |   | $ | 9,439 |   |
| Long-Term Debt (2)                                        |       | 7,143                                     |       | 11,928 |   | 18,572 |   | 0 |   | 37,643 |   |
| Operating Leases (3)                                      |       | 1,817                                     |       | 1,740 |   | 1,412 |   | 1,944 |   | 6,913 |   |
| Total  Contractual Cash Obligations                       |       | $                                         | 8,960      |   | $ | 13,668 |   | $ | 29,423 |   | $ | 1,944 |   | $ | 53,995 |   |

 
| ** **                                          | ** ** | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Other Commitments (in thousands)** | ** ** | **1 year or less**                                      | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit (4)                                  |       | $                                                                      | 0          |   | $ | 0 |   | $ | 95,561 |   | $ | 0 |   | $ | 95,561 |   |
| Guarantees (5)                                      |       | 14,302                                                                 |       | 0 |   | 0 |   | 0 |   | 14,302 |   |
| Repurchase Obligations  (6)                         |       | 0                                                                      |       | 585,192 |   | 0 |   | 0 |   | 585,192 |   |
| Total  Commitments                                  |       | $                                                                      | 14,302     |   | $ | 585,192 |   | $ | 95,561 |   | $ | 0 |   | $ | 695,055 |   |

 

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| (1) | See Note 5 of  the Condensed Consolidated Financial Statements. The amount listed represents  the outstanding balance at September 30, 2006.                    |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | See Note 6 of  the Condensed Consolidated Financial Statements.                                                                                                 |
| (3) | Various leases  including manufacturing facilities, aircraft, and machinery and equipment.                                                                      |
| (4) | See Note 5 of  the Condensed Consolidated Financial Statements. The amount listed represents  available borrowings on the line of credit at September 30, 2006. |
| (5) | Guarantees  related to aircraft operating lease.                                                                                                                |
| (6) | Reflects  obligations under manufacturer repurchase commitments. See Note 10 of the  Condensed Consolidated Financial Statements.                               |

 

**INFLATION**

During2005 and the first nine months of 2006, the Company experienced increases inthe prices of certain commodity items that we use in the manufacturing of ourproducts.  These include, but are notlimited to, steel, copper, aluminum, petroleum, and wood.  While price increases for these raw materialsare not necessarily indicative of widespread inflationary trends, they had animpact on the Company’s production costs. The impact of these 

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increaseshas caused the Company to increase its selling prices subsequent to the end ofthe quarter.  The current trend in theseprices, could have a materially adverse impact on the Company’s business goingforward.*

**CRITICAL ACCOUNTING POLICIES**

The discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities.  Onan ongoing basis, the Company evaluates its estimates, including those relatedto warranty costs, product liability, and impairment of goodwill.  The Company bases estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.  The Company believes the following accountingpolicies and related judgments and estimates are critical in the preparation ofour consolidated financial statements.

WARRANTY COSTS Estimated warranty costsare provided for at the time of sale of products with warranties covering theproducts for up to one year from the date of retail sale (five years for thefront and sidewall frame structure, and three years on the Roadmasterchassis).  These estimates are based onhistorical average repair costs, feedback from the Company’s productionfacilities on new product design changes, technical advice from vendors, aswell as other reasonable assumptions that have been deemed appropriate bymanagement.

PRODUCT LIABILITY  The Company provides an estimate for accruedproduct liability based on current pending cases, as well as for those caseswhich are incurred but not reported. This estimate is developed by legal counsel based on professionaljudgment, as well as historical experience.

IMPAIRMENT OF GOODWILL  The Company assesses the potential impairmentof goodwill in accordance with Financial Accounting Standards Board (FASB)Statement No. 142.  This annual testinvolves management comparing the market capitalization of the Company, to thecarrying amount, including goodwill, of the net book value of the Company, todetermine if goodwill has been impaired. If the Company determines that the market capitalization is notrepresentative of the fair value of the reporting unit as a whole, then theCompany will use an estimate of discounted future cash flows to determine fairvalue.

INVENTORY ALLOWANCE  The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated market value. These write-downs are based on assumptions about futuresales demand and market conditions. If actual sales demand or market conditionschange from those projected by management, additional inventory write-downs maybe required.

BRAND ELEMENTS AND SIGNAGE  As part of its franchise program for dealers,the Company places certain fixed assets at independent dealerships.  These assets are comprised of informationalcomputer kiosks, brand island displays, furniture and fixtures, as well asoutdoor storefront signage.  These assetsare leased to dealers over 10 years through an operating lease, and the Companydepreciates the assets over their respective useful lives.

