**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

 

**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 quarterly period ended:   September 28, 2002**                                                                                                                |
| **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** |

 

Indicate by check mark whether the registrant  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and  (2)has been subject to such filing requirements for the past 90 days.

 

YES  ý               NO  o

 

The number of shares outstanding of common stock, $.01par value, as of September 28, 2002: 28,869,264

 

 

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**MONACO COACHCORPORATION**

 

**FORM10-Q**

 

**September28, 2002**

 

**INDEX**

 
| **PART I - FINANCIAL INFORMATION**                                                                              |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |   |
| **Item 1.  Financial Statements.**                                                                         |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Balance Sheets as of December 29, 2001 and September 28, 2002. |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Statements of Income for the quarters and nine-month periods  ended September 29, 2001 and September 28, 2002. |
|                                                                                                            |   |
|                                                                                                            | Condensed  Consolidated Statements of Cash Flows for the nine-month periods ended  September 29, 2001 and September 28, 2002. |
|                                                                                                            |   |
|                                                                                                            | 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 5.   Audit Committee Approval of Non-Audit Services.**                                              |
|                                                                                                            |
| **Item 6.   Exhibits and Reports on Form 8-K.**                                                            |
|                                                                                                            |
| **Signatures**                                                                                                  |

 

2

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**PART I****- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

3

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited:dollars in thousands)**

 
|                                                                                                                        |   | **December 29,  2001** |    | **September 28,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                  |   |                   |    |                    |   |
| Current assets:                                                                                                             |   |                   |    |                    |   |
| Trade receivables, net                                                                                                      |   | $                      | 82,885  |                    | $      | 111,383 |   |
| Inventories                                                                                                                 |   | 127,075                |    | 167,543                 |   |
| Prepaid expenses                                                                                                            |   | 2,063                  |    | 4,552                   |   |
| Deferred income taxes                                                                                                       |   | 27,327                 |    | 32,410                  |   |
| Total current assets                                                                                                        |   | 239,350                |    | 315,888                 |   |
|                                                                                                                        |   |                   |    |                    |   |
| Notes receivable                                                                                                            |   | 8,157                  |    | 7,845                   |   |
| Property, plant and equipment, net                                                                                          |   | 122,795                |    | 128,155                 |   |
| Debt issuance costs, net of accumulated amortization  of $75, and $313, respectively                                        |   | 940                    |    | 702                     |   |
| Goodwill, net of accumulated amortization of $5,320  and $5,320, respectively                                               |   | 55,856                 |    | 55,255                  |   |
|                                                                                                                        |   |                   |    |                    |   |
| Total assets                                                                                                                |   | $                      | 427,098 |                    | $      | 507,845 |   |
|                                                                                                                        |   |                   |    |                    |   |
| **LIABILITIES**                                                                                                             |   |                   |    |                    |   |
| Current liabilities:                                                                                                        |   |                   |    |                    |   |
| Book overdraft                                                                                                              |   | $                      | 5,889   |                    | $      | 9,812 |   |
| Line of credit                                                                                                              |   | 26,004                 |    | 14,804                  |   |
| Current portion of long-term note payable                                                                                   |   | 10,000                 |    | 10,000                  |   |
| Accounts payable                                                                                                            |   | 66,859                 |    | 96,649                  |   |
| Income taxes payable                                                                                                        |   | 0                      |    | 8,199                   |   |
| Accrued expenses and other liabilities                                                                                      |   | 66,904                 |    | 84,743                  |   |
| Total current liabilities                                                                                                   |   | 175,656                |    | 224,207                 |   |
|                                                                                                                        |   |                   |    |                    |   |
| Long-term note payable                                                                                                      |   | 30,000                 |    | 22,500                  |   |
| Deferred income taxes                                                                                                       |   | 8,312                  |    | 13,935                  |   |
| Total liabilities                                                                                                           |   | 213,968                |    | 260,642                 |   |
|                                                                                                                        |   |                   |    |                    |   |
| **STOCKHOLDERS’ EQUITY**                                                                                               |   |                   |    |                    |   |
| Common stock, $.01 par value; 50,000,000 shares  authorized, 28,632,774 and 28,869,264 issued and outstanding, respectively |   | 286                    |    | 289                     |   |
| Additional paid-in capital                                                                                                  |   | 48,522                 |    | 50,162                  |   |
| Retained earnings                                                                                                           |   | 164,322                |    | 196,752                 |   |
| Total stockholders’ equity                                                                                             |   | 213,130                |    | 247,203                 |   |
| Total  liabilities and stockholders’ equity                                                                            |   | $                      | 427,098 |                    | $      | 507,845 |   |

 

See accompanying notes.

 

