**SECURITIES AND EXCHANGECOMMISSION**

 

**Washington, D.C.20549**

 

**FORM 10-Q**

** **
| **ý****  Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                   |   |
| **For the period ended:    September 27, 2003**                                                                                                                                                                    |   |
|                                                                                                                                                                                                                                   |   |
| **or**                                                                                                                                                                                                                                 |   |
|                                                                                                                                                                                                                                   |   |
| **o****  Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                         |   |
|                                                                                                                                                                                                                                   |   |
| **For the period  from                 to                 ** |   |
|                                                                                                                                                                                                                                   |   |
| **Commission File Number:    1-14725**                                                                                                                                                                             |   |

 

| **MONACO COACH CORPORATION**                                                 |
|------------------------------------------------------------------------------|
|                                                                         |   |   |
| **Delaware**                                                                 |   | **35-1880244** |
| (State of Incorporation)                                                     |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |   |
| **91320 Industrial Way  Coburg, Oregon 97408**                               |
| (Address of  principal executive offices)                                    |
|                                                                         |   |   |
| Registrant’s  telephone number, including area code **(541)  686-8011** |

 

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

 

YES  ý          NO  o          

 

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

 

YES  ý          NO  o          

 

Thenumber of shares outstanding of common stock, $.01 par value, as of September27, 2003:  **29,093,637**

 

 

----

 

**MONACO COACHCORPORATION**

 

**FORM 10-Q**

 

**September 27, 2003**

 

**INDEX**

 
| **PART I - FINANCIAL INFORMATION** |
|------------------------------------|
|                               |
|                               | **Item 1.   Financial Statements.** |
|                               |
|                               | Condensed  Consolidated Balance Sheets as of  December 28, 2002 and September 27, 2003. |
|                               |
|                               | Condensed  Consolidated Statements of Income  for the quarters and nine-month periods ended  September 28, 2002 and September 27, 2003. |
|                               |
|                               | Condensed  Consolidated Statements of Cash  Flows for the nine-month periods ended  September 28, 2002 and September 27, 2003. |
|                               |
|                               | 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 6.   Exhibits and Reports on Form 8-K.** |
|                               |
|                               | **Signatures.** |
|                                    |  |  |

 

2

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**PARTI****- FINANCIAL INFORMATION**

 

**Item 1****.  FinancialStatements**

 

3

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**MONACO COACHCORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                               |   | **December 28,  2002** |       | **September 27,  2003** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                         |   |                   | ** ** |                    | ** ** |
| Current assets:                                                                                                                    |   |                   |       |                    |       |
| Trade  receivables, net                                                                                                            |   | $                      | 116,647    |                    | $          | 105,949 |   |
| Inventories                                                                                                                        |   | 175,609                |       | 132,142                 |       |
| Resort  lot inventory                                                                                                              |   | 26,883                 |       | 14,972                  |       |
| Prepaid  expenses                                                                                                                  |   | 3,612                  |       | 2,880                   |       |
| Deferred  income taxes                                                                                                             |   | 33,379                 |       | 33,047                  |       |
| Total  current assets                                                                                                              |   | 356,130                |       | 288,990                 |       |
|                                                                                                                               |   |                   |       |                    |       |
| Property,  plant, and equipment, net                                                                                               |   | 135,350                |       | 141,669                 |       |
| Debt  issuance costs net of accumulated amortization of $389, and $686,  respectively                                              |   | 683                    |       | 690                     |       |
| Goodwill,  net of accumulated amortization of $5,320 and $5,320, respectively                                                      |   | 55,254                 |       | 55,254                  |       |
| Total  assets                                                                                                                      |   | $                      | 547,417    |                    | $          | 486,603 |   |
|                                                                                                                               |   |                   |       |                    |       |
| **LIABILITIES**                                                                                                                    |   |                   | ** ** |                    | ** ** |
| Current liabilities:                                                                                                               |   |                   |       |                    |       |
| Book  overdraft                                                                                                                    |   | $                      | 3,518      |                    | $          | 4,724 |   |
| Line  of credit                                                                                                                    |   | 51,413                 |       | 0                       |       |
| Current  portion of long-term note payable                                                                                         |   | 21,667                 |       | 15,500                  |       |
| Accounts  payable                                                                                                                  |   | 78,055                 |       | 77,504                  |       |
| Product  liability reserve                                                                                                         |   | 21,322                 |       | 20,626                  |       |
| Product  warranty reserve                                                                                                          |   | 31,745                 |       | 28,976                  |       |
| Income  taxes payable                                                                                                              |   | 4,536                  |       | 2,096                   |       |
| Accrued  expenses and other liabilities                                                                                            |   | 29,633                 |       | 30,013                  |       |
| Total  current liabilities                                                                                                         |   | 241,889                |       | 179,439                 |       |
|                                                                                                                               |   |                   |       |                    |       |
| Long-term  note payable                                                                                                            |   | 30,333                 |       | 17,000                  |       |
| Deferred  income taxes                                                                                                             |   | 14,568                 |       | 16,932                  |       |
|                                                                                                                               |   | 286,790                |       | 213,371                 |       |
|                                                                                                                               |   |                   |       |                    |       |
| Commitments and  contingencies (Note 8)                                                                                            |   |                   |       |                    |       |
|                                                                                                                               |   |                   |       |                    |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                     |   |                   | ** ** |                    | ** ** |
| Preferred stock, $.01 par,  1,934,783 shares authorized, no shares outstanding                                                     |   |                   |       |                    |       |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 28,871,144 and  29,093,637 issued and outstanding,  respectively |   | 289                    |       | 291                     |       |
| Additional  paid-in capital                                                                                                        |   | 51,501                 |       | 52,934                  |       |
| Retained  earnings                                                                                                                 |   | 208,837                |       | 220,007                 |       |
| Total  stockholders’ equity                                                                                                   |   | 260,627                |       | 273,232                 |       |
| Total  liabilities and stockholders’ equity                                                                                   |   | $                      | 547,417    |                    | $          | 486,603 |   |

 

Seeaccompanying notes.

