**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**
| **ý** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                    |
| ** ** | ** ** | **For the year ended December 31, 2005**                                                           |
|       |       |                                                                                                    |
| **OR**     |
|       |       |                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **Commission  file number: 001-12085**                                                                  |

 

 

**NATIONAL R.V. HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                 | ** ** | **No. 33-0371079**              |
|----------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of              |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)               |       |                                 |
|                                         |       |                                 |
| **3411 N. Perris Blvd., Perris, California** | ** ** | **92571**                            |
| (Address of principal executive offices)     |       | (Zip Code)                           |

 

**(951) 943-6007**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Common Stock, par value $.01 per share** | ** ** | **New York Stock Exchange**                 |
|--------------------------------------------|------------|---------------------------------------------|
| (Title of class)                           |       | (Name of each Exchange on which registered) |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

 

Yes  o     No  ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act.

 

Yes  o     No  ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  ý     No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K.

 

Yes  o     No  ý

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler” or “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer |  o | Accelerated  filer |  ý | Non-accelerated  filer | o |
|--------------------------|---------|--------------------|--------------|------------------------|---|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes  o     No  ý

 

The aggregate marketvalue of voting and non-voting common equity held by non-affiliates of theregistrant (assuming for these purposes, but without conceding, that allexecutive Officers and Directors are “affiliates: of the Registrant) wasapproximately $78,138,237 as of the last business day of the registrant’s mostrecently completed second fiscal quarter, based on the closing sale price uponthe New York Stock Exchange reported for such date.

 

There were 10,339,484shares of the registrant’s common stock issued and outstanding as of March 21,2006.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporatesinformation by reference from the definitive proxy statement for the 2006Annual Meeting of Stockholders (unless such information is included in anamendment to this Form 10-K).

 

 

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**TABLE OF CONTENTS**

** **
| **PART I**                                                                                                             | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                        |       |
| Item 1.  Business                                                                                                           |       |
| Item 1A:  Risk Factors                                                                                                      |       |
| Item  1B: Unresolved Staff Comments                                                                                         |       |
| Item 2.  Properties                                                                                                         |       |
| Item 3.  Legal Proceedings                                                                                                  |       |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                                |       |
|                                                                                                                        |       |
| **PART II**                                                                                                            | ** ** |
|                                                                                                                        |       |
| Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities |       |
| Item 6.  Selected Financial Data                                                                                            |       |
| Item  7. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                        |       |
| Item 7A. Quantitative and Qualitative Disclosures  About Market Risk                                                        |       |
| Item 8. Consolidated Financial Statements and  Supplementary Data                                                           |       |
| Item 9. Changes in and Disagreements With Accountants  on Accounting and Financial Disclosure                               |       |
| Item 9A. Controls and Procedures                                                                                            |       |
| Item  9B. Other Information                                                                                                 |       |
|                                                                                                                        |       |
| **PART III**                                                                                                           | ** ** |
|                                                                                                                        |       |
| Item 10. Directors and Executive Officers of the  Registrant                                                                |       |
| Item 11. Executive Compensation                                                                                             |       |
| Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    |       |
| Item 13. Certain Relationships and Related  Transactions                                                                    |       |
| Item 14. Principal Accountant Fees and Services                                                                             |       |
|                                                                                                                        |       |
| **PART IV**                                                                                                            | ** ** |
|                                                                                                                        |       |
| Item 15. Exhibits and Consolidated Financial Statement  Schedules                                                           |       |
| SIGNATURES                                                                                                                  |       |
| Reports of Independent Registered Public Accounting Firms                                                                   |       |
| CONSOLIDATED BALANCE SHEETS                                                                                                 |       |
| CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                       |       |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                       |       |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY                                                                        |       |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                  |       |
| SCHEDULE II – CONSOLIDATED VALUATION AND  QUALIFYING ACCOUNTS                                                     |       |

 

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**FORWARD-LOOKINGSTATEMENTS**

 

*This report contains informationthat may constitute “forward-looking statements.” Generally, the words “believe,”“expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similarexpressions identify forward-looking statements, which generally are nothistorical in nature. All statements that address operating performance, eventsor developments that the Company expects or anticipates will occur in thefuture—including statements about the Company’s future expectations,performance, plans, and prospects, as well as assumptions about future events,and statements expressing general optimism about future operating results—areforward-looking statements. As and when made, management believes that theseforward-looking statements are reasonable. However, caution should be taken notto place undue reliance on any such forward-looking statements because suchstatements speak only as of the date when made. The Company undertakes noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. In addition,forward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from the Company’s historicalexperience and its present expectations or projections. These risks anduncertainties include, but are not limited to, those described in Part I, “Item1A. Risk Factors” and elsewhere in this report and those described from time totime in the Company’s future reports filed with the Securities and ExchangeCommission.*

 

PART I

 

## Item 1. Business

##  

### **General**

### ** **

National R.V.Holdings, Inc. (the “Company”) through its two wholly-owned subsidiaries,National RV, Inc. (“NRV”) and Country Coach, Inc. (“CCI”), is one ofthe nation’s leading producers of motorized recreational vehicles, oftenreferred to as RVs or motorhomes. The Company’s product line consists of 12models of motorhomes with 69 floorplans across numerous price ranges. From itsPerris, California facility, NRV designs, manufactures and markets Class Agas and diesel motorhomes under model names *Dolphin*, *Islander*, *Sea Breeze*, *Surf Side*, *Tradewinds* and *Tropi-Cal*. From its Junction City, Oregon facility, CCIdesigns, manufactures and markets high-end (Highline) Class A dieselmotorhomes under the model names *Affinity*, *Allure*, *Inspire*, *Intrigue*, and *Magna*, and busconversions under the *Country Coach Prevost*brand. NRV began manufacturing RVs in 1964 and CCI has been manufacturing RVssince 1973. Based upon retail registrations for the year ended December 31,2005, the Company, through its subsidiaries, is the sixth largest domesticmanufacturer of Class A motorhomes. The Company sells its motorhomesthrough a network of approximately 108 dealer locations in 33 states and 5Canadian provinces.

 

The Company wasincorporated in Delaware in 1988. As used herein, the term “Company” refers toNational R.V. Holdings, Inc., NRV and CCI unless the context otherwiserequires. The Company’s headquarters are located at 3411 N. Perris Blvd.,Perris, California 92571, and its telephone number is (951) 943-6007.

 

### **Motorized RecreationalVehicle Industry Overview**

### ** **

#### **Motorhomes**

####  

Motorhomes areself-powered RVs built on a motor vehicle chassis. The interior typicallyincludes a driver’s area, kitchen, bathroom, dining and sleeping areas.Motorhomes are self-contained, with their own power generation, heating,cooking, refrigeration, sewage holding and water storage facilities, so thatthey can be lived in without being attached to utilities. Motorhomes aregenerally categorized into A, B and C classes based upon standards establishedby the Recreational Vehicle Industry Association (the “RVIA”). Class Amotorhomes are constructed on a medium-duty to heavy-duty truck chassis, whichincludes the engine, drive train and other operating components. Retail pricesfor Class A motorhomes range from $58,000 to $1,630,000, with the majorityin the $58,000 to $400,000 range. Highline motorhomes, which are a subsetof Class A motorhomes, generally range in retail price from $250,000 to$1,630,000. Class B motorhomes are van campers, which generally containfewer features than Class A or Class C motorhomes and generally rangein retail price from $41,000 to $74,000. Class C motorhomes are built on avan or pick-up truck chassis, which includes an engine, drive train componentsand a finished cab section, and generally range in retail price from $48,000 to$140,000.

 

#### **Trends and Demographics**

####  

According to the RVIA’swholesale statistics, total Class A motorhome industry unit sales in 2005decreased 18.1% to 37,900 from 46,300 in 2004. The aggregate wholesale value ofthe Class A motorhome industry’s shipments for the year ended December 31, 2005is not yet available from the RVIA. The aggregate wholesale value of the Class Amotorhome

 

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industry’s shipments forthe year ended December 31, 2004 was approximately $5.7 billion. The averagewholesale price of Class A motorhomes increased 7.2% in 2004 to $123,406from $115,067 in 2003. Statistical information regarding the aggregatewholesale value of Class A industry shipments and average wholesale price ofClass A motorhomes were not available for the year ended December 31, 2005 asof the date of this report.

 

Between 1998 and 2005,the number of Class A motorhome manufacturers decreased from 27 to 23. Inaddition, during this period, the aggregate retail market share of the tenlargest Class A motorhome manufacturers increased from 92.5% to 95.4%.

 

RVs are purchased for avariety of purposes, including camping, visiting family and friends,sightseeing, vacationing and enjoying outdoor activities and sporting events.According to a 2005 University of Michigan study, approximately 7.9 millionhouseholds (or 8.0% of all vehicle owning households) in the United Statesowned RVs in 2005, up from 6.9 million in 2001, 6.4 million in 1997, 5.8million in 1993 and 5.8 million in 1988. In addition, the study indicated that64% of all current RV owners and 34% of all former RV owners plan to purchaseanother RV in the future. This study further indicated that 67% of all futureRV purchases will be used RVs (RVIA and market share statistics reflect newproduct sales only) with 13% of these used RVs older than 11 years.

 

Based on the 2005 studydone by the University of Michigan, ownership of RVs reaches its highest levelamong those Americans aged 55 to 64, with 10.0% of households in this categoryowning RVs. According to the study, the number of households in this group,which constitutes the Company’s primary target market, is projected to grow by3.6 million households, or 20%, from 2005 to 2010. Baby Boomers are defined asthose born between the years 1947 and 1967, and thus the leading edge of theBaby Boomer generation began turning 55 in 2002. This generation is expected tobe more affluent and retire earlier than past generations. As Baby Boomersenter and travel through the important 55 to 64 age group for RV sales, theCompany believes that they represent the potential for a secular uptrend in theRV industry. Additionally, the RVIA’s “Go RVing” campaign has been successfulin bringing in new and younger buyers.

 

As motorhomes haveincreased in popularity due, in part, to the entry of the Baby Boomergeneration into the target market, the purchasers of these products have grownmore sophisticated in their tastes. The Company believes that as a result,customers have demanded more value for their money, and brand recognition andloyalty have become increasingly important. These trends have favored companiesthat can deliver quality, value and reliability on a sustained basis.

 

### **RecentDevelopments**

### ** **

During the past fiveyears, the Company has experienced net losses. These losses, which areprimarily the result of lower sales volumes related to recent market declinesin the RV industry, have negatively impacted the Company’s liquidity. Inresponse to these conditions, the Company has implemented initiatives toincrease market share through new product and floorplan introductions and theaddition of new dealers, to decrease overall sales incentives in the comingyear by tailoring programs that provide the maximum value to the Company, toreduce material and related obsolescence costs in the coming year, improvemanufacturing efficiencies in the coming year, further reduce manufacturing andother overhead costs, and improve quality in order to decrease the costs ofwarranty.

 

The Company has incurrednet losses of $19.8 million, $9.5 million and $8.5 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. For the years endedDecember 31, 2005 and 2003, the Company provided cash from operating activitiesof $1.4 million and $8.4 million, respectively, while it used cash in operatingactivities of $15.8 million for the year ended December 31, 2004. The Company’s2004 results gave effect to the establishment of a full valuation allowance inthe amount of $11.2 million against the Company’s net deferred tax asset.Recent cumulative losses, the downturn in current market conditions and itsimpact on near term earnings outweighed other factors, including the longcarryforward periods, and led the Company to conclude that it was more likelythan not that its recorded net deferred tax assets will not be realizedresulting in the full valuation allowance against the net deferred tax assetincreasing to $18.4 million through December 31, 2005.

 

### **Business Development andStrategy**

### ** **

The Company’s businessdevelopment and operating strategy is to deliver high quality, innovativeproducts that offer superior value to enhance the Company’s position as one ofthe nation’s leading manufacturers of RVs. This strategy focuses on thefollowing key elements: (i) building upon and promoting recognition of theCompany’s brand names; (ii) offering the highest value products atmultiple price points to appeal to first time and repeat buyers;(iii) utilizing vertically integrated manufacturing processes; and(iv) capitalizing on the Company’s reputation to expand its presence inthe market.

 

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###### *Building upon and Promoting Recognition of the Company’s Brand Names*

######  

The Company believes thatits brand names and historical reputation for manufacturing quality productswith excellent value have fostered strong consumer awareness of the Company’sproducts and have contributed to its overall growth during the past decade. TheCompany intends to capitalize on its brand name recognition in order toincrease its sales and market share, facilitate the introduction of newproducts and enhance its dealer network.

 

###### *Offering the Highest Value Products at Multiple Price Points to Appealto First Time and Repeat Buyers*

######  

The Company currentlyoffers 12 distinct models of RVs with 69 floor plans, which are available in avariety of lengths, color schemes and interior designs and range in suggestedretail price from $90,000 to $1,630,000. Each model is intended to attractcustomers seeking an RV within their price range by offering value superior tocompetitive products from other manufacturers. RVIA data indicates that mostnew motorhome purchasers have previously owned a recreational vehicle, and theCompany’s models are positioned to address the demands of these repeatcustomers as well as first time buyers.

 

###### *Utilizing Vertically Integrated Manufacturing Processes*

######  

The Company designs andmanufactures a significant number of the components used in the assembly of itsproducts, rather than purchasing them from third parties. The Company believesthat its vertically integrated manufacturing processes allow it to achieve costsavings and better quality control. The Company’s in-house research anddevelopment staff and on-site component manufacturing departments enable theCompany to ensure a timely supply of necessary products and to respond rapidlyto market changes.

 

###### *Capitalizing on the Company’s Reputation to Expand its Presence in theMarket*

######  

The Company’s NRV productofferings compete in the most common and competitive price points in the RVindustry. Through continued product development, a focus on quality, andstrategic pricing, NRV has maintained demand for its products in 2005 and seeksto increase demand with the reintroduction of its *Surf Side*model, and to further increase demand in mid-to-late 2006 with the introductionof the *Pacifica*. In 2006, NRV will continue totarget the expansion of its dealer body. The Company’s CCI product offeringsfocus exclusively on the Highline segment of the Class A motorhome market.According to the 2005 year-end Statistical Surveys, Inc., a provider ofindustry information concerning retail sales, the Company’s Highline marketshare increased to 11.7% in 2005 from 10.2% in 2004. The Highline marketsegment of the industry, which represents all motorhomes with a retail pricestarting at $250,000 or above, includes more models than in previous years. TheCompany believes that the re-design of the entire CCI product line during thepast three years contributed to its increase in Highline market share. Goingforward, CCI has set forth initiatives to enhance the ownership experiencethrough the use of innovative technology, quality and customer service tofurther differentiate itself as the producer of the “the world’s finestmotorcoaches.” The Company continues to seek to expand its share of this marketby capitalizing on its established reputation, developing new products ofsuperior quality while reducing its costs, expanding its dealer network andsatisfying the desire of many current RV owners to purchase more upscalevehicles.

 

#### **Company’s Products**

####  

The Company’s productstrategy is to offer the highest value RVs across a wide range of retail pricesin order to appeal to a broad range of potential customers and to capture thebusiness of brand-loyal repeat purchasers who tend to trade up with each newpurchase. The Company’s motorhomes are designed to offer all the comforts ofhome within a 253 to 440 square foot area. Accordingly, the interior of therecreational vehicle is designed to maximize use of available space. TheCompany’s products are designed with six general areas, which are integrated toform comfortable and practical mobile accommodations. The six areas are thedriver’s compartment, living room, kitchen, dining room, bathroom and bedroom.In many models, the Company offers up to four “slide-outs”, which arecompartments that can be expanded to create additional living space when themotorhome is parked. For each model, the Company offers a variety of interiorlayouts and designs, as well as exterior graphic and paint schemes.

 

The Company’s productsare offered with a wide range of accessories and options and manufactured withhigh-quality materials and components. Certain of the Company’s Highlinemotorhomes can be customized to a purchaser’s specifications. Each vehicle isequipped with a wide range of kitchen and bathroom appliances, audio and videoelectronics, communication and systems monitoring devices, furniture, climatecontrol systems and storage spaces.

 

The Company’s vehiclesare built by integrating manufacturing and assembly line processes. The Companygenerally operates one production shift for most assembly activities. TheCompany believes that the vertically integrated manufacturing systems andprocesses it has developed enable it to efficiently and consistently producehigh-quality products.

 

Among other items, theCompany fabricates, molds and finishes fiberglass to produce its front andrear-end caps, manufactures its own walls and roofs, assembles sub-floors andmolds plastic components. In addition to assembling its vehicles and installingvarious options and accessories, the Company manufactures the majority of itsinstalled amenities

 

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such as cabinetry,draperies, showers and bathtubs. The Company fabricates furniture used in itsmotorhomes. The Company believes that by manufacturing these components onsite, rather than purchasing them from third parties, it achieves cost savings,better quality control and timely supply of necessary components. Chassis forcertain of the Company’s coaches, plumbing fixtures, floor coverings, hardwareand appliances are purchased in finished form from various suppliers.

 

The Company purchases theprincipal raw materials and certain other components used in the production ofits RVs from third parties. Other than the chassis, and some chassiscomponents, some sidewall materials, and some fabrics, these components and rawmaterials typically have short delivery lead times. All materials are generallyavailable from numerous sources, and the Company has not experienced anysignificant shortages of raw materials or components.

 

**CountryCoach Models:**

 

***CountryCoach Prevost XLII Conversion***

 

This completelycustomized bus is built on the 45’ LeMirage XLII Prevost chassis. Fully custominteriors on this coach are complemented by multi-color custom exteriorgraphics with clear coat. The coach offers custom modifications,state-of-the-art customized Crestron electronics, in-motion satellite dish, GPSnavigation system, concealable color back-up monitor, computerized touch padswitching, computerized air leveling, and large, often concealable LCD highdefinition television monitors. Slide room floorplans expand the interiorliving space. Suggested retail prices for the *CountryCoach Prevost XLII Conversion* double-slide start at $1,339,000. The*Country Coach Prevost XLII Conversion* was introduced in1983.

 

***Affinity***

 

The*Affinity*is available in 40’, 42’ and 45’ lengths with four modular floorplans featuringup to four slide rooms. The *Affinity*ispowered by the Caterpillar C-13 525 HP engine, or the optional 600 HP CumminsISX diesel engine, both teamed with Allison’s 4000MH transmission. Sleek bodystyling, a one-piece windshield, 84-inch interior height and manystate-of-the-art entertainment and convenience features characterize thisproduct. The*Affinity* is built on the DynoMaxchassis manufactured by CCI, and features independent front suspension,anti-lock braking system (ABS) brakes, front disc brakes, sway bar and liftabletag axle. The *Affinity* offers varying degreesof customization, including floorplan modification and custom interior/exteriorschemes. Modular slide-out floorplan combinations with up to four slide roomsoffer significant opportunities for personalization. Suggested retail pricesfor the*Affinity* start at $660,000. The*Affinity* was introduced in 1990.

 

***Magna***

 

The*Magna*is available in 40’, 42’ and 45’ lengths with four floorplans, each offering upto four slide rooms. The*Magna* is builton the DynoMax chassis and features independent front suspension and aCaterpillar C-13 525 HP, or the optional 600 HP Cummins ISX diesel engine, bothteamed with Allison’s 4000MH transmission. Six designer coordinated interiorpackages or the optional custom interior package complement the fiberglassexterior with six exterior paint color packages in two different availablestyles. Suggested retail prices for the*Magna* start at$563,000. The*Magna* was introduced in 1991.

 

***Intrigue***

 

The*Intrigue*features a one-piece windshield, tall 82-inch interior height, and sleek Eurobody styling. This coach is built on the DynoMax chassis and featuresindependent front suspension, ABS brakes, and a sway bar. It is available in 40’,42’ and 45’ lengths. This diesel pusher is powered by the 400 HP Cummins ISLdiesel engine or the optional Caterpillar C–13 525 HP diesel engine. Thefiberglass exterior features painted exterior graphics including full bodypaint with complete clear coat protection. Custom crafted cabinetry is standardin each of the floorplans, and up to four modular slide rooms are available witheach floorplan. Suggested retail prices for the*Intrigue*start at $428,000. The*Intrigue* wasintroduced in 1994.

 

***Allure***

 

The*Allure*is available in 34’, 37’, 40’ and 42’ lengths, is built on the DynoMax chassisand is powered by a Caterpillar 400 HP C-9 diesel engine teamed with Allison’s3000MH transmission. The fiberglass exterior, with its painted graphics,including full body paint, complete clear coat protection and bus-styleaerodynamics, is complemented by four designer coordinated interior packages.Four slide-out arrangements are available on most floorplans. Suggested retailprices for the*Allure* start at $315,000. The*Allure* was introduced in 1995.

 

***Inspire***

 

The*Inspire*is available in 34’, 36’ and 40’ lengths with up to four slide rooms in certainconfigurations. The *Inspire*isbuilt on the DynoMax chassis and is powered by the Caterpillar 400 HP C-9diesel engine paired with an Allison 3000MH transmission. The*Inspire* offers an 85-inch interior height, and featureshigh-end diesel coach elements like independent front suspension. Suggestedretail prices for the*Inspire* startat $254,000. The*Inspire* was introduced in 2003.

 

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**National RV Models:**

 

##### ***Islander***

#####  

The 40’ Islander is abus-style diesel pusher built on the Spartan Mountain Master GT chassis,offering considerable strength in addition to features like a 400 HP CumminsISL diesel engine, independent front suspension, and an 85-inch ceiling. The *Islander* features large triple and quad slide models thatadd to the living space. This motorhome receives intricate full exterior paintdesigns, in addition to interior appointments like OptimaLeatherTM, upgradedelectronics and several interior upgrades. Suggested retail prices for the *Islander* start at $274,000. The *Islander*debuted in 1999, but was not built for model-year 2005. It was reintroduced in2005 for model-year 2006.

 

##### ***Tradewinds***

#####  

The 40’ *Tradewinds* is a bus-style diesel pusher built on theFreightliner XC raised rail chassis, offering considerable strength in additionto features like a 400 HP Cummins ISL diesel engine, Allison MH3000transmission, and an 85-inch ceiling. The *Tradewinds*features large three and four slide rooms that add to the already spaciousliving space. This motorhome receives intricate full exterior paint designs, inaddition to interior appointments like OptimaLeatherTM, upgraded electronics andseveral interior upgrades. Suggested retail prices for the *Tradewinds*start at $247,000. The *Tradewinds*debuted in 1997, but was not built for model-year 2005. It was reintroduced in2005 for model-year 2006.

 

##### ***Tropi-Cal***

#####  

The *Tropi-Cal*is a competitively priced diesel pusher built on the FreightlinerXC-Series Chassis. The 33’, 34’, 35’, 37’, and 39’ *Tropi-Cal*floorplans feature two, three, and four slide-outs and include expansivebasement storage, excellent cargo carrying capacities and comfortable,convenient layouts. The *Tropi-Cal*offers a distinctive vinyl graphics package and a partial and full paintoption. The *Tropi-Cal* seeks to capitalize on brandloyalty earned since the original nameplate introduction in the early 1990s.Suggested retail prices for the *Tropi-Cal* startat $161,000. The *Tropi-Cal* was originallyintroduced as a gasoline motorhome in 1994 and made its debut as a dieselpusher in 2002.

 

##### ***Dolphin***

#####  

The *Dolphin*was re-designed from the ground up for 2006, incorporating several innovativeindustry trends such as the “big box” house and aggressive new front and rearcaps. The *Dolphin* is available in four floorplans,and is built on either the Ford or Workhorse gas-powered chassis. These modelsare full-basement, bus-style motorhomes with up to three slides. The *Dolphin LX* is an upgraded *Dolphin*,offering certain distinct features, exterior styling and floorplans often reservedfor higher-priced diesel motorhomes. Many optional *Dolphin*features become standard on the *Dolphin LX*, andthe LX features many items not available on the standard *Dolphin*.The *Dolphin* products are produced in 32’ to38’ lengths. Suggested retail prices for the*Dolphin* startat $125,000. The Class A *Dolphin*motorhome was first introduced in 1985. However, the *Dolphin*brand dates back to 1963.

 

##### ***Sea Breeze***

#####  

The *Sea Breeze*is a moderately priced, bus-style motorhome, offered on a Ford gas-powered chassis.A full-height motorhome, the *Sea Breeze*offers considerable basement storage. The *Sea Breeze*features Corian® countertops, power heated side-view mirrors, deluxe trim andheated water and waste holding tanks. The *Sea Breeze*offers floorplans ranging from 30’ to 35’ in length. Also offered under the *Sea Breeze* name is the *Sea Breeze* LXbuilt on either the Ford or Workhorse W-22 chassis. The *Sea Breeze*LX offers many upgrades not available in the standard *Sea Breeze*.The *Sea Breeze LX* models are produced in 31’to 35’ lengths. Suggested retail prices for the *Sea Breeze*start at $102,000. The Class A *Sea Breeze*product was introduced in 1992.

 

##### ***Surf Side***

#####  

The *Surf Side* was originally offered from 1999 through the 2001model year and has returned for the 2006 model year as an entry-level pricedcoach. The *Surf Side* is offered ona Ford gas-powered chassis and offers floorplans produced in 29’ to 34’lengths. Each *Surf Side* offers competitivestyling, full-basement pass-through storage, insulated and heated waterand waste holding tanks and lightweight aluminum basement compartmentdoors. Suggested retail prices for *the Surf Side*start at $90,000.

 

The Company, onSeptember 24, 2004, sold its travel trailer business assets to WeekendWarrior, a privately owned, California-based ramp-trailer manufacturer. Thesale was designed to allow the Company to further concentrate its efforts andresources on its growing motorhome business.

