**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**ý****        ****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the quarterly period ended:  April 2, 2005**

 

**or**

 

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

 

**For the transition period from                        to                      **

 

**Commission File Number:  1-14725**

 

**MONACO COACH CORPORATION**

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

 

**91320Industrial Way**

**Coburg,Oregon 97408**

(Address of principal executiveoffices)

 

Registrant’s telephone number,including area code  **(541) 686-8011**

 

Indicate by check mark whether theregistrant  (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat 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

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

 

YES   ý                       NO   o

 

The number of shares outstanding of commonstock, $.01 par value, as of April 2, 2005:  **29,488,513**

 

 

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**MONACOCOACH CORPORATION**

 

**FORM 10-Q**

 

**APRIL 2,2005**

 

**INDEX**

 
| **PART I - FINANCIAL INFORMATION** | ** **                                                                                                | ** ** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------|------------|
|                                    |                                                                                                      |       |   |
| ** **                              | **Item 1. Financial Statements.**                                                                         |       |   |
|                                    |                                                                                                      |       |   |
|                                    | Condensed Consolidated Balance Sheets as of                                                               |       |   |
|                                    | January 1, 2005 and April 2,  2005.                                                             |       |   |
|                                    |                                                                                                      |       |   |
|                                    | Condensed Consolidated Statements of Income                                                               |       |   |
|                                    | for the quarters ended April 3, 2004  and                                                            |       |   |
|                                    | April 2, 2005.                                                                                       |       |   |
|                                    |                                                                                                      |       |   |
|                                    | Condensed Consolidated Statements of Cash  Flows                                                          |       |   |
|                                    | for the quarters ended April 3, 2004  and                                                            |       |   |
|                                    | April 2, 2005.                                                                                       |       |   |
|                                    |                                                                                                      |       |   |
|                                    | 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**                                                                                      |       |   |
|                                    | ** **                                                                                                |       |   |
| ** **                              | **Signatures.**                                                                                           |       |   |
|                                    | ** **                                                                                                |       |   |
|                                    | **Certifications under Section 302(a) and  906 of the Sarbanes-Oxley Act of 2002.**             |       |   |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

3

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(dollarsin thousands)**

 
| ** **                                                                                                                   | ** ** | **January 1,** | ** ** | **April 2,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**            | ** ** | **2005**          | ** ** |
| ** **                                                                                                                   | ** ** | ** **          | ** ** | **(unaudited)**   | ** ** |
| **ASSETS**                                                                                                                   |       |                |       |              |       |
| Current  assets:                                                                                                             |       |                |       |              |       |
| Cash                                                                                                                         |       | $                   | 0          |              | $          | 1,477 |   |
| Trade  receivables, net                                                                                                      |       | 127,380             |       | 138,770           |       |
| Inventories                                                                                                                  |       | 169,777             |       | 169,018           |       |
| Resort lot  inventory                                                                                                        |       | 7,315               |       | 8,228             |       |
| Prepaid  expenses                                                                                                            |       | 5,190               |       | 4,937             |       |
| Deferred  income taxes                                                                                                       |       | 33,188              |       | 33,350            |       |
| Total  current assets                                                                                                        |       | 342,850             |       | 355,780           |       |
|                                                                                                                         |       |                |       |              |       |
| Property,  plant, and equipment, net                                                                                         |       | 141,563             |       | 140,112           |       |
| Debt  issuance costs, net of accumulated amortization of $572 and $616,  respectively                                        |       | 571                 |       | 537               |       |
| Goodwill                                                                                                                     |       | 55,254              |       | 55,254            |       |
| Total assets                                                                                                                 |       | $                   | 540,238    |              | $          | 551,683 |   |
|                                                                                                                         |       |                |       |              |       |
| **LIABILITIES**                                                                                                              |       |                |       |              |       |
| Current  liabilities:                                                                                                        |       |                |       |              |       |
| Book  overdraft                                                                                                              |       | $                   | 1,587      |              | $          | 0 |   |
| Line of  credit                                                                                                              |       | 34,062              |       | 25,000            |       |
| Accounts  payable                                                                                                            |       | 79,072              |       | 96,095            |       |
| Product  liability reserve                                                                                                   |       | 20,233              |       | 20,053            |       |
| Product  warranty reserve                                                                                                    |       | 32,369              |       | 32,159            |       |
| Income taxes  payable                                                                                                        |       | 2,087               |       | 3,984             |       |
| Accrued  expenses and other liabilities                                                                                      |       | 31,533              |       | 30,891            |       |
| Total  current liabilities                                                                                                   |       | 200,943             |       | 208,182           |       |
|                                                                                                                         |       |                |       |              |       |
| Deferred  income taxes                                                                                                       |       | 19,679              |       | 19,713            |       |
| Total  liabilities                                                                                                           |       | 220,622             |       | 227,895           |       |
|                                                                                                                         |       |                |       |              |       |
| **STOCKHOLDERS’  EQUITY**                                                                                               |       |                |       |              |       |
| Preferred  stock, $.01 par value, 1,934,783 shares authorized, no shares outstanding                                         |       |                |       |              |       |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 29,425,787 and  29,488,513 issued and outstanding, respectively |       | 294                 |       | 295               |       |
| Additional  paid-in capital                                                                                                  |       | 57,454              |       | 58,071            |       |
| Retained  earnings                                                                                                           |       | 261,868             |       | 265,422           |       |
| Total  stockholders’ equity                                                                                             |       | 319,616             |       | 323,788           |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                   | 540,238    |              | $          | 551,683 |   |

 

Seeaccompanying notes.