 

4

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**MONACO COACHCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

** **
|                                           |   | **Quarter Ended**             |    | **Nine-Months Ended**     |   |
|------------------------------------------------|--------|-------------------------------|---------|---------------------------|--------|
|                                           |   | **September 28,********2002** |    | **September 27****,2003** |   | **September 28,  2002** |   | **September 27,  2003** |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Net  sales                                     |   | $                             | 314,680 |                      | $      | 303,178 |   | $ | 922,022 |   | $ | 845,113 |   |
| Cost  of sales                                 |   | 271,863                       |    | 266,458                   |   | 800,230 |   | 747,534 |   |
| Gross  profit                                  |   | 42,817                        |    | 36,720                    |   | 121,792 |   | 97,579 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Selling,  general, and administrative expenses |   | 22,783                        |    | 25,667                    |   | 66,455 |   | 77,060 |   |
| Operating  income                              |   | 20,034                        |    | 11,053                    |   | 55,337 |   | 20,519 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Other  income, net                             |   | 3                             |    | 64                        |   | 47 |   | 502 |   |
| Interest  expense                              |   | (633                          | )       | (767                      | )      | (2,000 | ) | (2,558 | ) |
| Income  before income taxes                    |   | 19,404                        |    | 10,350                    |   | 53,384 |   | 18,463 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Provision  for income taxes                    |   | 7,616                         |    | 4,088                     |   | 20,953 |   | 7,293 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Net  income                                    |   | $                             | 11,788  |                      | $      | 6,262 |   | $ | 32,431 |   | $ | 11,170 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Earnings per common share:                     |   |                          |    |                      |   |   |   |   |   |
| Basic                                          |   | $                             | .41     |                      | $      | .22 |   | $ | 1.13 |   | $ | .38 |   |
| Diluted                                        |   | $                             | .40     |                      | $      | .21 |   | $ | 1.10 |   | $ | .38 |   |
|                                           |   |                          |    |                      |   |   |   |   |   |
| Weighted average common  shares outstanding:   |   |                          |    |                      |   |   |   |   |   |
| Basic                                          |   | 28,859,515                    |    | 29,080,716                |   | 28,793,435 |   | 29,021,742 |   |
| Diluted                                        |   | 29,527,539                    |    | 29,625,959                |   | 29,604,369 |   | 29,478,842 |   |

 

Seeaccompanying notes.

 

5

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**MONACO COACHCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited: dollars inthousands)**

** **
|                                                                                      |   | **Nine-Months Ended**         |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                      |   | **September 28,********2002** |   | **September 27,  2003** |   |
|                                                                                      |   |                          |   |   |   |
| **Increase  (Decrease) in Cash**:                                                         |   |                          |   |   |   |
|                                                                                      |   |                          |   |   |   |
| Cash flows from operating  activities:                                                    |   |                          |   |   |   |
| Net  income                                                                               |   | $                             | 32,431 |   | $ | 11,170 |   |
| Adjustments to reconcile  net income to net cash (used) provided by operating activities: |   |                          |   |   |   |
| Loss  on sale of assets                                                                   |   | 164                           |   | 20 |   |
| Depreciation  and amortization                                                            |   | 6,364                         |   | 7,202 |   |
| Deferred  income taxes                                                                    |   | (1,511                        | )      | 4,297 |   |
| Changes in working capital  accounts:                                                     |   |                          |   |   |   |
| Trade  receivables, net                                                                   |   | (28,668                       | )      | 11,075 |   |
| Inventories                                                                               |   | (40,468                       | )      | 43,467 |   |
| Resort  lot inventory                                                                     |   | 0                             |   | 4,712 |   |
| Prepaid  expenses                                                                         |   | (2,582                        | )      | 724 |   |
| Accounts  payable                                                                         |   | 30,045                        |   | (551 | ) |
| Product  liability reserve                                                                |   | 4,069                         |   | (696 | ) |
| Product  warranty reserve                                                                 |   | 1,368                         |   | (2,769 | ) |
| Income  taxes payable                                                                     |   | 13,234                        |   | (2,440 | ) |
| Accrued  expenses and other liabilities                                                   |   | 11,043                        |   | 633 |   |
| Net  cash provided by operating activities                                                |   | 25,489                        |   | 76,844 |   |
| Cash flows from investing  activities:                                                    |   |                          |   |   |   |
| Additions  to property, plant, and equipment                                              |   | (13,055                       | )      | (16,969 | ) |
| Proceeds  from sale of assets                                                             |   | 384                           |   | 2,051 |   |
| Proceeds  from sale of Naples property                                                    |   | 0                             |   | 6,650 |   |
| Issuance  of notes receivable                                                             |   | 312                           |   | 0 |   |
| Net  cash used in investing activities                                                    |   | (12,359                       | )      | (8,268 | ) |
| Cash flows from financing  activities:                                                    |   |                          |   |   |   |
| Book  overdraft                                                                           |   | 3,923                         |   | 1,206 |   |
| Payments  on lines of credit, net                                                         |   | (11,196                       | )      | (51,413 | ) |
| Payments  on long-term notes payable                                                      |   | (7,500                        | )      | (19,500 | ) |
| Debt  issuance costs                                                                      |   | 0                             |   | (304 | ) |
| Issuance  of common stock                                                                 |   | 1,643                         |   | 1,435 |   |
| Net  cash used in financing activities                                                    |   | (13,130                       | )      | (68,576 | ) |
| Net  change in cash                                                                       |   | 0                             |   | 0 |   |
| Cash  at beginning of period                                                              |   | 0                             |   | 0 |   |
| Cash  at end of period                                                                    |   | $                             | 0      |   | $ | 0 |   |

 

See accompanying notes.