 

#### **Arrangements with Chassis Suppliers**

####  

One of the principalcomponents used in the manufacture of motorhomes is the chassis, which includesthe engine, drive train and other operating components. Although CCImanufactures its own chassis, the DynoMax, used in its motorhomes (but not

 

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its bus conversions), theCompany obtains the required chassis for its NRV Class A motorhomes from alimited number of manufacturers. As is standard in the industry, arrangementswith such suppliers permit them to terminate their relationship with the Companyat any time. Lead times for the delivery of chassis frequently exceed twomonths and the RV industry as a whole has from time to time experiencedtemporary shortages of chassis. The Company’s outside chassis suppliersaccounted for approximately 44% of the total chassis purchased or manufacturedduring 2005. If any of the Company’s suppliers were to discontinue themanufacture of chassis utilized by the Company in the manufacture of itsClass A motorhomes, materially reduce their availability to the RV industryin general or limit or terminate their availability to the Company inparticular, the business and financial condition of the Company could bematerially and adversely affected.

 

#### **Product Warranty**

####  

The Company providesretail purchasers of its motorhomes with a limited warranty against defects inmaterials and workmanship. Excluded from the Company’s warranties are chassismanufactured by third parties and other components, typically those that arewarranted by the Company’s suppliers of these items. Service covered bywarranty must be performed at either the Company’s in-house service facilitiesor any of its dealers or other authorized service centers. The basic warrantyterms are as follows:

 

• CCImotorhomes – One year basic, five years structural

• NRVmotorhomes – One year basic, five years structural

•DynoMax chassis – Two years basic, five years structural

 

#### **Trademarks and Patents**

 

The Company hasregistered NRV’s **Dolphin, DuraFrame,Islander, Marlin, National RV Palisades, Sea Breeze, Sea View National R.V.(Logo), Sea View, Surf Side, Tradewinds, Tropi-Cal****and* Your Own Private Island*trademarks, and CCI’s **Affinity,Allure, Country Coach, Country Coach Destinations, DynoMax, Inspire, Intrigueand Magna** trademarks and believes they are material to the Company’sbusiness. The Company has additional trademarks filed and pending registration.In addition, the Company has four patents covering RV sub-floors, exteriordoors, and stow-away beds.

 

#### **Product Development**

 

The Company utilizesresearch and development staff that concentrates on product development andenhancements. New ideas are presented to the staff from a variety of sources,including management, wholesale and retail sales representatives, dealers,suppliers, trade shows, and consumers. The staff utilizes computer-aided designequipment to assist in the development of new products and floor plans and toanalyze suggested modifications of existing products and features. After theinitial step of development, prototype models for new products are constructedand refined. In the case of modifications to certain features, new molds forvarious parts, such as front-end caps, storage doors, and dashes are producedand tested. New product prototypes are produced both off-line as well asdirectly on the production line. The Company believes that the maintenance ofan in-house research and development staff enables the Company to respondrapidly to ongoing shifts in consumer tastes and demands. Total research,development and engineering expenses were $9.5 million, $7.8 million and $6.7million for the years ended December 31, 2005, 2004 and 2003,respectively, of which research and development expenses alone were $1.6million, $1.5 million and $2.1 million, respectively.

 

#### **Planned Product Introductions**

####  

The Company is in theprocess of developing three new models, set to debut in the summer of 2006, asmodel-year 2007 coaches. The first new product introduction, to be called the *Pacifica*, is in the upper mid-range diesel pusher market andis targeted in a segment between the Company’s existing product lines. TheCompany also plans to debut a new introductory Highline model called the *Tribute* and a fully customized motorcoach called the *Rhapsody*. These new product offerings are intended to expandthe number of price points at which the Company competes in the market place.

 

During 2006, the Companyplans to introduce new floorplans in its existing products to target certainmarket niches not previously represented. Throughout much of the Company’sproduct offerings, model change will herald new and updated interior andexterior color schemes, and new floorplans will be debuted throughout thecalendar year.

 

### **Distribution and Marketing**

### ** **

The Company markets NRVproducts through a network of approximately 83 Class A dealer locations in31 states and 5 Canadian provinces. These dealers generally carry all or aportion of NRV’s product lines along with competitors’ products. The Companymarkets CCI products through 31 dealer locations in 20 states. Overall, theCompany markets its NRV and CCI products through a network of approximately 108dealer locations in 33 states and 5 Canadian provinces. CCI utilizes a limiteddealer network for its Highline motorhomes due to the high level of knowledgeneeded by the dealer sales people and the tendency of Highline customers tomake destination-type purchases at shows and rallies. The Company believes thateach of the CCI dealers has significant experience with top-of-the-lineproducts and has outstanding facilities and service programs.

 

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The Company generallypromotes its products through product support at dealer locations, productbrochures, live plant tours, product walk-throughs on DVD, attendance at tradeand consumer shows, direct mail promotions, company web sites, corporatenewsletters, press releases, promotional appearances, trade and consumermagazine advertising, RV owner rallies that include limited free service andits in-house magazine publications. From time to time, the Company also offersdealer incentives. In addition, to help promote customer satisfaction and brandloyalty, the Company sponsors NRV and CCI clubs for owners of the Company’sproducts. The clubs publish newsletters on a monthly or quarterly basis andorganize RV rallies and other activities. The Company continually seeksconsumer preference input from several sources, including dealers, RV ownersand the Company’s sales representatives, and, in response, the Companyimplements changes in the design, decor and features of its products. TheCompany’s website also offers an extensive listing of the Company’s models,floor plans and features, including “virtual tours” of some models.

 

Most of the Company’smotorhome sales are made on terms requiring payment within 15 business days orless of the dealer’s receipt of the unit. Most dealers finance all, orsubstantially all, of the purchase price of their inventory under floor planarrangements with banks or finance companies under which the lender pays the Companydirectly. Dealers typically are not required to commence loan repayments tosuch lenders for a period of at least six months. The loan is collateralized bya lien on the motorhome. Consistent with industry practice, the Company hasentered into repurchase agreements with these lenders. In general, therepurchase agreements require the Company to repurchase a unit if the dealerdefaults on the financed unit. Upon a dealer default, the agreements generallyrequire the Company to repurchase RVs at the election of the lender providedcertain conditions are met, such as repossession of the RV by the lender, theRV being new and unused and the time elapsed between invoice date and demandfor repurchase being no longer than a specified period which is typically 18months or less. The Company’s undiscounted maximum potential exposure underthese agreements approximated $174 million at December 31, 2005. As withreceivables, the risk of loss under the repurchase agreements was spread over anumber of dealers and lenders and was reduced by the resale value of the RVs,which the Company would be required to repurchase. Losses under theseagreements have not been material in the past and management does not believethat any future losses under such agreements will have a material adverseeffect on the Company’s consolidated financial position, results of operations,or cash flows. Consequently, no liability has been recognized in theconsolidated financial statements.

 

Many finance companiesand banks provide retail financing to purchasers of RVs. Certain provisions ofthe U.S. tax laws applicable to second residences, including the deductibilityof mortgage interest, currently apply to motorhomes used as qualifyingresidences.

 

#### **Cyclicality, Seasonality and Economic Conditions**

####  

The RV industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic conditions, which affect disposable income forleisure-time activities. Declines in consumer confidence driven by concernsabout the availability and price of gasoline, inflation, increases in interestrates, reductions in available financing, and political uncertainty has had,and may in the future have, an adverse impact on RV sales. Seasonal factors,over which the Company has no control, also have an effect on the demand forthe Company’s products. Demand in the RV industry declines over the winterseason, while sales are generally highest during the spring and summer months.

 

#### **Competition**

####  

The motorhome market isintensely competitive, with a number of other manufacturers selling productsthat compete with those of the Company. According to StatisticalSurveys, Inc., a provider of industry information concerning retail sales,the three leading manufacturers accounted for approximately 54.8%, 55.8% and55.7% of total retail units sold in the Class A motorhome market duringthe years ended December 31, 2005, 2004 and 2003, respectively. These companiesand certain other competitors have substantially greater financial and otherresources than the Company. Sales of used motorhomes also compete with theCompany’s products. The Company competes on the basis of value, quality, priceand design. According to Statistical Surveys, Inc., the Company’sClass A retail market share of new product unit sales was 7.0%, 6.6% and6.1% for the years ended December 31, 2005, 2004 and 2003, respectively.

 

#### **Dependence on Certain Dealers and Concentration of Dealers in CertainRegions**

####  

For the year endedDecember 31, 2005, three dealers accounted for 13%, 13% and 12%respectively, of the Company’s annual net sales. Also, the Company’s top tendealers accounted for approximately 66%, 72% and 66% of the Company’s annualnet sales during the years ended December 31, 2005, 2004 and 2003,respectively. The loss by the Company of one or more of these dealers couldhave a material adverse effect on the Company’s financial condition and resultsof operations. In addition, a significant portion of the Company’s sales isfrom dealers located in states in the western part of the United States.Consequently, a general downturn in economic conditions or other materialevents in the western region could materially adversely affect the Company’ssales.

 

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**GovernmentRegulation**

 

The Company is subject tofederal, state and local regulations governing the manufacture and sale oftheir products, including the provisions of the National Traffic and MotorVehicle Safety Act (the “Motor Vehicle Act”), the Transportation RecallEnhancement, Accountability and Documentation Act (the “TREAD” Act) and theFederal Motor Vehicle Safety Standards (“FMVSS”). Certain states requireapproval of coach designs and provide certification tags proving compliancebefore coaches can be sold into that state. The Motor Vehicle Act authorizesthe National Highway Traffic Safety Administration (“NHTSA”) to require amanufacturer to recall and repair vehicles that contain safety defects or failto comply with the FMVSS. In addition, the Company has, from time to time,instituted voluntary recalls of certain motorhome units. On January 21, 2005,NHTSA notified us that it opened a recall query to investigate allegations offront tire failures as a result of overloading in certain CCI motorhomes. OnAugust 2, 2005, NHTSA further notified us that the investigation was upgradedto an engineering analysis. We are fully cooperating with NHTSA and havecomplied with all requests for information. Future recalls of the Company’sproducts, if any, could have a material adverse effect on the Company and harmthe Company’s reputation. The Company is also subject to some federal and stateconsumer protection and unfair trade practice laws and regulations relating tothe sale, transportation and marketing of motor vehicles, including so-called “LemonLaws.”

 

Federal and state lawsand regulations also impose upon vehicle operators various restrictions on theweight, length and width of motor vehicles, including trucks and motorhomes,that may be operated in certain jurisdictions or on certain roadways. As aresult of these restrictions, certain models of motorhomes manufactured by theCompany’s CCI subsidiary may not be legally operated in certain jurisdictionsor on certain roadways.

 

Amendments and changes inenforcement with respect to these laws and regulations and the implementationof new laws and regulations could significantly increase the costs ofmanufacturing, purchasing, operating or selling the Company’s products andcould have a material adverse effect on the Company’s business, results ofoperations and financial condition. The failure of the Company to comply withthese present or future laws or regulations could result in fines imposed onthe Company, civil and criminal liability, or suspension of operations, any ofwhich could have a material adverse financial effect on the Company.

 

The Company’smanufacturing operations are subject to a variety of federal and stateenvironmental regulations relating to the use, generation, storage, treatment,emissions, and disposal of hazardous materials and wastes and noise pollution.Such laws and regulations are becoming more stringent, and it is likely thatfuture amendments to these environmental statutes and additional regulationspromulgated there under will be applicable to the Company, its manufacturingoperations and its products in the future. The failure of the Company to complywith present or future regulations could result in fines being imposed on theCompany, civil and criminal liability, suspension of operations, alterations tothe manufacturing process, or costly cleanup or capital expenditures.

 

#### **Employees**

####  

As of December 31,2005, the Company employed a total of 2,744 people (including temporaryemployees), of which 2,148 were involved in manufacturing, 190 in service, 156in administration, 173 in research, development and engineering, and 77 insales and marketing. None of the Company’s personnel are represented by laborunions. The Company considers its relations with its personnel to be good.

 

#### **Available Information**

####  

National R.V.Holdings, Inc.’s Internet website address is www.nrvh.com. The Company’sannual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports filed or furnishedpursuant to section 13(a) or 15(d) of the Exchange Act areavailable free of charge through the Company’s website as soon as reasonablypracticable after they are electronically filed with, or furnished to, theSecurities and Exchange Commission.

 

Item 1A. Risk Factors

 

**(Referencesto “we”, “us” or “our” in the following discussion refer to the Company.)**

 

In addition to the otherinformation set forth in this report, you should carefully consider thefollowing factors that could materially affect our business, financialcondition or future results. The risks described below are not the only risksfacing our company. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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#### **Risks Related to Our Operating Performanceand Our Industry**

####  

**We have incurred significant losses in recentyears, and if our losses continue, and we are unable to achieve and maintainprofitability, our stock price will likely suffer**.

 

Wehave had net losses totaling $19.8 million, $9.5 million and $8.5 million forthe years ended December 31, 2005, 2004 and 2003, respectively. Continuedlosses could reduce our liquidity and cause us to reduce our expenditures oncapital improvements, machinery and equipment, and research and development. Thiscould have a negative effect on our ability to maintain production schedules,manufacture products of high quality, and develop and manufacture new productsthat will achieve market acceptance. This could in turn, have a negative impacton sales and earnings. If we continue to suffer losses, then we could be unableto implement our business and financial strategies or meet our obligations whendue. Our failure to achieve and sustain our profitability will negativelyimpact the market price of our common stock.

 

#### **Our operating results will potentially fluctuate.**

####  

Our net sales, grossmargin and operating results may fluctuate significantly from period to perioddue to factors such as the mix of products sold, the level of discountingemployed on our products, the ability to utilize or expand manufacturingresources efficiently, material shortages, the introduction and consumeracceptance of new models offered by our competition, warranty expense, theaddition or loss of dealers, the timing of trade shows and rallies, and factorsaffecting the recreational vehicle industry as a whole, such as cyclicality andseasonality. In addition, our overall gross margin will be affected by shiftsin the type of models sold. Due to the relatively high selling prices of manyof our motorhome models (in particular, our Highline Class A motorcoaches), a relatively small variation in the number of motorhomes sold in anyquarter can have a significant effect on sales and operating results for thatquarter.

 

#### **The RV industry has been characteristically cyclical and seasonal,which can have a negative effect on our operating results and our stock price.**

####  

The RV industry has beencharacterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic conditions, which affect disposable income forleisure-time activities. Declines in consumer confidence driven by concernsabout the availability and price of gasoline, inflation, increases in interestrates, reductions in available financing, and political uncertainty have had,and may in the future have, an adverse impact on RV sales. Seasonal factors,over which we have no control, also have an effect on the demand for ourproducts. Demand in the RV industry declines over the winter season, whilesales are generally highest during the spring and summer months. We cannotassure that the factors currently adversely affecting our business will notcontinue, or have an adverse effect beyond their present scope.

 

#### **We depend on certain dealers and concentration of dealers in certainregions.**

####  

For the year endedDecember 31, 2005, three dealers accounted for 13%, 13% and 12%, respectively,of the annual net sales. Also, our top ten dealers accounted for approximately66%, 72% and 66% of our annual net sales during the years endedDecember 31, 2005, 2004 and 2003, respectively. The loss of one or more ofthese dealers could have a material adverse effect on our financial conditionand results of operations. In addition, a significant portion of our sales isfrom dealers located in states in the western part of the United States.Consequently, a general downturn in economic conditions or other materialevents in the western region could materially adversely affect our sales.

 

****Reducedavailability of financing for our dealers or retail customers couldadversely affect revenues and margins.****

 

Our RV dealers, aswell as retail buyers of RV products, generally secure financing from thirdparty lenders. Any reduction in the availability of such financing orsignificant increase in the cost of such financing resulting from higherinterest rates may have an adverse effect on our business. Availability offinancing is dependent on the lending practices of financial institutions,financial markets, governmental policies and economic conditions, all of whichare largely beyond our control. For example, in the recent past, floorplanlenders have tightened credit availability, which has negatively affected thetiming and accomplishment of our sales to our RV dealers, resultingin higher levels of finished goods inventory and associated financing costs. Inresponse to lower demand, we offered retail-financing incentives toconsumers resulting in a reduction in net sales, which negatively affectedprofitability.

 

****Highinventories of recreational vehicles among dealers could continue to negativelyaffect our sales volume and profit margins.****

 

The level of recreationalvehicle inventories among dealers can have a significant impact onmanufacturing, shipments, inventory levels and operating results. As wholesaleshipments of recreational vehicles within the industry exceed retail sales ofvehicles, inventories at the dealer level expand to a point where dealerssignificantly cut orders from manufacturers. As manufacturers respond toreduced demand, many offer wholesale and retail discounts and incentives in aneffort to maintain production volumes. As a result, dealer inventories mayexpand further resulting in an increasing need for discounts and incentives, orin the alternative, a need for dramatic reduction in overall production levelsby manufacturers. Increased discounts and incentives, and reduced productionlevels, negatively affect our revenues and profitability.

 

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**For some of our components, wedepend on a small group of suppliers, and the loss or business interruption ofany of these suppliers could affect our ability to obtain components atcompetitive prices, which would decrease our margins.**Most recreation vehicle and bus components are readilyavailable from a variety of sources. However, a few components are produced byonly a small group of quality suppliers that have the capacity to supply largequantities on a national basis. Our NRV subsidiary purchases gasoline-poweredchassis from Ford Motor Company and Workhorse Custom Chassis and rear enginediesel-powered chassis from Freightliner Custom Chassis Corporation and SpartanMotor Corporation. Our CCI subsidiary manufactures its own chassis, theDynoMax, which is used as the base upon which all CCI motorhomes are built,except for the Country Coach Prevost bus conversions, which utilize a Prevostbus shell. We generally maintain a one to two month production supply of achassis in inventory. Historically, in the event of an industry-widerestriction of supply, chassis manufacturers have allocated chassis among ourcompetitors and us based on the volume of chassis previously purchased. If FordMotor Company, Workhorse Custom Chassis, Freightliner Custom ChassisCorporation or Spartan Motor Corporation were to discontinue the manufacturingof motor home chassis, or if as a group all of our chassis supplierssignificantly reduced the availability of chassis to the industry, our businesscould be adversely effected. Similarly, shortages, production delays or workstoppages by the employees of these chassis manufacturers or other chassissuppliers could have a material adverse effect on us. Finally, as is standardin the industry, arrangements with chassis suppliers are terminable at any timeby either the chassis supplier or us. If we cannot obtain an adequate chassissupply, this could result in a material adverse affect on our financialcondition and results of operations.

 

****Fuelshortages, or higher prices for fuel, could have a negative effect on sales ofrecreational vehicles.****

 

The recreational vehiclesproduced by us require gasoline or diesel fuel for their operation.Gasoline and diesel fuel have, at various times in the past, been difficult toobtain, and there can be no assurance that the supply of gasoline and dieselfuel will continue uninterrupted, that rationing will not be imposed or thatthe price of, or tax on, fuel will not significantly increase in the future.Shortages of gasoline and diesel fuel and rapid significant increases in fuelprices have had a significant adverse effect on the demand for recreationalvehicles in the past and could have a material adverse effect on demand in thefuture. Such a reduction in overall demand for recreational vehicles could havea materially adverse impact on our revenues and profitability.

 

****Theconsolidation of distribution channels within the RV industry could have amaterial negative effect on revenues and profitability.****

 

Over the last severalyears, several large-scale recreational vehicle dealers have grown to representa significant presence in the industry. The expansion of large-scale dealersand the continued consolidation of dealerships among large players may resultin increased pricing pressures in the industry in general. Such pressureexerted by the distribution channel may have a material adverse effect on ourrevenues and profitability.

 

****Arise in the frequency or size of workers’ compensation, and other claimsagainst us, may result in a material adverse effect on our business,operating results and financial condition.****

 

We are subject, inthe ordinary course of business, to litigation related to workers’ compensationand other employee related claims. We substantially self-insure theseclaims with a self-insurance retention level for claims above specified limits.An increase in frequency in claims below the self-insurance retention level mayadversely affect our financial results. In addition, insurance is notavailable for some kinds of claims; an insurance carrier may deny coverageresulting in potential litigation expenses and additional exposure to losses.Workers’ compensation insurance costs are directly attributable to experiencein the workplace. Any increase in the frequency and size of such claims, ascompared to our experience in prior years, may cause the premiums requiredfor insurance to rise significantly. Further, sizable claims maydamage our reputation that may adversely affect our future operatingand financial results.

 

****Arise in the frequency or size of warranty claims against us may result ina material adverse effect on our business, operating results and financialcondition.****

 

We provide customersof our products with a warranty covering defects in material orworkmanship for periods generally ranging from one to two years in length, andup to five years on certain structural components.  Although we maintainreserves for such claims, which to date have been adequate, there can be noassurance that warranty expense levels will remain at current levels or thatsuch reserves will continue to be adequate. A large number of warranty claimsexceeding our current warranty expense levels could have a material adverseeffect on our results of operations, financial condition, and cash flows.Further, some jurisdictions have laws providing for a multiple recovery onwarranty claims in some circumstances. The possibility for class actions alsoexists. In addition to the warranty expenses incurred by us, sizableproduct warranty claims may damage our reputation among dealers, buildersand consumers that may adversely affect our future operating and financialresults.

 

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#### ****Repurchase agreements with floorplan lenderscould result in increased costs.****

####  

Most of our motorhomesales are made on terms requiring payment within 15 business days or less ofthe dealer’s receipt of the unit. Most dealers finance all, or substantiallyall, of the purchase price of their inventory under floor plan arrangementswith banks or finance companies under which the lender pays us directly.Dealers typically are not required to commence loan repayments to such lendersfor a period of at least six months. The loan is collateralized by a lien onthe motorhome. Consistent with industry practice, we have entered intorepurchase agreements with these lenders. In general, the repurchase agreementsrequire us to repurchase a unit if the dealer defaults on the financed unit.Upon a dealer default, the agreements generally require us to repurchase RVs atthe election of the lender provided certain conditions are met, such asrepossession of the RV by the lender, the RV being new and unused and the timeelapsed between invoice date and demand for repurchase being no longer than aspecified period which is typically 18 months or less. Increase in thesignificance or number of future losses under such agreements could have amaterial adverse effect on our consolidated financial position, results ofoperations, or cash flows.

 

****Arise in the frequency or size of “lemon law” and product liability claimsagainst us may result in a material adverse effect on our business,operating results and financial condition.****

 

We are involved in legalproceedings in the ordinary course of business, including a variety ofwarranty, “lemon law” and product liability claims typical in the recreationvehicle industry. With respect to product liability claims, our insurancepolicies cover, in whole or in part, defense costs and liability costs forpersonal injury or property damage (excluding damage to our motorhomes). Wecannot be certain that our insurance coverage will be sufficient to cover allfuture claims against us. Any increase in the frequency and size of theseclaims, as compared to our experience in prior years, may cause the premiumsthat we are required to pay for insurance to rise significantly. It may alsoincrease the amounts we pay in punitive damages, which may not be covered byour insurance. These factors may have a material adverse effect on our resultsof operations and financial condition. In addition, if these claims rise to alevel of frequency or size that is significantly higher than similar claimsmade against our competitors, our reputation and business will be harmed.

 

****Changesin labor practices could adversely affect our labor costs andprofitability.****

 

Currently, noneof our employees are members of any union or covered under any collectivebargaining agreement. We provide competitive wages and a variety ofbenefits to our employees, including group life, dental, vision services,hospitalization, major medical plans, and a 401(k) plan. Although we consider ourrelations with employees to be good, any material changes in labor costs orpractices, including those resulting from union activity may have a negativeimpact on our profitability.

 

****Increasedcosts, including costs of component parts and labor may adversely affect ourprofitability if such costs cannot be offset because of market forces.****

 

Our financialresults may be significantly adversely affected by the availability and pricingof manufacturing components (particularly those with substantial steel, copper,plastic or lumber content) and labor. We attempt to mitigate the effect ofany cost inflation in raw materials, components and labor by negotiating withcurrent or new suppliers, contract price escalators, increasing laborproductivity or increasing the sales prices of our products.However, we cannot assure that such actions will not have an adverseimpact on the competitiveness of our products and result in decliningrevenues. If we are unable to successfully offset increases in manufacturingcosts, this could have a material adverse impact on margins, operating incomeand cash flows. If we increase prices to offset higher manufacturingcosts, the benefit of such increases may lag behind the rise in manufacturingcosts.

 

****TheRV industry is highly competitive and some of our competitors havesignificantly greater resources than we have.****

 

The market for motorizedproducts is highly concentrated. This concentration is due in part to thehigher barriers to entry within the motorized market, including the significantcapital required for fixed asset investment, higher level of governmentregulation and dependence on a limited number of chassis suppliers.Consolidation within the industry may also increase overall competitivepressure. A number of our competitors have made acquisitions over the last fiveyears that have increased their market share. Existing or new competitors couldadversely affect our revenues and profit margins. For example, thesecompetitors could develop products superior to our recreational vehicleofferings or that could achieve better consumer acceptance than our products.

 

According to StatisticalSurveys, Inc., the three leading manufacturers accounted for approximately54.8% of total retail units sold in the Class A motorhome market during theyear ended December 31, 2005. These companies and certain other competitorshave substantially greater financial and other resources than we have. Sales ofused motorhomes also compete with our products. We compete on the basis ofvalue, quality, price and design. According to Statistical Surveys, Inc.,our Class A retail market share of new product unit sales was 7.0% for theyear ended December 31, 2005.

 

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Sustained increases inthese competitive pressures could have a material adverse effect on our resultsof operations. There can be no assurance that existing or new competitors willnot develop products that are superior to our recreational vehicles or thatachieve better consumer acceptance, thereby adversely affecting our marketshare, sales volume and profit margins.