4

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                         |   | **Quarter Ended**       |       | **Nine Months Ended**   |       |
|----------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
|                                         |   | **September 29,  2001** |       | **September 28,  2002** |       | **September 29,  2001** |   | **September 28,  2002** |   |
|                                         |   |                    | ** ** |                    | ** ** |   | ** ** |   | ** ** |
| Net sales                                    |   | $                       | 240,831    |                    | $          | 314,680 |   | $ | 675,483 |   | $ | 922,022 |   |
| Cost of sales                                |   | 210,283                 |       | 271,863                 |       | 593,643 |   | 800,230 |   |
| Gross profit                                 |   | 30,548                  |       | 42,817                  |       | 81,840 |   | 121,792 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Selling, general and administrative expenses |   | 18,949                  |       | 22,783                  |       | 51,677 |   | 66,455 |   |
| Amortization of goodwill                     |   | 161                     |       | 0                       |       | 484 |   | 0 |   |
| Operating income                             |   | 11,438                  |       | 20,034                  |       | 29,679 |   | 55,337 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Other income, net                            |   | (42                     | )          | 3                       |       | 320 |   | 47 |   |
| Interest expense                             |   | (539                    | )          | (633                    | )          | (1,638 | ) | (2,000 | ) |
| Income before income taxes                   |   | 10,857                  |       | 19,404                  |       | 28,361 |   | 53,384 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Provision for income taxes                   |   | 4,234                   |       | 7,616                   |       | 11,061 |   | 20,953 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Net income                                   |   | $                       | 6,623      |                    | $          | 11,788 |   | $ | 17,300 |   | $ | 32,431 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Earnings per common  share:                  |   |                    |       |                    |       |   |   |   |   |
| Basic                                        |   |                    | $.23       |                    |       | $.41 |   |   | $.61 |   |   | $1.13 |   |
| Diluted                                      |   |                    | $.23       |                    |       | $.40 |   |   | $.59 |   |   | $1.10 |   |
|                                         |   |                    |       |                    |       |   |   |   |   |
| Weighted average common  shares outstanding: |   |                    |       |                    |       |   |   |   |   |
| Basic                                        |   | 28,550,019              |       | 28,859,515              |       | 28,506,844 |   | 28,793,435 |   |
| Diluted                                      |   | 29,390,018              |       | 29,527,539              |       | 29,241,263 |   | 29,604,369 |   |
|                                              |        |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

5

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:dollars in thousands)**

 
|                                                                                      |   | **Nine Months Ended**   |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                      |   | **September 29,  2001** |   | **September 28,  2002** |   |
|                                                                                      |   |                    |   |   |   |
| **Increase (Decrease) in Cash**:                                                          |   |                    |   |   |   |
|                                                                                      |   |                    |   |   |   |
| Cash flows from  operating activities:                                                    |   |                    |   |   |   |
| Net income                                                                                |   | $                       | 17,300 |   | $ | 32,431 |   |
| Adjustments to  reconcile net income to net cash provided (used) by operating activities: |   |                    |   |   |   |
| Gain (loss) on sale of assets                                                             |   | (74                     | )      | 164 |   |
| Depreciation and amortization                                                             |   | 5,212                   |   | 6,364 |   |
| Deferred income taxes                                                                     |   | 567                     |   | (1,511 | ) |
| Changes in working  capital accounts:                                                     |   |                    |   |   |   |
| Trade receivables, net                                                                    |   | (3,497                  | )      | (28,668 | ) |
| Inventories                                                                               |   | 13,174                  |   | (40,468 | ) |
| Prepaid expenses                                                                          |   | 319                     |   | (2,582 | ) |
| Accounts payable                                                                          |   | (8,440                  | )      | 30,045 |   |
| Income taxes payable                                                                      |   | 5,123                   |   | 13,234 |   |
| Accrued expenses and other liabilities                                                    |   | (2,345                  | )      | 16,480 |   |
| Net cash provided by operating activities                                                 |   | 27,339                  |   | 25,489 |   |
| Cash flows from  investing activities:                                                    |   |                    |   |   |   |
| Additions to property, plant and equipment                                                |   | (6,262                  | )      | (13,055 | ) |
| Proceeds from sale of assets                                                              |   | 106                     |   | 384 |   |
| Payments for business  acquisition                                                        |   | (24,320                 | )      |   |   |
| Issuance of notes receivable                                                              |   | (4,750                  | )      | 312 |   |
| Net cash used in investing activities                                                     |   | (35,226                 | )      | (12,359 | ) |
| Cash flows from  financing activities:                                                    |   |                    |   |   |   |
| Book overdraft                                                                            |   | (1,691                  | )      | 3,923 |   |
| Payments on lines of credit, net                                                          |   | (30,304                 | )      | (11,196 | ) |
| Borrowings (payments) on long-term note payable                                           |   | 40,000                  |   | (7,500 | ) |
| Debt issuance costs                                                                       |   | (994                    | )      |   |   |
| Issuance of common stock                                                                  |   | 876                     |   | 1,643 |   |
| Net cash provided (used) by financing activities                                          |   | 7,887                   |   | (13,130 | ) |
| 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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**MONACOCOACH CORPORATION**

**NOTESTO 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 December 29, 2001and September 28, 2002, and the results of its operations for the quarters andnine-month periods ended September 29, 2001 and September 28, 2002, and cashflows of the Company for the nine-month periods ended September 29, 2001 andSeptember 28, 2002.  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 29, 2001 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 29, 2001.

 

**2.**           Acquisition of SMCCorporation

** **

On August 6, 2001, the Company completed theacquisition of all of the outstanding stock of SMC Corporation (“SMC”) at aprice of $3.70 per share through a cash tender offer and back-end cashmerger.  The cash paid for SMC,including transaction costs of $3,062,000, totaled $24,320,000.  The total assets acquired and liabilitiesassumed of SMC based on estimated fair values at August 6, 2001, is as follows:

 
|                                           |   | ***(in thousands)*** |   |
|------------------------------------------------|--------|----------------------|--------|
|                                           |   |                 |   |
| Receivables                                    |   | $                    | 6,678  |   |
| Inventories                                    |   | 25,360               |   |
| Deferred tax asset                             |   | 17,418               |   |
| Property and equipment                         |   | 14,776               |   |
| Prepaids and other assets                      |   | 21                   |   |
| Goodwill                                       |   | 37,317               |   |
| Total assets acquired                          |   | 101,570              |   |
|                                           |   |                 |   |
| Book overdraft                                 |   | (1,551               | )      |
| Notes payable                                  |   | (16,345              | )      |
| Accounts payable                               |   | (23,824              | )      |
| Accrued liabilities                            |   | (35,530              | )      |
| Total liabilities assumed                      |   | (77,250              | )      |
|                                           |   |                 |   |
| Total assets  acquired and liabilities assumed |   | $                    | 24,320 |   |