 

6

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**MONACO COACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

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

 

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the“Company”) without audit.  In theopinion of management, the accompanying unaudited financial statements containall adjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 28, 2002and September 27, 2003, and the results of its operations for the quarters andnine-month periods ended September 28, 2002 and September 27, 2003, and cashflows of the Company for the nine-month periods ended September 28, 2002 andSeptember 27, 2003.  The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries, and all significant intercompany accounts andtransactions have been eliminated in consolidation.  The balance sheet data as of December 28, 2002 was derived fromaudited financial statements, but does not include all disclosures contained inthe Company’s Annual Report to Stockholders. These interim condensed consolidated financial statements should be readin conjunction with the audited financial statements and notes theretoappearing in the Company’s Annual Report to Stockholders for the year endedDecember 28, 2002.

 

**2.****          ****Acquisition of Outdoor Resorts**

 

OnNovember 27, 2002, the Company completed the acquisition from Outdoor Resortsof America (“ORA”) of all the outstanding stock of Outdoor Resorts of LasVegas, Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), and Outdoor ResortsMotorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed andundeveloped luxury motor coach resorts. Prior to the acquisition, the Company had provided ORA with loans in theamount of $8.0 million, and had co-guaranteed $10 million in bank debt securedby ORA properties.

 

Asconsideration for the acquisition, the Company assumed the current debt andliabilities of the projects of approximately $30.8 million, including the $8.0million note payable to the Company, and the $10 million co-guaranteed debt.

 

Thecash portion of the $30.8 million in consideration paid for the Projects,including transaction costs of $522,000, totaled $21,113,000.  The total assets acquired and liabilitiesassumed of the Projects, based on estimated fair values at November 27, 2002,were as follows:

 

|                                           |   | **(in thousands)** |     |
|------------------------------------------------|--------|--------------------|----------|
|                                           |   |               | * * |
| Cash                                           |   | $                  | 28       |   |
| Resort  lot inventory                          |   | 26,098             |     |
| Deferred  tax asset                            |   | 1,873              |     |
| Property  and equipment                        |   | 2,755              |     |
| Total  assets acquired                         |   | 30,754             |     |
|                                           |   |               |     |
| Notes  payable                                 |   | (8,027             | )        |
| Accounts  payable                              |   | (1,165             | )        |
| Accrued  liabilities                           |   | (449               | )        |
| Total  liabilities assumed                     |   | (9,641             | )        |
|                                           |   |               |     |
| Total  assets acquired and liabilities assumed |   | $                  | 21,113   |   |

 

7

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The allocation of the purchase price hasbeen adjusted for the resolution of pre-acquisition contingencies of $1.6million.  The effects of the resolutionof pre-acquisition contingencies occurring: (i) within one year of theacquisition date were reflected as an adjustment of the allocation of the purchaseprice, and (ii) after one year will be recognized in the determination of netincome.

 

**3.****          ****Inventories**

 

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

 

|            |   | **December 28,  2002** |    | **September 27,********2003** |   |
|-----------------|--------|------------------------|---------|-------------------------------|--------|
|            |   | **(in thousands)**     |    |
| Raw  materials  |   | $                      | 70,021  |                          | $      | 53,083 |   |
| Work-in-process |   | 62,022                 |    | 58,546                        |   |
| Finished  units |   | 43,566                 |    | 20,513                        |   |
|            |   | $                      | 175,609 |                          | $      | 132,142 |   |

 

**4.****          ****Line of Credit**

 

The Company has a bank line of creditconsisting of a revolving line of credit of up to $95 million (the “RevolvingLoan”).  At the election of the Company,the Revolving Loan bears interest at variable rates that fluctuate based on thePrime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly onthe unused available portion of the Revolving Loan at varying rates, determinedby the Company’s leverage ratio.  TheRevolving Loan is due and payable in full on June 30, 2005, and requiresmonthly interest payments.  There was nobalance outstanding under the Revolving Loan at September 27, 2003.  The Revolving Loan is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.

 

**5.****          ****Long-term Notes Payable**

 

The Company has long-term notes payableof $32.5 million outstanding at September 27, 2003.  The term notes bear interest at varying rates that fluctuatebased on the Prime rate or LIBOR, and are determined based on the Company’sleverage ratio.  The term notes requiremonthly interest payments and quarterly principal payments and arecollateralized by all the assets of the Company.  Additional prepayments for portions of the term notes arerequired in the event the Company sells substantially all or any motor coachresort location.  The term notes are dueand payable in full on October 3, 2005.

 

The following table displays thescheduled future principal payments by fiscal year that will be due on the termloan.

 

| **Year** |   | **Amount of  Payment  Due** |   |
|----------|--------|-----------------------------|--------|
|     |   | **(in thousands)**          |   |
| 2003     |   | $                           | 2,500  |   |
| 2004     |   | 17,333                      |   |
| 2005     |   | 12,667                      |   |
|     |   | $                           | 32,500 |   |

 

8

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**6.****             ****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 basedon the weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options.   The weighted average number of commonshares used in the computation of earnings per common share are as follows:

 
|                                             |   | **Quarter Ended**             |       | **Nine-Months Ended**     |       |
|--------------------------------------------------|--------|-------------------------------|------------|---------------------------|------------|
|                                             |   | **September 28,********2002** |       | **September 27****,2003** |       | **September 28,  2002** |   | **September 27,  2003** |   |
| **Basic**                                        |   |                          |       |                      |       |   |   |   |   |
| Issued  and outstanding shares(weighted average) |   | 28,859,515                    |       | 29,080,716                |       | 28,793,435 |   | 29,021,742 |   |
|                                             |   |                          |       |                      |       |   |   |   |   |
| **Effect of  Dilutive Securities**               |   |                          | ** ** |                      | ** ** |   | ** ** |   | ** ** |
| Stock  Options                                   |   | 668,024                       |       | 545,243                   |       | 810,934 |   | 457,100 |   |
| **Diluted**                                      |   | 29,527,539                    |       | 29,625,959                |       | 29,604,369 |   | 29,478,842 |   |

