MONACO COACH CORP /DE/ - 10-Q Quarterly Report

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 be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

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

MONACO COACH CORPORATION

FORM 10-Q

September 28, 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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED 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.

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED 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.

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED 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.

MONACO COACH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements have been prepared by Monaco Coach Corporation (the “Company”) without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary, consisting only of normal recurring adjustments, to present fairly the financial position of the Company as of December 29, 2001 and September 28, 2002, and the results of its operations for the quarters and nine-month periods ended September 29, 2001 and September 28, 2002, and cash flows of the Company for the nine-month periods ended September 29, 2001 and September 28, 2002. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and all significant intercompany accounts and transactions have been eliminated in consolidation. The balance sheet data as of December 29, 2001 was derived from audited financial statements, but does not include all disclosures contained in the Company’s Annual Report to Stockholders. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto appearing in the Company’s Annual Report to Stockholders for the year ended December 29, 2001.

2. Acquisition of SMC Corporation

On August 6, 2001, the Company completed the acquisition of all of the outstanding stock of SMC Corporation (“SMC”) at a price of $3.70 per share through a cash tender offer and back-end cash merger. The cash paid for SMC, including transaction costs of $3,062,000, totaled $24,320,000. The total assets acquired and liabilities assumed 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

3. Inventories

Inventories are stated at lower of cost (first-in, first-out) or market. The composition of 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 of acquisition over the fair value of net assets acquired. At each balance sheet date, management assesses whether there has been permanent impairment in the value of goodwill. The amount of any such impairment is determined by comparing the fair value of the associated goodwill with its carrying value. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. As of September 28, 2002, as required by Financial Accounting Standards Board (“FASB”) Statement No. 142, management has determined that there has been no impairment of goodwill requiring a write down. FASB Statement No. 142 also states that goodwill and other intangible assets with indefinite lives are no longer subject to amortization. Therefore, in accordance with the requirements of FASB Statement No. 142, the Company has not recorded amortization for the period ending September 28, 2002.

The following table presents the impact of SFAS 142 on net income and net income per share had SFAS 142 been in effect prior to the three 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 a revolving line of credit of up to $70 million. At the election of the Company, the line of credit bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio. The Company also pays interest monthly on the unused available portion of the line at varying rates, determined by the Company’s leverage ratio. The revolving line of credit is due and payable in full on September 30, 2004, and requires monthly interest payments. The balance outstanding under the line of credit at September 28, 2002 was $15 million. The line of credit is collateralized by all the assets of the Company and includes various restrictions and financial covenants.

6. Long-term Note Payable

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

The following table displays the scheduled future principal 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 Common Share

Basic earnings per common share is based on the weighted average number of shares outstanding during the period. Diluted earnings per common share is based on the weighted average number of shares outstanding during the period, after consideration of the dilutive effect of stock options. The weighted average number of common shares used 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 and Contingencies

Repurchase Agreements

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

Litigation

The Company is involved in legal proceedings arising in the ordinary course of its business, including a variety of product liability and warranty claims typical in the recreational vehicle industry. Management does not believe that the outcome of its pending legal proceedings will have a material adverse effect on the business, financial condition, or results of operations of the Company.

Debt Guarantee

In 2000, the Company entered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”) and ORLV’s parent company Outdoor Resorts of America (“ORA”), for the purpose of constructing a luxury motor coach resort in Las Vegas, Nevada. In the first quarter of 2001, two additional projects, one in Naples, Florida (“ORN”), and the other in Indio, California (“ORMCC”), were added. As of September 28, 2002, the Company has recorded $7.8 million in the form of a long term note receivable from ORA and its respective subsidiaries. Accrued interest receivable from the loans was $1.5 million at September 28, 2002, of which approximately $779,000 was in arrears due to delays in development of the respective projects. Accordingly, the Company 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 had approximately $9.9 million outstanding on the construction loan. In return for the Company’s loans and guarantee commitment, ORLV and ORA has agreed to pay interest and income participation to the Company. This guarantee has off-balance sheet credit risk until the construction loan is fully repaid. The Company could incur a loss if the proceeds from the sale of lots are insufficient to satisfy the construction loan.