 

****Changesin consumer preferences, and our ability to effectively adapt to thosepreferences, may adversely affect revenues and profitability.****

 

Consumer preferencesfor our recreational vehicles are likely to change over time, and as aresult, we continually introduce new features, designs and models to meetchanging consumer demand. Delays in the introduction of new models or productfeatures, or a lack of market acceptance of new features, designs or models,could have a material adverse effect on our business and operatingresults. As a result, we may incur significant additional costs indesigning or redesigning models that are not accepted in the marketplace. Wemay also experience production difficulties, such as inefficiencies inpurchasing and increased labor costs, as new models are introduced. Inaddition, new product introductions may reduce revenues from existing modelsand adversely affect operating results. There can be no assurance that any newmodels or products will be introduced to the market on time or that they willbe successful when introduced.

 

****Newproduct introductions may result in unanticipated expenses resulting in reducedearnings.****

 

The introduction of newproducts is critical to our success. We incur additional costs when newproducts are introduced, such as research and development costs, engineeringcosts, and initial labor or purchasing inefficiencies. Additionally, wemay incur unexpected expenses, including those associated with unexpectedengineering or design flaws that could force a recall of a new product. We maybe prompted to offer additional incentives to stimulate the sales of products,not adequately accepted by the market, or to stimulate sales of older orobsolete products. These types of costs could be substantial and could have asignificant adverse effect on our financial results.

 

****Changesin favorable tax laws could adversely affect our results of operations.****

 

Certain U.S. tax lawscurrently afford favorable tax treatment for the purchase and sale ofrecreational vehicles that are used as the equivalent of second homes. Theselaws and regulations have historically been amended frequently, and it islikely that additional amendments and additional regulations affecting ourproducts, or us, may be enacted in the future. Amendments to these laws andregulations and the implementation of new regulations could have a materialadverse effect on our results of operations.

 

#### **Risks Related to Regulation and Compliance**

####  

****Changesto, or increases in, the regulations governing our businesses could have amaterial impact on operating and financial results.****

 

We are subject tofederal, state and local regulations governing the manufacture and sale of ourproducts, including the provisions of the National Traffic and Motor VehicleSafety Act (the “Motor Vehicle Act”), the Transportation Recall Enhancement,Accountability and Documentation Act (the “TREAD” Act) and the Federal MotorVehicle Safety Standards (“FMVSS”). Certain states require approval of coachdesigns and provide certification tags proving compliance before coaches can besold into that state. The Motor Vehicle Act authorizes the National HighwayTraffic Safety Administration (“NHTSA”) to require a manufacturer to recall andrepair vehicles that contain safety defects or fail to comply with the FMVSS.In addition, we have, from time to time, instituted voluntary recalls ofcertain motorhome units. On January 21, 2005, NHTSA notified us that it openeda recall query to investigate allegations of front tire failures as a result ofoverloading in certain CCI motorhomes. On August 2, 2005, NHTSA furthernotified us that the investigation was upgraded to an engineering analysis. Weare fully cooperating with NHTSA and have complied with all requests forinformation. Future recalls of our products, if any, could have a materialadverse effect on us and harm our reputation. We are also subject to somefederal and state consumer protection and unfair trade practice laws andregulations relating to the sale, transportation and marketing of motorvehicles, including so-called “Lemon Laws.”

 

Federal and state lawsand regulations also impose upon vehicle operators various restrictions on theweight, length and width of motor vehicles, including trucks and motorhomes,that may be operated in certain jurisdictions or on certain roadways. As aresult of these restrictions, certain models of motorhomes manufactured by ourCCI subsidiary may not be legally operated in certain jurisdictions or oncertain roadways.

 

Amendments and changes inenforcement with respect to these laws and regulations and the implementationof new laws and regulations could significantly increase the costs ofmanufacturing, purchasing, operating or selling our products and could have amaterial adverse effect on our business, results of operations and financialcondition. Our failure to comply with these present or future laws orregulations could result in fines imposed, civil and criminal liability, orsuspension of operations, any of which could have a material adverse financialeffect on us.

 

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#### **We did not maintain effective internal controls over financialreporting.**

####  

Effective internalcontrol over financial reporting is necessary for us to provide reliablefinancial reports and effectively prevent fraud. If we cannot provide reliablefinancial reports or prevent fraud, our brand and operating results could beharmed. As reported in this Form 10-K, we have identified, and may in thefuture identify, areas of our internal control over financial reporting thatneed improvement. Because of the material weakness in our internal control overfinancial reporting as of December 31, 2005, we and our independentregistered public accountants have concluded that we did not have effectiveinternal controls over financial reporting at December 31, 2005. We expect todevote significant resources to remediate and improve our internal control overfinancial reporting. We cannot be certain that these measures will ensure thatwe implement and maintain adequate internal control over financial reporting inthe future. In addition to the materialweakness identified as of December 31, 2005, significant deficiencies inour internal control over financial reporting were also identified and thosesignificant deficiencies, if not corrected, could become material weaknesses inthe future. Any failure to implement required new or improved controls,or difficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our reporting obligations. Failure tomaintain an effective system of internal controls could also cause investors tolose confidence in our reported financial information, which could have anegative effect on the trading price of our stock.

 

### **We were notified by the NYSEthat we did not meet its continued listing requirements and we potentially facedelisting if we do not comply with NYSE standards.**

### ** **

On November 2, 2005,we receivednotification from the New York Stock Exchange (“NYSE”) that we were not incompliance with the NYSE’s continued listing standards. We were considered “belowcriteria” by the NYSE because our total market capitalization was less than $75million over a consecutive 30 trading-day period and our stockholders’ equitywas less than $75 million as of June 30, 2005. While we were in compliance withprevious continued listing standards set forth by the NYSE, the NYSE adoptednew continued listing standards, effective June 2005, which increased theformer standards significantly. Beginning on or about November 9, 2005, theNYSE made available on its consolidated tape, a “.BC” indicator transmittedwith our listing symbol to identify that we are below the NYSE’s quantitativecontinued listing standards. The required plan, which lays out in detail ourfinancial projections for the next 18 months, was submitted and the NYSEnotified us of its approval and acceptance. As a result, our common stock willcontinue to be listed on the NYSE pending quarterly reviews by the Exchange’slisting and compliance committee to ensure progress relative to the plan.

 

If we are unable toachieve compliance with the NYSE’s continued listing criteria through ourimplementation of the plan, we will be subject to NYSE trading suspension anddelisting, at which time we would intend to apply to have our shares listed onanother stock exchange or quotation system. The suspension or delisting of ourstock on the NYSE could affect the ability of current stockholders to trade ourstock on the open market. Imposing a restriction on the trading of our stockwould possibly have a negative impact on the price of our stock. Further, ifthe NYSE were to delist us, there is no guarantee that we would qualify forlisting on another exchange.

 

****We maybe unable to comply in the future with financial covenants in our creditfacility, which could restrict our ability to operate.****

 

At December 31, 2005, wehad a $30 million asset-based revolving credit facility with UPSC and WellsFargo Bank, with the option, subject to certain conditions, of increasing therevolver in $5 million increments up to a total credit facility of $40 million.The revolving credit facility expires in August 2008. Borrowing availability isbased on eligible accounts receivable and inventory. The credit facilitycontains, among other provisions, certain financial covenants, including fundeddebt to Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA), and a fixed charge coverage ratio. If these financial covenants are not met, our availability under thecredit facility will be reduced. We did not meet these financial covenants asof year-end and currently we do not expect to meet them until the fourthquarter of 2006. Until these covenants are met, our average monthlyborrowing availability under our $40 million facility will be limited to anamount between $24 million and $32 million, depending on eligible inventory andaccounts receivable. While we do not anticipate any events of default, in suchan event, the lender could restrict our borrowings under the line ofcredit which could restrict or limit our ability to react to changes inmarket conditions and acquire properties or businesses and if we were unable toobtain a waiver on the line of credit from UPSC and Wells Fargo Bank, theunderlying assets could be called by UPSC and Wells Fargo Bank. If our debtwere to be accelerated, we cannot assure you that we would be able to repay it.There are no guarantees that we could obtain sufficient financing resources asan alternative to the line of credit, which could have a material negativeimpact on our financial position, results of operations and cash flows.

 

15

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****Failureto comply with environmental regulations could result in significantlyincreased costs and capital expenditures.****

 

Our manufacturingoperations are subject to a variety of federal and state environmentalregulations relating to the use, generation, storage, treatment, emissions, anddisposal of hazardous materials and wastes and noise pollution. Such laws andregulations are becoming more stringent, and it is likely that futureamendments to these environmental statutes and additional regulations promulgatedthere under will be applicable to us, our manufacturing operations and ourproducts in the future. Our failure to comply with present or futureregulations could result in fines being imposed on us, civil and criminalliability, suspension of operations, alterations to the manufacturing process,costly cleanup or significant capital expenditures.

 

#### **Other Risks**

####  

#### **Provisions in our charter documents, and of Delaware law, may make itdifficult for a third party to acquire our company and could depress the priceof our common stock.**

####  

Certain provisions of ourCertificate of Incorporation, as well as Delaware corporate law and theStockholder Rights Plan (the “Rights Plan”), may be deemed to haveanti-takeover effects and may delay, defer or prevent a takeover attempt that astockholder might consider in its best interest. Such provisions also mayadversely affect prevailing market prices for the Common Stock. Certain of suchprovisions allow the Company’s Board of Directors to issue, without additionalstockholder approval, preferred stock having rights senior to those of theCommon Stock. In addition, we are subject to the anti-takeover provisions ofSection 203 of the Delaware General Corporation Law, which prohibits usfrom engaging in a “business combination” with an “interested stockholder” fora period of three years after the date of the transaction in which the personbecame an interested stockholder, unless the business combination is approvedin a prescribed manner. In August 1996, we adopted the Rights Plan,pursuant to which holders of the Common Stock received a distribution of rightsto purchase additional shares of Common Stock, which rights become exercisableupon the occurrence of certain events.****

 

Item 1B. Unresolved StaffComments

 

There are no materialunresolved Securities and Exchange Commission (SEC) staff comments as of thedate of this report.

 

## Item 2. Properties

##  

The Company owns andoperates manufacturing facilities in Perris, California and Junction City,Oregon. NRV products are designed and manufactured in facilities encompassing607,000 square feet located on approximately 49 acres in Perris. CCI productsare designed and manufactured in facilities encompassing 436,000 square feetlocated on approximately 71 acres in Junction City. A portion of CCI’sfacilities representing 325,000 square feet is being leased under an agreementexpiring in October 2010. In addition, the building where CCI’s busconversions are manufactured representing 27,000 square feet is being leasedunder a one-year agreement expiring in November 2006. The Company has theoption to renew the lease at the end of each lease year. In September 2005, CCIleased approximately 50,000 square feet of additional warehouse space inJunction City, Oregon for research and development and material distribution.This lease is set to expire in November 2010. In March 2004, the Companysold a 10-bay service and parts distribution center in Lakeland, Florida andsubsequently moved this service and parts center to a new facility in the samegeneral area to minimize its invested capital.

 

The Company believes thatpresent facilities are well maintained and in good condition. While the Perris,California facilities are sufficient to meet the NRV production needs,management is currently evaluating the need to expand its CCI capacity. As aresult, in September 2005, the Company leased approximately 50,000 square feetof warehouse space and in August 2004, the Company entered into anagreement to acquire for $3.0 million approximately 73 acres of land adjacentto the CCI facility. The closing of the purchase is subject to customaryclosing conditions and is expected to occur in 2006.

 

## Item 3. LegalProceedings

##  

The Company is involvedin legal proceedings in the ordinary course of business, including a variety ofwarranty, “lemon law,” product liability (all of which are typical in therecreation vehicle industry) and employment claims. With respect to productliability claims, the Company’s insurance policies cover, in whole or in part,defense costs and liability costs for personal injury or property damage(excluding damage to Company motorhomes). While it is impossible to estimatewith certainty the ultimate legal and financial liability with respect to thislitigation, management is of the opinion that the final resolution of any suchlitigation could have a material adverse effect on the Company’s financialposition, results of operations or liquidity in a reporting period, andmanagement has provided an estimated reserve for such contingencies in theconsolidated financial statements.

 

16

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## Item 4. Submission ofMatters to a Vote of Security Holders

##  

On December 9, 2005, National R.V. Holdings, Inc. held its 2005 Annual Meeting of Stockholders (the “Annual Meeting”). The matters voted upon at the Annual Meeting, and the final votes cast for such matters, were as follows:

 

1.               The Company’s stockholders elected Bradley C. Albrechtsen as a Class I Director. Voting for the nominee was as follows: 8,935,127 shares FOR and 1,298,934 shares WITHHELD.

 

2.               The Company’s stockholders approved the appointment of Swenson Advisors, LLP as the Company’s auditor for the fiscal year ending December 31, 2005. For the appointment of Swenson Advisors, LLP as the Company’s auditor the vote was 9,020,695 shares FOR; 930,366 shares AGAINST and 283,000 shares ABSTAINING.

 

# PART II

#  

## Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

##  

The Company’s Common Stock,par value $0.01 per share (the “Common Stock”), has been trading on the NewYork Stock Exchange under the symbol NVH since December 14, 1998.

 

| **2005**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 12.05      |    | $          | 9.70 |   |
| Second Quarter |       | $        | 10.17      |    | $          | 7.80 |   |
| Third Quarter  |       | $        | 8.35       |    | $          | 5.06 |   |
| Fourth Quarter |       | $        | 6.89       |    | $          | 4.00 |   |
|           |       |     |       |    |       |
| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 15.80      |    | $          | 9.40 |   |
| Second Quarter |       | $        | 18.50      |    | $          | 11.63 |   |
| Third Quarter  |       | $        | 16.25      |    | $          | 11.98 |   |
| Fourth Quarter |       | $        | 12.99      |    | $          | 8.64 |   |

 

On March 21, 2006, thelast reported sales price for the Common Stock quoted on the New York StockExchange was $6.01 per share. At March 21, 2006, there were approximately 59record holders of Common Stock. Such number does not include persons whoseshares are held of record by a bank, brokerage house or clearing agency, butdoes include such banks, brokerage houses and clearing agencies.

 

### **Dividends**

### ** **

The Company has not paidany cash dividends or distributions on its Common Stock and has no intention todo so in the foreseeable future. The Company presently intends to retainearnings for general corporate purposes, including business expansion, capitalexpenditures and possible acquisitions. The declaration and payment of futuredividends will be at the sole discretion of the Board of Directors and willdepend on the Company’s profitability, financial condition, capital needs,future prospects and other factors deemed relevant by the Board of Directors.The Company’s current credit agreement with UPS Capital Corporation restrictsthe declaration and payment of dividends. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Liquidity andCapital Resources.”

 

#### **Issuer Purchases of Equity Securities**

####  

There were no purchasesby the Company of its Common Stock during the quarter ended December 31,2005 nor does the Company have outstanding any publicly announced repurchaseprogram.

 

#### **Unregistered Sales of Equity Securities**

 

During the fiscal yearended December 31, 2005, the Company sold no equity securities of theCompany, which were not registered under the Securities Act of 1933, asamended.

 

17

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## Item 6. SelectedFinancial Data

##  

The following selectedconsolidated financial data should be read in conjunction with the Company’sconsolidated financial statements and the notes thereto, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contained elsewhere herein.

 

SELECTEDCONSOLIDATED FINANCIAL INFORMATION

(In thousands, except per share and unit amounts)

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| **Consolidated Statements of  Operations Data:**              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net sales                                                     |       | $                                 | 463,610    |   | $ | 436,813 |   | $ | 312,548 |   | $ | 267,920 |   | $ | 249,250 |   |
| Cost of goods sold                                            |       | 451,622                           |       | 405,858 |   | 306,333 |   | 269,827 |   | 247,200 |   |
| Gross profit  (loss)                                          |       | 11,988                            |       | 30,955 |   | 6,215 |   | (1,907 | ) | 2,050 |   |
| Selling expenses                                              |       | 15,301                            |       | 11,616 |   | 9,500 |   | 10,925 |   | 10,366 |   |
| General and administrative expenses                           |       | 14,801                            |       | 13,626 |   | 7,466 |   | 7,430 |   | 8,106 |   |
| Other expense                                                 |       | —                            |       | 632 |   | — |   | — |   | — |   |
| Amortization of intangibles                                   |       | —                            |       | — |   | — |   | — |   | 413 |   |
| Impairment of goodwill (1)                                    |       | —                            |       | — |   | — |   | 6,126 |   | — |   |
| Operating income  (loss)                                      |       | (18,114                           | )          | 5,081 |   | (10,751 | ) | (26,388 | ) | (16,835 | ) |
| Interest expense                                              |       | 1,492                             |       | 327 |   | 399 |   | 357 |   | 107 |   |
| Other income                                                  |       | (78                               | )          | (90 | ) | (6 | ) | (117 | ) | (527 | ) |
| Loss (gain) on  disposal of land and equipment                |       | 59                                |       | — |   | (1 | ) | (355 | ) | (71 | ) |
| Income (loss)  from continuing operations before income taxes |       | (19,587                           | )          | 4,844 |   | (11,143 | ) | (26,273 | ) | (16,344 | ) |
| Provision for  (benefit from) income taxes                    |       | 181                               |       | 13,161 |   | (4,116 | ) | (7,716 | ) | (6,168 | ) |
| Loss from  continuing operations                              |       | (19,768                           | )          | (8,317 | ) | (7,027 | ) | (18,557 | ) | (10,176 | ) |
| Loss from  discontinued operations                            |       | —                            |       | 2,155 |   | 2,301 |   | 2,212 |   | 3,712 |   |
| Gain from sale  of discontinued operations                    |       | —                            |       | (281 | ) | — |   | — |   | — |   |
| Benefit from  income taxes                                    |       | —                            |       | (737 | ) | (853 | ) | (847 | ) | (1,400 | ) |
| Loss from  discontinued operations, net of taxes              |       |                              |       | (1,137 | ) | (1,448 | ) | (1,365 | ) | (2,312 | ) |
| Net loss                                                      |       | $                                 | (19,768    | ) | $ | (9,454 | ) | $ | (8,475 | ) | $ | (19,922 | ) | $ | (12,488 | ) |
| Basic loss per  common share:                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                        |       | $                                 | (1.91      | ) | $ | (0.81 | ) | $ | (0.71 | ) | $ | (1.90 | ) | $ | (1.05 | ) |
| Discontinued  operations                                      |       | —                            |       | (0.12 | ) | (0.15 | ) | (0.14 | ) | (0.24 | ) |
| Net loss                                                      |       | $                                 | (1.91      | ) | $ | (0.93 | ) | $ | (0.86 | ) | $ | (2.04 | ) | $ | (1.29 | ) |
| Diluted loss per  common share:                               |       |                              |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                        |       | $                                 | (1.91      | ) | $ | (0.81 | ) | $ | (0.71 | ) | $ | (1.90 | ) | $ | (1.05 | ) |
| Discontinued  operations                                      |       | —                            |       | (0.12 | ) | (0.15 | ) | (0.14 | ) | (0.24 | ) |
| Net loss                                                      |       | $                                 | (1.91      | ) | $ | (0.93 | ) | $ | (0.86 | ) | $ | (2.04 | ) | $ | (1.29 | ) |
| Weighted average  number of common shares outstanding:        |       |                              |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | 10,338                            |       | 10,217 |   | 9,900 |   | 9,788 |   | 9,683 |   |
| Diluted                                                       |       | 10,338                            |       | 10,217 |   | 9,900 |   | 9,788 |   | 9,683 |   |
| **Other  Data:**                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Class A  units sold                                      |       | 2,792                             |       | 2,968 |   | 2,417 |   | 1,919 |   | 1,957 |   |

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| **Consolidated Balance Sheet  Data:**     | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Total assets                              |       | $                     | 127,390    |   | $ | 140,233 |   | $ | 130,242 |   | $ | 142,067 |   | $ | 170,529 |   |
| Working capital                           |       | 26,136                |       | 49,094 |   | 49,669 |   | 55,941 |   | 64,098 |   |
| Long-term debt (including capital leases) |       | 169                   |       | 185 |   | — |   | 19 |   | 43 |   |
| Stockholders’ equity                 |       | 59,662                |       | 79,290 |   | 87,783 |   | 94,093 |   | 112,840 |   |
|                                           |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) The impairmentof goodwill was attributable to the adoption of Statement of FinancialAccounting Standards No. 142, effective January 1, 2002.

 

18

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## Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

##  

### **Executive Overview**

### ** **

During the past fiveyears, the Company has experienced net losses. These losses, which arepartially the result of lower sales volumes related to market declines in theRV industry have negatively impacted the Company’s liquidity. In response tothese conditions, the Company has implemented initiatives to increase salesvolumes through new product and floorplan introductions and the addition of newdealers, to re-balance head counts to current retail sales-supported productionlevels, to improve manufacturing efficiencies, and to further reducemanufacturing and other overhead costs.

 

For the year endedDecember 31, 2005 the Company had a net loss of $19.8 million or $1.91 pershare, compared to its net loss of $9.5 million or $0.93 per share for the yearended December 31, 2004. At December 31, 2004, the Company established a fullvaluation allowance of $11.2 million against its deferred tax asset andrecorded the corresponding non-cash charge in its December 31, 2004 financialresults. The Company’s full valuation allowance increased by $7.2 million, to$18. 4 million, during the year ended December 31, 2005. As a result of thefull tax valuation allowance established for the years ended December 31, 2005and 2004, the financial results do not include an income tax benefit. Inresponse to the weakness in the Class A market and an industry-wide build-up ininventory levels, the Company changed its overall strategy to a retail pullstrategy and set its production rates at or below retail demand. This allowedthe Company to reduce excess work-in-process and finished goods inventory toacceptable levels by the end of the year. However, this effort was costly asthe gross margin percentage declined by 4.5%, to 2.6%, for the year endedDecember 31, 2005 from 7.1% for the year ended December 31, 2004. The lowergross margins for the year ended December 31, 2005 were caused by higher salesincentives resulting from the weakening Class A market, increased spending onengineering and product development, higher material handling costs, highermid-year manufacturing costs as the Company’s work-in-process inventoriesincreased, multiple weeks of shutdowns, and finally, higher warranty costsdriven by higher rates and costs of settlement of claims on older highlinecoaches.

 

The Company finished theyear with a 6% increase in market share, the fourth largest annual market sharepercent increase of the top ten Class A manufacturers as reported byStatistical Surveys, Inc. The Company’s Class A motorhome shipments weredown 6% in 2005 compared to 2004, while average selling price increased 13%,leading to a 6% increase in net sales for the year. Industry wide, shipments ofClass A motorhomes were down 18% in 2005 compared to 2004. Key to the Company’snet sales improvement in 2005 were new and enhanced product offerings, thequality and service provided its customers and the addition of new dealers.

 

During the third quarterof 2004, the Company sold its Travel Trailer business, which it recorded as adiscontinued operation. The sale was designed to allow the Company to furtherconcentrate its efforts and resources on its growing motorhome business. For theyears ended December 31, 2004 and 2003, the Company recorded losses fromdiscontinued operations of $1.1 million and $1.4 million, respectively. Theloss on discontinued operations for the year ended December 31, 2004included a pre-tax gain on the sale of the Travel Trailer business of $0.3million.

 

### **Product Development**

### ** **

The Company hascontinuously re-designed and introduced new product offerings. At NRV, the *Tradewinds* and the *Islander*, whichstarted in production in early 2005, are diesel products efficiently built onthe same production line as the gas products. Additionally, in October 2005 NRVintroduced the *Surf Side*, an entry-level gasproduct that is a key sales volume price point. CCI has completely revitalizedits Highline products. Going forward, CCI has set forth initiatives to enhancethe ownership experience through the use of innovative technology, quality andcustomer service to further differentiate itself as the producer of the “theworld’s finest motorcoaches.”

 

The Company has continuouslyre-designed and introduced new product offerings. At NRV, the *Tradewinds*and the *Islander*, whichstarted in production in early 2005, are diesel products efficiently built onthe same production line as the gas products. Additionally, in October 2005 NRVintroduced the *Surf Side*, an entry-level gasproduct that is a key sales volume price point. CCI has completely revitalizedits Highline products. These efforts have resulted in an increase in its marketshare.

 

New model introductionsand new floorplans, together with interior and exterior product enhancements,have proven very successful in the marketplace. As the Company has introducednew and revitalized products, it has seen a rise in wholesale deliveries and animprovement in Class A retail market share, to 7.0% in 2005 from 6.6% in2004. Management believes that focusing on the customer and providing greatproducts that support the customer’s lifestyle will drive future growth for theCompany.

 

19

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### **Operating Performance**

 

During 2005, the RVindustry experienced an 18% decline in wholesale shipments while the Companyexperienced a decline of only 6%. Despite the improved shipments compared tothe RV industry as a whole, the results of the Company were significantlyimpacted by the industry-wide slump in demand for Class A motorhomes. Abuild-up in finished goods inventory at the Company, and within the industry,led to significant discounting to reduce the excess inventories. Additionally,the Company experienced production inefficiencies at its California operationsdriven by challenges with new model introductions, commodity flow difficulties,the work down of excess work-in-process inventory, and with lower productionrates leading to lower fixed-cost absorption. Other factors leading to thedecline in operating performance include higher warranty costs related to largewarranty claim settlements on older units at the Company’s highline division,significant investments in product development and the high cost of ongoingcompliance with the Sarbanes/Oxley Act.

 

### **Looking Ahead**

 

Many of the sameobjectives the Company addressed last year remain in place for the currentyear, including aggressive product development, cost containment, and increasedcustomer satisfaction. In addition, the Company will continue to focus onincreasing its dealer body in open markets during 2006.

 

The Company’s continuousre-design and introduction of new product offerings at its NRV and CCIdivisions has resulted in a continued annual increase in its market shareduring 2005. The introduction of additional new products are planned at bothdivisions in 2006.