 

**7.****             ****Stock Option Plans**

 

At June 28, 2003, the Company had threestock-based employee compensation plans. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123, Accounting for Stock-based Compensation, tostock-based employee compensation.

 
|                                                                                                                                          |   | **Quarter Ended**             |   | **Nine-Months Ended**   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------------|--------|
|                                                                                                                                          |   | **September 28,********2002** |   | **September 27,  2003** |   | **September 28,********2002** |   | **September 27,********2003** |   |
|                                                                                                                                          |   |                          |   |                    |   |   |   |   |   |
| Net  income - as reported                                                                                                                     |   | $                             | 11,788 |                    | $      | 6,262 |   | $ | 32,431 |   | $ | 11,170 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |   | 202                           |   | 194                     |   | 606 |   | 532 |   |
|                                                                                                                                          |   | $                             | 11,586 |                    | $      | 6,068 |   | $ | 31,825 |   | $ | 10,638 |   |
|                                                                                                                                          |   |                          |   |                    |   |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                          |   |                    |   |   |   |   |   |
| Basic  - as reported                                                                                                                          |   | $                             | 0.41   |                    | $      | 0.22 |   | $ | 1.13 |   | $ | 0.38 |   |
| Basic  - pro forma                                                                                                                            |   | $                             | 0.40   |                    | $      | 0.21 |   | $ | 1.11 |   | $ | 0.37 |   |
|                                                                                                                                          |   |                          |   |                    |   |   |   |   |   |
| Diluted  - as reported                                                                                                                        |   | $                             | 0.40   |                    | $      | 0.21 |   | $ | 1.10 |   | $ | 0.38 |   |
| Diluted  - pro forma                                                                                                                          |   | $                             | 0.39   |                    | $      | 0.20 |   | $ | 1.08 |   | $ | 0.36 |   |

 

9

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**8.****          ****Commitments and Contingencies**

 

Repurchase Agreements

 

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in thevehicles.  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, the Companywill execute a repurchase agreement. These agreements provide that, for up to 18 months after a unit isshipped, the Company will repurchase a dealer’s inventory in the event of adefault by a dealer to its lender.

 

TheCompany’s liability under repurchase agreements is limited to the unpaidbalance owed to the lending institution by reason of its extending credit tothe dealer to purchase its vehicles, reduced by the resale value of vehicleswhich may be repurchased.  The risk ofloss is spread over numerous dealers and financial institutions.

 

Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at September 27, 2003 is $440.8 million, with approximately8.0% concentrated with one dealer.  Ifthe Company were obligated to repurchase a significant number of units underany repurchase agreement, its business, operating results, and financialcondition could be adversely affected. The Company has included the disclosure requirements of FASBInterpretation No. 45 (FIN 45), “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” in its financial statements, and has determined that the recognitionprovisions of FIN 45 apply to certain guarantees routinely made by the Companyincluding contingent repurchase obligations to third party lenders forinventory financing of dealer inventories. As of September 27, 2003, the Company has provided a reserve in theamount of $731,000, and expects to record an expense in the fourth quarter inthe amount of $150,000.  This estimatedliability is based on the Company’s experience of losses associated with therepurchase and resale of units in prior years.

 

 

Productliability

 

TheCompany is subject to regulations which may require the Company to recallproducts with design or safety defects, and such recall could have a materialadverse effect on the Company’s business, results of operations, and financialcondition.

 

TheCompany has from time to time been subject to product liability claims.  To date, the Company has been successful inobtaining product liability insurance on terms 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.  There can be no assurance that the Company will be able to obtaininsurance coverage in the future at acceptable levels or that the cost ofinsurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.

 

Litigation

 

TheCompany is involved in various legal proceedings which are incidental to theindustry and for which certain matters are covered in whole or in part byinsurance or, otherwise, the Company has recorded accruals for estimatedsettlements.  Management believes thatany liability which may result from these proceedings will not have a materialadverse effect on the Company’s consolidated financial statements.

 

10

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Aircraft Lease Commitment

 

The Company has a two-year operatinglease for an aircraft, ending February 11, 2004, with annual renewals for up tothree additional years.  If at the endof the initial lease period the Company elects to return the aircraft, theCompany has guaranteed up to $16 million in the event the Lessor’s net salesproceeds are less than $18.5 million.

 

11

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**Item 2****.  Management’s Discussion andAnalysis 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 below that have been markedwith an asterisk (*).  In addition, theCompany may from time to time make forward-looking statements throughstatements that include the words “believes,” “expects,” “anticipates,” orsimilar expressions.  Suchforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause actual results, performance or achievements of theCompany to differ materially from those expressed or implied by suchforward-looking statements, including those set forth below under the caption“Factors That May Affect Future Operating Results” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth under the caption “Factors That May Affect FutureOperating Results.”  The Company cautionsthe reader, however, that these factors may not be exhaustive.

 

 

**GENERAL**

 

Monaco Coach Corporation is a leadingmanufacturer of premium Class A and Class C motor coaches and towablerecreational vehicles (“towables”).  TheCompany’s product line currently consists of a broad line of motor coaches,fifth wheel trailers and travel trailers under the “Monaco,” “Holiday Rambler,”“Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  The Company’s products, which are typicallypriced at the high end of their respective product categories, range insuggested retail price from $70,000 to $1.1 million for motor coaches and from$25,000 to $65,000 for towables.

 

 

**RESULTS OF OPERATIONS**

 

 

**Quarter ended September 27,2003 Compared to Quarter ended September 28, 2002**

 

Third quarter net sales decreased 3.7% to $303.2 million compared to $314.7million for the same period last year. Gross diesel motorized revenues were down 3.5%, while gas motorized weredown 15.4% and towables were down 0.9%, reflecting continued challenging marketconditions.  The Company’s overall unitsales were down 14.4% in the third quarter of 2003 with diesel motorized unitsales down 9.9% to 1,302 units, gas motorized unit sales down 24.7% to 449units, and towable unit sales down by 14.9% to 685 units.  The Company’s total average selling priceincreased to $124,000 from $112,000 in the same period last year.

