SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934 For the fiscal year ended December 31, 1998 or

[ ]    Transition report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934
       For the transition period from __________ to __________

Commission file number 0-25390

                                 SMC CORPORATION
             (Exact name of registrant as specified in its charter)

     Oregon                                               93-0939076
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                      Identification No.)

     20545 Murray Road
     Bend, Oregon                                        97701
     (Address of principal executive offices)            (Zip Code)

                         Registrant's telephone number,
                       including area code: (503) 995-8214

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

     Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 17, 1999: $5,557,489. For purposes of this calculation,
officers and directors are considered affiliates.

     Number of shares of Common Stock outstanding at March 17, 1999: 5,890,208.

                       Documents Incorporated by Reference
                       -----------------------------------

                                                     Part of Form 10-K into
Document                                               which incorporated
--------                                             ----------------------

Proxy Statement for 1999 Annual
  Meeting of Shareholders                                   Part III

<PAGE>
                                TABLE OF CONTENTS

Item of Form 10-K                                                           Page
-----------------                                                           ----

PART I ....................................................................... 1


Item 1     Business........................................................... 1

Item 2     Properties.........................................................14

Item 3     Legal Proceedings..................................................14

Item 4     Submission of Matters to a Vote of Security Holders................15

Item 4(a)  Executive Officers of the Registrant...............................15

PART II ......................................................................16

Item 5     Market for the Registrant's Common
           Equity and Related Shareholder Matters.............................16

Item 6     Selected Financial Data............................................17

Item 7     Management's Discussion and Analysis
           of Financial Condition and Results of Operations...................19

Item 8     Financial Statements and Supplementary Data........................25

Item 9     Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure.............................25

PART III .....................................................................26

Item 10    Directors and Executive Officers of
           the Registrant.....................................................26

Item 11    Executive Compensation.............................................26

Item 12    Security Ownership of Certain Beneficial
           Owners and Management..............................................26

Item 13    Certain Relationships and Related Transactions.....................26

PART IV ......................................................................27

Item 14    Exhibits, Financial Statement Schedules,
           and Reports on Form 8-K............................................27

SIGNATURES ...................................................................30


<PAGE>
PART I

ITEM 1.  BUSINESS

Introduction

     SMC Corporation (SMC or the Company) is one of the largest manufacturers of
high-line motor coaches in the United States. SMC was incorporated in Oregon in
1986 and production operations began in 1987. SMC has relocated its headquarters
to Bend, Oregon from Harrisburg, Oregon and has six operating subsidiaries. The
Company's executive offices are located at 20545 Murphy Road, Bend, Oregon,
97701, and its telephone number is (541) 995-8214. The subsidiaries of the
Company are Safari Motor Coaches, Inc. (Safari), Magnum Manufacturing, Inc.
(Magnum), Beaver Motor Coaches, Inc. (Beaver), Electronic Design & Assembly,
Inc. (ED&A), Composite Technologies, Inc. (CTI), and Harney County Operations,
Inc. (HCO). Safari and Magnum are located in Harrisburg, Oregon; Beaver and ED&A
are located in Bend, Oregon; and CTI and HCO are located in Hines, Oregon.

General Background

     Within the multi-billion dollar recreational vehicle industry, the majority
of SMC's products are positioned among the most expensive. SMC predominately
builds luxury Class A motor coaches - motorized, fully self-contained motorhomes
with features such as solid hardwood cabinetry, powerful diesel engines, and
residential decor that separate these coaches from the rest of the market.

     This select segment was targeted from SMC's founding and the Company
rapidly grew to become a leader in the luxury market. Mathew Perlot, SMC's
founder and Chief Executive Officer, considered this market particularly
attractive - anticipating the aging of the "baby boomers" and believing that
this maturing, affluent group would provide growing support for this product.
The initial product included coaches ranging from 30 to 34 feet and retailed for
about $100,000. Over the next several years SMC expanded its product offerings
to both higher and lower price points, to include coaches ranging in length from
24 to 40 feet, and with retail prices ranging from $70,000 to $230,000.

     Magnum began production of chassis for Safari products in 1993 and has
since expanded operations to provide chassis for seven of the eight model lines
of Safari and Beaver products. By manufacturing chassis specially designed for
applications in the recreational vehicle (RV) industry, the Company believes it
has quality, ride and cost advantages over competitors that do not build their
own chassis.

     SMC acquired the Beaver brand names and production facilities in 1994. At
that time the Beaver product ranged in retail price from $180,000 to $350,000.
The line has since been broadened to include a lower-priced coach, the Monterey.
This expansion of product offerings has enabled Beaver to expand distribution of
its products.