 

Cost containment remainsa high priority, specifically in the manufacturing cost areas, warranty, andworkers’ compensation. The Company continues to focus on improving the qualityof its motorhomes. Also, the Company has instituted a number of safetyprograms, which have resulted in measurably reduced workers’ compensationcosts. The Company expects further progress in containing its costs as itcontinues to implement lean manufacturing concepts. Both NRV and CCI haverecently staffed full-time manufacturing engineers to assist in drivingefficiency gains.

 

The Company iscontinually striving to increase its customer support by improving clubsupport, telephone support for owners and dealers, and parts fulfillment. TheCompany utilizes various techniques such as surveys and focus groups to ensurethat it is improving in the area of customer satisfaction.

 

A renewed focus on dealeracquisition and enhanced training programs for the Company’s workforce, servicecenters, dealers, and consumers are also key initiatives. The Company hasalready undertaken efforts in the areas of safety; with new distance learningcapabilities, the Company is looking forward to broadcasting its servicetraining programs directly to dealers and service providers, driving themovement for increased customer satisfaction in areas of technical maintenance.In addition, factory-training programs are providing the Company’s customers abasis for self-diagnostics and a better understanding of the equipment they areoperating.

 

The Recreation VehicleIndustry Association’s (RVIA) market expansion campaign, GO RVing, now in itseighth year, is fostering greater awareness and garnering media attention.Though RVIA expects substantial growth for the industry in the long-term ordecade ahead, RVIA expects a continued decline in the industry during 2006.

 

This analysis of theCompany’s financial condition and operating results should be read inconjunction with the accompanying consolidated financial statements includingthe notes thereto.

 

20

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#### **Critical Accounting Policies**

 

The Company’s discussionand analysis of its financial condition and results of operations are basedupon its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The Company has performed an evaluation of its ability to continueas a going concern and believes it has sufficient financial resources to fundits operations through at least March 2007. Accordingly, the consolidatedfinancial statements have been prepared assuming the Company will continue as agoing concern, which contemplates the realization of the assets and thesatisfaction of liabilities in the normal course of business. The preparationof these consolidated financial statements requires the Company to makeestimates and judgments that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amount of revenues andexpenses for each period.

 

The following representsa summary of the Company’s critical accounting policies, defined as thosepolicies that the Company believes are: i) the most important to the portrayalof the Company’s financial condition and results of operations, and ii) thatrequire the Company’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effects of matters that areinherently uncertain.

 

#### **Valuation of Inventory**

####  

Inventoryis valued at the lower of cost (estimated using the first-in, first-out method)or market. The Company periodically evaluates the carrying value of inventoriesand maintains a reserve for excess and obsolescence to adjust the carryingvalue as necessary to the lower of cost or market or to amounts on hand to meetexpected demand in the near term. Specifically, service and slow-moving partsnot being used in the manufacture of current model year motorhomes are reviewedby the Company to determine which can be used in production, which can be usedfor future service and warranty repairs of customer-owned motorhomes, and whichcan be returned to suppliers for full or partial credit. In addition, finishedgood motorhomes are evaluated by the Company and the value of those motorhomesis adjusted to an estimated market value based on a combination of the NationalAutomobile Dealers Association Guide and the Company’s general industryknowledge. The inventory reserves are reviewed each fiscal quarter andrevisions are made as necessary. Unfavorable changes in obsolete inventoryestimates would result in an increase in the inventory reserve and a decreasein gross profit.

 

#### **Valuation of Long-Lived Assets**

####  

Effective the firstquarter of fiscal 2003, the Company adopted SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.” In accordance with SFASNo. 144, the Company assesses the fair value and recoverability of itslong-lived assets whenever events and circumstances indicate the carrying valueof an asset may not be recoverable from estimated future cash flows expected toresult from its use and eventual disposition. In doing so, the Company makesassumptions and estimates regarding future cash flows and other factors. Thefair value of the long-lived assets is dependent upon the forecastedperformance of the Company’s business and the overall economic environment.When the Company determines that the carrying value of the long-lived assetsmay not be recoverable, it measures impairment based upon a forecasteddiscounted cash flow method. The following table provides the estimated usefullives used for each asset type:

 

| Land  improvements                  |   | 5-40 years |   |
|-------------------------------------|--------|------------|--------|
| Buildings and building improvements |   | 5-40 years |   |
| Machinery and equipment             |   | 3-12 years |   |
| Office equipment                    |   | 3-15 years |   |

 

Leasehold improvements,which are included in buildings and building improvements, made at theinception or during the term of the lease and assets under capital leases areamortized over the shorter of the useful life of the assets or a term thatincludes required lease periods and renewals that are deemed to be reasonablyassured at the date the leasehold improvements are purchased or when thecapital lease is entered into.

 

#### **Warranty Reserve**

####  

The Company’s warrantyreserve is established based on its best estimate of the amounts necessary tosettle future and existing claims on products sold as of the balance sheetdate. The Company records an estimate for future warranty-related costs basedon recent actual warranty claims and historical experience. Also, the Company’srecall reserve is established, as necessary, based on management’s estimate ofthe cost per unit to remedy a recall problem and the estimated number of unitsthat will ultimately be brought in for the repair. While the Company’s warrantycosts have historically been within its expectations and the provisionsestablished, the Company cannot guarantee that it will continue to experiencethe same warranty costs that it has in the past. A significant increase indealer shop rates, the cost of parts or the frequency of claims could have amaterial adverse impact on the Company’s operating results for the period orperiods in which such claims or additional costs materialize.

 

21

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#### **Workers’ Compensation Self-Insurance Reserve**

####  

The Company’s workers’compensation reserve is established based on its best estimate of the amountsnecessary to settle future and existing employee workers’ compensation claimsincurred as of the balance sheet date. The Company records a reserve estimatefor future workers’ compensation related costs based on the Company’shistorical workers’ compensation claims paid history using an actuarialincurred but not reported (IBNR) approach. The Company cannot provide assurancethat these costs will continue at these levels, increase or decrease, in thenear term. A significant change in California workers’ compensationlegislation, the cost of claims or the frequency of claims could have amaterial adverse impact on the Company’s operating results for the period orperiods in which such claims or additional costs materialize.

 

#### **Legal Proceedings**

####  

The Company is involvedin legal proceedings in the ordinary course of business, including a variety ofwarranty, “lemon law” and product liability claims typical in the recreationvehicle industry. With respect to product liability claims, the Company’sinsurance policies cover, in whole or in part, defense costs and liabilitycosts for personal injury or property damage (excluding damage to Companymotorhomes). While it is impossible to estimate with certainty the ultimatelegal and financial liability with respect to this litigation, management is ofthe opinion that while the final resolution of any such litigation may have animpact on the Company’s consolidated results for a particular reporting period,the ultimate disposition of such litigation will not have any material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

#### **Revenue Recognition**

####  

The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 104, RevenueRecognition in Financial Statements, or SAB 104. SAB 104 requires that fourbasic criteria must be met before revenue can be recognized: i) persuasiveevidence of an arrangement exists, ii) delivery has occurred and title and therisks and rewards of ownership have been transferred to the customer, iii) theprice is fixed and determinable, and iv) collectibility is reasonably assured.

 

#### **Sales Incentives**

####  

As is common throughoutthe RV industry, the Company offers incentives to its dealers in the form ofdiscounts and floorplan interest reimbursement programs, rebate and holdbackprograms, and retail sales incentives given to its dealers’ retailsalespersons. The Company recognizes and records the costs of these incentivesin accordance with Emerging Issue Task Force (EITF) No. 01-09, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products)”.

 

Discounts and floorplaninterest reimbursement programs are offered to dealers on purchases of certainunits. The Company recognizes the cost of discounts and floorplan interestreimbursement as a reduction of revenue and records the cost of these programsat the later of the offer or when the associated revenue is recognized.

 

Rebate and holdbackprograms involve payments by the Company to the dealer based on either apercentage of the net invoice price or a predetermined amount based on themodel of the coach sold by the dealer. The dealer incentive program varies bydealer. Not all dealers participate. The purpose of the program is to providean additional incentive to the dealer to promote sales of the product. The dealers earn the incentive upon the wholesalepurchase of the unit from the Company. The Company recognizes theseincentives as a reduction of revenue and records the cost of these incentiveswhen the associated revenue is recognized.

 

TheCompany often pays retail sales incentives directly to dealer retailsalespersons to promote the sale of the product and the return of sale andwarranty information. This information assists in providing sales and marketingdata to the Company. The Company recognizes the cost of such retail salesincentives as a reduction of revenue and records the cost of such retail salesincentives when the associated revenue is recognized.

 

Cooperative advertisingarrangements exist through which dealers receive a certain allowance of thetotal purchases from the Company if certain qualitative advertising criteriaare met and if specified amounts are spent on the advertisements. A dealer mustmaintain documentation of all advertising performed that includes the Company’sproducts and provide that documentation to the Company upon request. Becausethe Company receives an identifiable advertising benefit from the dealer, theCompany recognizes the cost of cooperative advertising as a selling expense andrecords the cost of cooperative advertising when the units are sold to the dealers.

 

The Company uses anon-monetary incentive program that rewards RV dealer personnel by performance.Instead of cash, rewards are offered at tiered levels, based on the number ofthe Company’s products by each dealership participant. Rewards include itemssuch as home electronics, exercise equipment, personal data assistants, trips,and so on. The more a salesperson sells, the more they are eligible to redeemitems at the various reward levels set for the program. The Company accrues theestimated costs of the non-monetary loyalty program upon retail sale of a unitin selling expenses.

 

22

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#### **Income Taxes**

####  

As part of the process ofpreparing its consolidated financial statements, the Company estimates itsincome taxes in each of the taxing jurisdictions in which the Company operates.This process involves estimating actual current tax expense together withassessing any temporary differences resulting from the different treatment ofcertain items, such as the timing for recognizing revenues and expenses, fortax and financial reporting purposes. These differences may result in deferredtax assets and liabilities, which are included in the consolidated balancesheet. The Company is required to assess the likelihood that its net deferredtax assets, which include net operating loss carryforwards and temporarydifferences that are expected to be deductible in future years, will berecoverable from future taxable income or other tax planning strategies. Statementof Financial Accounting Standards (“SFAS”) No. 109 “Accounting for IncomeTaxes” (“SFAS No. 109”) requires that a valuation allowance be established whenit is more likely than not that its recorded net deferred tax assets will notbe realized. In determining whether a valuation allowance is necessary, theCompany is required to take into account all positive and negative evidencewith regard to the utilization of a deferred tax asset, including the Company’spast earnings history, market conditions, management profitability forecasts,the character and jurisdiction of such earnings, unsettled circumstances that,if unfavorably resolved, would adversely affect utilization of a deferred taxasset, carryback and carryforward periods, and tax strategies that couldpotentially enhance the likelihood of realization of a net deferred tax asset. SFASNo. 109 further states that it is difficult to conclude that a valuationallowance is not needed when there is negative evidence such as cumulativelosses in recent years.

 

The provision for taxliabilities involves evaluations and judgments of uncertainties in theinterpretation of complex tax regulations by various taxing authorities. Insituations involving tax related uncertainties, the Company provides for taxliabilities when it determines it is probable and estimable that additionaltaxes may be due. As additional information becomes available, or theseuncertainties are resolved with the taxing authorities, revisions to theseliabilities may be required, resulting in additional provision for or benefitfrom income taxes in the consolidated statement of operations in the periodsuch determination is made.

 

### **Results of Operations**

### ** **

The following table setsforth, for the periods indicated, the percentage of net sales represented bycertain items reflected in the Company’s Consolidated Statements of Operationsfor the year ended December 31, 2005, 2004 and 2003.

 

| ** **                                                    | ** ** | **Percentage of Net Sales  Years Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                          |       |                                                        |       |   |   |   |   |
| Net sales                                                     |       | 100.0                                                       | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                            |       | 97.4                                                        |       | 92.9 |   | 98.0 |   |
| Gross profit                                                  |       | 2.6                                                         |       | 7.1 |   | 2.0 |   |
| Selling expenses                                              |       | 3.3                                                         |       | 2.7 |   | 3.0 |   |
| General and administrative expenses                           |       | 3.2                                                         |       | 3.1 |   | 2.4 |   |
| Other expense                                                 |       | 0.0                                                         |       | 0.1 |   | 0.0 |   |
| Operating income (loss)                                       |       | (3.9                                                        | )          | 1.2 |   | (3.4 | ) |
| Interest expense                                              |       | 0.3                                                         |       | 0.1 |   | 0.1 |   |
| Other income                                                  |       | (0.0                                                        | )          | (0.0 | ) | (0.0 | ) |
| Income (loss)  from continuing operations before income taxes |       | (4.2                                                        | )          | 1.1 |   | (3.5 | ) |
| Provision for (benefit from) income taxes                     |       | 0.1                                                         |       | 3.0 |   | (1.3 | ) |
| Loss from continuing operations                               |       | (4.3                                                        | )          | (1.9 | ) | (2.2 | ) |
| Loss from discontinued operations                             |       | 0.0                                                         |       | 0.5 |   | 0.8 |   |
| Income taxes related to discontinued operations               |       | 0.0                                                         |       | (0.2 | ) | (0.3 | ) |
| Loss from discontinued operations, net of taxes               |       | 0.0                                                         |       | (0.3 | ) | (0.5 | ) |
| Net loss                                                      |       | (4.3                                                        | )          | (2.2 | ) | (2.7 | ) |

 

23

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### **Year Ended December 31,2005 Compared to Year Ended December 31, 2004**

### ** **

##### ***Amounts in tablesare in thousands, except percentages***

#####  

#### **Net sales**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Net sales                 |       | $                                                          | 463,610    |   | 6.1 | % | $ | 436,813 |   |
| as a percent of net sales |       | 100.0                                                      | %          |   |   | 100.0 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Net sales of $463.6million for the year ended December 31, 2005 represent an increase of$26.8 million, or 6.1%, from the year ended December 31, 2004. Wholesale dieselmotorhome shipments for the year ended December 31, 2005 were 1,411, up 2.2%from 1,380 units shipped during the year ended December 31, 2004. Wholesale gasmotorhome shipments were 1,381, down 13.0% from 1,588 for the year endedDecember 31, 2004.

 

The Company increased netsales for the year ended December 31, 2005, as compared to the prior year,despite an 18.1% annual industry-wide decline in the Class A wholesale unitshipments, eroding consumer confidence levels throughout most of 2005, highergasoline prices and natural disasters in the Eastern part of the United States.In addition, according to Statistical Surveys, Inc., the Company increased itsretail market share by 5.9% during 2005. These sales and market share gainswere driven by initiatives to add new dealers and an aggressive productdevelopment program in 2004 and 2005.

 

#### **Gross profit margin**

####  

| ** **          | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------|------------|
| ** **          | ** ** | **2005**                                                                  | ** ** | ** ** | ** ** | **2004** | ** ** |
| Gross profit margin |       | 2.6                                                                       | %          | (63.4) | % | 7.1 | % |

 

The gross profit marginfor the year ended December 31, 2005 was 2.6% (or a $12.0 million gross profit)compared to a 7.1% gross margin (or a $31.0 million gross profit) for the yearended December 31, 2004. The lower gross margin for the year ended December 31,2005 was caused by higher sales incentives resulting from a weakening Class Amarket and an industry-wide build-up in inventories, increased spending onengineering and product development at NRV where several new product lines wereintroduced or placed into production, higher material handling costs, highermid-year manufacturing costs as the Company’s work-in-process inventoriesincreased, higher material costs associated with obsolescence as sales declinedleading into model-year change, multiple weeks of shutdowns, and finally, higherwarranty costs driven by a higher rates and higher cost of settlement of claimson older highline coaches, partially offset by a decreasing effect in theestimate of workers’ compensation costs as the Company refines its estimatesbased on more mature experience rates.

 

#### **Selling expenses**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Selling expenses          |       | $                                                          | 15,301     |   | 31.7 | % | $ | 11,616 |   |
| as a percent of net sales |       | 3.3                                                        | %          |   |   | 2.7 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Selling expensesincreased $3.7 million, or 31.7%, for the year ended December 31, 2005 ascompared to the year ended December 31, 2004. Selling expenses for the yearended December 31, 2005 increased mainly due to higher sales, media andmarketing costs to support the Company’s marketing programs and dealer expansioninitiatives.

 

24

----

 

#### **General and administrative expenses**

 

| ** **                          | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| General and administrative expenses |       | $                                                          | 14,801     |   | 8.6 | % | $ | 13,626 |   |
| as a percent of net sales           |       | 3.2                                                        | %          |   |   | 3.1 | % |
|                                     |            |                                                            |            |  |  |  |  |  |  |

 

General andadministrative expenses totaling $14.8 million for the year ended December 31,2005 were up $1.2 million, or 8.6%, compared to the year ended December 31,2004. The increase in general and administrative expenses is principally due tohigher staffing levels to support ongoing Sarbanes-Oxley compliance, partiallyoffset by lower audit and professional fees.

 

#### **Other expense**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Other expense             |       | $                                                          | —     |   | (100.0 | )% | $ | 632 |   |
| as a percent of net sales |       | 0.0                                                        | %          |   |   | 0.1 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Other expense for theyear ended December 31, 2004 was primarily the loss on the sale of the realproperty in Florida totaling $0.3 million and the impairment of an emissionscontrol system totaling $0.3 million. There were no such charges incurredduring the year ended December 31, 2005.

 

#### **Interest expense**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Interest expense          |       | $                                                          | 1,492      |   | 356.3 | % | $ | 327 |   |
| as a percent of net sales |       | 0.3                                                        | %          |   |   | 0.1 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Interest expense for theyear ended December 31 2005 increased $1.2 million compared to the year endedDecember 31, 2004. The higher interest expense was due to increased averageborrowings and rising interest rates on the Company’s line of credit during theyear ended December 31, 2005. The Company’s weighted average interest rate forthe year ended December 31, 2005 was 6.97% as compared to 5.49% for the yearended December 31, 2004.

 

#### **Provision for income taxes**

 

| ** **                 | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Provision for income taxes |       | $                                                          | 181        |   | (98.6 | )% | $ | 13,161 |   |
| as a percent of net sales  |       | 0.1                                                        | %          |   |   | 3.0 | % |
|                            |            |                                                            |            |  |  |  |  |  |  |

 

The overalleffective tax rate for the year ended December 31, 2005 was 0.9%, compared toan effective tax rate of 418.3% for the year ended December 31, 2004. Theeffective tax rate for the year ended December 31, 2004 gives effect to acharge to establish a full valuation allowance in the amount of $11.2 millionagainst the Company’s net deferred tax asset as of December 31, 2004. For theyear ended December 31, 2005, the Company continues to recognize a fullvaluation allowance against its future income tax benefits but has recorded aprovision for various state income taxes of $0.2 million.

 

The Company plansto continue to provide a full valuation allowance on future tax benefits untilit can sustain an appropriate level of profitability and until such time, theCompany would not expect to recognize any significant tax benefits in itsfuture results of operations.

 

25

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#### **Loss from discontinued operations, net of taxes**

 

| ** **                                      | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                                   | ** ** | ** ** | ** ** | **2004** | ** ** |
| Loss from discontinued operations, net of taxes |       | $                                                          | —     |   | (100.0 | )% | $ | (1,137 | ) |
| as a percent of net sales                       |       | 0.0                                                        | %          |   |   | (0.3 | )% |
|                                                 |            |                                                            |            |  |  |  |  |  |  |

 

On September 24,2004, the Company sold its Travel Trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The loss fromdiscontinued operations for the year ended December 31, 2004 totaled $1.1million and included a pre-tax gain on the sale of $0.3 million.

 

### **Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

### ** **

##### ***Amounts in tablesare in thousands, except percentages***

#####  

#### **Net sales**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Net sales                 |       | $                                                          | 436,813    |   | 39.8 | % | $ | 312,548 |   |
| as a percent of net sales |       | 100.0                                                      | %          |   |   | 100.0 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Net sales of $436.8million for the year ended December 31, 2004 represent an increase of$124.3 million, or 39.8%, from the year ended December 31, 2003. Annualwholesale unit shipments of diesel motorhomes were 1,380, up 33.3% from 1,035units for the year ended December 31, 2003. Annual shipments of gas motorhomeswere 1,588, up 14.9% from 1,382 units sold for the year ended December 31,2003.

 

Theincrease in net sales is mainly attributable to strong sales of CCI’s Inspireand Magna product lines and NRV’s Tropi-Cal, as well as an overall increase inthe demand for the Company’s Highline and other products. The Company also benefitedfrom a healthy economy and an 11.6% increase in the industry-wide wholesaleClass A motorhome sales in 2004

 

#### **Gross profit margin**

 

| ** **          | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------|------------|------------------------------------------------------------|------------|
| ** **          | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Gross profit margin |       | 7.1                                                        | %          | 255.0 | % | 2.0 | % |

 

The gross profit marginfor 2004 was 7.1% (or a $31.0 million gross profit) compared to a 2.0% grossmargin (or a $6.2 million gross profit) for the year ended December 31, 2003.The primary factors that led to the improved gross margins were higherproduction levels, reduced workers’ compensation costs, product price increasesand reduced discounting, partially offset by production inefficiencies

 

#### **Selling expenses**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Selling expenses          |       | $                                                          | 11,616     |   | 22.3 | % | $ | 9,500 |   |
| as a percent of net sales |       | 2.7                                                        | %          |   |   | 3.0 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Selling expensesincreased $2.1 million, or 22.3%, for the year December 31, 2004 from December31, 2003. Selling expenses for 2004 increased mainly due to increased salescommissions, marketing, and rally and show expenses resulting from highersales. However, as a percentage of net sales, selling expenses decreased due tohigher sales over which to spread the fixed selling expenses.

 

26

----

 

#### **General and administrative expenses**

 

| ** **                          | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| General and administrative expenses |       | $                                                          | 13,626     |   | 82.5 | % | $ | 7,466 |   |
| as a percent of net sales           |       | 3.1                                                        | %          |   |   | 2.4 | % |
|                                     |            |                                                            |            |  |  |  |  |  |  |

 

General andadministrative expenses totaling $13.6 million for 2004 were up $6.2 million,or 82.5%, compared to 2003. The increase in general and administrative expensesis due to increased expenses related to compliance with the Sarbanes-Oxley Act,higher audit fees, increased personnel expenses, and an employee bonus program.The cost for outside consultants and fees from the independent registeredpublic accounting firm to comply with the Sarbanes-Oxley Act was approximately$1.8 million of the total increase in general and administrative expenses for 2004.

 

#### **Other expense**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Other expense             |       | $                                                          | 632        |   | 100.0 | % | $ | — |   |
| as a percent of net sales |       | 0.1                                                        | %          |   |   | 0.0 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Other expense for 2004was primarily the loss on the sale of the real property in Florida totaling$0.3 million and the impairment of an emissions control system totaling $0.3million.

 

#### **Interest expense**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Interest expense          |       | $                                                          | 327        |   | (18.0 | )% | $ | 399 |   |
| as a percent of net sales |       | 0.1                                                        | %          |   |   | 0.1 | % |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

Interest expense for 2004totaling $0.3 million decreased over the previous year due to reduced averageborrowings on the line-of-credit. As a percentage of net sales, interestexpense for 2004 remained unchanged at 0.1% compared to 2003. Interest expenserepresents the interest and fees paid on the Company’s credit facility.

 

#### **Other income**

 

| ** **                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Other income              |       | $                                                          | (90        | ) | 100 | % | $ | (7 | ) |
| as a percent of net sales |       | (0.0                                                       | )%         |   |   | (0.0 | )% |
|                           |            |                                                            |            |  |  |  |  |  |  |

 

The individual componentsof other income during 2004 and 2003 are immaterial.

 

#### **Provision for (benefit from) income taxes**

 

| ** **                                | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Provision for (benefit from) income taxes |       | $                                                          | 13,161     |   | N/A |   | $ | (4,116 | ) |
| as a percent of net sales                 |       | 3.0                                                        | %          |   |   | (1.3 | )% |
|                                           |            |                                                            |            |  |  |  |  |  |  |

 

27

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The overall effective taxrate for 2004 was 418.3%, compared to 37.0% for 2003. The 2004 effective taxrate gives effect to a charge to establish a full valuation allowance in theamount of $11.2 million against the Company’s net deferred tax asset as of theend of 2004. SFAS No. 109 requires that a valuation allowance beestablished when it is more likely than not that its recorded net deferred taxasset will not be realized. In determining whether a valuation allowance isrequired, the Company must take into account all positive and negative evidencewith regard to the utilization of a deferred tax asset. SFAS No. 109further states that it is difficult to conclude that a valuation allowance isnot needed when there is negative evidence such as cumulative losses in recentyears. Recent cumulative losses, the downturn in current market conditions andits impact on near term earnings outweighed other factors including the longcarryforward periods and led the Company to conclude that it was more likelythan not that its recorded net deferred tax assets will not be realizedresulting in the full valuation allowance against the net deferred tax asset asof December 31, 2004. As a result, the Company has recorded a non-cashcharge of $11.2 million to establish a full valuation allowance against itsDecember 31, 2004 net deferred tax asset. The Company expects to record afull valuation allowance on future tax benefits until it can sustain anappropriate level of profitability and until such time, the Company would notexpect to recognize any significant tax benefits in its future results ofoperations. During 2004, the Company’s income tax expense for continuingoperations was $13.2 million as a result of the Company’s full valuationallowance.