 

Gross profit for the third quarter of2003 decreased to $36.7 million, down from $42.8 million in 2002, and grossmargin decreased from 13.6% in the third quarter of 2002 to 12.1% in the third quarter of 2003.  The decrease in gross margin over the prioryear was due in part to an increase in sales discounts, which increased as apercentage of sales by 0.6%.  Grossmargins were further dampened by higher indirect costs of sales due to lowerrun rates in the Company’s production facilities, which impacted gross marginnegatively by approximately 1%.

 

Selling, general, and administrativeexpenses increased by $2.9 million to $25.7 million in the third quarter of2003 and increased as a percentage of sales from 7.2% in 2002 to 8.5% in  2003. The increase in selling, general, and administrative expenses in thethird quarter of 2003 was due to increases in retail promotions in the thirdquarter of 2003 of 1.4% of sales.  TheCompany’s selling, general, and administrative expense may fluctuate in futureperiods depending on the Company’s strategy of retail promotions as a result ofdifficult market conditions or competitive pressures.*

 

Operating income was $11.1 million, or3.7% of sales in the third quarter of 2003 compared to $20.0 million, or 6.4%of sales in the similar 2002 period.  The decrease in operatingmargins reflects lower gross margins, and higher selling, general, and administrativecosts.

 

Net interest expense was $767,000 in thethird quarter of 2003 versus $633,000 in the comparable 2002 period, reflectinga higher level of borrowing during the third quarter of 2003.

 

The Company reported a provision forincome taxes of $4.1 million, or an effective tax rate of 39.5%, in the thirdquarter of 2003, compared to $7.6 million, or an effective tax rate of 39.3%,for the comparable 2002 period.

 

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Net income for the third quarter of 2003was $6.3 compared to $11.8 million in 2002 due to a decrease in sales combinedwith a lower operating margin and higher interest expense.

 

**Nine Months ended  September 27, 2003 Compared to Nine Monthsended September 28, 2002**

 

Net revenues decreased 8.3% to $845.1million compared to $922.0 million for the same period last year.  Gross diesel  motorized sales revenues were down 10.1% for the nine monthsended September 27, 2003, gas motorized were down 4.7%, and towables were down12.1%. Overall unit sales for the Company were down 17.2% in the first ninemonths of 2003 compared to the similar period in 2002, with diesel motorizedunit sales down 16.5% to 3,698 units, gas motorized down 10.5% to 1,459units,  and towables down 23.0% to1,906. The Company’s average unit selling prices increased in the first ninemonths of 2003 compared to the similar 2002 period to $119,000 from $109,000.

 

Gross profit for the nine months endedSeptember 27, 2003 decreased to $97.6 million from $121.8 million in 2002, andgross margin decreased to 11.6% in 2003 from 13.2% in 2002. The decrease ingross margin over the prior year was due in part to an increase in salesdiscounts, which increased as a percentage of sales by 0.8%.   Gross margins were further dampened byhigher indirect costs of sales due to lower run rates in the Company’sproduction facilities which impacted gross margin negatively by 1.5%, and byvarious other direct costs of sales.

 

Selling, general, and administrativeexpenses increased by $10.6 million to $77.1 million in the first nine monthsof 2003 and increased as a percentage of sales from  7.2% in 2002 to 9.1% in 2003. Selling, general, and administrative expenses in the first nine monthsof 2003 were higher than the corresponding period of 2002, due primarily to anincrease of 1.8%, as a percentage of sales, in dealer promotions, which includeretail incentives.

 

Operating income decreased to $20.5million in the first nine months of 2003 from $55.3 million in 2002. TheCompany’s higher selling, general, and administrative expenses as a percentageof sales, combined with the decline in the Company’s gross margin, resulted ina decrease in operating margin, as a percentage of sales, to 2.4% in the firstnine months of 2003 compared to 6.0% in the first nine months of 2002.

 

Net interest expense was $2.6 million(after the capitalization of $135,000 for construction-in-progress) in thefirst nine months of 2003 versus $2.0 million in the comparable 2002  period, reflecting a higher level of borrowingduring the first nine months of 2003.

 

The Company reported a provision forincome taxes of $7.3 million, or an effective tax rate of 39.5%, for the firstnine months of 2003, compared to $21.0 million, or an effective tax rate of39.3%, for the comparable 2002 period.

 

Net income for the first nine months of2003 was $11.2 million compared to $32.4 million in 2002 due to the decrease insales combined with lower gross margins, and higher selling, general, andadministrative costs.

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s primary sources ofliquidity are internally generated cash from operations and availableborrowings under its credit facilities. During the first nine months of 2003, the Company generated cash of $76.8million from operating activities.  TheCompany generated $18.4 million from net income and non-cash expenses such asdepreciation and amortization. Additional sources of cash included a decrease in trade receivables of$11.1 million, a decrease in inventories of $43.5 million, and a decrease inresort lot inventory of $4.7 million. The uses of cash in operating activities included a decrease in accountspayable of $551,000, a decrease in product liability reserve of $696,000, adecrease in product warranty reserve of $2.8 million, and a decrease of $2.4million in income taxes payable.  Thedecrease in trade receivables reflects decreased shipments in the last week ofthe third quarter of 2003 compared to the fourth quarter of 2002.  Decreased inventory levels reflect a decreasein finished goods and raw materials in accordance with the Company’s desire toreduce working capital needs.  Decreasedpayables and liabilities are reflective of decreased purchases for lowerproduction run rates over the prior year, model change, accruals for currentincome taxes payable, and various other accrued liabilities.  In addition to cash flows from operations,the Company also received $6.7 million from the sale of investment property inNaples, Florida, as well as $2.1 million from the sale of property in Leesburg,Florida.  Proceeds from the sale ofproperties served to pay

 

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down long-term debt in theamount of $6.5 million, and to reduce the Company’s outstanding borrowingsunder it’s operating line of credit.