 

4

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                     | ** ** | **Quarter Ended**       | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **April 3,  2004** | ** ** | **April 2,  2005** | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                       | 354,976    |   | $ | 331,512 |   |
| Cost of  sales                                 |       | 310,493                 |       | 295,295 |   |
| Gross profit                                   |       | 44,483                  |       | 36,217 |   |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Selling,  general, and administrative expenses |       | 24,800                  |       | 27,343 |   |
| Operating  income                              |       | 19,683                  |       | 8,874 |   |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Other  income, net                             |       | 86                      |       | 114 |   |
| Interest  expense                              |       | (405                    | )          | (485 | ) |
| Income  before income taxes                    |       | 19,364                  |       | 8,503 |   |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Provision  for income taxes                    |       | 7,441                   |       | 3,180 |   |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net income                                     |       | $                       | 11,923     |   | $ | 5,323 |   |
|                                           |       |                    |       |   |   |
| Earnings per  common share:                    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Basic                                          |       | $                       | .41        |   | $ | .18 |   |
| Diluted                                        |       | $                       | .40        |   | $ | .18 |   |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Weighted  average common shares outstanding:   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Basic                                          |       | 29,296,193              |       | 29,460,137 |   |
| Diluted                                        |       | 29,967,452              |       | 29,893,889 |   |

 

Seeaccompanying notes.

 

5

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**MONACOCOACH CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:dollars in thousands)**

 
| ** **                                                                                | ** ** | **Quarter Ended**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | **April 3,  2004** | ** ** | **April 2,  2005** | ** ** |
| ** **                                                                                | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                                    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                       | 11,923     |   | $ | 5,323 |   |
| Adjustments  to reconcile net income to net cash provided (used) by operating activities: | ** ** | ** **              | ** ** | ** ** | ** ** |
| Loss (gain)  on sale of assets                                                            |       | 78                      |       | (1 | ) |
| Depreciation  and amortization                                                            |       | 2,536                   |       | 2,515 |   |
| Deferred  income taxes                                                                    |       | 459                     |       | (128 | ) |
| Changes in  working capital accounts:                                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Trade receivables,  net                                                                   |       | (25,447                 | )          | (11,390 | ) |
| Inventories                                                                               |       | (18,805                 | )          | 759 |   |
| Resort lot  inventory                                                                     |       | 3,360                   |       | 139 |   |
| Prepaid  expenses                                                                         |       | (3,547                  | )          | 250 |   |
| Accounts  payable                                                                         |       | 39,075                  |       | 17,023 |   |
| Product  liability reserve                                                                |       | (1,120                  | )          | (180 | ) |
| Product  warranty reserve                                                                 |       | 1,068                   |       | (210 | ) |
| Income taxes  payable                                                                     |       | 2,967                   |       | 1,897 |   |
| Accrued  expenses and other liabilities                                                   |       | 3,556                   |       | (642 | ) |
| Net cash  provided by operating activities                                                |       | 16,103                  |       | 15,355 |   |
| Cash flows  from investing activities:                                                    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Additions to  property, plant, and equipment                                              |       | (2,553                  | )          | (2,119 | ) |
| Proceeds  from sale of assets                                                             |       | 145                     |       | 52 |   |
| Net cash  used in investing activities                                                    |       | (2,408                  | )          | (2,067 | ) |
| Cash flows  from financing activities:                                                    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Book  overdraft                                                                           |       | 0                       |       | (1,587 | ) |
| Payments on  lines of credit, net                                                         |       | 0                       |       | (9,062 | ) |
| Payments on  long-term notes payable                                                      |       | (3,750                  | )          | 0 |   |
| Debt  issuance costs                                                                      |       | 129                     |       | (11 | ) |
| Dividends  paid                                                                           |       | (1,465                  | )          | (1,769 | ) |
| Issuance of  common stock                                                                 |       | 769                     |       | 618 |   |
| Net cash  used by financing activities                                                    |       | (4,317                  | )          | (11,811 | ) |
| Net change  in cash                                                                       |       | 9,378                   |       | 1,477 |   |
| Cash at  beginning of period                                                              |       | 13,398                  |       | 0 |   |
| Cash at end  of period                                                                    |       | $                       | 22,776     |   | $ | 1,477 |   |

 

Seeaccompanying notes.

 

6

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**MONACOCOACH CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

The interim condensed consolidated financialstatements 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 January 1, 2005and April 2, 2005, and the results of its operations and its cash flowsfor the quarters ended April 3, 2004 and April 2, 2005.  The condensed consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of January 1, 2005 was derived from auditedfinancial statements, but does not include all disclosures contained in theCompany’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 ended January 1,2005.