INCOME TAXES  In conjunction with preparing itsconsolidated financial statements, the Company must estimate its income taxesin each of the jurisdictions in which it operates. This process involvesestimating actual current tax expense together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included in the consolidated balance sheets. The Company must thenassess the likelihood that the deferred tax assets will be recovered fromfuture taxable income, and to the extent management believes that recovery isnot likely, a valuation allowance must be established. Significant managementjudgment is required in determining the Company’s provision for income taxes,deferred tax assets and liabilities, and any valuation allowance recordedagainst net deferred tax assets.

REPURCHASEOBLIGATIONS  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement.** **The Company has recorded aliability associated with the disposition of repurchased inventory.  To determine the appropriate liability, theCompany calculates a reserve, based on an estimate of potential net losses, alongwith qualitative and quantitative factors, including dealer inventory turnrates, and the financial strength of individual dealers.

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**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

**FIN 48**

In June 2006, the Board issued FIN 48, “Accountingfor Uncertainty in Income Taxes” (the “Interpretation”).  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in accordance with FASB 109, “Accountingfor Income Taxes” by defining a criterion that an individual tax position must bemet for any part of the benefit to be recognized in the financial statements.

The Interpretation is effective for fiscal yearsbeginning after December 15, 2006.  Weare reviewing the provisions of the Interpretation and will adopt it for thefiscal year beginning 2007.

**FAS 157**

In September 2006, the Board issued FAS 157, “FairValue Measurements.”  The Statementdefines fair value, establishes a framework for measuring fair value, andexpands disclosure requirements regarding fair value measurements.

FAS 157 is effective for fiscal years beginningafter November 15, 2007.  We arereviewing the provisions of the Statement and will adopt it for the fiscal yearbeginning 2008.

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

Not applicable.

**Item 4.  Controls andProcedures**

**Evaluation of Disclosure Controlsand Procedures**

Ourmanagement evaluated, with the participation of our Chief Executive Officer andour Chief Financial Officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report on Form10-Q.  Based on this evaluation, ourChief Executive Officer and our Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective to ensure that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is accumulated and communicated to our managementincluding our principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure, and thatsuch information is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules and forms.

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.

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**PART II - OTHER INFORMATION**

**ITEM 1A.  RISK FACTORS**

Wehave listed below various risks and uncertainties relating to ourbusinesses.  This list is not inclusiveof all the risks and uncertainties we face, but any of these could cause ouractual results to differ materially from the results contemplated by theforward-looking statements contained in this report or that we may issue fromtime to time in the future.

WE MAY EXPERIENCE UNANTICIPATEDFLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS  The Company’s 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 factors include the following:

·                  Themargins associated with the mix of products the Company sells in any particularperiod.

·                  TheCompany has historically shipped large amounts of product near quarter end.

·                  TheCompany’s ability to utilize and expand our manufacturing resourcesefficiently.

·                  Shortagesof materials used in our products.

·                  Theeffects of inflation on the costs of materials used in the Company’s products.

·                  Adetermination by the Company that goodwill or other intangible assets areimpaired and have to be written down to their fair values, resulting in acharge to the Company’s results of operations.

·                  TheCompany’s ability to introduce new models that achieve consumer acceptance.

·                  Theintroduction, marketing and sale of competing products by others, includingsignificant discounting offered by the Company’s competitors.

·                  Theaddition or loss of the Company’s dealers.

·                  Thetiming of trade shows and rallies, which the Company uses to market and sellour products.

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

·                  TheCompany’s inability to acquire and develop key pieces of property for on-goingresort activity.

·                  Fluctuationsin demand for the Company’s resort lots due to changing economic and otherconditions.

The Company’s overall gross margin maydecline in future periods to the extent that the Company increases thepercentage of sales of lower gross margin towable products or if the mix ofmotor coaches the Company sells shifts to lower gross margin units.  In addition, a relatively small variation inthe number of recreational vehicles the Company sells in any quarter can have asignificant impact on total sales and operating results for that quarter.

Demand in the recreational vehicleindustry generally declines during the winter months, while sales are generallyhigher during the spring and summer months. With the broader range of products we now offer, seasonal factors couldhave a significant impact on our operating results in the future.  Additionally, unusually severe weatherconditions in certain markets could delay the timing of shipments from onequarter to another.

The Company attempts to forecast ordersfor our products accurately and commence purchasing and manufacturing prior toreceipt of such orders.  However, it ishighly unlikely that we will consistently accurately 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. 

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THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICALAND SUSCEPTIBLE TO 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.  For example, unit shipments of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  The industry continued to climb toapproximately 321,000 units in 2003, 370,000 units in 2004, and 384,000 in2005.  Our business is subject to thecyclical nature of this industry.  Someof the factors that contribute to this cyclicality include fuel availabilityand costs, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidence andslowing of the overall economy has adversely affected the recreational vehiclemarket.  An extended continuation ofthese conditions would materially affect our business, results of operations,and financial condition.