 

#### **Loss from discontinued operations, net of taxes**

 

| ** **                                      | ** ** | **Twelve Months Ended  December 31,  Percent Change** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                   | ** ** | ** ** | ** ** | **2003** | ** ** |
| Loss from discontinued operations, net of taxes |       | $                                                          | (1,137     | ) | (21.5 | )% | $ | (1,448 | ) |
| as a percent of net sales                       |       | (0.3                                                       | )%         |   |   | (0.5 | )% |
|                                                 |            |                                                            |            |  |  |  |  |  |  |

 

On September 24,2004, the Company sold its Travel Trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The loss fromdiscontinued operations for 2004 totaled $1.1 million compared to a loss of$1.4 million for the same period last year. The net loss from discontinuedoperations for the year ended December 31, 2004 included a pre-tax gain onthe sale of $0.3 million.

 

### **Liquidity and CapitalResources**

 

The Company has incurrednet losses of $19.8 million, $9.5 million, and $8.5 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. The Company provided cashfrom operating activities of $1.4 million and $8.4 million for the years endedDecember 31, 2005 and 2003, respectively, and used cash from operatingactivities of $15.8 million for the year ended December 31, 2004. The RVindustry has been historically cyclical and subject to downturns during periodsof weak economic conditions. With eroding consumer confidence and continuedeconomic uncertainty, the Company experienced a continuation of losses duringthe year ended December 31, 2005. These conditions led the Company to assessits short-term liquidity needs and plans to achieve profitability.

 

During the year endedDecember 31, 2005, the Company financed its operations primarily through itsexisting working capital and its line-of-credit with UPS Capital Corporationand Wells Fargo Bank. At December 31, 2005, the Company had $0.01 million incash and cash equivalents (excluding restricted cash totaling $0.2 millionrequired to secure a letter of credit in connection with one of the Company’sinsurance policies). The Company had working capital of $26.1 million and $49.1million at December 31, 2005 and 2004, respectively. The decrease inworking capital for the year ended December 31, 2005 from 2004 was mainlyattributed to a reduction of inventories in the amount of $12.9 million,repayments on the note receivable of $2.2 million, an increase in bookoverdraft of $1.8 million, an increase in accounts payable of $3.2 million andan increase in current accrued expenses of $4.5 million, partially offset by anincrease in receivables of $1.6 million.

 

For the year endedDecember 31, 2005, net cash provided by operating activities was $1.4 million,which was primarily attributable to a $10.7 million decrease in inventories,$3.9 million of depreciation and amortization, a $3.2 million increase inaccounts payable and a $2.5 million increase in accrued expenses, mostly offsetby a $19.8 million net loss. For the year ended December 31, 2004, net cashused in operating activities totaled $15.8 million, which was substantiallyattributable to a $27.3 million increase in inventories ($2.8 million of whichwas sold to Weekend Warrior as part of the Travel Trailer business sale) and a$9.5 million net loss, partially offset by a non-cash charge of $11.9 milliondeferred income tax provision, which is primarily due to the Company recordingan $11.2 million valuation allowance against its deferred tax assets, $3.9million of depreciation and amortization, a $2.5 million increase in accountspayable and a $1.3 million inventory valuation adjustment. For the year endedDecember 31, 2003, net cash provided by operating activities was $8.4 million whichwas primarily attributable to a $20.2 million decrease in inventories and a$7.0 million decrease in income taxes receivable partially offset by an $8.5million net loss and $5.4 million of a non-cash deferred income tax benefit.

 

28

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For the year endedDecember 31, 2005, the Company used $2.4 million of cash in investingactivities, which primarily resulted from $4.6 million of purchases ofproperty, plant and equipment, partially offset by $2.2 million in repaymentson the note receivable. For the year ended December 31, 2004, the Company used$0.4 million of cash for investing activities, including $4.9 million forpurchases of property, plant and equipment, with the single largest expenditurebeing the purchase of the Florida service center totaling $0.8 million. Thesecapital expenditures were mostly offset by the proceeds from the sale of assetstotaling $3.6 million, with the largest single sale of assets being the sale ofthe Florida property totaling $1.9 million, by the proceeds from the sale ofdiscontinued operations totaling $0.5 million, and by the note receivablerepayments of $0.5 million. For the year ended December 31, 2003, the Companyused $2.0 million of cash in investing activities, which were primarily capitalexpenditures of $1.6 million.

 

For the year endedDecember 31, 2005, the Company provided $1.0 million of cash from financingactivities, which were primarily due to an increase in the book overdraft of$1.8 million, partially offset by repayments on the line of credit of $0.6million. Net cash provided by financing activities for the year ended December31, 2004 was $14.2 million, mainly due to the advances on the line of credittotaling $12.7 million, an increase in book overdraft of $0.8 million and $0.7million in proceeds from issuance of common stock through the exercise of stockoptions. For the year ended December 31, 2003, the Company used $4.3 million ofcash in financing activities, which primarily included $4.9 million ofrepayments on the line of credit and a $0.9 million reduction in the bookoverdraft, partially offset by $1.6 million in proceeds from the issuance ofcommon stock.

 

At January 1, 2005, theCompany had an asset-based revolving credit facility of $15 million with UPSC,which was scheduled to expire in August 2005. On August 12, 2005, theoriginal facility was replaced by a new three-year asset-based revolving creditfacility with UPSC and Wells Fargo Bank for $25 million, with the Companyhaving the option, subject to certain conditions, of increasing the revolver in$5 million increments up to a total credit facility of $40 million. OnSeptember 29, 2005, the Company affected such an increase in the amount ofthe credit facility from $25 million to $30 million. The new credit facility iscollateralized by all of the Company’s assets other than real estate. Borrowingavailability is based on eligible accounts receivable and inventory. The facilityalso includes a requirement to maintain a blocked account arrangement, wherebyremittances from the Company’s customers reduce the debt outstanding. The newcredit facility contains, among other provisions, certain financial covenants,including funded debt to EBITDA, and a fixed charge coverage ratio. If these financial covenants are not met, theCompany’s availability under the credit facility will be reduced. The Companydid not meet these financial covenants as of year-end and currently does not expectto meet them until the fourth quarter of 2006. Until these covenants are met,the Company’s average monthly borrowing availability under its $40million facility will be limited to an amount between $24 million and $32million, depending on eligible inventory and accounts receivable. Initialamounts borrowed under the revolving credit facility bear interest at the primerate listed in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At December 31, 2005 the interest rate on theoutstanding borrowings under the line-of-credit was 7.75%. The weighted averageinterest rate for the borrowings under the line-of-credit during the yearsended December 31, 2005 and 2004 were 6.97% and 5.49%, respectively.

 

Management’s plan toachieve operational profitability includes continuing or starting a variety ofinitiatives to improve its earnings and working capital position, including:(i) new product and floor plan introductions in 2006, (ii) new dealer additionsto fill open market areas or replace under-performing dealers, (iii) decreaseoverall sales incentives by tailoring programs that provide the maximum valueto the Company, (iv) reduce material and related obsolescence costs, (v)improve manufacturing efficiencies, (vi) further reduce manufacturing and otheroverhead costs, and (vii) decrease the costs of warranty.

 

In order to fund on-goingoperations through at least March 31, 2007, the Company remains dependent uponits ability to utilize outside financing through borrowings on itsline-of-credit until it achieves sustained operational profitability through acombination of increased sales, cost reductions and improved product margins. Afterconsideration of the restrictions of the borrowing capacity noted above, theCompany believes it has sufficient financial resources to fund its operationsthrough at least March 31, 2007. However, the Company’s ability to meet itsobligations beyond March 2007 is dependent on its ability to generate positivecash flows from operations and is dependent on continued borrowings under itsline of credit. If management is unable to achieve its operationalprofitability plan or unforeseen events occur and its existing line of creditis insufficient to allow the Company to meet its obligations, the Company mayneed to implement alternative plans that could include long-term financingcollateralized by real estate (which is presently unencumbered) or obtainingadditional debt financing, additional reductions in operating costs, deferralof capital expenditures, and further reductions in working capital. While theCompany believes that it could successfully complete the alternative plans, ifnecessary, there can be no assurance that such alternatives would be availableon acceptable terms and conditions or that the Company would be successful inits implementation of such plans.

 

29

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#### **Contractual Obligations**

 

The following is a schedule atDecember 31, 2005 of the Company’s known contractual obligations:

 
| **(in  thousands)**             | ** ** | ** ** | ** ** | **Less than**      | ** ** | **1 – 3**           | ** ** | **4 - 5**           | ** ** | **After**        | ** ** |
|---------------------------------|------------|------------|------------|--------------------|------------|--------------------------|------------|---------------------|------------|------------------|------------|
| **Contractual  obligations**    | ** ** | **Total**  | ** ** | **1 Year**         | ** ** | **Years**                | ** ** | **Years**           | ** ** | **5 Years**      | ** ** |
| Operating leases                |       | $          | 7,822      |               | $          | 1,742                    |       | $                   | 3,203      |             | $          | 2,877 |   | $ | — |   |
| Capital leases                  |       | 283        |       | 73                 |       | 145                      |       | 65                  |       | —           |       |
|                            |       | $          | 8,105      |               | $          | 1,815                    |       | $                   | 3,348      |             | $          | 2,942 |   | $ | — |   |
|                            |       |       |       |               |       |                     |       |                |       |             |       |
| **(in thousands)**         | ** ** | ** ** | ** ** | **Less than** | ** ** | **1 – 3** | ** ** | **4 - 5** | ** ** | **After**        | ** ** |
| **Commercial commitments** | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **Years**                | ** ** | **Years**           | ** ** | **5 Years** | ** ** |
| Revolving credit facility       |       | $          | 12,059     |               | $          | 12,059                   |       | $                   | —     |             | $          | — |   | $ | — |   |
| Letter of credit (Wells Fargo)  |       | 201        |       | 201                |       | —                   |       | —              |       | —           |       |
|                            |       | $          | 12,260     |               | $          | 12,260                   |       | $                   | —     |             | $          | — |   | $ | — |   |

 

#### **Other Commitments**

####  

Most of the Company’smotorhome sales are made on terms requiring payment within 15 business days orless of the dealer’s receipt of the unit. Most dealers finance all, orsubstantially all, of the purchase price of their inventory under floor planarrangements with banks or finance companies under which the lender pays theCompany directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s undiscounted maximum potentialexposure under these agreements approximated $174 million at December 31,2005. As with receivables, the risk of loss under the repurchase agreements wasspread over a number of dealers and lenders and was reduced by the resale valueof the RVs, which the Company would be required to repurchase. Losses underthese agreements have not been material in the past and management does notbelieve that any future losses under such agreements will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, or cash flows. Consequently, no liability has been recognized inthe consolidated financial statements.

 

In August 2004, theCompany entered into an agreement to acquire approximately 73 acres of landadjacent to its Country Coach, Inc. facility in Junction City, Oregon for$3 million. The Company paid a deposit of $0.1 million in 2004. The closing ofthe purchase is subject to customary closing conditions and is expected tooccur in 2006.

 

### **Effects of Inflation**

### ** **

Higher steel andpetroleum prices during 2005, while partially passed along to customers in theform of surcharges, had an adverse effect on the Company’s profit marginsthroughout the year. Such adverse effects have continued through the earlymonths of 2006. For the year ended December 31, 2005, the affects of increasinginterest rates became increasingly significant to the Company, as the Companyuses a variable rate line of credit, and the Company increased its average borrowingsunder the line during the year ended December 31, 2005 as compared to 2004.

 

### **Recent AccountingPronouncements**

### ** **

In November 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs-an Amendment of ARBNo. 43, Chapter 4.” SFAS No. 151 requires that accounting for itemssuch as idle facility expense, freight, handling costs, and wasted materials(spoilage) be recognized as current period charges regardless of whether theymeet the criterion of “so abnormal.” In addition, this standard requires thatallocation of fixed production overhead to the costs of conversion be based onthe normal capacity of the production facilities. This standard is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005. The provision of this standard shall be applied prospectively. TheCompany does not expect the adoption of SFAS No. 151 to have a material impacton the consolidated financial position, results of operations or cash flows ofthe Company.

 

30

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In December 2004, theFASB issued SFAS 153, “Exchanges of Nonmonetary Assets”, which eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. SFAS No. 153 will be effective fornonmonetary asset exchanges occurring in fiscal periods beginning afterJune 15, 2005. Adoption of SFAS No. 153 did not significantly affectthe financial condition, results of operations or cash flows of the Company.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004),”Share-Based Payment” (SFASNo. 123R), which replaces SFAS No. 123, “Accounting for Stock-BasedCompensation,” (SFAS No. 123) and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the consolidated financial statements based on their fair valuesbeginning with the first annual period after June 15, 2005, with earlyadoption encouraged. The pro forma disclosures previously permitted underSFAS No. 123 no longer will be an alternative to consolidated financialstatement recognition. The Company is required to adopt SFAS No. 123R inthe first calendar quarter of 2006, beginning January 1, 2006. Under SFASNo. 123R, the Company must determine the appropriate fair value model tobe used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition methods include modified prospective and modified retrospectiveadoption options. Under the modified retrospective option, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The modified prospective method requires that compensation expensebe recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS No. 123R, while themodified retrospective method would record compensation expense for allunvested stock options and restricted stock beginning with the first periodrestated. After evaluating the requirements of SFAS No. 123R, the Companydetermined that it will adopt SFAS No. 123 using the modified prospectivemethod and use the Black-Scholes model to value service stock option plans thatare currently in effect. The Company expects the adoption of SFAS No. 123R tohave a material effect on its 2006 consolidated financial statements.

 

In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS No. 123R and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS No. 123R, to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. The Company expects the adoption of SFAS No. 123R, and all related provisions, to have a material effect on its 2006 consolidated financial statements.

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”  (FIN 47). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

 

In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. The provisions of this consensus did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

 

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB No. 20 and SFAS No. 3” (SFAS No. 154). SFAS No.154 provides guidance on the accounting for and reporting of accounting changesand error corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS No. 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The correction of an error in previously issuedconsolidated financial statements is not an accounting change. However, thereporting of an error correction involves adjustments to previously issuedconsolidated financial statements similar to those generally applicable toreporting an accounting change retrospectively. Therefore, the reporting of acorrection of an error by restating previously issued consolidated financialstatements is also addressed by SFAS No. 154. SFAS No. 154 is required to beadopted in fiscal years beginning after December 15, 2005. The Companydoes not expect that adoption of this standard will have an impact on itsconsolidated financial statements.

 

31

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In August 2005, the FASB issued FSP FAS 123-1, “Classificationand Measurement of Freestanding Financial Instruments Originally Issued inExchange for Employee Services under FASB Statement No. 123R.” In this FSP, theFASB decided to defer the requirements in SFAS No. 123 (Revised 2004), “Share-BasedPayment”, that make a freestanding financial instrument subject to therecognition and measurement requirements of other GAAP when the rights conveyedby the instrument are no longer dependent on the holder being an employee. Theguidance in this FSP should be applied upon initial adoption of SFAS No. 123R.The Company expects the adoption of SFAS No. 123R, and all related provisions,to have a material effect on its 2006 consolidated financial statements.

 

In October 2005, the FASBissued FASB Staff Position (“FSP”) FAS 123R-2, “Practical Accommodation to theApplication of Grant Date As Defined in FASB Statement No. 123R*.”* In this FSP, the FASB is providing companies with a “practicalaccommodation” when determining the grant date of an award that is subject tothe accounting provisions in SFAS No. 123R, “Share-Based Payment”*.* Specifically, assuming a company meets all of the othercriteria in the definition of grant date in SFAS No. 123R, a mutualunderstanding (between the company and the recipient) of the key terms and conditionsof an award is presumed to exist at the date the award is approved (inaccordance with the company’s normal corporate governance policy) if (1) theaward is a unilateral grant meaning that the recipient does not have theability to negotiate the key terms and conditions of the award, and (2) the keyterms and conditions of the award are expected to be communicated to therecipient within a relatively short period of time (as defined in the FSP)after the grant was approved. The guidance in this FSP shall be applied uponinitial adoption of SFAS No. 123R. The Company expects the adoption of SFAS No.123R, and all related provisions, to have a material effect on its 2006consolidated financial statements.

 

In November 2005, theFASB has issued FASB Staff Position (FSP) FAS 123R-3, “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” ThisFSP provides a practical exception when a company transitions to the accountingrequirements in SFAS No. 123 (Revised 2004), “Share-Based Payment”. SFAS No.123R requires a company to calculate the pool of excess tax benefits availableto absorb tax deficiencies recognized subsequent to adopting SFAS No. 123R(termed the “APIC Pool”), assuming the company been following the recognitionprovisions prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation”.The FASB learned that several companies do not have the necessary historicalinformation to calculate the APIC pool as envisioned by SFAS No. 123R andaccordingly, the FASB decided to allow a practical exception as documented inthis FSP. The guidance in this FSP is effective immediately and includestransition guidance. The guidance in this FSP is effective after the date theFSP is posted to the FASB website. The Company expects the adoption of SFAS No.123R, and all related provisions, to have a material effect on its 2006consolidated financial statements.

 

## Item 7A. Quantitativeand Qualitative Disclosures About Market Risk

##  

The Company has nosignificant financial instruments. The Company has not entered into anyderivative financial instruments. The Company does not have any significantforeign currency exposure because it does not transact business in foreigncurrencies. However, the Company is exposed to interest rate changes relatedprimarily to cash borrowings on the Company’s credit facility. The weightedaverage interest rate for the borrowings on the credit facility during the yearended December 31, 2005 was 6.97%. For every 0.25% increase in interestrates, the Company would expect an annual increase in interest expense ofapproximately $2,500 for every $1.0 million borrowed.

 

## Item 8. ConsolidatedFinancial Statements and Supplementary Data

##  

The information requiredby this item is contained in the consolidated financial statements listed inItem 15(a) 1 under the caption “Consolidated Financial Statements.”

 

Item 9. Changes inand Disagreements With Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

## Item 9A. Controls andProcedures

##  

### **Disclosure Controls andProcedures**

### ** **

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s reports under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated tomanagement, including the Company’s Chief Executive Officer (“CEO”)

 

32

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and Chief FinancialOfficer (“CFO”), as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, as the Company’s are designed to do, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

In connection with thepreparation of this Annual Report on Form 10-K, as of December 31, 2005, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) under the Exchange Act). Based on, and as of thedate of, this evaluation, the Company’s CEO and CFO concluded that the Company’sdisclosure controls and procedures were not effective at the reasonableassurance level as of December 31, 2005 because of the material weaknessdescribed below.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Management of theCompany is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(f) under theExchange Act. The Company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

Management has assessedthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2005. In making its assessment of internal control overfinancial reporting, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control — Integrated Framework*.

 

A material weakness is acontrol deficiency, or a combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. As of December 31,2005, we identified the following material weakness in the Company’s internalcontrol over financial reporting:

 

*Insufficientpersonnel resources, supervision and training within its accounting function -*TheCompany did not maintain effective controls over the financial reportingprocess at its CCI division and the related corporate oversight because ofinsufficient personnel resources, supervision and training within the accountingfunction. This material weakness resulted in the restatement of theconsolidated financial statements to correct an error related to theamortization of leasehold improvements. In addition, this material weaknessresulted in audit adjustments to the 2005 annual consolidated financialstatements affecting inventory, accounts payable, accrued liabilities,accumulated depreciation and amortization, and the related income statementaccounts, primarily cost of goods sold, selling, general and administrative andamortization expenses. Additionally, this control deficiency could result inmisstatements in the aforementioned accounts that would result in a materialmisstatement to the annual or interim consolidated financial statements thatwould not be prevented or detected.

 

33

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Because of this materialweakness, management concluded that the Company did not maintain effectiveinternal control over financial reporting as of December 31, 2005, based oncriteria established in *Internal Control –Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).

 

The Company’s independentregistered public accounting firm, Swenson Advisors, LLP has audited management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as stated in their report which appears on page 39 of thisAnnual Report on Form 10-K.

 

#### **Remediation of Material Weakness**

 

As of the filing date ofthis report, the Company has not fully remediated the material weakness in theCompany’s internal control over financial reporting as of December 31, 2005.However, during fiscal year 2006, management has taken a number of steps thatit believes will impact the effectiveness of our internal control over ourfinancial reporting including the following:

 

**1.****              *Insufficientpersonnel resources, supervision and training within its accounting function*

 

Management has assessedthe supervision, training and corporate oversight within its accountingfunction. The Company has undertaken remedial actions that include increasedtraining at the divisional and corporate level and the implementation ofprocedures to improve the supervision of the divisional accounting staffs. Remedialactions also include additional procedures at corporate to strengthen ongoingreviews of divisional accounting activities through the utilization of itscorporate and internal audit staffs.

 

The Company believes thatit will be able to improve its internal control procedures and remedy the materialweakness and additional control deficiencies identified as part of itsassessment process.  Notwithstanding theCompany’s remediation efforts, because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

#### **Changes in Internal Control over Financial Reporting**

####  

Except as otherwisediscussed herein, there have been no changes in the Company’s internal controlover financial reporting during the most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

Item 9B. Other Information

 

Not applicable.

 

34

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# PART III

#  

## Item 10. Directors andExecutive Officers of the Registrant

##  

The information requiredfor this Item will be set forth in the Company’s definitive Proxy Statement forits 2006 Annual Meeting of Stockholders or by an amendment to this Form 10-K tobe filed with the Securities and Exchange Commission no later than 120 daysafter December 31, 2005, which information is incorporated herein by reference.

 

#### **Code of Business Conduct and Ethics**

####  

The Company has adopted awritten code of conduct and ethics (the “Code,” which is applicable to all ofthe Company’s officers, directors and employees, including the Company’s ChiefExecutive Officer and Chief Financial Officer (collectively, the “SeniorOfficers”). In accordance with the rules and regulations of the Securities andExchange Commission and the rules of the New York Stock Exchange, a copy of theCode has been posted on the Company’s website at http://www.nrvh.com. TheCompany intends to disclose any changes in or waivers from the Code applicableto any Senior Officers on its website or by filing a Form 8-K.

 

## Item 11. ExecutiveCompensation

##  

The information requiredfor this Item will be set forth in the Company’s definitive Proxy Statement forits 2006 Annual Meeting of Stockholders or by an amendment to this Form 10-K tobe filed with the Securities and Exchange Commission no later than 120 daysafter December 31, 2005, which information is incorporated herein by reference.

 

## Item 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

##  

The information requiredfor this Item will be set forth in the Company’s definitive Proxy Statement forits 2006 Annual Meeting of Stockholders or by an amendment to this Form 10-K tobe filed with the Securities and Exchange Commission no later than 120 daysafter December 31, 2005, which information is incorporated herein by reference.

 

## Item 13. CertainRelationships and Related Transactions

##  

The information requiredfor this Item will be set forth in the Company’s definitive Proxy Statement forits 2006 Annual Meeting of Stockholders or by an amendment to this Form 10-K tobe filed with the Securities and Exchange Commission no later than 120 daysafter December 31, 2005, which information is incorporated herein by reference.

 

## Item 14. PrincipalAccountant Fees and Services

##  

The information requiredfor this Item will be set forth in the Company’s definitive Proxy Statement forits 2006 Annual Meeting of Stockholders or by an amendment to this Form 10-K tobe filed with the Securities and Exchange Commission no later than 120 daysafter December 31, 2005, which information is incorporated herein by reference.

 

35

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# PART IV

#  

## Item 15. Exhibits andConsolidated Financial Statement Schedules

##  

| (a)    | List of Documents filed as part of this Report                          |
|--------|-------------------------------------------------------------------------|
|   |                                                                    |
| 1.     | Consolidated financial statements:                                      |
|   | REPORTS OF  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS              |
|   | CONSOLIDATED BALANCE  SHEETS                                            |
|   | CONSOLIDATED  STATEMENTS OF OPERATIONS                                  |
|   | CONSOLIDATED  STATEMENTS OF CASH FLOWS                                  |
|   | CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY                   |
|   | NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                             |
|   |                                                                    |
| 2.     | Consolidated financial statement schedule                               |
|   | SCHEDULE II  – CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS |

 

All other schedules are omitted because they are notapplicable or the required information is shown in the consolidated financialstatements or notes thereto.

 

36

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3.               Exhibits

 
| 3.     | 1      |   | The Company’s  Restated Certificate of Incorporation. (2)                                                                                                                       |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.     | 2      |   | Amended and  Restated Bylaws of National R.V. Holdings, Inc. (9)                                                                                                                     |
| 4.     | 1      |   | Specimen-Certificate  of Common Stock. (1)                                                                                                                                           |
| 4.     | 2      |   | Amended and  Restated Rights Agreement, dated as of November 25, 2005, between National  R.V. Holdings, Inc. and Continental Stock Transfer & Trust Company as  Rights Agent (9) |
| 10.    | 1      |   | 1993 Stock  Option Plan. (1)                                                                                                                                                         |
| 10.    | 2      |   | 1993 Option  Plan. (2)                                                                                                                                                               |
| 10.    | 3      |   | 1995 Stock  Option Plan. (3)                                                                                                                                                         |
| 10.    | 4      |   | 1996 Stock  Option Plan. (4)                                                                                                                                                         |
| 10.    | 5      |   | 1997 Stock  Option Plan. (5)                                                                                                                                                         |
| 10.    | 6      |   | 1999 Stock  Option Plan. (6)                                                                                                                                                         |
| 10.    | 7      |   | Form of the  Company’s Stock Option Grant Agreement. (7)                                                                                                                   |
| 10.    | 8      |   | CCI Bus Facility  Lease Agreement between Sterling Pacific and CCI dated as of November 6,  2003. (7)                                                                           |
| 10.    | 9      |   | Lee Joint  Venture Real Property Lease Agreement between CCI and the Lee Joint Venture  dated as of October 12, 1995. (7)                                                       |
| 10.    | 10     |   | Lee Joint  Venture Real Property Lease Agreement Amendment between the Company and the  Lee Joint Venture dated as of November 2, 1999. (7)                                     |
| 10.    | 11     |   | Lee Joint  Venture Real Property Lease Renewal Agreement between CCI and the Lee Joint  Venture dated as of January 2, 2001. (7)                                                |
| 10.    | 12     |   | Credit  Agreement, dated as of August 12, 2005, between the Company, NRV, CCI and UPS  Capital Corporation and Wells Fargo Bank, as lenders. (8)                                     |
| 10.    | 13     |   | Loan  Modification Agreement, dated October 4, 2005, between the Company, NRV, CCI  and UPS Capital Corporation and Wells Fargo Bank, as lenders. (8)                                |
|   |   |   |                                                                                                                                                                                 |
| 21.    | 1      |   | List of  Subsidiaries. (5)                                                                                                                                                           |
| 23.    | 1      |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                           |
| 23.    | 2      |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                           |
| 31.    | 1      |   | Rule 13a-14(a) Certification  of Principal Executive Officer.                                                                                                              |
| 31.    | 2      |   | Rule 13a-14(a) Certification  of Principal Financial Officer.                                                                                                              |
| 32.    | 1      |   | Certifications  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                 |

 

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(1)          Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-1filed on August 16, 1993 (File No. 33-67414) as amended by AmendmentNo. 1 thereto filed on September 22, 1993 and Amendment No. 2thereto filed on September 29, 1993.