 

**2.****              Inventories**

 

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

 
| ** **      | ** ** | **January 1,  2005** | ** ** | **April 2,  2005** | ** ** |
|-----------------|------------|---------------------------|------------|-------------------------|------------|
| ** **      |       | **(in thousands)**        |       |
| Raw  materials  |       | $                         | 75,853     |                    | $          | 69,707 |   |
| Work-in-process |       | 71,387                    |       | 67,708                  |       |
| Finished  units |       | 22,537                    |       | 31,603                  |       |
|            |       | $                         | 169,777    |                    | $          | 169,018 |   |

 

**3.****              Line of Credit**

 

The Company’s credit facility consists of arevolving line of credit of $105.0 million. On April 2, 2005, borrowings outstanding on the revolving line ofcredit (the “Revolving Loan”) were $25.0 million.  At the election of the Company, the RevolvingLoan bears interest at varying rates that fluctuate based on the Prime rate orLIBOR, and are determined based on the Company’s leverage ratio.  At April 2, 2005, the interest rate was3.7%.  The Company also pays interestmonthly on the unused available portion of the Revolving Loan at varying rates,determined by the Company’s leverage ratio. The Revolving loan is due and payable in full on November 17, 2009and requires monthly interest payments. The Revolving Loan is collateralized by all the assets of the Companyand includes various restrictions and financial covenants.

 

7

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**4.****              Earnings Per CommonShare**

 

Basic earnings per common share is based onthe 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 stock options.   The weighted average number of common sharesused in the computation of earnings per common share are as follows:

 
| ** **                                        | ** ** | **Quarter Ended**       | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **April 3,  2004** | ** ** | **April 2,  2005** | ** ** |
| **Basic**                                         |       |                    |       |   |   |
| Issued and  outstanding shares (weighted average) |       | 29,296,193              |       | 29,460,137 |   |
|                                              |       |                    |       |   |   |
| **Effect  of Dilutive Securities**                |       |                    |       |   |   |
| Stock  Options                                    |       | 671,259                 |       | 433,752 |   |
| **Diluted**                                       |       | 29,967,452              |       | 29,893,889 |   |

 

**5.****              Stock Option Plans**

 

At April 2, 2005, 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 Issuedto Employees, 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 effect onnet 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**                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **April 3,  2004**                   | ** ** | **April 2,  2005** | ** ** |
| ** **                                                                                                                                    |       | **(In thousands, except per share data)** |       |
| Net income -  as reported                                                                                                                     |       | $                                         | 11,923     |   | $ | 5,323 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | 209                                       |       | 227 |   |
|                                                                                                                                          |       |                                      |       |   |   |
|                                                                                                                                          |       | $                                         | 11,714     |   | $ | 5,096 |   |
|                                                                                                                                          |       |                                      |       |   |   |
| Earnings per  share:                                                                                                                          |       |                                      |       |   |   |
| Basic - as  reported                                                                                                                          |       | $                                         | 0.41       |   | $ | 0.18 |   |
| Basic - pro  forma                                                                                                                            |       | $                                         | 0.41       |   | $ | 0.17 |   |
|                                                                                                                                          |       |                                      |       |   |   |
| Diluted - as  reported                                                                                                                        |       | $                                         | 0.40       |   | $ | 0.18 |   |
| Diluted -  pro forma                                                                                                                          |       | $                                         | 0.39       |   | $ | 0.17 |   |

 

8

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**6.****              Commitments andContingencies**

 

Repurchase Agreements

 

Many of the Company’s sales to independentdealers are made on a “floor plan” basis by a bank or finance company whichlends the dealer all or substantially all of the wholesale purchase price andretains a security interest in the vehicles. Upon request of a lending institution financing a dealer’s purchases ofthe Company’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18months after a unit is shipped, the Company will repurchase a dealer’sinventory in the event of a default by a dealer to its lender.

 

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

 

The approximate amount subject to contingentrepurchase obligations arising from these agreements at April 2, 2005 is$603 million, with approximately 6.9% concentrated with one dealer.  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.  The Company has included the disclosurerequirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” in its financial statements, and hasdetermined that the recognition provisions of FIN 45 apply to certainguarantees routinely made by the Company including contingent repurchaseobligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $780,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers.  This estimated liability is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.  If the Companywere obligated to repurchase a significant number of units under any repurchaseagreement, its business, operating results, and financial condition could beadversely affected.

 

Product Liability

 

The Company is subject to regulations whichmay require the Company to recall products with design or safety defects, andsuch 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.

 

9

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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, otherwise, the Company hasrecorded accruals for estimated settlements. Management believes that any liability which may result from theseproceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

 

Aircraft Lease Commitment

 

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

 

10

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Thesestatements include, but are not limited to, those below that have been markedwith an asterisk (*).  In addition, wemay from time to time make forward-looking statements through statements thatinclude words such as “believes,” “expects,” “anticipates” or similarexpressions.  Such forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, performance or achievements to differmaterially from those expressed or implied by such forward-looking statements,including those set forth below under the caption “Factors That May AffectFuture Operating Results” and elsewhere in this Quarterly Report on Form 10-Q.  The reader should carefully consider,together with the other matters referred to herein, the factors set forth underthe caption “Factors That May Affect Future Operating Results.”  We caution the reader, however, that thesefactors may not be exhaustive.