** **

7

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**3.**           Inventories

 

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

 
|            |   | **December 29,  2001** |    | **September 28,  2002** |   |
|-----------------|--------|------------------------|---------|-------------------------|--------|
|            |   | ***(in thousands)***   |    |
| Raw materials   |   | $                      | 53,160  |                    | $      | 71,246 |   |
| Work-in-process |   | 44,436                 |    | 62,143                  |   |
| Finished units  |   | 29,479                 |    | 34,154                  |   |
|            |   | $                      | 127,075 |                    | $      | 167,543 |   |

 

**4.**           Goodwill

 

Goodwill represents the excess of the cost ofacquisition over the fair value of net assets acquired.  At each balance sheet date, managementassesses whether there has been permanent impairment in the value ofgoodwill.  The amount of any suchimpairment is determined by comparing the fair value of the associated goodwillwith its carrying value.  The factorsconsidered by management in performing this assessment include currentoperating results, trends and prospects, as well as the effects ofobsolescence, demand, competition and other economic factors.  As of September 28, 2002, as required by FinancialAccounting Standards Board (“FASB”) Statement No. 142, management hasdetermined that there has been no impairment of goodwill requiring a writedown.  FASB Statement No. 142 alsostates that goodwill and other intangible assets with indefinite lives are nolonger subject to amortization. Therefore, in accordance with the requirements of FASB Statement No.142, the Company has not recorded amortization for the period ending September28, 2002.

 

The following table presents the impact of SFAS 142 onnet income and net income per share had SFAS 142 been in effect prior to thethree and nine month periods ended September 29, 2001:

 
|                          |   | **Quarter Ended**       |   | **Nine Months Ended**   |   |
|-------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                          |   | **September 29,  2001** |   | **September 28,  2002** |   | **September 29,  2001** |   | **September 28,  2002** |   |
|                          |   |                    |   |                    |   |   | ** ** |   |   |
| Net income as reported        |   | $                       | 6,623  |                    | $      | 11,788 |   | $ | 17,300 | ** ** | $ | 32,431 |   |
| Add: Amortization of goodwill |   | 161                     |   | 0                       |   | 320 | ** ** | 0 |   |
| Income tax effect             |   | (63                     | )      | 0                       |   | (125 | **)** | 0 |   |
| Net income -  adjusted        |   | $                       | 6,721  |                    | $      | 11,788 |   | $ | 17,495 | ** ** | $ | 32,431 |   |
|                          |   |                    |   |                    |   |   | ** ** |   |   |
| Earnings per common  share:   |   |                    |   |                    |   |   | ** ** |   |   |
| Basic                         |   | $                       | .23    |                    | $      | .41 |   | $ | .61 | ** ** | $ | 1.13 |   |
| Diluted                       |   | $                       | .23    |                    | $      | .40 |   | $ | .60 | ** ** | $ | 1.10 |   |

** **

**5.**           Line of Credit

 

The Company has a bank line of credit consisting of arevolving line of credit of up to $70 million. At the election of the Company, the line of credit bears interest atvarying rates that fluctuate based on the Prime rate or LIBOR, and aredetermined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused availableportion of the line at varying rates, determined by the Company’s leverageratio.  The revolving line of credit isdue and payable in full on September 30, 2004, and requires monthly interestpayments.  The balance outstanding underthe line of credit at September 28, 2002 was $15 million.  The line of credit is collateralized by allthe assets of the Company and includes various restrictions and financialcovenants.

 

8

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**6.**           Long-term Note Payable

 

The Company has a long-term note payable of $32.5million outstanding at September 28, 2002. The term note bears interest at varying rates that fluctuate based onthe Prime rate or LIBOR, and are determined based on the Company’s leverageratio.  The term note requires monthlyinterest payments and quarterly principal payments and is collateralized by allthe assets of the Company.  The termnote is due and payable in full on September 28, 2005.

** **

The following table displays the scheduled futureprincipal payments by fiscal year that will be due on the term loan.

 

| **Year** |   |                 | **Amount of Payment  Due** |       |
|----------|--------|----------------------|----------------------------|------------|
|     |   | ***(in thousands)*** |                       |
| 2002     |   | $                    | 2,500                      | ** ** |
| 2003     |   | 12,500               | ** **                 |
| 2004     |   | 10,000               | ** **                 |
| 2005     |   | 7,500                | ** **                 |
|     |   | $                    | 32,500                     | ** ** |

** **

**7.**              Earnings Per CommonShare

 

Basic earnings per common share is based on theweighted 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 common sharesused in the computation of earnings per common share are as follows:

 
|                                             |   | **Quarter Ended**       |   | **Nine Months Ended**   |   |
|--------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                             |   | **September 29,  2001** |   | **September 28,  2002** |   | **September 29,  2001** |   | **September 28,  2002** |   |
| **Basic**                                        |   |                    |   |                    |   |   |   |   |   |
| Issued and outstanding shares (weighted average) |   | 28,550,019              |   | 28,859,515              |   | 28,506,844 |   | 28,793,435 |   |
|                                             |   |                    |   |                    |   |   |   |   |   |
| **Effect of Dilutive Securities**                |   |                    |   |                    |   |   |   |   |   |
| Stock Options                                    |   | 839,999                 |   | 668,024                 |   | 734,419 |   | 810,934 |   |
| **Diluted**                                      |   | 29,390,018              |   | 29,527,539              |   | 29,241,263 |   | 29,604,369 |   |

** **

**8.**           Commitments andContingencies

 

Repurchase Agreements

 

Most dealers finance units on a “floor plan” basiswith a bank or finance company lending the dealer all or substantially all ofthe wholesale purchase price and retaining a security interest in thevehicles.  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement. These agreements provide that, for varying periods of up to 18 monthsafter a unit is shipped, the Company will repurchase its products from thefinancing institution in the event that they have repossessed them upon adealer’s default.  The risk of lossresulting from these agreements is further reduced by the resale value of theproducts repurchased.  The Company’scontingent obligations under repurchase agreements vary from period to periodand totaled approximately $426.8 million as of September 28, 2002, withapproximately 10.1% concentrated with one dealer.