 

On May 29, 2003 the Company amended it’scredit facility to increase it’s operating line of credit from $70.0 million to$95.0 million.  This amendment alsoextended the maturity date of the operating line of credit from September 30,2004 to June 30, 2005.  At September 27,2003, the Company had credit facilities consisting of a revolving line ofcredit of up to $95.0 million, under which no borrowings were outstanding  (the “Revolving Loan”) and term loans withaggregate balances of $32.5 million at September 27, 2003 (the “TermLoans”).  At the election of theCompany, the Revolving Loan and Term Loans bear  interest at varying rates that fluctuate based on the Prime rateor LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly onthe unused available portion of the Revolving Loan at varying rates, determinedby the Company’s leverage ratio.  TheRevolving loan is due and payable in full on June 30, 2005, and requiresmonthly interest payments.  Additionalprepayments for portions of the term notes are required in the event theCompany sells substantially all of any motor coach resort location.  The Term Loans require monthly interestpayments and quarterly principal payments that total $4.3 million.  The Revolving Loan and Term Loans arecollateralized by all the assets of the Company and include variousrestrictions and financial covenants. The Company utilizes “zero balance” bank disbursement accounts in whichan advance on the line of credit is automatically made for checks clearing eachday.  Since the balance of thedisbursement account at the bank returns to zero at the end of each day, theoutstanding checks of the Company are reflected as a liability.  The outstanding check liability is combinedwith the Company’s positive cash balance accounts to reflect a net bookoverdraft or a net cash balance for financial reporting.

 

The Company’s 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 27, 2003, the Company had working capital of approximately $109.6million, a decrease of $4.7 million from working capital of $114.2 million atDecember 28, 2002.  The Company has beenusing short-term credit facilities and cash flows from operations to financeits capital expenditures.

 

The Company believes thatcash flow from operations and funds available under its credit facilities willbe sufficient to meet the Company’s liquidity requirements for the next 12months.*  The Company’s capitalexpenditures were $17.0 million in the first nine months of 2003, whichincluded costs related to the construction of a new paint facility at theCompany’s Indiana location, an expansion of the Indiana towable plant, a newservice facility in Florida, as well as various other routine capitalexpenditures.  The Company anticipatesthat capital expenditures for all of 2003 will be approximately $21 to $22million, which includes expenditures to complete the Indiana towable plantexpansion, and routine capital expenditures for computer system upgrades andadditions, smaller scale plant remodeling projects, and normal replacement ofoutdated or worn-out equipment.*  TheCompany may require additional equity or debt financing to address workingcapital and facilities expansion needs, particularly if the Company significantlyincreases the level of working capital assets such as inventory and accountsreceivable.  The Company may also fromtime to time seek to acquire businesses that would complement the Company’scurrent business, and any such acquisition could require additionalfinancing.  There can be no assurancethat additional financing will be available if required or on terms deemedfavorable by the Company.

 

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 the Company’s products. Under the terms of these floor plan arrangements, institutional lenderscustomarily require the recreational vehicle manufacturer to agree torepurchase any unsold units if the dealer fails to meet its commitments to thelender, subject to certain conditions. The Company has agreements with several institutional lenders underwhich the Company currently has repurchase obligations.  The Company’s contingent obligations underthese repurchase agreements are reduced by the proceeds received upon the saleof any repurchased units.  The Company’sobligations under these repurchase agreements vary from period to period.  At September 27, 2003, approximately $440.8million of products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 8.0% concentrated with one dealer.  Historically, the Company has been successful in mitigatinglosses associated with repurchase obligations. During  the first nine months of2003, there were approximately $600,000 in losses associated with the exerciseof repurchase agreements. If the Company were obligated to repurchase asignificant number of units under any repurchase agreement, its business,operating results, and financial condition could be adversely affected.

 

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**CONTRACTUALOBLIGATIONS AND COMMITMENTS**

 

As part of the normal course of business,the Company incurs certain contractual obligations and commitments which willrequire future cash payments.  Thefollowing tables summarize the significant obligations and commitments as ofSeptember 27, 2003:

 

 

PAYMENTS DUE BY PERIOD

 
| **Contractual Obligations (in  thousands)** |   | **1 year  or less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|---------------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Long-term  Debt (1)                         |   | $                   | 15,500 |              | $      | 17,000            |   | $              | 0      |      | $      | 0 |   | $ | 32,500 |   |
| Operating  Leases (2)                       |   | 2,598               |   | 2,216             |   | 2,003             |   | 2,528          |   | 9,345     |   |
| Total  Contractual Cash Obligations         |   | $                   | 18,098 |              | $      | 19,216            |   | $              | 2,003  |      | $      | 2,528 |   | $ | 41,845 |   |

 

 

AMOUNT OF COMMITMENT EXPIRATION BY PERIOD

 
| **Other Commitments (in  thousands)** |   | **1 year  or less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|---------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Lines  of Credit (3)                  |   | $                   | 0      |              | $      | 95,000            |   | $              | 0      |      | $      | 0 |   | $ | 95,000 |   |
| Guarantees                            |   | 0                   |   | 16,000            | (2)    | 0                 |   | 0              |   | 16,000    |   |
| Repurchase  Obligations (4)           |   | 0                   |   | 440,789           |   | 0                 |   | 0              |   | 440,789   |   |
| Total  Commitments                    |   | $                   | 0      |              | $      | 551,789           |   | $              | 0      |      | $      | 0 |   | $ | 551,789 |   |

 

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(1)   See Note 5 to the financial  statements included in this report.  Amount represented reflects a prepayment of$6.5 million from proceeds received from the sale of property held for sale inNaples, Florida.