 

**GENERAL**

 

Monaco Coach Corporation is a leadingmanufacturer of premium Class A and Class C motor coaches and towablerecreational vehicles (“towables”).  Ourproduct line currently consists of a broad line of motor coaches, fifth wheeltrailers and travel trailers under the “Monaco,” “Holiday Rambler,” “RoyaleCoach,” “Beaver,” “Safari,” and “McKenzie” brand names.  Our products, which are typically priced atthe high end of their respective product categories, range in suggested retailprice from $75,000 to $1.4 million for motor coaches and from $20,000 to$65,000 for towables.

 

**RESULTS OF OPERATIONS**

 

The following table illustrates the resultsof operations for the quarters ended April 3, 2004, and April 2,2005.  All dollars represented are in thousands.

 
| ** **                                    | ** ** | **2004** | ** ** | **%  of Sales** | ** ** | **2005** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------|------------|----------|------------|-----------------|------------|----------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                     |       | $        | 354,976    |            | 100.0      | %        | $          | 331,512         |       | 100.0         | %          | $             | -23,464    |   | -6.6 | % |
| Cost of  Sales                                |       | 310,493  |       | 87.5            | %          | 295,295  |       | 89.1            | %          | -15,198       |       | -4.9          | %          |
| Gross Profit                                  |       | 44,483   |       | 12.5            | %          | 36,217   |       | 10.9            | %          | -8,266        |       | -18.6         | %          |
| Selling,  general and administrative expenses |       | 24,800   |       | 7.0             | %          | 27,343   |       | 8.2             | %          | 2,543         |       | 10.3          | %          |
|                                          |       |     |       |            |       |     |       |            |       |          |       |          |       |
| Operating  income                             |       | $        | 19,683     |            | 5.5        | %        | $          | 8,874           |       | 2.7           | %          | $             | -10,809    |   | -54.9 | % |

 

*Performance in the first quarter of 2005*

 

The first quarter of 2005 presented certainchallenges to our operations. The industry’s dealers built up inventory ontheir respective lots during the third and fourth quarters of 2004, inanticipation of a continued strong retail market as was exhibited during the firsthalf of 2004. As a result, in the first quarter of 2005, dealers focused onselling through their available units to reduce inventories on hand. To attainthis goal, dealers slowed orders at the wholesale level which created increasedcompetitive pressures for manufacturers. In response, we reduced output fromour plants to limit the buildup of finished goods inventories at ourmanufacturing facilities. This reduction in output should provide the positiveresult of producing fewer units than are retailing at our dealers’ lots, whichwill ultimately stimulate wholesale demand.* However, the reduction in outputhas also resulted in our plants running at lower capacities which negativelyaffected our gross margin in the first quarter 2005 versus the same period lastyear. Further changes in gross margin were the result of increases in sales oflower priced and lower margin product.

 

11

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With the softening of wholesale demand for RVproducts during the first quarter, we have been very focused on developingselling and marketing plans to drive retail traffic to our dealers’ lots. Whilethis has been successful from the respect of maintaining a low level ofinventories for both us and our dealers, it has been costly to our earnings. Weexpect that we will continue to incur selling, general and administrative costsat similar rates through the end of the second quarter, with reductionsbeginning in the third quarter and continuing into the fourth quarter.*Reductions should begin to occur as the new franchise agreement that we arerolling out at our June 2005 dealer meeting begins to positively impactboth our wholesale and our dealer retail selling efforts.*

 

*Quarter ended April 2, 2005 compared toQuarter ended******April 3, 2004*

 

First quarter net sales decreased 6.6% to$331.5 million compared to $355.0 million for the same period last year. Grossdiesel motorized sales were down 3.5%, gas motorized sales were down 29.5%, andtowables were up 14.5%.  Diesel productsaccounted for 77.9% of our first quarter revenues while gas products were11.6%, and towables were 10.5%.  Theoverall decrease in revenues was driven by a decrease in wholesale demand, asdealers sought to reduce retail inventories. Additional pressures to demand were added by an uncertain stock market,a weakened dollar, and escalating fuel prices. Our overall unit sales were down 3.5% in the first quarter of 2005 to3,025 units, with diesel motorized unit sales down 8.0% to 1,320 units, gasmotorized unit sales down 32.4% to 478 units, and towable unit sales up 23.4%to 1,227 units.  Our total average unitselling price decreased to $108,700 from $111,500 in the same period last year,reflecting gains made in increasing the sale of lower priced gas motor homesand towable products.