 

9

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Litigation

 

The Company is involved in legal proceedings arisingin the ordinary course of its business, including a variety of productliability and warranty claims typical in the recreational vehicleindustry.  Management does not believethat the outcome of its pending legal proceedings will have a material adverseeffect on the business, financial condition, or results of operations of theCompany.

 

Debt Guarantee

 

In 2000, the Company entered into an agreement withOutdoor Resorts of Las Vegas (“ORLV”) and ORLV’s parent company Outdoor Resortsof America (“ORA”), for the purpose of constructing a luxury motor coach resortin Las Vegas, Nevada.  In the firstquarter of 2001, two additional projects, one in Naples, Florida (“ORN”), andthe other in Indio, California (“ORMCC”), were added.  As of September 28, 2002, the Company has recorded $7.8 millionin the form of a long term note receivable from ORA and its respectivesubsidiaries.  Accrued interestreceivable from the loans was $1.5 million at September 28, 2002, of whichapproximately $779,000 was in arrears due to delays in development of therespective projects.  Accordingly, theCompany has reserved the entire interest receivable.

 

As part of the financing structure for the projects,the Company also agreed to act as co-guarantor with ORLV’s parent company, ORA,on an $11.2 million construction loan for the Las Vegas resort.  At September 28, 2002, ORLV and ORA hadapproximately $9.9 million outstanding on the construction loan.  In return for the Company’s loans andguarantee commitment, ORLV and ORA has agreed to pay interest and incomeparticipation to the Company.  Thisguarantee has off-balance sheet credit risk until the construction loan isfully repaid.  The Company could incur aloss if the proceeds from the sale of lots are insufficient to satisfy theconstruction loan.

 

During the quarter ended September 28, 2002, theCompany reached an agreement in principle with ORA to acquire all of theoutstanding stock of ORLV, ORN, and ORMCC (the Projects).  As consideration, Monaco will assume thecurrent debt and liabilities of the projects of approximately $30 million,including the $7.8 million note payable to the Company, and the $10 millionco-guaranteed debt. The transaction is subject to due diligence procedures bythe Company, and execution of a definitive agreement.  As of September 28, 2002, due diligence procedures have beensubstantially completed.  The Companyintends to finalize the definitive agreements, and complete the acquisitionduring the fourth quarter of 2002.  Thisplanned acquisition relieves ORA of certain debt pressures associated withresort construction, and will allow ORA to continue to focus on development andlot sales, as well as providing management services for the Company on theProjects.

 

Aircraft Lease Commitment

 

The Company has a two-year operating lease for anaircraft, with annual renewals for up to three additional years.  If at the end of the initial lease periodthe Company elects to return the aircraft, the Company has guaranteed up to $16million in the event the Lessor’s net sales proceeds are less than $18.5million.

 

10

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

 

This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended.  These statementsinclude, but are not limited to, those below that have been marked with anasterisk (*).  In addition, the Companymay from time to time make forward-looking statements through statements thatinclude the words “believes”, “expects”, “anticipates” or similarexpressions.  Such forward-lookingstatements involve known and  unknownrisks, uncertainties and other factors that may cause actual results,performance or achievements of the Company to differ materially from thoseexpressed or implied by such forward-looking statements, including those setforth below under the caption “Factors That May Affect Future OperatingResults” 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.”  The Company cautions the reader, however,that these factors may not be exhaustive.

 

**GENERAL**

 

Monaco Coach Corporation is a leading manufacturer ofpremium Class A motor coaches and towable recreational vehicles(“towables”).  The Company’s productline currently consists of a broad line of motor coaches, fifth wheel trailersand travel trailers under the “Monaco”, “Holiday Rambler”, “Royale Coach”, “Beaver”,“Safari”, and “McKenzie” brand names. The Company’s products, which are typically priced at the high end oftheir respective product categories, range in suggested retail price from$60,000 to $1.2 million for motor coaches and from $20,000 to $65,000 fortowables.

 

**RESULTSOF OPERATIONS**

 

**Quarterended September 28, 2002 Compared to Quarter ended September 29, 2001**

 

Third quarter net sales were up 30.7% to $314.7million compared to $240.8 million for the same period last year. Gross dieselmotorized sales revenues were up 35.3%, while gas motorized were up 25.0%,reflecting an improved market. The Company’s gross towable sales were up 17.5%as the Holiday Rambler towable operations reported increases that more thanoffset decreases on the McKenzie towable sales.  The Company’s overall unit sales were up 20.0% in the thirdquarter of 2002 with diesel motorized unit sales up 31.8% to 1,445 units, gasmotorized unit sales up 16.9% to 596 units, and towable unit sales up by 5.2%to 805 units.  The Company’s totalaverage unit selling price increased to $112,000 from $101,700 in the sameperiod last year.

 

Gross profit for the thirdquarter of 2002 increased to $42.8 million, up from $30.5 million in 2001, andgross margin increased from 12.7% in the third quarter of 2001 to 13.6% in thethird quarter of 2002.  The increase ingross margin over the prior year was primarily due to a reduction in indirectcosts as a percentage of sales, as the Company was able to leverage plantoperations with higher production leveles compared to last year.  The Company’s overall gross margin mayfluctuate in future periods if the mix of products shifts from higher to lowergross margin units or if the Company encounters unexpected manufacturingdifficulties or competitive pressures.