(2)   Various leases including manufacturingfacilities, aircraft, and machinery and equipment.  See Note 8 to the financial statements included in this report.

(3)   See Note 4 to the financial statementsincluded in this report.  The amountlisted represents available borrowings on the line of credit at September 27,2003.

(4)   Reflects obligations under manufacturerrepurchase commitments.  See Note 8 tothe financial statements included in this report.

 

**INFLATION**

 

TheCompany does not believe that inflation has had a material impact on itsresults of operations for the periods presented.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

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 financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those relatedto warranty costs, product liability, and impairment of goodwill.  We base our 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.  We believe the following critical accountingpolicies and related judgments and estimates affect the preparation of ourconsolidated financial statements.

 

WARRANTY COSTS  The Company provides an estimate for accrued warranty costs atthe time a product is sold.  Thisestimate is based on historical average repair costs, as well as otherreasonable assumptions as have been deemed appropriate by management.

 

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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 potentialimpairment of goodwill in accordance with Financial Accounting Standards Board(FASB) Statement No. 142.  This analysisinvolves 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.

 

INVENTORY RESERVES  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.  Ifactual sales demand or market conditions change from those projected bymanagement, additional inventory write-downs may be required.

 

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

 

**FACTORS THAT MAY AFFECT FUTUREOPERATING RESULTS**

 

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

 

•                  Themargins associated with the mix of products we sell in any particular period.

 

•                  Ourability to utilize our manufacturing resources efficiently may be adverselyimpacted due to reduced run rates in our plants.

 

•                  Shortagesof materials used in our products.

 

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

 

•                  Ourability to introduce new models that achieve consumer acceptance.

 

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

 

•                  Theaddition or loss of our dealers.

 

•                  Thetiming of trade shows and rallies, which we use to market and sell ourproducts.

 

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

 

Our overall gross margin may decline infuture periods to the extent that we increase the percentage of sales of lowergross margin towable products or if the mix of motor coaches we sell shifts tolower gross margin units.  In addition,a relatively small variation in the number of recreational vehicles we sell inany quarter can have a significant impact on total sales and operating resultsfor that quarter.  Our overall grossmargin may also decline in the future to the extent we continue to run atreduced rates in our plants.  Thesereduced rates create inefficiencies in plant overhead and indirect costsassociated with the production process.

 

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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.

 

We attempt to forecast orders for ourproducts accurately and commence purchasing and manufacturing prior to receiptof such orders.  However, it is highlyunlikely that we will consistently accurately forecast the timing, rate, andmix 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.

 

THE RECREATIONAL VEHICLE INDUSTRY ISCYCLICAL AND 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 sales of recreational vehicles (excludingconversion vehicles) peaked at approximately 259,000 units in 1994 and declinedto approximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units anddeclined in 2001 to 257,000 units.  In2002, the industry rebounded up to approximately 307,000 units.  Our business is subject to the cyclicalnature of this industry.  Some of thefactors that contribute to this cyclicality include fuel availability andcosts, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidenceand slowing of the overall economy has adversely affected the recreational vehiclemarket.  An extended continuation ofthese conditions could materially affect our business, results of operations,and financial condition.

 

OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATIONSYSTEMS  In the past few years, we havesignificantly expanded the size and scope of our business, which has requiredus to hire additional employees.  Someof these new employees include new management personnel.  In addition, our current management personnelhave assumed additional responsibilities.  The increase in our size over a relatively short period of time has putpressure on our operating, financial, and management information systems.  If we continue to expand, such growth wouldput additional pressure on these systems and may cause such systems tomalfunction or to experience significant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES WHEN WE EXPAND OUR MANUFACTURING CAPACITY  In the past few years, we have significantly increased ourmanufacturing capacity.   In connectionwith this expansion, we have also integrated some of our manufacturingfacilities.   We may experienceunexpected building and production problems associated with any suchexpansion.  In the past, we have had difficultieswith the manufacturing of new models and increasing the rates of production ofour plants.   Our expenses haveincreased as a result of the expansion and we will be materially and adverselyaffected if the expansion does not result in an increase in revenue from new oradditional products.

 

This expansion involves risks, includingthe following:

 

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

 

•                  Thedevelopment of new products 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 expansion in a timely manner, which couldresult in lower production levels and an inability to satisfy customer demandfor our products.

 

WE RELY ON A RELATIVELY SMALL NUMBER OFDEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although our products were offered by approximately 420dealerships located primarily in the United States and Canada as of September27, 2003, a significant percentage of our sales are concentrated among a relativelysmall number of independent dealers. For the nine months ended September 27, 2003, sales to one dealer, LazyDays RV Center, accounted for 11.8% of total sales compared to 12.3% of salesin the same period ended last year.  Forthe nine months ended September 27, 2003, sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 39.2% of sales,compared to 40.4% of sales for the same 

 

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period in 2002.  The loss of a significant dealer or asubstantial decrease in sales by any of these dealers could have a materialimpact on our business, results of operations, and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER  As is common in the recreationalvehicle industry, we enter into repurchase agreements with the financinginstitutions used by our dealers to finance their purchases of ourproducts.  These agreements require usto repurchase the dealer’s inventory in the event that the dealer does notrepay its lender.  Obligations underthese agreements vary from period to period, but totaled approximately $440.8million as of September 27, 2003, with approximately 8.0% concentrated with onedealer.  Losses associated with repurchasesand subsequent resales of the Company’s products have historically beenimmaterial to operations, however the Company has provided a reserve inaccordance with FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, in the amount of $731,000 for the first nine months of2003.  Nonetheless, if the Company wereobligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could beadversely affected.

 

OUR ACCOUNTS RECEIVABLE BALANCE ISSUBJECT TO CONCENTRATION RISK  We sellour product to dealers who are predominantly located in the United States andCanada.  The terms and conditions ofpayment are a combination of open trade receivables, and commitments fromdealer floor plan lending institutions. As of September 27, 2003, total trade receivables were $105.9 million,with approximately $82.8 million, or 78.2% of the outstanding accountsreceivable balance concentrated among floor plan lenders. The remaining $23.1million of trade receivables were concentrated substantially all with onedealer.