 

Gross profit for the first quarter of 2005decreased to $36.2 million, down from $44.5 million in 2004, and gross margindecreased from 12.5% in the first quarter of 2004 to 10.9% in the first quarterof 2005.  The decrease in gross margin in2005 is illustrated in the following table. All numbers are expressed in thousands, percentages are expressed aspercent of net sales:

 
| ** **           | ** ** | **April 3, 2004** | ** ** | **% of Sales** | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|----------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|----------------|------------|---------------------------|------------|
| Direct  Materials    |       | $                      | 220,588    |           | 62.2       | %                      | $          | 207,273        |       | 62.5                      | %          | 0.3 | % |
| Direct Labor         |       | 35,161                 |       | 9.9            | %          | 32,418                 |       | 9.8            | %          | -0.1                      | %          |
| Warranty             |       | 9,336                  |       | 2.6            | %          | 7,535                  |       | 2.3            | %          | -0.3                      | %          |
| Other Direct         |       | 16,368                 |       | 4.6            | %          | 17,956                 |       | 5.4            | %          | 0.8                       | %          |
| Indirect             |       | 29,040                 |       | 8.2            | %          | 30,113                 |       | 9.1            | %          | 0.9                       | %          |
| Total Cost  of Sales |       | $                      | 310,493    |           | 87.5       | %                      | $          | 295,295        |       | 89.1                      | %          | 1.6 | % |

 

The changes noted above, comparing April 3,2004 to April 2, 2005, are discussed below.

 

•                  Directmaterial increases, as a percent of sales, were due mostly towards productsthat have a higher material cost as a percentage of sales.

•                  Directlabor decreases, as a percent of sales, were predominantly due to improvementsin automation of certain plant operations.

•                  Decreasesin warranty expense, as a percent of sales, were due mostly to qualityimprovement projects and improvements in recoveries from vendors for warrantyclaims.

•                  Increasesin other direct costs, as a percent of sales, were due mostly to increases inemployee health benefits, and delivery expense for the Company’s product.

•                  Increasesin indirect costs, as a percent of sales, were due mostly to inefficiencieswithin the production facilities associated with lower run rates in the firstquarter of 2005 versus the same period in 2004, as well as increases in servicepersonnel for the Company’s service facilities.

 

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Selling, general, and administrative expenses(S,G&A) increased by $2.5 million to $27.3 million in the first quarter of2005 and increased as a percentage of sales from 7.0% in 2004 to 8.2% in2005.  Increases in spending over theprior year, as a percentage of sales, are shown in the following table.  All numbers are expressed in thousands,percentages are expressed as percent of net sales:

 
| ** **                | ** ** | **April 3, 2004** | ** ** | **% of Sales** | ** ** | **April 2, 2005** | ** ** | **% of Sales** | ** ** | **Change in % of  Sales** | ** ** |
|---------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|----------------|------------|---------------------------|------------|
| Wages and  Salaries       |       | $                      | 3,333      |           | 0.9        | %                      | $          | 3,612          |       | 1.1                       | %          | 0.2 | % |
| Selling  Expenses         |       | 7,002                  |       | 2.0            | %          | 8,789                  |       | 2.6            | %          | 0.6                       | %          |
| Settlement  Expense       |       | 940                    |       | 0.3            | %          | 2,961                  |       | 0.9            | %          | 0.6                       | %          |
| Marketing  Expenses       |       | 3,039                  |       | 0.8            | %          | 2,792                  |       | 0.8            | %          | 0.0                       | %          |
| Other                     |       | 10,486                 |       | 3.0            | %          | 9,189                  |       | 2.8            | %          | -0.2                      | %          |
| Total  S,G&A Expenses |       | $                      | 24,800     |           | 7.0        | %                      | $          | 27,343         |       | 8.2                       | %          | 1.2 | % |

 

The changes noted above, comparing April 3, 2004 to April 2,2005, are discussed below.

 

•                  Increasesin wages and salaries, as a percent of sales, were due primarily to reducedsales volumes, and the impact of changes in the compensation structure forcertain personnel.

•                  Increasesin selling expenses, as a percent of sales, were due to continued sales effortsto assist dealers in developing programs to increase customer awareness of product offerings.

•                  Increasesin settlement expense (litigation settlement expense), as a percent of sales,were due to a return to more normal levels of activity in 2005 versus 2004.

•                  Decreasesin other expenses were a combination of decreases in management bonus due todecreased profits and decreases in audit and related expenses for first yearcompliance with Sarbanes-Oxley 404 Certification in the 2004 fiscal year.

 

Operating income was $8.9 million, or 2.7% ofsales in the first quarter of 2005 compared to $19.7 million, or 5.5% of salesin the similar 2004 period.  The decreasein operating margins reflects dampened gross margins as well as increasedS,G&A as a percentage of sales.

 

Net interest expense was $485,000 in thefirst quarter of 2005 compared to $405,000 in the comparable 2004 period,reflecting a higher level of borrowing during the first quarter of 2005.

 

We reported a provision for income taxes of$3.2 million, or an effective tax rate of 37.4% in the first quarter of 2005,compared to $7.4 million, or an effective tax rate of 38.4% for the comparable2004 period.  The decrease in theeffective tax rate was due primarily to benefits received from foreign salesactivities, as well as favorable tax law changes at certain state levels.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our primary sources of liquidity areinternally generated cash from operations and available borrowings under ourcredit facilities.  During the firstquarter of 2005, we generated cash of $15.4 million from operatingactivities.  We generated $7.8 millionfrom net income and non-cash expenses such as depreciation and amortization.Other sources of cash included a $17.0 million increase in trade payables, anda $1.9 million increase in tax liability.  Trade payables increased primarily due totiming associated with the regularly scheduled shut down of the plants thatoccurs at year end, which results in a lower accounts payable balance at yearend.  The increase in the tax liabilityis the result of profits for the quarter and timing of tax payments.  These sources of cash were offset by an $11.4million increase in receivables, a $642,000 decrease in other accruedliabilities, a $210,000 decrease in product warranty reserve, and a $180,000decrease in the product liability reserve. Trade receivables increased due to higher shipment levels occurring atthe end of the first quarter of 2005 versus shipment levels at the end of thefourth quarter of 2004.