(2)          Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-1filed on December 15, 1993 (File No. 33-72954).

(3)          Previouslyfiled as an exhibit to the Company’s Form 10-K for the seven months endedDecember 31, 1995 filed on March 27, 1996.

(4)          Incorporatedby reference from the Company’s Form 10-K for the year endedDecember 31, 1996.

(5)          Incorporatedby reference from the Company’s Form 10-K for the year endedDecember 31, 1997.

(6)          Incorporatedby reference from the Company’s Form 10-K for the year endedDecember 31, 2001.

(7)          Incorporatedby reference from the Company’s 2004 Form 10-K, filed with the SEC on October11, 2005.

(8)          Incorporatedby reference from the Company’s September 2005 Form 10-Q, filed with the SEC onNovember 8, 2005.

(9)          Incorporatedby reference from the Company’s Form 8-K dated November 22, 2005 filed with theSEC on November 28, 2005.

 

37

----

 

## SIGNATURES

##  

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                   | NATIONAL R.V.  HOLDINGS, INC.               |
|------------------------|---------------------------------------------|
|                   |                                        |
| Dated: March 24,  2006 | By                                          | /s/ Thomas J.  Martini |   |
|                   |                                        | Thomas J.  Martini, |
|                   |                                        | Chief Financial  Officer |
|                   | (Principal  Accounting and Finance Officer) |
|                        |                                             |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| **Signature** | ** **              | **Capacity in Which Signed** | ** **                                    | **Date**                           |
|---------------|-------------------------|---------------------------------------------|-----------------------------------------------|------------------------------------|
|          |                    |                                        |                                          |                               |
| /s/           | Doy B. Henley           |                                        |                                          | Chairman of the  Board             |   | March 24, 2006 |
|          | Doy B. Henley           |                                        |                                          |                               |   |
|          |                    |                                        |                                          |                               |
| /s/           | Bradley C.  Albrechtsen |                                        |                                          | Director, Chief  Executive Officer |   | March 24, 2006 |
|          | Bradley C.  Albrechtsen |                                        | and President  (Principal Executive Officer)  |                               |   |
|          |                    |                                        |                                          |                               |
| /s/           | Thomas J.  Martini      |                                        |                                          | Chief Financial  Officer           |   | March 24, 2006 |
|          | Thomas J.  Martini      |                                        | (Principal  Accounting and Financial Officer) |                               |   |
|          |                    |                                        |                                          |                               |
| /s/           | Robert B. Lee           |                                        |                                          | Director                           |   | March 24, 2006 |
|          | Robert B. Lee           |                                        |                                          |                               |   |
|          |                    |                                        |                                          |                               |
| /s/           | Greg McCaffery          |                                        |                                          | Director                           |   | March 24, 2006 |
|          | Greg McCaffery          |                                        |                                          |                               |   |
|          |                    |                                        |                                          |                               |
| /s/           | James B. Roszak         |                                        |                                          | Director                           |   | March 24, 2006 |
|          | James B. Roszak         |                                        |                                          |                               |   |
|          |                    |                                        |                                          |                               |   |
| /s/           | David J.  Humphreys     |                                        | Director                                      |                               | March 24, 2006 |
|          | David J.  Humphreys     |                                        |                                          |                               |   |
|               |                         |                                             |                                               |                                    |  |  |  |  |  |

 

38

----

 

## **REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

##  

To the Board of Directorsand Stockholders of National R.V. Holdings, Inc.:

 

We have completed anintegrated audit of National R.V. Holdings, Inc.’s 2005 consolidatedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2005 in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinion, based on our audit, ispresented below.

 

Consolidated financial statements and financial statementschedule

 

In our opinion, theconsolidated financial statements and schedule listed in the index appearingunder Item 15(a)(1) present fairly, in all material respects, thefinancial position of National R.V. Holdings, Inc. and its subsidiaries atDecember 31, 2005 and the results of their operations and their cash flowsfor the period then ended in conformity with accounting principles generallyaccepted in the United States of America. In addition, in our opinion, theconsolidated financial statement schedule listed in the index appearingunder Item 15(a)(2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These consolidated financial statements andconsolidated financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and consolidated financial statementschedule based on our audit. We conducted our audit of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. An audit of consolidated financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall consolidated financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, we have auditedmanagement’s assessment, included in Management’s Report on Internal ControlOver Financial Reporting appearing under item 9A, that National R.V. Holdings,Inc. did not maintain effective control over financial reporting as of December31, 2005 because the Company did not properly and completely maintain inventorycosts, leasehold improvements, accounts payable and accrued liabilities and therelated income statement accounts, primarily cost of goods sold, selling,general and administrative and amortization expenses for the period endedDecember 31, 2005.  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit ofinternal control over financial reporting in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof consolidated financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America. Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation ofconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and(iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the consolidated financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

A material weakness is acontrol deficiency, or combination of control deficiencies that results in morethan a remote likelihood that a material misstatement of the annual or interimconsolidated financial statements will not be prevented or detected. Thefollowing material weakness has been identified and included in management’sassessment.

 

39

----

 

*Insufficientpersonnel resources, supervision and training within its accounting function -*TheCompany did not maintain effective controls over the financial reportingprocess at its CCI division and the related corporate oversight because ofinsufficient personnel resources, supervision and training within theaccounting function. This material weakness resulted in the restatement of theconsolidated financial statements to correct an error related to theamortization of leasehold improvements. In addition, this material weaknessresulted in audit adjustments to the 2005 annual consolidated financialstatements affecting inventory, accounts payable, accrued liabilities,accumulated depreciation and amortization, and the related income statementaccounts, primarily cost of goods sold, selling, general and administrative andamortization expenses. Additionally, this control deficiency could result inmisstatements in the aforementioned accounts that would result in a materialmisstatement to the annual or interim consolidated financial statements thatwould not be prevented or detected.

 

This material weaknesswas considered in evaluating the nature, timing, and extent of audit testsapplied in our audit of the 2005 consolidated financial statements, and our opinionregarding the effectiveness of the Company’s internal control over financialreporting does not affect our opinion on those consolidated financialstatements.

 

In our opinion,management’s assessment that National R.V. Holdings, Inc. did not maintaineffective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on criteria establishedin **Internal Control - IntegratedFramework** issued by the COSO. Also, in our opinion, because of the effectsof the material weakness described above on the achievement of the objectivesof the control criteria, National R.V. Holdings, Inc. has not maintainedeffective internal control over financial reporting as of December 31,2005, based on criteria established in **InternalControl - Integrated Framework** issued by the COSO.

 

The financial statementsof National R.V. Holdings, Inc. as of December 31, 2004 and 2003 were auditedby other auditors whose report dated October 6, 2005, except for therestatement discussed in the second and sixth paragraphs of Note 2 (notpresented herein) to the consolidated financial statements appearing under item8 of the Company’s 2004 Annual Report on Form 10-K/A, as to which the date isMarch 21, 2006, stated the financial statements presented fairly, in allmaterial respects, the financial position of National R.V. Holdings, Inc. as ofDecember 31, 2004 and 2003 and for the years then ended.

 

/s/ SwensonAdvisors, LLP

San Diego, California

March 27, 2006

 

40

----

 

## **REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

##  

To The Board of Directorsand Stockholders of

National R.V. Holdings,Inc.

 

In our opinion, theconsolidated balance sheet as of December 31, 2004 and the related consolidatedstatements of operations, of stockholders’ equity and of cash flows (appearingon pages 42 through 45 of National R.V. Holdings, Inc.’s 2005 Annual Report toShareholders which has been included in this Form 10-K) present fairly, in allmaterial respects, the financial position of National R.V. Holdings, Inc. andits subsidiaries at December 31, 2004, and the results of their operations andtheir cash flows for each of the two years in the period ended December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in ouropinion, the financial statement schedule II - Consolidated Valuation andQualifying Accounts as of December 31, 2004 and 2003 presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|

Orange County, California

October 6, 2005, exceptfor the restatement discussed in the second and sixth paragraphs of Note 2 (notpresented herein) to the consolidated financial statements appearing under Item8 of the Company’s 2004 Annual Report on Form 10-K/A, as to which the date isMarch 21, 2006

 

41

----

 

**NATIONAL R.V. HOLDINGS, INC**.

## CONSOLIDATED BALANCESHEETS

##  

(in thousands, exceptshare and per share amounts)

 
| ** **                                                                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                    |       | $                     | 11         |   | $ | 11 |   |
| Restricted cash                                                                                                               |       | 201                   |       | 251 |   |
| Receivables,  less allowance for doubtful accounts ($392 and $137, respectively)                                              |       | 21,533                |       | 19,976 |   |
| Inventories                                                                                                                   |       | 61,940                |       | 74,826 |   |
| Deferred income  taxes                                                                                                        |       | 1,281                 |       | 1,291 |   |
| Note receivable                                                                                                               |       | —                |       | 2,213 |   |
| Prepaid expenses                                                                                                              |       | 2,359                 |       | 2,924 |   |
| Total current assets                                                                                                          |       | 87,325                |       | 101,492 |   |
| Property, plant  and equipment, net                                                                                           |       | 38,457                |       | 37,403 |   |
| Other assets                                                                                                                  |       | 1,608                 |       | 1,338 |   |
|                                                                                                                          |       | $                     | 127,390    |   | $ | 140,233 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       |                  |       |   |   |
| Current  liabilities:                                                                                                         |       |                  |       |   |   |
| Book overdraft                                                                                                                |       | $                     | 2,582      |   | $ | 803 |   |
| Accounts payable                                                                                                              |       | 19,769                |       | 16,612 |   |
| Accrued expenses                                                                                                              |       | 26,722                |       | 22,242 |   |
| Line of credit                                                                                                                |       | 12,059                |       | 12,690 |   |
| Current portion  of capital leases                                                                                            |       | 57                    |       | 51 |   |
| Total current  liabilities                                                                                                    |       | 61,189                |       | 52,398 |   |
| Long-term  accrued expenses                                                                                                   |       | 5,089                 |       | 7,069 |   |
| Deferred income  taxes                                                                                                        |       | 1,281                 |       | 1,291 |   |
| Long-term  portion of capital leases                                                                                          |       | 169                   |       | 185 |   |
| Total  liabilities                                                                                                            |       | 67,728                |       | 60,943 |   |
| Commitments and  contingencies (Note 9)                                                                                       |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                   |       |                  |       |   |   |
| Preferred Stock,  $0.01 par value, 5,000 shares authorized, 4,000 issued and outstanding                                      |       | —                |       | — |   |
| Common Stock,  $0.01 par value, 25,000,000 shares authorized, 10,339,484 and 10,302,109  issued and outstanding, respectively |       | 103                   |       | 103 |   |
| Additional  paid-in capital                                                                                                   |       | 37,563                |       | 37,423 |   |
| Retained  earnings                                                                                                            |       | 21,996                |       | 41,764 |   |
| Total  stockholders’ equity                                                                                              |       | 59,662                |       | 79,290 |   |
|                                                                                                                          |       | $                     | 127,390    |   | $ | 140,233 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

42

----

 

### **NATIONAL R.V. HOLDINGS, INC.**

## CONSOLIDATED STATEMENTS OFOPERATIONS

##  

(in thousands, exceptshare and per share amounts)

 
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                                     |       | $                                          | 463,610    |   | $ | 436,813 |   | $ | 312,548 |   |
| Cost of goods sold                                            |       | 451,622                                    |       | 405,858 |   | 306,333 |   |
| Gross profit                                                  |       | 11,988                                     |       | 30,955 |   | 6,215 |   |
| Selling expenses                                              |       | 15,301                                     |       | 11,616 |   | 9,500 |   |
| General and administrative expenses                           |       | 14,801                                     |       | 13,626 |   | 7,466 |   |
| Other expense                                                 |       | —                                     |       | 632 |   | — |   |
| Total operating expenses                                      |       | 30,102                                     |       | 25,874 |   | 16,966 |   |
| Operating income (loss)                                       |       | (18,114                                    | )          | 5,081 |   | (10,751 | ) |
| Interest expense                                              |       | 1,492                                      |       | 327 |   | 399 |   |
| Other income                                                  |       | (19                                        | )          | (90 | ) | (7 | ) |
| Income (loss) from continuing operations before income  taxes |       | (19,587                                    | )     | 4,844 |   | (11,143 | ) |
| Provision for (benefit from) income taxes                     |       | 181                                        |       | 13,161 |   | (4,116 | ) |
| Loss from continuing operations                               |       | (19,768                                    | )          | (8,317 | ) | (7,027 | ) |
| Loss from discontinued operations                             |       | —                                     |       | 2,155 |   | 2,301 |   |
| Gain from sale of discontinued operations                     |       | —                                     |       | (281 | ) | — |   |
| Income taxes related to discontinued operations               |       | —                                     |       | (737 | ) | (853 | ) |
| Loss from discontinued operations, net of taxes  (Note 14)    |       | —                                     |       | (1,137 | ) | (1,448 | ) |
| Net loss                                                      |       | $                                          | (19,768    | ) | $ | (9,454 | ) | $ | (8,475 | ) |
|                                                          |       |                                       |       |   |   |   |   |
| Basic and diluted loss per common share:                      |       |                                       |       |   |   |   |   |
| Continuing operations                                         |       | $                                          | (1.91      | ) | $ | (0.81 | ) | $ | (0.71 | ) |
| Discontinued operations                                       |       | —                                     |       | (0.12 | ) | (0.15 | ) |
| Total                                                         |       | $                                          | (1.91      | ) | $ | (0.93 | ) | $ | (0.86 | ) |
| Weighted average number of shares:                            |       |                                       |       |   |   |   |   |
| Basic                                                         |       | 10,338                                     |       | 10,217 |   | 9,900 |   |
| Diluted                                                       |       | 10,338                                     |       | 10,217 |   | 9,900 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

43

----

 

### **NATIONAL R.V. HOLDINGS, INC.**

## CONSOLIDATEDSTATEMENTS OF CASH FLOWS

##  

(in thousands)

 
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                       |       |                                       |       |   |   |   |   |
| Cash flows from operating activities:                                                      |       |                                       |       |   |   |   |   |
| Net loss                                                                                   |       | $                                          | (19,768    | ) | $ | (9,454 | ) | $ | (8,475 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                              |       | 3,890                                      |       | 3,905 |   | 3,997 |   |
| Bad debt expense                                                                           |       | 270                                        |       | 32 |   | 63 |   |
| Reserve and write down of inventories                                                      |       | 1,767                                      |       | 1,280 |   | 673 |   |
| Loss (gain) on asset disposal                                                              |       | 59                                         |       | 391 |   | (1 | ) |
| Tax benefit related to exercise of stock options                                           |       | —                                     |       | 254 |   | 550 |   |
| Deferred income tax provision (benefit)                                                    |       | —                                     |       | 11,894 |   | (5,447 | ) |
| Changes in assets and liabilities:                                                         |       |                                       |       |   |   |   |   |
| Decrease (increase) in receivables                                                         |       | (1,827                                     | )     | 970 |   | (11,063 | ) |
| Decrease (increase) in inventories                                                         |       | 10,725                                     |       | (27,279 | ) | 20,200 |   |
| Decrease in income taxes receivable                                                        |       | —                                     |       | — |   | 7,015 |   |
| Decrease (increase) in prepaid expenses                                                    |       | 645                                        |       | (1,266 | ) | 476 |   |
| Increase in accounts payable                                                               |       | 3,157                                      |       | 2,511 |   | 618 |   |
| Increase (decrease) in accrued expenses                                                    |       | 2,500                                      |       | 972 |   | (225 | ) |
| Net cash provided by (used in) operating activities                                        |       | 1,418                                      |       | (15,790 | ) | 8,381 |   |
| Cash flows from investing activities:                                                      |       |                                       |       |   |   |   |   |
| Decrease (increase) in restricted cash                                                     |       | 50                                         |       | (1 | ) | (250 | ) |
| Increase in other assets                                                                   |       | (177                                       | )          | (86 | ) | (239 | ) |
| Proceeds from sale of property, plant and equipment                                        |       | 84                                         |       | 3,601 |   | 14 |   |
| Proceeds from sale of discontinued operations                                              |       | —                                     |       | 500 |   | — |   |
| Note receivable repayments                                                                 |       | 2,213                                      |       | 469 |   | — |   |
| Purchase of property, plant and equipment                                                  |       | (4,603                                     | )          | (4,914 | ) | (1,568 | ) |
| Net cash used in investing activities                                                      |       | (2,433                                     | )          | (431 | ) | (2,043 | ) |
| Cash flows from financing activities:                                                      |       |                                       |       |   |   |   |   |
| Net advances under (payments on) line of credit                                            |       | (631                                       | )     | 12,690 |   | (4,943 | ) |
| Deferred financing costs                                                                   |       | (236                                       | )          | — |   | — |   |
| Increase (decrease) in book overdraft                                                      |       | 1,779                                      |       | 803 |   | (943 | ) |
| Principal payments on long-term debt                                                       |       | —                                     |       | (19 | ) | (22 | ) |
| Principal payments on capital leases                                                       |       | (37                                        | )          | (8 | ) | — |   |
| Proceeds from issuance of common stock                                                     |       | 140                                        |       | 707 |   | 1,615 |   |
| Net cash provided by (used in) financing activities                                        |       | 1,015                                      |       | 14,173 |   | (4,293 | ) |
| Net increase (decrease) in cash and cash equivalents                                       |       | —                                     |       | (2,048 | ) | 2,045 |   |
| Cash and cash equivalents, beginning of year                                               |       | 11                                         |       | 2,059 |   | 14 |   |
| Cash and cash equivalents, end of year                                                     |       | $                                          | 11         |   | $ | 11 |   | $ | 2,059 |   |
|                                                                                       |       |                                       |       |   |   |   |   |   |   |   |
| Supplemental cash flow information:                                                        |       |                                       |       |   |   |   |   |   |   |   |
| Income taxes paid                                                                          |       | $                                          | 290        |   | $ | 554 |   | $ | 85 |   |
| Interest paid                                                                              |       | $                                          | 1,430      |   | $ | 324 |   | $ | 399 |   |
|                                                                                       |       |                                       |       |   |   |   |   |   |   |   |
| Supplemental schedule of non-cash investing and  financing activities:                     |       |                                       |       |   |   |   |   |   |   |   |
| Note received in sale of Towables division                                                 |       | $                                          | —     |   | $ | 2,682 |   | $ | — |   |
| Capital lease acquisitions of property and equipment                                       |       | $                                          | 27         |   | $ | 245 |   | $ | — |   |
| Reclassification of leased inventory                                                       |       | $                                          | 394        |   | $ | — |   | $ | — |   |
|                                                                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

44

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### **NATIONAL R.V. HOLDINGS, INC.**

## CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

##  

(in thousands)

 
| ** **                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balance, December 31, 2002                  |       | 9,832                 |       | $                       | 98         |         | $          | 34,302       |       | $ | 59,693 |   | $ | 94,093 |   |
| Common stock issued under option plans           |       | 358                   |       | 4                       |       | 1,611        |       | —       |       | 1,615 |   |
| Tax benefit related to exercise of stock options |       | —                |       | —                  |       | 550          |       | —       |       | 550 |   |
| Net loss                                         |       | —                |       | —                  |       | —       |       | (8,475       | )          | (8,475 | ) |
| Balance, December 31, 2003                  |       | 10,190                |       | 102                     |       | 36,463       |       | 51,218       |       | 87,783 |   |
| Common stock issued under option plans           |       | 112                   |       | 1                       |       | 706          |       | —       |       | 707 |   |
| Tax benefit related to exercise of stock options |       | —                |       | —                  |       | 254          |       | —       |       | 254 |   |
| Net loss                                         |       | —                |       | —                  |       | —       |       | (9,454       | )          | (9,454 | ) |
| Balance, December 31, 2004                  |       | 10,302                |       | 103                     |       | 37,423       |       | 41,764       |       | 79,290 |   |
| Stock option exercise                            |       | 37                    |       | —                  |       | 140          |       | —       |       | 140 |   |
| Net loss                                         |       | —                |       | —                  |       | —       |       | (19,768      | )          | (19,768 | ) |
| Balance, December 31, 2005                  |       | 10,339                |       | $                       | 103        |         | $          | 37,563       |       | $ | 21,996 |   | $ | 59,662 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

45

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### **NATIONAL R.V. HOLDINGS, INC.**

## NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

##  

#### **1. Description of Business**

####  

National R.V.Holdings, Inc. (“the Company”) operates in one business segment thatdesigns, manufactures and markets Class A motorhomes through its wholly-ownedsubsidiaries, National R.V., Inc. (“NRV” or “National RV”) and CountryCoach, Inc. (“CCI” or “Country Coach”). The RVs are marketed primarily todealers in the United States by NRV under the *Dolphin*,*Islander*, *Sea Breeze*,*Surf Side*, *Tradewinds*and *Tropi-Cal* brand names and by CCI underbrand names including *Affinity*, *Allure*, *Inspire*, *Intrigue*, *Magna* and *Prevost*.

 

### **2. Summary of SignificantAccounting Policies**

### ** **

#### **BASIS OF PRESENTATION**

####  

The Company amended andrestated its 2004 Form 10-K as filed with the Securities and ExchangeCommisssion (SEC) on March 21, 2006. The consolidated financial statementsinclude the financial statements of the Company and its wholly-ownedsubsidiaries NRV and CCI, which are presented in accordance with accountingprinciples generally accepted in the United States of America. As furtherdiscussed in Note 14, the operating results of the travel trailer division havebeen reclassified as discontinued operations for all periods presented. Allsignificant intercompany transactions have been eliminated in consolidation.

 

#### **RECLASSIFICATIONS**

####  

Certainreclassifications, none of which affected net loss or retained earnings, havebeen made to prior year amounts to conform to the current year presentation.

 

#### **USE OF ESTIMATES**

####  

Management is required tomake certain estimates and assumptions in order to prepare consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. Such estimates and assumptions affectthe reported amounts of assets, liabilities, revenues and expenses anddisclosure of contingent assets and liabilities in the consolidated financialstatements and accompanying notes. The Company’s most significant estimatesrelate to valuation of inventories, realization of deferred tax assets,recoverability of long-lived assets, workers’ compensation, warranty accrualsand accrued losses for contingent liabilities. The estimation processrequired to prepare the Company’s consolidated financial statements requiresassumptions to be made about future events and conditions, and as such, isinherently subjective and uncertain. Actual results may differ from estimates,and it is at least reasonably possible that the effect of the estimates on theconsolidated financial statements will materially change within one year of thedate of the consolidated financial statements.

 

#### **FAIR VALUE OF FINANCIAL INSTRUMENTS**

####  

The Company’s financialinstruments consist primarily of cash and cash equivalents, restricted cash,receivables, prepaid expenses, note receivable, accounts payable, accruedexpenses, book overdraft, line of credit and capital lease obligations. Thecarrying amounts of the Company’s financial instruments approximate theirrespective fair values due to their relatively short maturities. The Companyalso had an outstanding letter of credit in the amount of $0.2 million and $0.3million for the years ended December 31, 2005 and 2004, respectively, whichcollateralizes one of the Company’s surety bonds.

 

#### **CONCENTRATIONS**

####  

Financial instruments,which subject the Company to credit risk, consist primarily of tradereceivables from dealerships which receivables are approved by the dealers’lenders prior to shipment. The Company generally does not require collateralfrom its customers. Such credit risk is considered by management to be limiteddue to the Company’s broad customer base, and terms requiring most of thedealers’ lenders to pay the Company directly fifteen business days or lessafter the dealers’ receipt of the unit. For the year ended December 31,2005, three dealers accounted for 13%, 13% and 12%, respectively, of theCompany’s net sales. In addition, the Company’s top ten dealers accounted forapproximately 66%, 72% and 66% of net sales for the years endedDecember 31, 2005, 2004 and 2003, respectively. At December 31, 2005,three dealers accounted for 16%, 11% and 11%, respectively, of the Company’strade receivables.

 

The Company currentlybuys certain key components of its products from limited suppliers. Althoughthere are a limited number of manufacturers of these key components, managementbelieves that other suppliers could provide similar key components oncomparable terms. A change in suppliers, however, could cause a delay inmanufacturing and a possible loss of sales, which would adversely affectoperating results.

 

46

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The Company’s NRVsubsidiary purchases gasoline-powered chassis that are manufactured by FordMotor Company and Workhorse Custom Chassis, and rear engine diesel-powered chassisfrom Freightliner Custom Chassis Corporation and Spartan Motor Corporation. TheCompany’s CCI subsidiary manufactures its own chassis, the DynoMax, which isused as the base upon which all CCI motorhomes are built, except for theCountry Coach Prevost bus conversions, which utilize a Prevost bus shell. TheCompany generally maintains a one to two month production supply of chassis ininventory. If any of the Company’s present chassis manufacturers were to ceasemanufacturing or otherwise reduce the availability of their chassis, thebusiness of the Company could be materially and adversely affected.