THEEXPECTED BENEFITS OF OUR RECENT ACQUISITION OF R-VISION AND AFFILIATES MAY NOTBE REALIZED  On November 18, 2005, theCompany acquired the Indiana based towable and motorhome manufacturer R-Visioncompanies and affiliates.  The R-Visioncompanies and affiliates consist of R-Vision, Inc., R-Vision Motorized, LLC,Bison Manufacturing, LLC, and Roadmaster, LLC (collectively “R-Vision”).  The process of integrating R-Vision into ourCompany operations may result in unforeseen operating difficulties andexpenditures and may absorb significant management attention that wouldotherwise be available for the ongoing development of the Company’sbusiness.  This may cause an interruptionor a loss of momentum in the Company’s operating activities, which in turn,could have a material adverse affect on the Company’s operating results andfinancial condition.  Moreover, theacquisition involves a number of additional risks, such as the loss of keyemployees of R-Vision as a result of the acquisition, the incorporation ofacquired products into our existing product line, the amortization of debtissuance costs, and the difficulty of integrating disparate corporatecultures.  Accordingly, the anticipatedbenefits may not be realized or the acquisition may have a material adverseaffect on our operating results and financial condition.

WE RELY ON A RELATIVELYSMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although the Company’s products were offeredby 580 dealerships located primarily in the United States and Canada as ofSeptember 30, 2006, a significant percentage of the Company’s sales areconcentrated among a relatively small number of independent dealers.  For the quarter ended September 30, 2006,sales to one dealer, DeMartini RV Sales , accounted for 4.4% of total salescompared to 4.7% of sales in the same period ended last year.  For quarters ended October 1, 2005 andSeptember 30, 2006, sales to our 10 largest dealers, including DeMartini RVSales, accounted for a total of 30.3% and 36.9% of total sales, respectively.   The loss of a significant dealer or asubstantial decrease in sales by any of these dealers could have a materialimpact on the Company’s business, results of operations, and financialcondition.

WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER  As is common in the recreationalvehicle industry, the Company enters into repurchase agreements with thefinancing institutions used by the Company’s dealers to finance their purchasesof our products.  These agreementsrequire the Company to repurchase the dealer’s inventory in the event that thedealer does not repay its lender. Obligations under these agreements vary from period to period, buttotaled approximately $585.2 million as of September 30, 2006, with approximately4.0% concentrated with one dealer.  Ifthe Company were obligated to repurchase a significant number of units underany repurchase agreement, the Company’s business, operating results, andfinancial condition could be adversely affected.

OURACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK The Company sells products to dealers who are predominantly located inthe United States and Canada.  The termsand conditions of payment are a combination of open trade receivables, andcommitments from dealer floor plan lending institutions.  For the Company’s RV dealers, terms are net30 days for units that are financed by a third party lender.  Terms of open trade receivables are grantedby us, on a very limited basis, to dealers who have been subjected toevaluative credit processes conducted by the Company.  For open receivables, terms vary from net 30days to net 180 days, depending on the specific agreement.  Agreements for payment terms beyond 30 daysgenerally require additional collateral, as well as security interest in theinventory sold.  As of September 30,2006, total trade receivables were $87.5 million, with approximately $71.1million, or 81.3% of the outstanding accounts receivable balance concentratedamong floor plan lenders. The remaining $16.4 million of trade receivables wereconcentrated substantially all with one dealer. For resort lot customers, funds are required at the time of closing.

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WE MAY EXPERIENCE A DECREASE IN SALES OFOUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OFFUEL  An interruption in the supply, or asignificant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect the Company’sbusiness.  Diesel fuel and gasoline have,at various times in the past, been either expensive or difficult to obtain, andprices of these commodities are currently at high levels on an historicalbasis.

WE DEPEND ON SINGLE OR LIMITED SOURCES TOPROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OFOUR PRODUCTS  A number of importantcomponents for the Company’s products are purchased from a single or a limitednumber of sources. These include turbo diesel engines (Cummins andCaterpillar), substantially all of the Company’s transmissions (Allison), axles(Dana) for all diesel motor coaches, and chassis (Workhorse and Ford) for gasmotor coaches.  The Company has nolong-term supply contracts with these suppliers or their distributors, and theCompany cannot be certain that these suppliers will be able to meet the Company’sfuture requirements.  Consequently, theCompany has periodically been placed on allocation of these and other keycomponents.  The last significantallocation occurred in 1997 from Allison, and in 1999 from Ford.  An extended delay or interruption in thesupply of any components that the Company obtains from a single supplier orfrom a limited number of suppliers could adversely affect the Company’s business,results of operations, and financial condition.