 

The Company’s credit facility consists of arevolving line of credit of up to $105.0 million.  As of April 2, 2005, borrowingsoutstanding on the revolving line of credit (the “Revolving Loan”) were $25.0million.  At the election of the Company,the Revolving Loan bears interest at varying rates that fluctuate based on thePrime rate or

 

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LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly on theunused available portion of the Revolving Loan at varying rates, determined bythe Company’s leverage ratio.  TheRevolving loan is due and payable in full on November 17, 2009 andrequires monthly interest payments.  TheRevolving Loan is collateralized by all the assets of the Company and includesvarious restrictions and financial covenants. The Company was in compliance with these covenants at April 2,2005.  The Company utilizes “zero balance”bank disbursement accounts in which an advance on the line of credit isautomatically 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.

 

Our principal working capital requirementsare for purchases of inventory and financing of trade receivables.  Many of our dealers finance product purchasesunder wholesale floor plan arrangements with third parties as describedbelow.  At April 2, 2005, we hadworking capital of approximately $147.6 million, an increase of $5.7 millionfrom working capital of $141.9 million at January 1, 2005.  We have been using cash flow from operationsto finance our capital expenditures.

 

We believe that cash flow from operations andfunds available under our credit facilities will be sufficient to meet ourliquidity requirements for the next 12 months.* Our capital expenditures were $2.1 million in the first quarter of 2005,which included costs related to installation of certain automated machinery,enhancements to the Company’s information system infrastructure, as well asvarious other routine capital expenditures. We anticipate that capital expenditures for all of 2005 will beapproximately $12 to $15 million, which includes expenditures to purchaseadditional machinery and equipment in both our Coburg, Oregon and Wakarusa,Indiana facilities, as well as upgrades to existing information systemsinfrastructures.*  We may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if we significantly increase the level of workingcapital assets such as inventory and accounts receivable.  We may also from time to time seek to acquirebusinesses that would complement our current business, and any such acquisitioncould require additional financing. There can be no assurance that additional financing will be available ifrequired or on terms deemed favorable by us.

 

As is typical in the recreational vehicleindustry, many of our retail dealers utilize wholesale floor plan financingarrangements with third party lending institutions to finance their purchasesof our products.  Under the terms ofthese floor plan arrangements, institutional lenders customarily require therecreational vehicle manufacturer to agree to repurchase any unsold units ifthe dealer fails to meet its commitments to the lender, subject to certainconditions.  We have agreements withseveral institutional lenders under which we currently have repurchaseobligations.  Our contingent obligationsunder these repurchase agreements are reduced by the proceeds received upon thesale of any repurchased units.  Ourobligations under these repurchase agreements vary from period to period up to18 months.  At April 2, 2005,approximately $603 million of products sold by us to independent dealers weresubject to potential repurchase under existing floor plan financing agreementswith approximately 6.9% concentrated with one dealer.  Historically, we have been successful inmitigating losses associated with repurchase obligations.  During the first quarter of 2005, we did notrepurchase any product under these repurchase obligations, and there wereaccordingly no losses.  If we wereobligated to repurchase a significant number of units under any repurchaseagreement, our business, operating results, and financial condition could be adverselyaffected.  We have been successful atmitigating the losses associated with repurchase obligations.  Dealers for the Company undergo credit reviewprior to becoming a dealer and periodically thereafter.  Financial institutions that providefloor-plan financing also perform credit reviews and floor checks on an ongoingbasis.  We closely monitor sales todealers that are a higher credit risk. The repurchase period is limited, usually to a maximum of 18 months.  We believe these activities minimize thenumber of required repurchases.  Additionally,the repurchase agreement specifies that the dealer is required to makeprincipal payments during the repurchase period.  Since the Company repurchases the units basedon the schedule of principal payments, the repurchase amount is typicallyless than the original invoice amount. Therefore, there is already some built in discount when we offer theinventory to another dealer at an amount lower than the original invoice asincentive for the dealer to take the repurchased inventory.  This helps minimize the losses we incur onrepurchased inventory.

 

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As part of the normal course of business, weincur certain contractual obligations and commitments which will require futurecash payments. The following tables summarize the significant obligations andcommitments.