During the quarter ended September 28, 2002, the Company reached an agreement in principle with ORA to acquire all of the outstanding stock of ORLV, ORN, and ORMCC (the Projects). As consideration, Monaco will assume the current debt and liabilities of the projects of approximately $30 million, including the $7.8 million note payable to the Company, and the $10 million co-guaranteed debt. The transaction is subject to due diligence procedures by the Company, and execution of a definitive agreement. As of September 28, 2002, due diligence procedures have been substantially completed. The Company intends to finalize the definitive agreements, and complete the acquisition during the fourth quarter of 2002. This planned acquisition relieves ORA of certain debt pressures associated with resort construction, and will allow ORA to continue to focus on development and lot sales, as well as providing management services for the Company on the Projects.

Aircraft Lease Commitment

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, those below that have been marked with an asterisk (*). In addition, the Company may from time to time make forward-looking statements through statements that include the words “believes”, “expects”, “anticipates” or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements, including those set forth below under the caption “Factors That May Affect Future 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 under the 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 of premium Class A motor coaches and towable recreational vehicles (“towables”). The Company’s product line currently consists of a broad line of motor coaches, fifth wheel trailers and travel trailers under the “Monaco”, “Holiday Rambler”, “Royale Coach”, “Beaver”, “Safari”, and “McKenzie” brand names. The Company’s products, which are typically priced at the high end of their 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 for towables.

RESULTS OF OPERATIONS

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

Third quarter net sales were up 30.7% to $314.7 million compared to $240.8 million for the same period last year. Gross diesel motorized 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 than offset decreases on the McKenzie towable sales. The Company’s overall unit sales were up 20.0% in the third quarter of 2002 with diesel motorized unit sales up 31.8% to 1,445 units, gas motorized unit sales up 16.9% to 596 units, and towable unit sales up by 5.2% to 805 units. The Company’s total average unit selling price increased to $112,000 from $101,700 in the same period last year.

Gross profit for the third quarter of 2002 increased to $42.8 million, up from $30.5 million in 2001, and gross margin increased from 12.7% in the third quarter of 2001 to 13.6% in the third quarter of 2002. The increase in gross margin over the prior year was primarily due to a reduction in indirect costs as a percentage of sales, as the Company was able to leverage plant operations with higher production leveles compared to last year. The Company’s overall gross margin may fluctuate in future periods if the mix of products shifts from higher to lower gross margin units or if the Company encounters unexpected manufacturing difficulties or competitive pressures.

Selling, general, and administrative expenses increased by $3.8 million to $22.8 million in the third quarter of 2002 and decreased as a percentage of sales from 7.9% in 2001 to 7.2% in 2002. Selling, general and administrative expenses in the third quarter of 2002, included slight decreases, as a percentage of sales, in spending related to retail promotion efforts, administrative and selling wages, and advertising. The Company’s selling, general, and administrative expense may fluctuate in future periods depending on the Company’s strategy of retail promotions as a result of difficult market conditions or competitive pressures.

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

Net interest expense was $633,000 in the third quarter of 2002 compared to $539,000 in the comparable 2001 period, reflecting a higher level of borrowing during the third quarter of 2002 due to higher inventory and accounts receivable balances. The Company reported a provision for income taxes of $7.6 million, or an effective tax rate of 39.3% in the third quarter of 2001, compared to $4.2 million, or an effective tax rate of 39.0% for the comparable 2001 period.

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

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

Net sales increased 36.5% to $922.0 million compared to $675.5 million for the same period last year. Gross diesel motorized sales revenues were up 37.8%, gas motorized were up 44.4%, and towables were up 9.8%. Overall unit sales for the Company were up 20.8% in the first nine months of 2002 compared to the similar period in 2001 with diesel motorized unit sales up 30.7% to 4,429 units, gas motorized up 37% to 1,630 units, and towable unit sales down .4% to 2,475.

Gross profit for the nine-month period ended September 28, 2002 increased to $121.8 million from $81.8 million in 2001, and gross margin increased to 13.2% in 2001 from 12.1% in 2000. Gross margin in the first nine months of 2002 was positively impacted by reduced sales discounts, which net against gross sales as well as improved production efficiencies created by increased volume.

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

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

Net interest expense was $2.0 million in the first nine months of 2002 compared to $1.6 million in the comparable 2001 period, reflecting a higher level of borrowing 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 of 2002, compared to $11.1 million, or an effective tax rate of 39.0% for the comparable 2001 period.