 

Selling, general, and administrative expensesincreased by $3.8 million to $22.8 million in the third quarter of 2002 anddecreased as a percentage of sales from 7.9% in 2001 to 7.2% in 2002.  Selling, general and administrative expensesin the third quarter of 2002, included slight decreases, as a percentage ofsales, in spending related to retail promotion efforts, administrative andselling wages, and advertising.  TheCompany’s selling, general, and administrative expense may fluctuate in futureperiods depending on the Company’s strategy of retail promotions as a  resultof difficult market conditions or competitive pressures.

 

Operating income was $20.0 million, or 6.4% of salesin the third quarter of 2002 compared to $11.4 million, or 4.7% of sales in thesimilar 2001 period.  The increase inoperating margins reflects an improved gross profit combined with lowerselling, general and administrative costs as a percentage of sales.

 

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Net interest expense was $633,000 in the third quarterof 2002 compared to $539,000 in the comparable 2001 period, reflecting a higherlevel of borrowing during the third quarter of 2002 due to higher inventory andaccounts receivable balances.  TheCompany reported a provision for income taxes of $7.6 million, or an effectivetax rate of 39.3% in the third quarter of 2001, compared to $4.2 million, or aneffective tax rate of 39.0% for the comparable 2001 period.

 

Net income for the third quarter of 2002 was $11.8million compared to $6.6 million in 2001 due to an improved operating margin.

 

**NineMonths ended September 28, 2002 Compared to Nine Months ended September 29,2001**

 

Net sales increased 36.5% to $922.0 million comparedto $675.5 million for the same period last year.  Gross diesel  motorizedsales revenues were up 37.8%, gas motorized were up 44.4%, and towables were up9.8%.  Overall unit sales for theCompany were up 20.8% in the first nine months of 2002 compared to the similarperiod in 2001 with diesel motorized unit sales up 30.7% to 4,429 units, gasmotorized up 37% to 1,630 units, and towable unit sales down .4% to 2,475.

 

Gross profit for the nine-month period ended September28, 2002 increased to $121.8 million from $81.8 million in 2001, and grossmargin increased to 13.2% in 2001 from 12.1% in 2000. Gross margin in the firstnine months of 2002 was positively impacted by reduced sales discounts, whichnet against gross sales as well as improved production efficiencies created byincreased volume.

 

Selling, general, and administrative expensesincreased by $14.8 million to $66.5 million in the first nine months of 2002and decreased as a percentage of sales from 7.7% in 2001 to 7.2% in 2002.  Selling, general and administrative expensesin the first nine months of 2002 included decreases, as  percentages of sales, spending related toretail promotion efforts, selling and administrative wages, and advertising.

 

Operating income increased to $55.3 million in thefirst nine months of 2002 from $29.7 million in 2001.  The Company’s lower selling, general, and administrative expenseas a percentage of sales combined with improvements in the Company’s grossmargin, resulted in an increase in operating margin to 6.0% in the first ninemonths of 2002 compared to 4.4% in the first nine months of 2001.

 

Net interest expense was $2.0 million in the firstnine months of 2002 compared to $1.6 million in the comparable 2001  period, reflecting a higher level ofborrowing during the first nine months of 2002.

 

The Company reported a provision for income taxes of$21.0 million, or an effective tax rate of 39.3% for the first nine months of2002, compared to $11.1 million, or an effective tax rate of 39.0% for thecomparable 2001 period.

 

Net income for the first nine months of 2002 was $32.4million compared to $17.3 million in 2001 due to the increase in sales combinedwith an improved operating margin.

 

**INFLATION**

 

The Company does not believe that inflation has had a material impacton its results of operations for the periods presented.

 

**CRITICALACCOUNTING POLICIES**

 

The discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from these estimates under differentassumptions or conditions.  We believethe following critical accounting policies and related judgments and estimatesaffect the preparation of our consolidated financial statements.

 

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WARRANTY COSTS  The Companyprovides an estimate for accrued warranty costs at the time a product issold.  This estimate is based onhistorical average repair costs, as well as other reasonable assumptions ashave been deemed appropriate by management.

 

PRODUCT LIABILITY  The Companyprovides an estimate for accrued product liability based on current pendingcases, as well as for those cases which are incurred but not reported.  This estimate is developed by legal counselbased on professional judgment, as well as historical experience.

 

IMPAIRMENT OF GOODWILL  TheCompany assesses the potential impairment of goodwill in accordance withFinancial Accounting Standards Board (FASB) Statement No. 142.  This estimate involves management comparingthe fair value of goodwill to the respective carrying value, to see if goodwillhas been impaired.  See note 4 of theNotes to Condensed Consolidated Financial Statements.

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN  OUR OPERATING RESULTS FOR A VARIETY OFREASONS  Our net sales, gross margin andoperating results may fluctuate significantly from period to period due to a numberof factors, many of which are not readily predictable.  These factors include the following:

 

•                       The marginsassociated with the mix of products we sell in any particular period

 

•                       Our abilityto 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

 

•                       Our abilityto introduce new models that achieve consumer acceptance

 

•                       Theintroduction, marketing and sale of competing products by others

 

•                       Theaddition or loss of our dealers

 

•                       The timingof trade shows and rallies, which we use to market and sell our products

 

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

 

Our overall gross margin may decline in future periods to the extentthat we increase the percentage of sales of lower gross margin towable productsor if the mix of motor coaches we sell shifts to lower gross margin units.  In addition, a relatively small variation inthe number of recreational vehicles we sell in any quarter can have asignificant impact on total sales and operating results for that quarter.