 

PAYMENTS DUE BY PERIOD

 
| **Contractual Obligations (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Operating  Leases (1)                      |       | $                  | 2,408      |             | $          | 2,960            |       | $              | 2,021      |      | $          | 2,711 |   | $ | 10,100 |   |
| Total  Contractual Cash Obligations        |       | $                  | 2,408      |             | $          | 2,960            |       | $              | 2,021      |      | $          | 2,711 |   | $ | 10,100 |   |

 

AMOUNT OF COMMITMENT EXPIRATIONBY PERIOD

 
| **Other Commitments (in thousands)** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|
| Line of  Credit (2)                  |       | $                  | 0          |             | $          | 105,000          |       | $              | 0          |      | $          | 0 |   | $ | 105,000 |   |
| Guarantees                           |       |               |       | 15,100           | (1)        | 0                |       | 0              |       | 15,100    |       |
| Repurchase  Obligations (3)          |       | 0                  |       | 603,000          |       | 0                |       | 0              |       | 603,000   |       |
| Total  Commitments                   |       | $                  | 0          |             | $          | 723,100          |       | $              | 0          |      | $          | 0 |   | $ | 723,100 |   |

 

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(1)          Various leases includingmanufacturing facilities, aircraft, and machinery and equipment.  See Note 6 to the Condensed Consolidated FinancialStatements.

 

(2)          See Note 3  to the Condensed Consolidated FinancialStatements.  The amount listed representsavailable borrowings on the line of credit at April 2, 2005.

 

(3)          Reflects obligationsunder manufacturer repurchase commitments. See Note 6 to the Condensed Consolidated Financial Statements.

 

**INFLATION**

 

During 2004 and in the first quarter of 2005,we experienced increases in the prices of certain commodity items that we usein the manufacturing of our products. These include, but are not limited to, steel, copper, aluminum,petroleum, and wood.  While these rawmaterials are not necessarily indicative of widespread inflationary trends, theyhad an impact on our production costs. While the impact of these increases has not caused us to increase ourselling prices, however, we may need to pass along increases in the future tomaintain an acceptable gross margin on our product.  The current trend in these prices, could havea materially adverse impact on our business going forward.*

 

**CRITICAL ACCOUNTING POLICIES**

 

The discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  On anongoing basis, we evaluate our estimates, including those related to warrantycosts, 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 Estimated warranty costs areprovided 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 initialtest involves

 

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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.

 

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

 

REPURCHASE OBLIGATIONS  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.** **The Company has recorded 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.

 

**FACTORS THAT MAY AFFECT FUTURE OPERATINGRESULTS**

 

WE MAY EXPERIENCE UNANTICIPATEDFLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS  Our net sales, gross margin, and operatingresults may fluctuate significantly from period to period due to a number offactors, 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 and expand our manufacturing resources efficiently.

 

•                  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, arelatively 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.

 

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Demand in the recreational vehicle industrygenerally declines during the winter months, while sales are generally higherduring 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 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 sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry climbed toapproximately 321,000 units, but declined to 286,000 units during 2004.  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, and availabilityof credit and overall consumer confidence. The recent decline in consumer confidence and slowing of the overalleconomy has adversely affected the recreational vehicle market.  An extended continuation of these conditionswould materially affect our business, results of operations, and financialcondition.

 

WE RELY ON A RELATIVELY SMALL NUMBER OFDEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although our products were offered by 332dealerships located primarily in the United States and Canada as of April 2,2005, a significant percentage of our sales are concentrated among a relativelysmall number of independent dealers.  Forthe quarter ended April 2, 2005, sales to one dealer, Lazy Days RV Center,accounted for 11.3% of total sales compared to 12.2% of sales in the sameperiod ended last year.  For quartersended April 3, 2004 and April 2, 2005, sales to our 10 largestdealers, including Lazy Days RV Center, accounted for a total of 41.6% and44.6% of total sales, respectively.  Theloss of a significant dealer or a substantial decrease in sales by any of thesedealers could have a material impact 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 our products.  These agreements require us to repurchase thedealer’s inventory in the event that the dealer does not repay its lender.  Obligations under these agreements vary fromperiod to period, but totaled approximately $603 million as of April 2,2005, with approximately 6.9% concentrated with one dealer.  If we were obligated to repurchase asignificant number of units under any repurchase agreement, our business,operating results, and financial condition could be adversely affected.

 

OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TOCONCENTRATION RISK  We sell our productto dealers who are predominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.    For our RV dealers,terms are net 30 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 us. For open receivables, terms vary from net 30 days to net 180 days,depending on the specific agreement.  Asof April 2, 2005, total trade receivables were $138.8 million, withapproximately $113.0 million, or 81.5% of the outstanding accounts receivablebalance concentrated among floor plan lenders. The remaining $25.7 million oftrade receivables were concentrated substantially all with one dealer.  For resort lot customers, funds are requiredat the time of closing.

 

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

 

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affect our business.  Diesel fueland gasoline have, at various times in the past, been either expensive ordifficult to obtain, and prices of these commodities are currently at highlevels on an historical basis.

 

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 our products are purchased from a single or a limited number ofsources. These include turbo diesel engines (Cummins and Caterpillar),substantially all of our transmissions (Allison), axles (Dana) for all dieselmotor coaches, and chassis (Workhorse and Ford) for gas motor coaches.  We have no long-term supply contracts withthese suppliers or their distributors, and we cannot be certain that thesesuppliers will be able to meet our future requirements.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocation occurred in1997 from Allison, and in 1999 from Ford. An extended delay or interruption in the supply of any components thatwe obtain from a single supplier or from a limited number of suppliers couldadversely affect our 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 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 orproduct features, quality problems associated with these introductions, or a lackof market acceptance of new models or features could affect us adversely.  For example, unexpected costs associated withmodel changes have affected our gross margin in the past.  Further, new product introductions can divertrevenues from existing models and result in fewer sales of existing products.