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

INFLATION

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

CRITICAL ACCOUNTING POLICIES

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

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

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

IMPAIRMENT OF GOODWILL The Company assesses the potential impairment of goodwill in accordance with Financial Accounting Standards Board (FASB) Statement No. 142. This estimate involves management comparing the fair value of goodwill to the respective carrying value, to see if goodwill has been impaired. See note 4 of the Notes to Condensed Consolidated Financial Statements.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

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

• Our ability to utilize and expand our manufacturing resources efficiently

• Shortages of materials used in our products

• A determination by us that goodwill or other intangible assets are impaired and have to be written down to their fair values, resulting in a charge to our results of operations

• Our ability to introduce new models that achieve consumer acceptance

• The introduction, marketing and sale of competing products by others

• The addition or loss of our dealers

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

• Factors affecting the recreational vehicle industry as a whole, including economic and seasonal factors

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

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

We attempt to forecast orders for our products accurately and commence purchasing and manufacturing prior to receipt of such orders. However, it is highly unlikely that we will consistently accurately forecast the timing and rate of orders. This aspect of our business 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 CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY The recreational vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic, demographic and political conditions that affect disposable income for leisure-time activities. For example, unit sales of recreational vehicles (excluding conversion

vehicles) peaked at approximately 259,000 units in 1994 and declined to approximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units and declined in 2000 and 2001 to approximately 300,000 and 257,000 units, respectively. Our business is necessarily subject to the cyclical nature of this industry. Some of the factors that contribute to this cyclicality include fuel availability and costs, interest rate levels, the level of discretionary spending, and availability of credit and overall consumer confidence. The recent decline in consumer confidence and slowing of the overall economy may adversely affect the recreational vehicle market. An extended 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 OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS In the past few years, we have significantly expanded the size and scope of our business, which has required us to hire additional employees. Some of these new employees include new management personnel. In addition, our current management personnel have assumed additional responsibilities. The increase in our size 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 on these systems and may cause such systems to malfunction or to experience significant delays.

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

This expansion involves risks, including the following:

• We must rely on timely performance by contractors, subcontractors, and government agencies, whose performance we may be unable to control.

• The development of new products involves costs associated with new machinery, training of employees, and compliance with environmental, health, and other government regulations.

• We may be unable to complete a planned expansion in a timely manner, which could result in lower production levels and an inability to satisfy customer demand for our products.

WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES Although our products were offered by 385 dealerships located primarily in the United States and Canada as of September 28, 2002, a significant percentage of our sales are concentrated 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 total sales compared to 12.2% of sales in the same period ended last year. For the nine 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 a substantial decrease in sales by any of these dealers could have a material impact on our business, results of operations and financial condition.

WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITS LENDER As is common in the recreational vehicle industry, we enter into repurchase agreements with the financing institutions used by our dealers to finance their purchases of our products. These agreements require us to repurchase the dealer’s inventory in the event 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, with approximately 10.1% concentrated with one dealer. If we have to repurchase a significant number of our products in the 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 AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL An interruption in the supply, or a significant increase

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

WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components for certain of our products are purchased from single or a limited number of sources. These include turbo diesel engines (Cummins and Caterpillar), substantially all of our transmissions (Allison), axles (Dana) for all diesel motor coaches and chassis (Workhorse and Ford) for certain motor home products. We have no long-term supply contracts with these suppliers or their distributors, and we cannot be certain that these suppliers will be able to meet our future requirements. For example, in 1997, Allison placed all chassis manufacturers on allocation with respect to one of the transmissions that we use, and again in 1999 Ford placed one of its gasoline powered chassis on allocation. An extended delay or interruption in the supply of any components that we obtain from a single supplier or from a limited number of suppliers could adversely affect our business, results of operations and financial condition.

OUR INDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE The market 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 have and extensive distribution networks. These companies, or new competitors in the industry, may develop products that customers in the industry prefer over our products.

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

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES Our customers require demanding specifications for product performance and reliability. Because our products are 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 and replacement costs and may cause serious damage to our customer relationships and industry reputation, all of which will negatively affect our sales and business.

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

To date, we have been successful in obtaining product liability insurance on terms that we consider acceptable. Our current policies jointly provide coverage against claims based on occurrences within the policy periods up to a maximum of $101 million for each occurrence and $102 million in the aggregate. We cannot be certain we will be able to obtain insurance coverage in the future at acceptable levels or that the costs of such insurance will be reasonable. Further, successful assertion against us of one or a series of large uninsured 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 RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING Our success depends in part upon attracting and retaining highly skilled professionals. A number of our employees are highly skilled engineers and other technical professionals, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the industry.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are internally generated cash from operations and available borrowings under its credit facilities. During the first nine months of 2002, the Company generated cash of $25.5 million from operating activities. The Company generated $38.8 million from net income and non-cash expenses such as depreciation and amortization. This amount was reduced by an increase of $28.7 million in trade receivables, as well as an increase of $40.5 million in inventories, that was mostly 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 further reduced the impact of the increases in inventories and accounts receivable. The increase in trade receivables reflect increased shipments near the end of the quarter compared to the year end of 2001. Increased inventory levels reflect an increase of work in process as the Company implemented a new quality improvement process that added an additional stage to the final completion of the product. Increased payables and liabilities are reflective of increased purchases for model change, accruals for current income taxes payable, and various other accrued liabilities.