 

#### **CASH AND CASH EQUIVALENTS**

####  

Cash and cash equivalentsinclude deposits in banks and short-term investments with original maturitiesof three months or less. Restricted cash consists of a deposit required tocollateralize a letter of credit in connection with one of the Company’sinsurance policies. The insurance policy, for which the restricted cash isassociated, expires within the next year; accordingly, this amount has beenclassified as current.

 

#### **RECEIVABLES**

####  

TheCompany reports receivables at net realizable value. The Company’s terms ofsale provide the basis for when receivables become delinquent or past due. TheCompany provides an allowance for doubtful accounts equal to estimateduncollectible amounts. The Company’s allowance for doubtful accounts reservetakes into consideration the use of dealer financing arrangements, wherepayment on motorhomes is pre-approved prior to shipment with payment made directlyfrom the dealer’s third party finance source to the Company within 15 businessdays from the date of shipment. This arrangement significantly reduces the riskof loss from the sale of motorhomes. Parts receivables represent a minimalportion of the total receivables. The Company uses a specific reservemethodology and currently reserves 100% of invoices greater than 120 days old.Additionally, the Company reviews all other accounts for collectibility anditems not considered collectible are reserved for as deemed appropriate.Receivables are generally charged off after management has determined that allreasonable collection efforts have been exhausted. It is at least reasonablypossible that the Company’s estimate of the allowance for doubtful accountswill change in the near-term.

 

#### **NOTE RECEIVABLE**

####  

In September 2004, theCompany entered into a note receivable in connection with the sale of theassets of its travel trailer division to Weekend Warrior, a privately owned,California-based ramp-trailer manufacturer (See Note 14). The face amount ofthe note was approximately $2.7 million and was due in ten equal monthlyinstallments. The effective interest rate of the note receivable was 5.0% perannum, which included an imputed discount of $0.06 million and an unamortizeddiscount of $0.04 million for the year ended December 31, 2004. The Companyrecognizes amortization of discounts on the effective interest rate method overthe life of the note and recorded $0.04 million and $0.02 million of discounts intointerest expense for the years ended December 31, 2005 and 2004, respectively.The Company reports its note receivable at net realizable value, which did notinclude an allowance for loan loss at December 31, 2004.

 

#### **INVENTORIES**

####  

Inventories are valued atthe lower of cost (estimated using the first-in, first-out method) or market.The Company periodically evaluates the carrying value of inventories andmaintains an allowance for excess and obsolescence to adjust the carrying valueas necessary to the lower of cost or market or to amounts on hand to meetexpected demand in the near term.

 

#### **PROPERTY, PLANT AND EQUIPMENT**

####  

Property, plant andequipment are stated at cost, less accumulated depreciation and amortization.Major renewals and improvements are capitalized, while routine maintenance andrepairs are expensed as incurred. The Company also capitalizes computersoftware costs that meet both the definition of internal-use software anddefined criteria for capitalization in accordance with Statement of PositionNo. 98-1, “Accounting for the Cost of Computer Software Developed orObtained for Internal Use.” At the time properties are retired from service,the cost and accumulated depreciation are removed from the respective accounts.

 

Depreciation expense iscomputed principally on the straight-line method, over estimated useful livesof the related assets. In addition, the Company does not estimate a salvagevalue for any of its property, plant and equipment. The following tableprovides the estimated useful lives used for each asset type:

 

| Land improvements           |   | 5-40 years |   |
|-----------------------------|--------|------------|--------|
| Buildings and  improvements |   | 5-40 years |   |
| Machinery and  equipment    |   | 3-12 years |   |
| Office equipment            |   | 3-15 years |   |

 

47

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Leasehold improvements, whichare included in buildings and building improvements, made at the inception orduring the term of the lease and assets under capital leases are amortized overthe shorter of the useful life of the assets or a term that includes requiredlease periods and renewals that are deemed to be reasonably assured at the datethe leasehold improvements are purchased or when the capital lease is enteredinto.

 

#### **LONG-LIVED ASSETS**

####  

In accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”the Company assesses the fair value and recoverability of its long-lived assetswhenever events and circumstances indicate the carrying value of an asset maynot be recoverable from estimated future cash flows expected to result from itsuse and eventual disposition. In doing so, the Company makes assumptions andestimates regarding future cash flows and other factors. The fair value of thelong-lived assets is dependent upon the forecasted performance of the Company’sbusiness and the overall economic environment. When it determines that thecarrying value of the long-lived assets may not be recoverable, it measuresimpairment based upon a forecasted discounted cash flow method.

 

#### **WORKERS’ COMPENSATION SELF-INSURANCE RESERVE**

####  

The Company’s workers’compensation self-insurance reserve is established based on its best estimateof the amounts necessary to settle future and existing employee workers’compensation claims incurred as of the balance sheet date. The Company recordsan undiscounted reserve estimate for future workers’ compensation related costsbased on the Company’s historical workers’ compensation claims paid historyusing an actuarial incurred but not reported (IBNR) approach.

 

### **PRODUCT WARRANTIES**

### ** **

The Company’s warrantyreserve is established based on its best estimate of the amounts necessary tosettle future and existing claims on products sold as of the balance sheetdate. The Company records a reserve for estimated future warranty-related costsbased on recent actual warranty claims and historical experience. Also, theCompany’s recall reserve is established, as necessary, based on management’sbest estimate of the cost per unit to remedy a recall problem and the estimatednumber of units that will ultimately be brought in for the repair. In addition,from time to time, the Company is involved in warranty or “lemon law”litigation arising out of its operations in the normal course of business. Thenumber of such matters as a percentage of sales is low and the aggregate costto the Company for these actions have not been material. While the Company’swarranty costs have historically been within its expectations and theprovisions established, a significant increase in dealer shop rates, the costof parts or the frequency of claims could have a material adverse impact on theCompany’s operating results for the period or periods in which such claims oradditional costs materialize and result in a change in estimate of warrantyreserves in that period.

 

### **COMMITMENTS AND CONTINGENCIES**

### ** **

The Company accounts forcontingencies in accordance with SFAS 5, “Accounting for Contingencies”, whichrequires the Company to accrue loss contingencies when the loss is bothprobable and estimable. For losses that are probable and reasonablyunestimable, but the amount falls within a reasonable range, the Companyapplies Financial Accounting Standards Board (FASB) Interpretation (FIN) 14, “ReasonableEstimation of the Amount of a Loss”, which promulgates that companies shouldaccrue the amount within the range that appears to be a better estimate thanany other. If no such amount can be determined, the Company accrues the minimumamount of the range. All legal costs expected to be incurred in connection withloss contingencies are expensed as incurred.

 

#### **STOCK-BASED COMPENSATION**

####  

The Company has stockoption plans that enable it to offer equity participation to employees,officers, and directors as well as certain non-employees. Stock options may begranted as incentive or nonqualified options. The Company has four fixed optionplans that reserve shares of common stock for issuance to executives, keyemployees, consultants, and directors. The Company has also issued fixedoptions outside of such plans pursuant to individual stock option agreements.Options granted to non-employee directors generally vest immediately upon grantand expire five to ten years from the date of grant. Options granted toemployees, including employee directors, generally vest in three equal annualinstallments and expire five to ten years from the date of grant. The price ofthe options granted pursuant to these plans will not be less than 100 percentof the market value of the shares on the date of grant. There were 162,000 and260,500 options granted for the years ended December 31, 2005 and 2004,respectively, and there were no options granted during the year ended December31, 2003.

 

The Company has adoptedthe provisions of Statement of Financial Accounting Standards No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure” (SFAS 148), whichamends SFAS Statement 123, “Accounting for Stock-Based Compensation.” Aspermitted by SFAS 148, the Company continues to measure compensation cost inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB 25) and related interpretations, butprovides pro forma disclosures of net loss and loss per share as if thefair-value method had been applied.

 

48

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The following tableillustrates the effect on net loss and loss per share if the Company hadapplied the fair value recognition provisions to stock-based employeecompensation (in thousands, except per share amounts):

 
| ** **                                                                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Loss from continuing operations                                                                                                       |       | $                                          | (19,768    | ) | $ | (8,317 | ) | $ | (7,027 | ) |
| Loss from discontinued operations                                                                                                     |       | —                                     |       | (1,137 | ) | (1,448 | ) |
| Net loss – as reported                                                                                                           |       | (19,768                                    | )          | (9,454 | ) | (8,475 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 263                                        |       | 569 |   | 298 |   |
| Pro forma net loss                                                                                                                    |       | $                                          | (20,031    | ) | $ | (10,023 | ) | $ | (8,773 | ) |
|                                                                                                                                  |       |                                       |       |   |   |   |   |
| Basic and diluted net loss per share, as reported                                                                                     |       |                                       |       |   |   |   |   |
| Continuing operations                                                                                                                 |       | $                                          | (1.91      | ) | $ | (0.81 | ) | $ | (0.71 | ) |
| Discontinued operations                                                                                                               |       | —                                     |       | (0.12 | ) | (0.15 | ) |
| Total basic and diluted net loss per share                                                                                            |       | (1.91                                      | )          | (0.93 | ) | (0.86 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.03                                       |       | 0.05 |   | 0.03 |   |
| Basic and diluted net loss per share pro forma                                                                                        |       | $                                          | (1.94      | ) | $ | (0.98 | ) | $ | (0.89 | ) |

 

The weighted-average fairvalue of the stock options has been estimated on the date of grant using theBlack-Scholes option-pricing model. The weighted-average fair value of stock optionsand the assumptions used to calculate weighted-average fair value are listedbelow for new grants.

 
| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                                                 |       | 0.0      | %          | 0.0      | %          |
| Expected volatility                                            |       | 42.7     | %          | 41.0     | %          |
| Risk-free interest rate                                        |       | 4.42     | %          | 3.45     | %          |
| Expected lives (in years)                                      |       | 5.3      |       | 4.2      |       |
| Weighted average Black-Scholes value of stock  options granted |       | $        | 2.83       |     | $          | 3.72 |   |
|                                                                |            |          |            |          |            |  |  |

 

#### **LOSS PER SHARE**

 

Basic loss per share iscomputed by dividing net loss by the weighted average number of common sharesoutstanding for the period. Diluted loss per share reflects the potentialdilution that could occur if securities to issue common stock were exercised orconverted into common stock. Shares attributable to the exercise of outstandingoptions that are anti-dilutive are excluded from the calculation of dilutedloss per share. No adjustments were made to reported net loss in thecomputation of loss per share for the years ended December 31, 2005, 2004 and2003.

 
| ** **                                                                              | ** ** | **December 31, (in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average  shares outstanding – basic                                       |       | 10,338                               |       | 10,217 |   | 9,900 |   |
| Weighted average  shares outstanding – diluted                                     |       | 10,338                               |       | 10,217 |   | 9,900 |   |
| Outstanding  “in-the-money” options excluded as impact would be anti-dilutive |       | 162                                  |       | 166 |   | 130 |   |

 

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#### **REVENUE RECOGNITION**

####  

The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 104, “RevenueRecognition in Financial Statements,” (or “SAB 104”). SAB 104 requires thatfour basic criteria must be met before revenue can be recognized: i) persuasiveevidence of an arrangement exists, ii) delivery has occurred and title and therisks and rewards of ownership have been transferred to the customer, iii) theprice is fixed and determinable, and iv) collectibility is reasonably assured.

 

During the fourth quarterof 2004, NRV began delivering motorhomes to its customers through independentthird party carriers. Title and risks of rewards of ownership are transferredto a customer upon delivery of a motorhome to a third party carrier, and a saleis recognized by NRV at the time of shipment.

 

For the year endedDecember 31, 2005, CCI began delivering motorhomes to its customers through acombination of independent third party carriers and company-employed deliverydrivers. Similar to National RV, title and risks of rewards of ownership aretransferred to a customer upon delivery of a motorhome to a third partycarrier. In cases in which CCI uses an independent third party carrier, salesare recognized at the time the motorhomes are delivered to the independentthird party carrier. In cases in which CCI uses company-employed deliverydrivers, sales are recognized upon acceptance of the motorhome by the dealer.

 

#### **SALES INCENTIVES**

####  

As is common throughoutthe RV industry, the Company offers incentives to its dealers in the form ofdiscounts and floorplan interest reimbursement programs, rebate and holdbackprograms, and retail sales incentives given to its dealers’ retailsalespersons. The Company recognizes and records the costs of these incentivesin accordance with Emerging Issue Task Force (EITF) No. 01-09, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products).”

 

Discounts and floorplaninterest reimbursement programs are offered to dealers on purchases of certainunits. The Company recognizes the cost of discounts and floorplan interestreimbursement as a reduction of revenue and records the cost of these programsat the later of the offer or when the associated revenue is recognized.

 

Rebate and holdbackprograms involve payments by the Company to the dealer based on either apercentage of the net invoice price or a predetermined amount based on themodel of the coach sold by the dealer. The dealer incentive program varies bydealer. Not all dealers participate. The purpose of the program is to providean additional incentive to the dealer to promote sales of certain motorhomes. The dealers earn the incentive upon the purchaseof the unit from the Company. The Company recognizes these incentives asa reduction of revenue and records the cost of these incentives when theassociated revenue is recognized.

 

TheCompany often pays retail sales incentives directly to dealer retailsalespersons to promote the sale of the product and the return of sale andwarranty information. This information assists in providing sales and marketingdata to the Company. The Company recognizes the cost of such retail salesincentives as a reduction of revenue and records the cost of such retail salesincentives when the associated revenue is recognized.

 

Cooperative advertisingarrangements exist through which dealers receive a certain allowance of thetotal purchases from the Company if certain qualitative advertising criteriaare met and if specified amounts are spent on the advertisements. A dealer mustmaintain documentation of all advertising performed that includes the Company’sproducts and provide that documentation to the Company upon request. Becausethe Company receives an identifiable advertising benefit from the dealer, theCompany recognizes the cost of cooperative advertising as a selling expense andrecords the cost of cooperative advertising when the units are sold to thedealers.

 

The Company uses anon-monetary incentive program that rewards RV dealer personnel by performance.Instead of cash, rewards are offered at tiered levels, based on the number ofthe Company’s products by each dealership participant. Rewards include itemssuch as home electronics, exercise equipment, personal data assistants, trips,and so on. The more a salesperson sells, the more they are eligible to redeemitems at the various reward levels set for the program. The Company accrues theestimated costs of the non-monetary loyalty program, in selling expenses, uponretail sale of a unit.

 

#### **RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES**

####  

Research, development andengineering expenses are expensed as incurred and are included in cost of goodssold and consist of normal improvements to models and model year changes. Totalresearch, development and engineering expenses were $9.5 million, $7.8 millionand $6.7 million for the years ended December 31, 2005, 2004 and 2003,respectively, of which research and development expenses alone were $1.6million, $1.5 million and $2.1 million, respectively.

 

50

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#### **SHIPPING AND HANDLING COSTS**

####  

Charges for shipping andhandling are included as a component of revenue. The Company records shippingand handling costs in costs of goods sold. Shipping and handling costs recordedwere $4.1 million, $4.3 million and $3.7 million in 2005, 2004 and 2003,respectively.

 

#### **ADVERTISING AND SALES PROMOTION COSTS**

####  

The Company expensesadvertising costs as incurred. For the years ended December 31, 2005, 2004and 2003, advertising and sales promotion costs, including cooperativeadvertising, were approximately $6.9 million, $4.1 million and $3.5 million,respectively.

 

#### **INCOME TAXES**

####  

As part of the process ofpreparing its consolidated financial statements, the Company estimates itsincome taxes in each of the taxing jurisdictions in which it operates. Thisprocess involves estimating the Company’s actual current tax expense togetherwith assessing any temporary differences resulting from the different treatmentof certain items, such as the timing for recognizing revenues and expenses, fortax and financial reporting purposes. These differences may result in deferredtax assets and liabilities.

 

The provision for taxliabilities involves evaluations and judgments of uncertainties in theinterpretation of complex tax regulations by various taxing authorities. Insituations involving tax related uncertainties the Company provides for taxliabilities unless the Company considers it probable and estimable thatadditional taxes would not be due. As additional information becomes available,or these uncertainties are resolved with the taxing authorities, revisions tothese liabilities may be required, resulting in additional provision for orbenefit from income taxes in the Company’s consolidated statements ofoperations.

 

The Companyevaluates the net realizable value of temporary deferred tax differences inaccordance with SFAS No. 109, “Accounting for Income Taxes,” whichrequires that a valuation allowance be established when it is more likely thannot that its recorded net deferred tax asset will not be realized. Indetermining whether a valuation allowance is required, the Company takes intoaccount all positive and negative evidence with regard to the utilization of adeferred tax asset.

 

#### **3. Recently Issued Accounting Pronouncements**

####  

In November 2004,the FASB issued Statement of Financial Accounting Standards (SFAS)No. 151, “Inventory Costs-an Amendment of ARB No. 43, Chapter 4.”SFAS No. 151 requires that accounting for items such as idle facilityexpense, freight, handling costs, and wasted materials (spoilage) be recognizedas current period charges regardless of whether they meet the criterion of “soabnormal.” In addition, this standard requires that allocation of fixed productionoverhead to the costs of conversion be based on the normal capacity of theproduction facilities. This standard is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. The provision of thisstandard shall be applied prospectively. The Company does not expect theadoption of SFAS No. 151 to have a material impact on the consolidatedfinancial position, results of operations or cash flows of the Company.

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, whicheliminates the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. SFAS No. 153 will be effective fornonmonetary asset exchanges occurring in fiscal periods beginning afterJune 15, 2005. Adoption of SFAS No. 153 did not significantly affectthe financial condition, results of operations or cash flows of the Company.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004),”Share-Based Payment” (SFASNo. 123R), which replaces SFAS No. 123, “Accounting for Stock-BasedCompensation,” (SFAS No. 123) and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the consolidated financial statements based on their fair valuesbeginning with the first annual period after June 15, 2005, with earlyadoption encouraged. The pro forma disclosures previously permitted underSFAS No. 123 no longer will be an alternative to consolidated financialstatement recognition. The Company is required to adopt SFAS No. 123R inthe first calendar quarter of 2006, beginning January 1, 2006. Under SFASNo. 123R, the Company must determine the appropriate fair value model tobe used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition methods include modified prospective and modified retrospectiveadoption options. Under the modified retrospective option, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The modified prospective method requires that compensation expensebe recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS No. 123R, while themodified retrospective method would record 

 

51

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compensation expense forall unvested stock options and restricted stock beginning with the first periodrestated. After evaluating the requirements of SFAS No. 123R, the Companydetermined that it will adopt SFAS No. 123 using the modified prospectivemethod and use the Black-Scholes model to value service stock option plans thatare currently in effect. The Company expects the adoption of SFAS No. 123R tohave a material effect on its 2006 consolidated financial statements.

 

In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS No. 123R and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS No. 123R, to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. The Company expects the adoption of SFAS No. 123R, and all related provisions, to have a material effect on its 2006 consolidated financial statements.

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”  (FIN 47). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

 

In June 2005, the Emerging Issues Task Force (or EITF), reached a consensus on Issue 05-6, “Determining the Amortization Period for Leasehold Improvements”, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. The provisions of this consensus did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

 

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB No. 20 and SFAS No. 3” (SFAS No. 154). SFAS No.154 provides guidance on the accounting for and reporting of accounting changesand error corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS No. 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The correction of an error in previously issuedconsolidated financial statements is not an accounting change. However, the reportingof an error correction involves adjustments to previously issued consolidatedfinancial statements similar to those generally applicable to reporting anaccounting change retrospectively. Therefore, the reporting of a correction ofan error by restating previously issued consolidated financial statements isalso addressed by SFAS No. 154. SFAS No. 154 is required to be adopted infiscal years beginning after December 15, 2005. The Company does notexpect that adoption of this standard will have an impact on its consolidatedfinancial statements.

 

In August 2005, the FASB issued FSP FAS 123-1, “Classificationand Measurement of Freestanding Financial Instruments Originally Issued inExchange for Employee Services under FASB Statement No. 123R.” In this FSP, theFASB decided to defer the requirements in SFAS No. 123 (Revised 2004), “Share-BasedPayment”, that make a freestanding financial instrument subject to therecognition and measurement requirements of other GAAP when the rights conveyedby the instrument are no longer dependent on the holder being an employee. Theguidance in this FSP should be applied upon initial adoption of SFAS No. 123R.The Company expects the adoption of SFAS No. 123R, and all related provisions,to have a material effect on its 2006 consolidated financial statements.

 

In October 2005, the FASBissued FASB Staff Position (“FSP”) FAS 123R-2, “Practical Accommodation to theApplication of Grant Date As Defined in SFAS No. 123R*.”*In this FSP, the FASB is providing companies with a “practical accommodation”when determining the grant date of an award that is subject to the accountingprovisions in SFAS No. 123R, “Share-Based Payment.” Specifically, assuming acompany meets all of the other criteria in the definition of grant date inStatement 123R, a mutual understanding (between the company and the recipient)of the key terms and conditions of an award is presumed to exist at the datethe award is approved (in accordance with the company’s normal corporategovernance policy) if (1) the award is a unilateral grant meaning that therecipient does not have the ability to negotiate the key terms and conditionsof the award, and (2) the key terms and conditions of the award are expected tobe communicated to the recipient within a relatively short period of time (asdefined in the FSP) after the grant was approved. The guidance in this FSPshall be applied upon initial adoption of SFAS No. 123R. The Company expectsthe adoption of SFAS No. 123R, and all related provisions, to have a materialeffect on its 2006 consolidated financial statements.

 

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In November 2005, theFASB has issued FASB Staff Position (FSP) FAS 123R-3, “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” ThisFSP provides a practical exception when a company transitions to the accountingrequirements in SFAS No. 123 (Revised 2004), “Share-Based Payment”*.* SFAS No. 123R requires a company to calculate the pool ofexcess tax benefits available to absorb tax deficiencies recognized subsequentto adopting SFAS No. 123R (termed the “APIC Pool”), assuming the company beenfollowing the recognition provisions prescribed by SFAS No. 123, “Accountingfor Stock-Based Compensation.” The FASB learned that several companies do nothave the necessary historical information to calculate the APIC pool asenvisioned by SFAS No. 123R and accordingly, the FASB decided to allow apractical exception as documented in this FSP. The guidance in this FSP iseffective immediately and includes transition guidance. The guidance in thisFSP is effective after the date the FSP is posted to the FASB website. TheCompany expects the adoption of SFAS No. 123R, and all related provisions, tohave a material effect on its 2006 consolidated financial statements.

 

### **4. Inventories**

### ** **

Inventories consist ofthe following:

 
| ** **      | ** ** | **December 31, (in thousands)** | ** ** |
|-----------------|------------|--------------------------------------|------------|
| ** **      | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Finished goods  |       | $                                    | 8,545      |   | $ | 16,379 |   |
| Work-in-process |       | 30,870                               |       | 35,388 |   |
| Raw materials   |       | 19,289                               |       | 18,398 |   |
| Chassis         |       | 3,236                                |       | 4,661 |   |
|            |       | $                                    | 61,940     |   | $ | 74,826 |   |

 

During the year endedDecember 31, 2005, the Company recorded $1.2 million of write-downs related tostating inventory at the lower of cost or market. The Company did not incursignificant lower of cost or market adjustments for the years ended December31, 2004 and 2003.

 

### **5. Property, Plant andEquipment**

 

Major classes ofproperty, plant and equipment consist of the following:

 
| ** **                          | ** ** | **December 31, (in thousands)** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Land and improvements               |       | $                                    | 8,429      |   | $ | 8,514 |   |
| Buildings and improvements          |       | 25,861                               |       | 24,810 |   |
| Machinery and equipment             |       | 20,431                               |       | 18,687 |   |
| Office equipment                    |       | 8,004                                |       | 7,771 |   |
| Assets under capital lease          |       | 270                                  |       | 245 |   |
| Construction in progress            |       | 1,868                                |       | 1,522 |   |
|                                |       | 64,863                               |       | 61,549 |   |
| Less accumulated depreciation       |       | (26,406                              | )          | (24,146 | ) |
| Property, plant  and equipment, net |       | $                                    | 38,457     |   | $ | 37,403 |   |

 

Depreciation expense (including amortization of assets under capital lease) was $3.9 million, $3.9 million and $4.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company sold real property in Florida during 2004 totaling $3.9 million and recorded impairments of an emissions control system and a paint booth due to obsolescence totaling $0.3 million and $0.1 million, respectively, which have been included in other expense.