 

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES  Our customers require demandingspecifications for product performance and reliability.  Because our 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 replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich could negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OFLITIGATION, 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 in obtainingproduct liability insurance on terms that we consider acceptable.  The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor each occurrence, as well as in the aggregate.  We cannot be certain we will be able toobtain insurance coverage in the future at acceptable levels or that the costsof such insurance will be reasonable. Further, successful assertion against us of one or a series of 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.

 

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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.  Some ofthese 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 PROBLEMSAND EXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN  As we continue to work towards involvingautomated machinery and equipment to improve efficiencies and quality, we willbe subject to certain risks involving implementing new technologies into ourfacilities.

 

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 PROBLEMSAND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION  We have recently 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.

 

WE MAY EXPERIENCE DIFFICULTIES INRELOCATING OUR BEND, OREGON MANUFACTURING FACILITY  We recently announced that we will be closingour Bend, Oregon manufacturing plant and relocating those operations to ourCoburg, Oregon plants.  This relocationwill be subject to certain risks including the following:

 

•                  Asmanagement focuses some of its attention on the relocation, they could bediverted from other issues.

 

•                  Wemay not experience the efficiencies we expect due to difficulties withintegrating new products into an existing production line.

 

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•                  Wemay experience difficulties in hiring an experienced workforce for theincreased production in the Coburg, Oregon plant.

 

•                  Ourcustomers may react adversely to the relocation of the facilities and reduceorders for new coaches**.**

 

**NEWLY ISSUED FINANCIAL REPORTINGPRONOUNCEMENTS**

 

EITF 04-10

 

In September of 2004, the FinancialAccounting Standards Board (the Board) issued EITF 04-10, “DeterminingWhether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.”  FASB Statement No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” requires publiccompanies to report financial and descriptive information about its reportableoperating segments.  EITF addresses howto determine if operating segments that do not meet the quantitative thresholdsof FASB No. 131 are to be reported as separate segments.

 

The EITF Task Force has delayed the effectivedate of EITF 04-10 to coincide with a related FASB Staff Position to beissued in 2005.

 

We have not yet determined if the provisionsof EITF 04-10 will impact the disclosures to be included in futurefinancial statements.

 

Amendment to FAS 128

 

The Board is amending FAS 128, “Earnings perShare,” to make it consistent with International Accounting Standards, and makeearnings per share calculations comparable on a global basis.  The amendment changes the computation torequire the use of the year-to-date average stock price when computing thenumber of potential incremental common shares for diluted EPS.  The old method was to calculate an average ofpotential incremental common shares computed for each quarter when computingyear-to-date incremental shares.

 

The Board has deferred the issuance of thefinal standard until 2005.

 

We will implement the provisions of theproposed amendment, and will appropriately present them in our future financialstatements.

 

FAS 151

 

In November 2004, the Board issued FAS151, “Inventory Costs an amendment of ARM No. 43, Chapter 4,” to clarifythe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material.  The standardis effective for inventory costs incurred during fiscal years beginning after June 15,2005.

 

We have not yet determined if the provisionsof the Statement will impact the Company’s financial statements.

 

FAS 123R

 

In December 2004, the Board issued FAS123R, “Share-Based Payment.”  TheStatement replaces FAS 123, “Accounting for Stock-Based Compensation,” andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The Statement establishes fair value as themeasurement objective in accounting for share-based payment arrangements andrequires a fair-value-based measurement method in accounting for share-basedpayments to employees except for equity instruments held by employee shareownership plans.  The Statement iseffective for public entities as of the beginning of the first annual reportingperiod that begins after June 15, 2005.

 

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We will adopt the provisions of the Statementfor the fiscal year beginning 2006.  Ifwe had included the cost of the employee stock option compensation using thefair value method in our financial statements, our net income for the firstquarters of 2004 and 2005 would have been impacted by $11.7 million, and $5.1million, respectively.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item 4.  Controls and Procedures**

 

Evaluation of Disclosure Controls andProcedures

 

Our management evaluated, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief ExecutiveOfficer and our Chief Financial Officer have concluded that our disclosurecontrols and procedures are effective to ensure that information we arerequired to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms.

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosurecontrols 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.

 

There was no change in our internal controlover financial reporting that occurred during the period covered by thisQuarterly Report on Form 10-Q that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

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

 
| 10.14+ |   | 2005 Short-Term Incentive Compensation Plan.                                                   |
|--------|--------|------------------------------------------------------------------------------------------------|
| 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, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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+  The item listed is a compensatory plan.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

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

 

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**EXHIBITSINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                     |
|-------------|------------|------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                                    |
|        |       |                                                                                           |
| 10.14+      |       | 2005 Short-Term Incentive Compensation Plan.                                                   |
|        |       |                                                                                           |
| 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, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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+  The item listed is a compensatory plan.

 

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