The Company has credit facilities consisting of a revolving line of credit of up to $70.0 million (the “Revolving Loan”). At the election of the Company, the Revolving Loan bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio. The Company also pays interest monthly 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 September 30, 2004, and requires monthly interest payments. The balance outstanding under the Revolving Loan at September 28, 2002 was $14.8 million. The Revolving Loan is collateralized by all the assets of the Company and includes various restrictions and financial covenants. The Company utilizes “zero balance” bank disbursement accounts in which an advance on the line of credit is automatically made for checks clearing each day. Since the balance of the disbursement account at the bank returns to zero at the end of each day, the outstanding checks of the Company are reflected as a liability. The outstanding check liability is combined with the Company’s positive cash balance accounts to reflect a net book overdraft or a net cash balance for financial reporting.

The Company’s principal working capital requirements are for purchases of inventory and, to a lesser extent, financing of trade receivables. The Company’s dealers typically finance product purchases under wholesale floor plan arrangements with 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 $63.7 million at December 29, 2001. The Company has been using short-term credit facilities and cash flow to finance its capital expenditures.

The Company believes that cash flow from operations and funds available under its anticipated credit facilities will be sufficient to 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 for routine capital expenditures, completing the cabinet shop renovation in Indiana, as well as, incurring costs with a paint shop addition in Indiana. The Company has also begun construction on a new Florida service center, which will replace it’s two existing service facilities in Florida. The Company anticipates that capital expenditures for all of 2002 will be approximately $19 to $20 million, which includes expenditures in the fourth quarter relating to the expansion of our towables facility in Indiana, routine capital expenditures for computer system upgrades and additions, smaller scale plant remodeling projects and normal replacement of outdated or worn-out equipment.* The Company may require additional equity or debt financing to address working capital and facilities expansion needs, particularly if the Company significantly increases the level of working capital assets such as inventory and accounts receivable. The Company may also from time to time seek to acquire businesses that would complement the Company’s current business, and any such acquisition could require additional financing. There can be no assurance that additional financing will be available if required or on terms deemed favorable by the Company.

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

were obligated to repurchase a significant number of its products in the future, it could have a material adverse effect on the Company’s financial condition, business and results of operations. The Company’s contingent obligations under repurchase agreements vary from period to 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 certain contractual obligations and commitments which will require future cash payments. The following tables summarize the significant obligations and commitments.

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

(1) See Note 6 to the financials.

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

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

(4) See Note 8 to the financials.

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

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

SFAS 143, 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 after June 15, 2002. FASB Statement No. 143, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FASB Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The impact of this pronouncement on the Company’s financial statements is not expected to be material.

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

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

applicability under changed conditions. The Company has reviewed this pronouncement and 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 and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”

This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination 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. Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits),

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

c. Costs to consolidate facilities or relocate employees.

This Statement does not apply to costs associated with the 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 statements is not expected to be material.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and 15-d-14(c)) have concluded that as of a date within 90 days of the filing date of this report (the “Evaluation Date”) our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

Subsequent to the “Evaluation Date”, there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

PART II - OTHER INFORMATION

Item 5. Audit Committee Approval of Non-Audit Services

In accord with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is responsible for disclosing non-audit services approved by the Company’s Audit Committee to be performed by the Company’s external auditor. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of the financial statements of the Company. During the three months ended September 28, 2002, the Audit Committee approved an engagement of PricewaterhouseCoopers LLP, the company’s external auditor, for non-audit services connected with due diligence procedures on the acquisition of Outdoor Resorts Las Vegas, Outdoor Resorts Naples, and Outdoor Resorts Motorcoach Country Club.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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

99.1 Certification by CEO and CFO of Financial Statements.

(b) Reports on Form 8-K

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

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 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)

Sarbanes-Oxley Section 302(a) Certification

I, P. Martin Daley, certify that:

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

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

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

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

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



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

Sarbanes-Oxley Section 302(a) Certification

I, Kay L. Toolson, certify that:

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

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

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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



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