 

### **6. Accrued Expenses**

### ** **

Accrued expenses consistof the following:

 
| ** **                                        | ** ** | **December 31, (in thousands)** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Current accrued expenses:                         |       |                                 |       |   |   |
| Workers’ compensation self-insurance reserve |       | $                                    | 2,209      |   | $ | 2,720 |   |
| Warranty reserve                                  |       | 11,705                               |       | 8,330 |   |
| Accrued sales incentives                          |       | 4,129                                |       | 1,744 |   |
| Payroll and other accrued expenses                |       | 8,679                                |       | 9,448 |   |
| Total current  accrued expenses                   |       | $                                    | 26,722     |   | $ | 22,242 |   |
|                                              |       |                                 |       |   |   |
| Long-term accrued expenses:                       |       |                                 |       |   |   |
| Workers’ compensation self-insurance reserve |       | $                                    | 4,280      |   | $ | 6,151 |   |
| Warranty reserve                                  |       | 130                                  |       | 175 |   |
| Deferred compensation                             |       | 679                                  |       | 743 |   |
| Total long-term  accrued expenses                 |       | $                                    | 5,089      |   | $ | 7,069 |   |

 

53

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### **7. Product Warranties**

 

The changes in thecarrying amount of the Company’s total product warranty liability for the yearsended December 31, 2005 and 2004 were as follows:

 

(in thousands)

 
| ** **            | ** ** | **Beginning** | ** ** | ** **       | ** ** | ** **     | ** ** | **Ending**  | ** ** |
|-----------------------|------------|---------------|------------|------------------|------------|----------------|------------|-------------|------------|
| ** **            | ** ** | **Balance**   | ** ** | **Accruals (1)** | ** ** | **Reductions** | ** ** | **Balance** | ** ** |
| Warranty Reserve 2005 |       | $             | 8,505      |             | $          | 18,437         |       | $           | 15,107     |   | $ | 11,835 |   |
| Warranty Reserve 2004 |       | $             | 8,660      |             | $          | 12,899         |       | $           | 13,054     |   | $ | 8,505 |   |

 

----

(1) The aggregate changes in the liability related tothe preexisting warranties were not significant for all years presented andhave been included with aggregate changes in the liability for accruals relatedto the current periods under the title “Accruals.”

 

### **8. Debt and Credit Agreements**

 
| ** **                             | ** ** | **December 31, (in thousands)** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Current:                               |       |                                 |       |   |   |
| Revolving line of credit               |       | $                                    | 12,059     |   | $ | 12,690 |   |
|                                   |       |                                 |       |   |   |
| Long-term debt:                        |       |                                 |       |   |   |
| Capital lease obligations (see Note 9) |       | 226                                  |       | 236 |   |
| Less payments  due within one year     |       | (57                                  | )          | (51 | ) |
| Long-term debt                         |       | 169                                  |       | 185 |   |
| Total debt                             |       | $                                    | 12,228     |   | $ | 12,875 |   |

 

At January 1, 2005, theCompany had an asset-based revolving credit facility of $15 million with UPSC,which was scheduled to expire in August 2005. On August 12, 2005, theoriginal facility was replaced by a new three-year asset-based revolving creditfacility with UPSC and Wells Fargo Bank for $25 million, with the Companyhaving the option, subject to certain conditions, of increasing the revolver in$5 million increments up to a total credit facility of $40 million. OnSeptember 29, 2005, the Company effected such an increase in the amount ofthe credit facility from $25 million to $30 million. The new credit facility iscollateralized by all of the Company’s assets other than real estate. Borrowingavailability is based on eligible accounts receivable and inventory. Thefacility also includes a requirement to maintain a blocked account arrangement,whereby remittances from the Company’s customers reduce the debt outstanding. Thenew credit facility contains, among other provisions, certain financialcovenants, including funded debt to Earnings Before Interest, Taxes,Depreciation and Amortization (EBITDA), and a fixed charge coverage ratio. If these financial covenants are not met, theCompany’s availability under the credit facility will be reduced. The Companydid not meet these financial covenants as ofyear-end and currently does notexpect to meet them until the fourth quarter of 2006. Until these covenants aremet, the Company’s average monthly borrowing availability under its $40million facility will be limited to an amount between $24 million and $32 million,depending on eligible inventory and accounts receivable. Initial amountsborrowed under the revolving credit facility bear interest at the prime ratelisted in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At December 31, 2005 the interest rate on theoutstanding borrowings under the line-of-credit was 7.75%. The weighted averageinterest rate for the borrowings under the line-of-credit during the yearsended December 31, 2005 and 2004 were 6.97% and 5.49%, respectively.

 

### **9. Commitments andContingencies**

### ** **

Litigation:

 

The Company is involvedin legal proceedings in the ordinary course of business, including a variety ofwarranty, “lemon law,” product liability (all of which are typical in therecreation vehicle industry) and employment claims. With respect to productliability claims, the Company’s insurance policies cover, in whole or in part,defense costs and liability costs for personal injury or property damage(excluding damage to Company motorhomes). While it is impossible to estimatewith 

 

54

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certainty the ultimatelegal and financial liability with respect to this litigation, management is ofthe opinion that the final resolution of any such litigation could have amaterial adverse effect on the Company’s financial position, results ofoperations or liquidity in a reporting period, and has provided an estimatedreserve at December 31, 2005 and 2004 of approximately $1.8 million and $1.2million, respectively for such contingencies in the consolidated financialstatements.

 

Recourse on DealerFinancing:

 

Most of the Company’smotorhome sales are made on terms requiring payment within 15 business days orless of the dealer’s receipt of the unit. Most dealers finance all, orsubstantially all, of the purchase price of their inventory under floor planarrangements with banks or finance companies under which the lender pays theCompany directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s undiscounted maximum potentialexposure under these agreements approximated $174 million at December 31,2005. As with receivables, the risk of loss under the repurchase agreements wasspread over a number of dealers and lenders and was reduced by the resale valueof the RVs, which the Company would be required to repurchase. Losses underthese agreements have not been material in the past and management does notbelieve that any future losses under such agreements will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or cash flows. Consequently, no liability has been recognized in theconsolidated financial statements.

 

Leases:

 

The Company leases someof its copy machines under capital lease agreements. The Company has no othercapital lease agreements. In addition, the Company leases a majority of its CCImanufacturing facilities under two non-cancelable operating lease agreementswhich agreements, expiring by the end of October 2010, represent most ofthe operating lease payment commitments. The remainder of the operating leaseagreements are for machinery and equipment.

 

The Company hascommitments under certain capital and non-cancelable operating leaseagreements. The future minimum capital and operating lease payments, as ofDecember 31, 2005, are as follows (in thousands):

 
| ** **                        | ** ** | **Capital  Leases** | ** ** | **Non-cancelable  Operating  Leases** | ** ** |
|-----------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| 2006                              |       | $                   | 73         |                                  | $          | 1,742 |   |
| 2007                              |       | 73                  |       | 1,612                                 |       |
| 2008                              |       | 73                  |       | 1,591                                 |       |
| 2009                              |       | 58                  |       | 1,589                                 |       |
| 2010                              |       | 6                   |       | 1,288                                 |       |
| Total minimum lease payments      |       | 283                 |       | $                                     | 7,822      |   |
| Less amount representing interest |       | 57                  |       |                                  |       |
| Capital lease obligations         |       | $                   | 226        |                                  |       |   |

 

Rent expense, fromnon-cancelable operating lease obligations, for the years endedDecember 31, 2005, 2004 and 2003 was approximately $1.6 million, $1.4million and $1.4 million, respectively.

 

Other Commitments:

 

In addition, the Companyin August 2004 entered into an agreement to acquire, for $3 million,approximately 73 acres of land adjacent to its Country Coach, Inc. facilityin Junction City, Oregon. The Company paid a deposit of $0.1 million. Theclosing of the purchase is subject to customary closing conditions and isexpected to occur in 2006. The Company believes the combination of internallygenerated funds and unused borrowing availability will be sufficient to meetthis obligation.

 

### **10. Stockholders’ Equity**

### ** **

#### **Preferred Stock**

####  

The Board of Directorshas authority to issue 5,000 shares of $0.01 par value Preferred Stock.Currently there are 4,000 Preferred Shares issued and outstanding with thefollowing terms: i) the Preferred Shares are not entitled to receive anydividends, ii) the Preferred Stock has no voting rights, iii) upon liquidation,either voluntary or involuntary, the preferred stockholders are entitled to receiveout of the assets of the corporation that are available for distribution, $0.01per share, and iv) the Preferred Stock is redeemable at the sole discretion ofthe Company.

 

55

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#### **Common Stock Options**

####  

The Company has stockoption plans that enable it to offer equity participation to employees,officers, and directors as well as certain non-employees. Stock options may begranted as incentive or nonqualified options. The Company has four fixed optionplans that reserve shares of common stock for issuance to executives, keyemployees, consultants, and directors. The Company has also issued fixedoptions outside of such plans pursuant to individual stock option agreements.Options granted to non-employee directors generally vest immediately upon grantand generally expire five to ten years from the date of grant. Options grantedto employees, including employee directors, generally vest in three equalannual installments and expire five to ten years from the date of grant. AtDecember 31, 2005, the Company had approximately 3.7 million of shares reservedfor stock option plans and financing arrangements. The price of the optionsgranted pursuant to these plans will not be less than 100 percent of the marketvalue of the shares on the date of grant. The exercise of certain of thesestock options represents a tax benefit for the Company which has been reflectedas a reduction of income taxes payable and an increase to additionalpaid-in-capital amounting to $0.3 million in 2004 and $0.6 million in 2003.During the year ended December 31, 2005, the exercise of certain of the stockoptions represented a tax benefit of $0.1 million. In accordance with SFASNo. 109 the Company recorded a full valuation allowance on all of theCompany’s net deferred tax assets (See Note 11 Income Taxes) and has fullyoffset the recorded benefit related to the exercise of stock options.

 

Information regardingthese option plans and option agreements for 2005, 2004 and 2003 is as follows(shares in thousands):

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Outstanding at December 31, 2002 |       | 2,016      |       | $                                                | 11.22      |   |
| Granted                               |       | —     |       | $                                                | —     |   |
| Expired or  forfeited                 |       | (332       | )          | $                                                | 13.62      |   |
| Exercised                             |       | (397       | )          | $                                                | 4.79       |   |
| Outstanding at December 31, 2003 |       | 1,287      |       | $                                                | 12.58      |   |
|                                  |       |       |       |                                             |       |
| Granted                               |       | 261        |       | $                                                | 9.79       |   |
| Expired or  forfeited                 |       | (302       | )          | $                                                | 21.91      |   |
| Exercised                             |       | (112       | )          | $                                                | 6.32       |   |
| Outstanding at December 31, 2004 |       | 1,134      |       | $                                                | 10.08      |   |
|                                  |       |       |       |                                             |       |
| Granted                               |       | 162        |       | $                                                | 6.31       |   |
| Expired or  forfeited                 |       | (179       | )          | $                                                | 8.72       |   |
| Exercised                             |       | (37        | )          | $                                                | 3.75       |   |
| Outstanding at December 31, 2005 |       | 1,080      |       | $                                                | 9.94       |   |

 

The following tablesummarizes information for those options that are outstanding and exercisableas of December 31, 2005:

 

| ** **          | ** ** | **Options Outstanding**               | ** ** | **Options Exercisable**                             | ** ** |
|---------------------|------------|---------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Number of  Shares (in  thousands)** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares (in  thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $ 6.31         |       | 162                                   |       | 9.94                                                |       | $ | 6.31 |   | — |   | $ | — |   |
| $ 8.50         |       | 8                                     |       | 4.59                                                |       | $ | 8.50 |   | 8 |   | $ | 8.50 |   |
| $ 9.33         |       | 180                                   |       | 0.75                                                |       | $ | 9.33 |   | 180 |   | $ | 9.33 |   |
| $ 9.50         |       | 202                                   |       | 8.10                                                |       | $ | 9.50 |   | 67 |   | $ | 9.50 |   |
| $10.05              |       | 3                                     |       | 8.15                                                |       | $ | 10.05 |   | 1 |   | $ | 10.05 |   |
| $10.08              |       | 319                                   |       | 1.42                                                |       | $ | 10.08 |   | 319 |   | $ | 10.08 |   |
| $10.43              |       | 3                                     |       | 8.16                                                |       | $ | 10.43 |   | 1 |   | $ | 10.43 |   |
| $12.50              |       | 14                                    |       | 8.38                                                |       | $ | 12.50 |   | 5 |   | $ | 12.50 |   |
| $12.83              |       | 178                                   |       | 0.79                                                |       | $ | 12.83 |   | 178 |   | $ | 12.83 |   |
| $26.81              |       | 12                                    |       | 3.39                                                |       | $ | 26.81 |   | 12 |   | $ | 26.81 |   |
|                |       | 1,081                                 |       | 3.90                                                |       | $ | 9.94 |   | 771 |   | $ | 10.75 |   |

 

56

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The number of exercisableoptions outstanding at December 31, 2005, 2004 and 2003 under these planswere 770,684, 877,129, and 1,219,269 shares, respectively, at weighted averageprices of $9.94, $10.16 and $12.57 per share, respectively.

 

### **11. Income Taxes**

 

The components of theprovision for (benefit from) income taxes were as follows:

 

| ** **                                      | ** ** | **December 31, (in thousands)** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current (refundable) payable:                   |       |                                 |       |   |   |   |   |
| Federal                                         |       | $                                    | (23        | ) | $ | 28 |   | $ | (167 | ) |
| State                                           |       | 204                                  |       | 249 |   | 94 |   |
|                                            |       | 181                                  |       | 277 |   | (73 | ) |
| Deferred:                                       |       |                                 |       |   |   |   |   |
| Federal                                         |       | —                               |       | 8,702 |   | (4,182 | ) |
| State                                           |       | —                               |       | 3,445 |   | (714 | ) |
|                                            |       | —                               |       | 12,147 |   | (4,896 | ) |
| Total provision for (benefit from) income taxes |       | $                                    | 181        |   | $ | 12,424 |   | $ | (4,969 | ) |

 

Deferred income taxes arerecorded based upon differences between the consolidated financial statementand tax basis of assets and liabilities. Temporary differences that give riseto deferred income tax assets and liabilities at December 31, 2005 and2004 were as follows:

 

| ** **                       | ** ** | **December 31, (in thousands)** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| **Current:**                     |       |                                 |       |   |   |
| Accrued expenses                 |       | $                                    | 7,076      |   | $ | 4,611 |   |
| NOL carryforward                 |       | 89                                   |       | 387 |   |
| Valuation allowance              |       | (5,884                               | )          | (3,707 | ) |
| Deferred income  tax assets      |       | $                                    | 1,281      |   | $ | 1,291 |   |
|                             |       |                                 |       |   |   |
| **Long-term:**                   |       |                                 |       |   |   |
| Accrued expenses                 |       | $                                    | (746       | ) | $ | (1,785 | ) |
| Fixed assets                     |       | 2,912                                |       | 3,136 |   |
| NOL carryforward                 |       | (13,388                              | )          | (7,585 | ) |
| Valuation allowance              |       | 12,503                               |       | 7,525 |   |
| Deferred income  tax liabilities |       | $                                    | 1,281      |   | $ | 1,291 |   |

 

SFAS No. 109requires that a valuation allowance be established when it is more likely thannot that its recorded net deferred tax asset will not be realized. Indetermining whether a valuation allowance is required, the Company must takeinto account all positive and negative evidence with regard to the utilizationof a deferred tax asset. SFAS No. 109 further states that it is difficultto conclude that a valuation allowance is not needed when there is negativeevidence such as cumulative losses in recent years. The Company recorded $7.2million and $11.2 million of charges to establish a net valuation allowanceagainst the deferred tax assets, which resulted in a net current deferred taxasset and long-term deferred tax liability of $1.3 million for the years endedDecember 31, 2005 and 2004, respectively. The federal operating losscarryforward of $27.9 million will expire in the year 2024. Pursuant to InternalRevenue Code Section 382 and 383, use of the Company’s net operating losscarryforwards may be limited if a cumulative change in ownership of more than50% occurs within a three-year period. No assessment has been made as towhether such a change in ownership has occurred.

 

The Company plansto continue to provide a full valuation allowance on future tax benefits untilit can sustain an appropriate level of profitability and until such time, theCompany would not expect to recognize any significant tax benefits in itsfuture results of operations.

 

57

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A reconciliation of thestatutory U.S. federal income tax rate to the Company’s effective income taxrate is as follows:

 
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Statutory rate                      |       | (34.0                 | )%         | 34.0 | % | (34.0 | )% |
| State taxes, net of federal taxes   |       | (4.0                  | )          | 5.6 |   | (4.2 | ) |
| Disallowed state loss carryforwards |       | 0.0                   |       | 0.0 |   | 0.8 |   |
| Other                               |       | 0.7                   |       | 1.2 |   | 0.4 |   |
| Valuation allowance                 |       | 38.2                  |       | 377.5 |   | 0.0 |   |
|                                |       | 0.9                   | %          | 418.3 | % | (37.0 | )% |

 

### **12. Defined ContributionPlans**

 

The Company maintains two401(K) plans serving the Company and the National RV and Country Coachsubsidiaries. Substantially all of the Company’s full-time employees arecovered under the plans, which allow for contributions by the employee as wellas contributions by the Company. For years prior to 2005, the Companycontributed a match of between 20% and 50% of the first 4% to 5% of an employee’swages, plus other discretionary amounts as approved by the Board of Directorsand may be in the form of cash or the Company’s common stock. For the yearended December 31, 2005, the Company contributed a match of 50% of the first 4%to 5% of an employee’s wages, plus other discretionary amounts as approved bythe Board of Directors and may be in the form of cash or the Company’s commonstock. Company contributions in 2005, 2004 and 2003 were $0.5 million, $0.4million and $0.4 million, respectively.

 

### **13. Related PartyTransactions**

 

Mr. Robert B. Lee, adirector of the Company, is a partner in a joint venture that leases propertyconstituting a majority of CCI’s manufacturing facilities property to theCompany. During the years ended December 31, 2005, 2004 and 2003, theCompany paid $1.37 million, $1.35 million and $1.32 million, respectively, inlease payments to the joint venture and there were no amounts due to Lee JointVentures at December 31, 2005 and 2004. In November 2005, the Company exercisedits second and final 5-year renewal option with the lease set to expire inNovember 2010. The lease agreements call for future payments totalingapproximately $6.8 million through the term of the lease. Lease payments areadjusted in accordance with the Consumer Price Index.

 

Heller Ehrman LLP, a lawfirm in which Mr. Stephen M. Davis, the current Secretary of the Companyand a Company director until June 2004, is a partner, performed legalservices for the Company. Fees paid to the law firm were $0.6 million, $0.2million and $0.2 million during the years ended December 31, 2005, 2004and 2003, respectively. Amounts due to Heller Ehrman LLP were $0.03 million and$0.01 million at December 31, 2005 and 2004, respectively.

 

### **14. Discontinued Operations**

 

On September 24,2004, the Company sold its travel trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The sale wasdesigned to allow the Company to further concentrate its efforts and resourceson its growing motorhome business. The total selling price of the business was$3.2 million. The sale included inventory totaling $2.8 million and equipmenttotaling $0.1 million. Weekend Warrior paid $0.5 million at closing with thebalance paid in ten equal monthly payments. The note receivable was recorded inthe accompanying 2004 consolidated balance sheet, net of $0.04 million of anunamortized discount for imputed interest. Furthermore, a payment of 1% ofmonthly sales for other assets and trademarks were made on a monthly basis overa twelve-month period ending October 10, 2005 with a minimum due of $0.3million which was previously recorded in the note receivable in theaccompanying consolidated balance sheets. The Company entered into a subleaseagreement, as of February 2006, which allows Weekend Warrior to lease a portionof the Company’s facilities for up to eight months, through September 2006. Thesublease expired in September 2005. For the years ended December 31, 2004and 2003, the Company’s net sales from discontinued operations were $14.7million and $27.5 million, respectively. In addition, for the years endedDecember 31, 2004 and 2003 the Company recorded net losses fromdiscontinued operations of $1.1 million and $1.4 million, respectively. The2004 net loss from discontinued operations included a pre-tax gain on the saleof the discontinued operations of $0.3 million.

 

58

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### **15. Quarterly ConsolidatedFinancial Data (unaudited)**

 

Thefollowing table summarizes the quarterly data for fiscal 2005:

(in thousands, except pershare amounts)

 
| ** **                         | ** ** | **2005 Quarter Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **March 31,**          | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                          |       | $                      | 125,625    |   | $ | 123,225 |   | $ | 108,232 |   | $ | 106,528 |   |
| Gross profit                       |       | $                      | 5,615      |   | $ | 2,101 |   | $ | 2,165 |   | $ | 2,107 |   |
| Net loss                           |       | $                      | (1,444     | ) | $ | (5,434 | ) | $ | (5,930 | ) | $ | (6,960 | ) |
|                               |       |                   |       |   |   |   |   |   |   |
| Loss per common share:             |       |                   |       |   |   |   |   |   |   |
| Basic                              |       | $                      | (0.14      | ) | $ | (0.53 | ) | $ | (0.57 | ) | $ | (0.67 | ) |
| Diluted                            |       | $                      | (0.14      | ) | $ | (0.53 | ) | $ | (0.57 | ) | $ | (0.67 | ) |
|                               |       |                   |       |   |   |   |   |   |   |
| Weighted average number of shares: |       |                   |       |   |   |   |   |   |   |
| Basic                              |       | 10,335                 |       | 10,339 |   | 10,339 |   | 10,339 |   |
| Diluted                            |       | 10,335                 |       | 10,339 |   | 10,339 |   | 10,339 |   |

 

Thefollowing table summarizes the quarterly data for fiscal 2004:

(in thousands, except pershare amounts)

 
| ** **                                                | ** ** | **2004 Quarter Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**          | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                                 |       | $                      | 103,146    |   | $ | 119,282 |   | $ | 112,525 |   | $ | 101,860 |   |
| Gross profit                                              |       | $                      | 7,083      |   | $ | 9,590 |   | $ | 7,903 |   | $ | 6,379 |   |
|                                                      |       |                   |       |   |   |   |   |   |   |
| Income (loss) from continuing operations                  |       | $                      | 1,209      |   | $ | 2,339 |   | $ | 834 |   | $ | (12,699 | ) |
| Income (loss) from discontinued operations, net of  taxes |       | (548                   | )          | 138 |   | (727 | ) | — |   |
| Net income (loss)                                         |       | $                      | 661        |   | $ | 2,477 |   | $ | 107 |   | $ | (12,699 | ) |
|                                                      |       |                   |       |   |   |   |   |   |   |
| Basic and diluted earnings (loss) per common share:       |       |                   |       |   |   |   |   |   |   |
| Continuing  operations                                    |       | $                      | 0.12       |   | $ | 0.23 |   | $ | 0.08 |   | $ | (1.24 | ) |
| Discontinued  operations                                  |       | $                      | (0.06      | ) | $ | 0.01 |   | $ | (0.07 | ) | — |   |
| Total                                                     |       | $                      | 0.06       |   | $ | 0.24 |   | $ | 0.01 |   | $ | (1.24 | ) |
|                                                      |       |                   |       |   |   |   |   |   |   |
| Weighted average number of shares:                        |       |                   |       |   |   |   |   |   |   |
| Basic                                                     |       | 10,190                 |       | 10,197 |   | 10,222 |   | 10,251 |   |
| Diluted                                                   |       | 10,334                 |       | 10,440 |   | 10,426 |   | 10,251 |   |

 

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SCHEDULE II –CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

 

For the yearsended December 31, 2005, 2004 and 2003

 
| ** **                                         | ** ** | ** **     | ** ** | **Additions**  | ** ** | ** **     | ** ** | ** **     | ** ** |
|----------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                         | ** ** | **Balance at** | ** ** | **charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                                         | ** ** | **Beginning**  | ** ** | **costs and**  | ** ** | ** **     | ** ** | **end of**     | ** ** |
| ** **                                         | ** ** | **of period**  | ** ** | **expenses**   | ** ** | **Deductions** | ** ** | **Period**     | ** ** |
| Year ended December 31, 2005                  |       |           |       |           |       |           |       |           |       |
| Allowance for  doubtful accounts                   |       | $              | 137,000    |           | $          | 270,000        |       | $              | 15,000     |   | $ | 392,000 |   |
| Inventory  reserve                                 |       | $              | 1,793,000  |           | $          | 812,000        |       | $              | 452,000    |   | $ | 2,153,000 |   |
| Income tax  valuation allowance                    |       | $              | 11,232,000 |           | $          | 7,155,000      |       | $              | —     |   | $ | 18,387,000 |   |
| Workers’  compensation self-insurance reserve |       | $              | 8,871,000  |           | $          | 6,665,000      |       | $              | 9,047,000  |   | $ | 6,489,000 |   |
| Warranty reserve                                   |       | $              | 8,505,000  |           | $          | 18,437,000     |       | $              | 15,107,000 |   | $ | 11,835,000 |   |
|                                               |       |           |       |           |       |           |       |           |       |
| Year ended December 31, 2004                  |       |           |       |           |       |           |       |           |       |
| Allowance for  doubtful accounts                   |       | $              | 132,000    |           | $          | 32,000         |       | $              | 27,000     |   | $ | 137,000 |   |
| Inventory  reserve                                 |       | $              | 673,000    |           | $          | 1,280,000      |       | $              | 160,000    |   | $ | 1,793,000 |   |
| Income tax  valuation allowance                    |       | $              | —     |           | $          | 11,232,000     |       | $              | —     |   | $ | 11,232,000 |   |
| Workers’  compensation self-insurance reserve |       | $              | 10,060,000 |           | $          | 2,893,000      |       | $              | 4,082,000  |   | $ | 8,871,000 |   |
| Warranty reserve                                   |       | $              | 8,660,000  |           | $          | 12,899,000     |       | $              | 13,054,000 |   | $ | 8,505,000 |   |
|                                               |       |           |       |           |       |           |       |           |       |
| Year ended December 31, 2003                  |       |           |       |           |       |           |       |           |       |
| Allowance for  doubtful accounts                   |       | $              | 127,000    |           | $          | 63,000         |       | $              | 58,000     |   | $ | 132,000 |   |
| Inventory  reserve                                 |       | $              | —     |           | $          | 673,000        |       | $              | —     |   | $ | 673,000 |   |
| Workers’  compensation self-insurance reserve |       | $              | 7,794,000  |           | $          | 5,892,000      |       | $              | 3,626,000  |   | $ | 10,060,000 |   |
| Warranty reserve                                   |       | $              | 11,840,000 |           | $          | 10,053,000     |       | $              | 13,233,000 |   | $ | 8,660,000 |   |

 

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