 

Demand in the recreational vehicle industry generally declines duringthe winter months, while sales are generally higher during the spring andsummer months.  With the broader rangeof products we now offer, seasonal factors could have a significant impact onour operating results in the future. Additionally, unusually severe weather conditions in certain marketscould delay the timing of shipments from one quarter to another.

 

We attempt to forecast orders for our products accurately and commencepurchasing and manufacturing prior to receipt of such orders.  However, it is highly unlikely that we willconsistently accurately forecast the timing and rate of orders.  This aspect of our business makes ourplanning inexact and, in turn, affects our shipments, costs, inventories,operating results and cash flow for any given quarter.

 

THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TOSLOWDOWNS IN THE GENERAL ECONOMY  Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic andpolitical conditions that affect disposable income for leisure-timeactivities.  For example, unit sales ofrecreational vehicles (excluding conversion

 

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vehicles) peaked at approximately 259,000 units in 1994 and declined toapproximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units anddeclined in 2000 and 2001 to approximately 300,000 and 257,000 units,respectively.  Our business isnecessarily subject to the cyclical nature of this industry.  Some of the factors that contribute to thiscyclicality include fuel availability and costs, interest rate levels, thelevel of discretionary spending, and availability of credit and overallconsumer confidence.  The recent declinein consumer confidence and slowing of the overall economy may adversely affectthe recreational vehicle market.  Anextended continuation of these conditions would materially affect our business,results of operations and financial condition.

 

OUR RECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUROPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS  In the past few years, we have significantlyexpanded the size and scope of our business, which has required us to hireadditional employees.  Some of these newemployees include new management personnel. In addition, our current management personnel have assumed additionalresponsibilities.  The increase in oursize over a relatively short period of time has put pressure on our operating,financial, and management information systems. If we continue to expand, such growth would put additional pressure onthese systems and may cause such systems to malfunction or to experiencesignificant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH THEEXPANSION OF OUR MANUFACTURING CAPACITY In the past few years, we have significantly increased our manufacturingcapacity.  In connection with thisexpansion, we have also integrated some of our manufacturing facilities.  We may experience unexpected building andproduction problems associated with this expansion.  In the past, we have had difficulties with the manufacturing ofnew models and increasing the rates of production of our plants.  Our expenses have increased as a result ofthe expansion and we will be materially and adversely affected if the expansiondoes not result in an increase in revenue from the new or additional products.

 

This expansion involves risks, including the following:

•                       We mustrely 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.

 

•                       We may beunable to complete a planned expansion in a timely manner, which could resultin lower production levels and an inability to satisfy customer demand for ourproducts.

 

WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANTPERCENTAGE OF OUR SALES  Although ourproducts were offered by 385 dealerships located primarily in the United Statesand Canada as of September 28, 2002, a significant percentage of our sales areconcentrated among a relatively small number of independent dealers.  For the nine months ended September 28,2002, sales to one dealer, Lazy Days RV Center, accounted for 12.3% of totalsales compared to 12.2%  of sales in thesame period ended last year.  For thenine months ended September 28, 2002, sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 40.40% of sales,compared to 39.0% of sales for the same period ended last year.  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’S INVENTORY OF OUR PRODUCTS IN THEEVENT THAT THE DEALER DOES NOT REPAY ITS LENDER  As is common in the recreational vehicle industry, we enter intorepurchase agreements with the financing institutions used by our dealers tofinance their purchases of our products. These agreements require us to repurchase the dealer’s inventory in theevent that the dealer does not repay its lender.  Obligations under these agreements vary from period to period,but totaled approximately $426.8 million as of September 28, 2002, withapproximately 10.1% concentrated with one dealer.  If we have to repurchase a significant number of our products inthe future, it could have a material adverse effect on our financial condition,business and results of operations.

 

WE MAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO ANINCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL  An interruption in the supply, or asignificant increase

 

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in the price or tax on the sale, of diesel fuel or gasoline on aregional or national basis could significantly affect our business.  Diesel fuel and gasoline have, at varioustimes in the past, been either expensive or difficult to obtain.

 

WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANTCOMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS  A number of important components for certainof our products are purchased from single or a limited number of sources. Theseinclude turbo diesel engines (Cummins and Caterpillar), substantially all ofour transmissions (Allison), axles (Dana) for all diesel motor coaches andchassis (Workhorse and Ford) for certain motor home products.  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.  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 AND NEW FEATURES TO REMAINCOMPETITIVE  The market for our productsis very competitive.  We currentlycompete with a number of manufacturers of motor coaches, fifth wheel trailers,and travel trailers.  Some of thesecompanies have greater financial resources than we have and extensivedistribution networks.  These companies,or new competitors in the industry, may develop products that customers in theindustry prefer over our products.

 

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

 

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVETO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OURREPUTATION AND RESULTING IN LOSS OF SALES Our customers require demanding specifications for product performanceand reliability.  Because our productsare complex and often use advanced components, processes and techniques,undetected errors and design flaws may occur. Product defects result in higher product service and warranty andreplacement costs and may cause serious damage to our customer relationshipsand industry reputation, all of which will negatively affect our sales andbusiness.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDINGPRODUCT LIABILITY AND WARRANTY CLAIMS  Weare subject to litigation arising in the ordinary course of our business,typically for product liability and warranty claims that are common in therecreational vehicle industry.  While wedo not believe that the outcome of any pending litigation, net of insurancecoverage, will materially adversely affect our business, results of operationsor financial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

 

To date, we have been successful in obtaining product liabilityinsurance on terms that we consider acceptable.  Our current policies jointly provide coverage against claimsbased on occurrences within the policy periods up to a maximum of $101 millionfor each occurrence and $102 million 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 andfinancial condition.