OUR INDUSTRY IS VERY COMPETITIVE.  WE MUST CONTINUE TO INTRODUCE NEW MODELS ANDNEW FEATURES TO REMAIN COMPETITIVE  Themarket for the Company’s products is very competitive.  The Company currently competes with a numberof manufacturers of motor coaches, fifth wheel trailers, and traveltrailers.  Some of these companies havegreater financial resources than the Company has and more extensivedistribution networks.  These companies,or new competitors in the industry, may develop products that customers in theindustry prefer over our products.

TheCompany believes that the introduction of new products and new features iscritical to our success.  Delays in theintroduction of new models or product features, quality problems associatedwith these introductions, or a lack of market acceptance of new models orfeatures could affect us adversely.  Forexample, unexpected costs associated with model changes have affected our grossmargin in the past.  Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

OUR PRODUCTS COULD FAIL TO PERFORMACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OURCUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES  The Company’s customers require demandingspecifications for product performance and reliability.  Because the Company’s products are complexand often use advanced components, processes and techniques, undetected errorsand design flaws may occur.  Productdefects result in higher product service and warranty and replacement costs andmay cause serious damage to the Company’s customer relationships and industryreputation, all of which could negatively affect our sales and business.

OUR BUSINESS IS SUBJECT TO VARIOUS TYPESOF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  The Company is subject to litigation arisingin the ordinary course of our business, typically for product liability and warrantyclaims that are common in the recreational vehicle industry.  While the Company does not believe that theoutcome of any pending litigation, net of insurance coverage, will materiallyadversely affect its business, results of operations, or financial condition,the Company cannot provide assurances in this regard because litigation is aninherently uncertain process.*

To date, the Company has been successfulin obtaining product liability insurance on terms that the Company considersacceptable.  The terms of the policycontain a self-insured retention amount of $500,000 per occurrence, with amaximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.   The Company cannot be certain they will beable to obtain insurance coverage in the future at acceptable levels or thatthe costs of such insurance will be reasonable. Further, successful assertion against the Company of one or a series oflarge uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on the Company’s business,results of operations, and financial condition. 

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IN ORDER TO BE SUCCESSFUL, WE MUSTATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES, ANDOUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OFOPERATIONS  The Company’s futureprospects depend upon retaining and motivating key management personnel,including Kay L. Toolson, the Company’s Chief Executive Officer, and John W.Nepute, the Company’s President.  Theloss of one or more of these key management personnel could adversely affectthe Company’s business.  The prospects ofthe Company also depend in part on its ability to attract and retain highlyskilled engineers and other qualified technical, manufacturing, financial,managerial, and marketing personnel. Competition for such personnel is intense, and there can be no assurancethat the Company will be successful in attracting and retaining such personnel.

OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATIONSYSTEMS  In the past few years, theCompany has significantly expanded the size and scope of its business, whichhas required the Company to hire additional employees.  Some of these new employees include newmanagement personnel.  In addition, theCompany’s current management personnel have assumed additionalresponsibilities.   The increase in sizeover a relatively short period of time has put pressure on our operating,financial, and management information systems. If the Company continues to expand, such growth would put additionalpressure on these systems and may cause such systems to malfunction or toexperience significant delays.

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN  As the Company continues to work towardsinvolving automated machinery and equipment to improve efficiencies andquality, we will be subject to certain risks involving implementing newtechnologies into our facilities.

The expansion into new machinery andequipment technologies involves risks, including the following:

·                  Wemust rely on timely performance by contractors, subcontractors, and governmentagencies, whose performance we may be unable to control.

·                  Thedevelopment of new processes involves costs associated with new machinery,training of employees, and compliance with environmental, health, and othergovernment regulations.

·                  Thenewly developed products may not be successful in the marketplace.

·                  Wemay be unable to complete a planned machinery and equipment implementation in atimely manner, which could result in lower production levels and an inabilityto satisfy customer demand for our products.

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION  We have begun toimplement a new ERP system and will be subject to certain risks including thefollowing:

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

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

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

·                  Itcould require us to restructure or develop our internal processes to adapt tothe new system.

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

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

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

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OURSTOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE  The market price of our Common Stock issubject to wide fluctuations in response to quarter-to-quarter variations inoperating results, changes in earnings estimates by analysts, announcements ofnew products by us or our competitors, general conditions in the recreationalvehicle market, and other events or factors. In addition, the stocks of many recreational vehicle companies haveexperienced price and volume fluctuations which have not necessarily beendirectly related to the companies’ operating performance, and the market priceof our Common Stock could experience similar fluctuations**.**

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**Item 6.  Exhibits**
| 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: November  9, 2006 | /s/ P. Martin  Daley              |   |
|                     | P. Martin Daley                   |
|                     | Vice President  and               |
|                     | Chief Financial  Officer (Duly    |
|                     | Authorized  Officer and Principal |
|                     | Financial  Officer)               |

 

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

 

41

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