 

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, ora significant increase in the price or tax on the sale, of diesel fuel orgasoline on a regional or national basis could significantly affect ourbusiness.  Diesel fuel and gasolinehave, at various times in the past, been either expensive or difficult toobtain.

 

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 certain of our products are purchased from single or a limitednumber of sources. These include turbo diesel engines (Cummins andCaterpillar), substantially all of our transmissions (Allison), axles (Dana andMeritor) for all diesel motor coaches and chassis (Workhorse and Ford) for gasmotor coaches.  We have no long-termsupply contracts with these suppliers or their distributors, and we cannot becertain that these suppliers will be able to meet our future requirements.  For example, in 1997, Allison placed allchassis manufacturers on allocation with respect to one of the transmissionsthat we use, and again in 1999 Ford placed one of its gasoline- powered chassison allocation.  An extended delay orinterruption in the supply of any components that we obtain from a singlesupplier or from a limited number of suppliers could adversely affect ourbusiness, results of operations, and financial condition.

 

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

 

We believe that the introduction of newproducts and new features is critical to our success.  Delays in the introduction of new models or product features,quality problems associated with these introductions, or a lack of marketacceptance of new models or features could affect us adversely.  For example, unexpected costs associatedwith model changes have affected our gross margin in the past.  Further, new product introductions candivert revenues from existing models and result in fewer sales of existingproducts.

 

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  Our customers require demandingspecifications for product performance and reliability.  Because our products are complex and oftenuse advanced components, processes and techniques, undetected errors and designflaws may occur.  Product defects resultin higher product service and warranty and 

 

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replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich will negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPESOF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  We are subject to litigation arising in theordinary course of our business, typically for product liability and warrantyclaims that are common in the recreational vehicle industry.  While we do not believe that the outcome ofany pending litigation, net of insurance coverage, will materially adverselyaffect our business, results of operations, or financial condition, we cannotprovide assurances in this regard because litigation is an inherently uncertainprocess.*

 

To date, we have been successful inobtaining product liability insurance on terms that we consideracceptable.  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 .0million for each occurrence, as well as in the aggregate.   We cannot be certain we will be able toobtain insurance coverage in the future at acceptable levels or that the costsof such insurance will be reasonable. Further, successful assertion against us of one or a series of largeuninsured claims, or of a series of claims exceeding our insurance coverage,could have a material adverse effect on our business, results of operations,and financial condition.

 

WE MAY BE UNABLE TO ATTRACT AND RETAINKEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING  Our success depends in part upon attractingand retaining highly skilled professionals. A number of our employees are highly skilled engineers and othertechnical professionals, and our failure to continue to attract and retain suchindividuals could adversely affect our ability to compete in the industry.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES WITH OUR INVESTMENT IN THE OUTDOOR RESORTS PROJECTS  We acquired from Outdoor Resorts of America,Inc. (“ORA”) three luxury motor coach resort properties being developed by ORAin Las Vegas, Nevada; Indio, California; and Naples, Florida.  The resorts offer individual lots to owners,with undivided interests in the resort amenities.   The investment property in Naples, Florida was sold in September2003.  If we experience difficulties inselling the remaining properties, we could incur additional expenses whichwould adversely affect our profits.

 

 

**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

 

**FIN 46**

 

In January 2003, the Board issued FASBInterpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities -an Interpretation of ARB No. 51, Consolidated Financial Statements.  The Interpretation addresses how variableinterest entities are to be identified and how an enterprise assesses itsinterests in a variable interest entity to decide whether to consolidate thatentity.  The Interpretation alsorequires existing unconsolidated variable interest entities to be consolidatedby their primary beneficiaries if the entities do not effectively disperserisks among the parties involved.

 

FIN 46 is effective at the end of theinterim or annual period ending after December 15, 2003 to variable interestentities (VIE), in which a company holds a variable interest that is acquiredbefore February 1, 2003.  The Companydoes not believe it is a primary beneficiary of a VIE or holds any significantinterest or involvement in a VIE; and therefore, there will be no impact ofadopting this standard on the Company’s consolidated financial statements. 

 

**Item3****.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Not applicable.

 

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**Item 4****.  Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

Our chief executive officer and our chieffinancial officer, after evaluating our “disclosure controls and procedures”(as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules13a-14(c) and 15-d-14(c)) have concluded that as of a date within 90 days ofthe filing date of this report (the “Evaluation Date”) our disclosure controlsand procedures are effective to ensure that information we are required todisclose in reports that we file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

Changes in Internal Controls

 

Subsequent to the “Evaluation Date,” therewere no significant changes in our internal controls or in other factors thatcould significantly affect internal controls, nor were there any significantdeficiencies or material weaknesses in our internal controls.  As a result, no corrective actions wererequired or undertaken.

 

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**PART II****- OTHER INFORMATION**

 

 

**Item6****.  Exhibits and Reports on Form 8-K**

 
| (a)    |   | 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. |
|   |   |                |   |
| (b)    |   | Reports on Form 8-K |
|   |   |                |   |
|   |   | i.                  | On July 14, 2003, the Company filed a Form 8-K  which furnished a copy of a press release announcing  preliminary results for the three months  ended June 28, 2003. |
|   |   | ii.                 | On July 24, 2003, the Company filed a Form 8-K  which furnished a copy of a press release announcing the Company’s results of  operations for the three months ended June 28, 2003. |

 

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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 3, 2003                 |   | /s/   P. Martin Daley |   |
|         | P. Martin Daley                  |
|         | Vice President and               |
|         | Chief Financial Officer (Duly    |
|         | Authorized Officer and Principal |
|         | Financial Officer)               |
|              |                                  |  |  |  |

 

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**EXHIBITS INDEX**

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

 

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