 

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCTDEVELOPMENT AND MANUFACTURING  Oursuccess depends in part upon attracting and retaining highly skilledprofessionals.  A number of ouremployees are highly skilled engineers and other technical professionals, andour failure to continue to attract and retain such individuals could adverselyaffect our ability to compete in the industry.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s primary sources of liquidity areinternally generated cash from operations and available borrowings under itscredit facilities.  During the firstnine months of 2002, the Company generated cash of $25.5 million from operatingactivities.  The Company generated $38.8million from net income and non-cash expenses such as depreciation andamortization. This amount was reduced by an increase of $28.7 million in tradereceivables, as well as an increase of $40.5 million in inventories, that wasmostly offset by an increase in trade payables and accrued liablilities of$30.0 million, and $16.5 million, respectively.  An increase in income taxes payable of $13.2 million furtherreduced the impact of the increases in inventories and accountsreceivable.  The increase in trade receivablesreflect increased shipments near the end of the quarter compared to the yearend of 2001.  Increased inventory levelsreflect an increase of work in process as the Company implemented a new qualityimprovement process that added an additional stage to the final completion ofthe product.  Increased payables andliabilities are reflective of increased purchases for model change, accrualsfor current income taxes payable, and various other accrued liabilities.

 

The Company has credit facilities consisting of arevolving line of credit of up to $70.0 million (the “Revolving Loan”).  At the election of the Company, theRevolving Loan bears interest at varying 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 September 30, 2004, and requiresmonthly interest payments.  The balanceoutstanding under the Revolving Loan at September 28, 2002 was $14.8million.  The Revolving Loan iscollateralized by all the assets of the Company and includes 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.

 

During the quarter ended September 28, 2002, theCompany reached an agreement in principle with ORA to acquire all of theoutstanding stock of ORLV, ORN, and ORMCC (the Projects).  As consideration, Monaco will assume thecurrent debt and liabilities of the Projects of approximately $30 million,including $7.8 million in notes payable to the Company, and $10 million inco-guaranteed debt.  To accomplish this,the Company has obtained financing from its current lending facility, in theform of a long-term note in the amount of $22.0 million.

 

The Company’s principal working capital requirementsare for purchases of inventory and, to a lesser extent, financing of tradereceivables.  The Company’s dealerstypically finance product purchases under wholesale floor plan arrangementswith third parties as described below. At September 28, 2002, the Company had working capital of approximately$91.7 million, an increase of $28.0 million from working capital of $63.7million at December 29, 2001.  TheCompany has been using short-term credit facilities and cash flow to financeits capital expenditures.

 

The Company believes that cash flow from operationsand funds available under its anticipated credit facilities will be sufficientto meet the Company’s liquidity requirements for the next 12 months.*  The Company’s capital expenditures were$13.1 million in the first nine months of 2002, which included costs forroutine capital expenditures, completing the cabinet shop renovation inIndiana, as well as, incurring costs with a paint shop addition inIndiana.  The Company has also begunconstruction on a new Florida service center, which will replace it’s twoexisting service facilities in Florida. The Company anticipates that capital expenditures for all of 2002 willbe approximately $19 to $20 million, which includes expenditures in the fourthquarter relating to the expansion of our towables facility in Indiana, routinecapital expenditures for computer system upgrades and additions, smaller scaleplant remodeling projects and normal replacement of outdated or worn-outequipment.*  The Company may requireadditional equity or debt financing to address working capital and facilitiesexpansion needs, particularly if the Company significantly increases the levelof working capital assets such as inventory and accounts receivable.  The Company may also from time to time seekto acquire businesses that would complement the Company’s current business, andany such acquisition could require additional financing.  There can be no assurance that additionalfinancing will be available if required or on terms deemed favorable by theCompany.

 

As is common in the recreational vehicle industry, theCompany enters into repurchase agreements with the financing institutions usedby its dealers to finance their purchases. These agreements obligate theCompany to repurchase a dealer’s inventory under certain circumstances in theevent of a default by the dealer to its lender. If the Company

 

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were obligated to repurchase a significant number ofits products in the future, it could have a material adverse effect on theCompany’s financial condition, business and results of operations. TheCompany’s contingent obligations under repurchase agreements vary from periodto period and totaled approximately $426.8 million as of September 28, 2002,with approximately 10.1% concentrated with one dealer.

 

As part of the normal course of business, the Company incurs certaincontractual obligations and commitments which will require future cashpayments. 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** |   |
|--------------------------------------------|--------|--------------------|--------|------------------|--------|------------------|--------|----------------|--------|-----------|--------|
| Long-term debt(1)                          |   | $                  | 10,000 |             | $      | 22,500           |   | $              | 0      |      | $      | 0 |   | $ | 32,500 |   |
| Operating Leases(2)                        |   | 2,204              |   | 2,563            |   | 1,350            |   | 4,333          |   | 10,450    |   |
| Total  Contractual Cash Obligations        |   | $                  | 12,204 |             | $      | 25,063           |   | $              | 1,350  |      | $      | 4,333 |   | $ | 42,950 |   |

 

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      |             | $      | 70,000           |   | $              | 0      |      | $      | 0 |   | $ | 70,000 |   |
| Guarantees                           |   | 9,900              | (4)    | 16,039           | (2)    | 0                |   | 0              |   | 25,939    |   |
| Repurchase Obligations(5)            |   | 0                  |   | 426,800          |   | 0                |   | 0              |   | 426,800   |   |
| Total  Commitments                   |   | $                  | 9,900  |             | $      | 512,839          |   | $              | 0      |      | $      | 0 |   | $ | 522,739 |   |

 

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(1)          See Note 6 to the financials.

(2)          Various leases includingmanufacturing facilities, aircraft, and machinery and equipment.  See Note 8 to the financials.

(3)          See Note 5 to the financials.  The amount listed represents availableborrowings on the line of credit at June 29, 2002.

(4)          See Note 8 to the financials.

(5)          Reflects obligations undermanufacturer repurchase commitments. See Note 8 to the financials.

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

**SFAS143, Accounting for Asset Retirement Obligations**

 

In June 2001, FASB issued Statement No. 143,Accounting for Asset Retirement Obligations. FASB Statement No. 143 is effective for the fiscal years beginning afterJune 15, 2002.  FASB Statement No. 143,addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. FASB Statement No. 143 requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The impact of this pronouncement on theCompany’s financial statements is not expected to be material.

 

**FAS 145,Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and TechnicalCorrections as of April 2002**

 

This Statement rescinds FASB Statement No. 4,Reporting Gains and Losses from Extinguishment of Debt, and an amendment ofthat Statement, FASB Statement No. 64, Extinguishments of Debt Made to SatisfySinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,Accounting for Intangible Assets of Motor Carriers. This Statement amends FASBStatement No. 13, Accounting for Leases, to eliminate an inconsistency betweenthe required accounting for sale-leaseback transactions and the requiredaccounting for certain lease modifications that have economic effects that aresimilar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncementsto make various technical corrections, clarify meanings, or describe their 

 

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applicability under changed conditions.  The Company has reviewed this pronouncementand will consider it’s impact on any relevant transactions.

 

**FAS 146,Accounting for Costs Associated with Exit or Disposal Activities**

 

This Statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”

 

This Statement applies to costs associated with anexit activity that does not involve an entity newly acquired in a businesscombination or with a disposal activity covered by FASB Statement No. 144,Accounting for the Impairment or Disposal of Long-lived Assets.  Those costs include, but are not limited to,the following:

 

a.               Terminationbenefits provided to current employees that are involuntarily terminated underthe terms of a benefit arrangement that, in substance, is not an ongoingbenefit arrangement or an individual deferred compensation contract(hereinafter referred to as one-time termination benefits),

 

b.              Coststo terminate a contract that is not a capital lease, and,

 

c.               Coststo consolidate facilities or relocate employees.

 

This Statement does not apply to costs associated withthe retirement of a long-lived asset covered by FASB Statement No. 143,Accounting for Asset Retirement Obligations. The impact of this pronouncement on the Company’s financial statementsis not expected to be material.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Not applicable.

 

**Item 4.  Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

Our chief executive officer and our chief financialofficer, after evaluating our “disclosure controls and procedures” (as definedin Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and15-d-14(c)) have concluded that as of a date within 90 days of the filing dateof this report (the “Evaluation Date”) our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

Changes in Internal Controls

 

Subsequent to the “Evaluation Date”, there were nosignificant changes in our internal controls or in other factors that couldsignificantly affect our disclosure controls and procedures, nor were there anysignificant deficiencies or material weaknesses in our internal controls.  As a result, no corrective actions wererequired or undertaken.

 

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**PART II - OTHER INFORMATION**

 

**Item 5.**** Audit Committee Approval of Non-Audit Services**

 

In accord with Section 10A(i)(2) of the SecuritiesExchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of2002, the Company is responsible for disclosing non-audit services approved bythe Company’s Audit Committee to be performed by the Company’s externalauditor. Non-audit services are defined in the law as services other than thoseprovided in connection with an audit or a review of the financial statements ofthe Company.  During the three monthsended September 28, 2002, the Audit Committee approved an engagement ofPricewaterhouseCoopers LLP, the company’s external auditor, for non-auditservices connected with due diligence procedures on the acquisition of OutdoorResorts Las Vegas, Outdoor Resorts Naples, and Outdoor Resorts MotorcoachCountry Club.

 

**Item 6.**** Exhibits and Reports on Form 8-K**

 

(a)                    Exhibits

 

10.1                 1993 IncentiveStock Option Plan as Amended Through October 23, 2002.

 

99.1                 Certification byCEO and CFO of Financial Statements.

 

(b)                   Reportson Form 8-K

 

No reports on Form 8-K were filed during the quarterended September 28, 2002.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | **MONACO  COACH CORPORATION**                                                                           |
|--------|---------------------------------------------------------------------------------------------------------|
|   |                                                                                                    |
|   |                                                                                                    |
| Dated: | November 12, 2002                                                                                       |   | /s/:  P. Martin Daley |
|   | P. Martin Daley                                                                                         |
|   | Vice President and  Chief Financial Officer (Duly  Authorized Officer and Principal  Financial Officer) |
|        |                                                                                                         |  |  |

 

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**Sarbanes-OxleySection 302(a) Certification**

 

I, P. Martin Daley, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Monaco Coach Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   |                                       |            |
|--------|--------------------------------------------|-----------------|
|   |                                       |            |
| Dated: | November 12, 2002                          |            | /s/:   P. Martin Daley |   |
|   |                                       | P. Martin Daley |
|   | Vice President and Chief Financial Officer |
|        |                                            |                 |  |  |

 

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**Sarbanes-OxleySection 302(a) Certification**

 

I, Kay L. Toolson, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Monaco Coach Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                   presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   |                    |           |
|--------|-------------------------|----------------|
|   |                    |           |
| Dated: | November 12, 2002       |           | /s/:   Kay L. Toolson |   |
|   |                    | Kay L. Toolson |
|   | Chief Executive Officer |
|        |                         |                |  |  |

 

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