                                                                               1
<PAGE>
     In 1996 the Company began to seek product opportunities in the lower-priced
segment of the recreational vehicle industry when it entered the Class C market
through acquisition of a facility in the Midwest. The Company continued its
penetration into the upper range Class C market in 1997 through its operations
at HCO and the introduction of a Safari brand Class C motor coach. This model
has retail prices ranging from $66,000 to $85,000. In 1998 the Company
introduced the Desperado, another Class C model, as the Company continues to
expand in the Class C market. Although the Company's primary market focus
remains the high-line luxury motor coaches it built its foundation on, the
Company plans to continue to develop this segment of its business.

     In 1998 the Company maintained its core market -- high-line motor coaches
with retail prices typically over $150,000. The Company's estimated market share
of high-line retail sales was 25.3%, 27.6%, and 29.1% in 1998, 1997, and 1996,
respectively. Total retail sales in this segment of the market was approximately
4,100 units in 1998.

     Also, at the HCO facility, the Renegade, a new Class A motor coach, was
introduced in 1998. With retail prices starting at $134,000, the Renegade is
targeted toward the entry-level of the Class A market --buyers that are
value-oriented but still demanding features and quality. This segment of the
market has become very popular. The Company sold 178 Renegade units in 1998. The
production facility in Hines, Oregon has ample production capacity to meet
expected demand for both the Renegade Class A coaches as well as the Class C
production.

     At the Beaver facility, the newly designed Contessa Class A model was
introduced in December 1997. The Contessa had been a Beaver product before the
Company acquired Beaver in 1994, but had been dormant since that time. Priced
below the existing Patriot model but above the Monterey, the Contessa has been
resurrected with a new design and feature set that has been widely accepted.
Sales for the Contessa were very favorable in 1998, with sales of 112 units.

     At the Safari facility, a new Class A model, the Zanzibar, was introduced
in June 1998. This model is priced at the lower range of the Class A market,
targeting a market similar to that of the Renegade, but designed with the
distinction of a Safari brand product. The sales for the Zanzibar unit were 148
in 1998.

     At the Magnum facility, a new chassis was developed for the Beaver Marquis.
Previously, the Marquis was constructed on a Gillig brand chassis. Gillig ceased
production of the chassis in 1997. Magnum acquired the rights to manufacture the
chassis from Gillig and, after making some modifications for the Marquis'
specific requirements, now produces the chassis at a lower overall cost to the
Company. With the new chassis, Magnum now produces the chassis for all of the
Company's models except the Trek and Class C models, resulting in significant
overall costs savings to the Company.

     Originally the Company had acquired the Midwest facility to gain entrance
into the Class C market. However in 1996 the Company determined that the losses
being incurred through operation of the Midwest facility were not acceptable.
The Midwest facility was 

                                                                               2
<PAGE>
closed in 1996 and a pre-tax restructuring charge of $2.4 million was incurred
related to this decision in 1996. The exit plan was completed as planned, and no
further restructuring charges were necessary in 1997. Production of Class C
motor coaches has been transferred to the Company's HCO production facilities in
Hines, Oregon. This facility now produces the Renegade (Class A), Safari (Class
C) and the Desperado (Class C) products.

     In 1998, the Company opened a service center facility in Tampa, Florida to
provide better, more timely, and cost effective customer service. This service
center operation is a branch of the existing service centers located in
Harrisburg and Bend, Oregon, and the Company is able to use the resources of
skilled technicians during slow service periods in Oregon at the facility in
Florida.

Industry Background

     Recreational vehicles encompass a wide range of mobile housing options,
including folding camping trailers, van conversions, truck campers, fifth wheel
trailers, Class A, B and C motor coaches, and bus conversions. The retail prices
of these vehicles range from under $3,000 for the simplest folding camping
trailer to over $750,000 for the most expensive bus conversion. The Recreational
Vehicle Industry Association (RVIA) has reported that one in ten households in
the U.S. owns a recreational vehicle, resulting in a total ownership of
approximately nine million recreational vehicles.

     Although retail sales of recreational vehicles and Class A motor coaches
have fluctuated over the last five years, retail sales of high-line motor
coaches have remained steady during this period according to Statistical
Surveys, Inc. The following table shows (i) unit shipments to dealers of all
recreational vehicles, all motor coaches, and Class A motor coaches in the U.S.,
based on RVIA data, and (ii) unit retail sales of high-line motor coaches in the
U.S. and unit retail sales of Safari and Beaver coaches as a percentage of the
high-line market, based on data distributed by Statistical Surveys, Inc.

<TABLE>
<CAPTION>
===========================================================================================================

                                                        1994        1995        1996        1997        1998
                                                              (In thousands, except percentage data)
<S>                                                    <C>         <C>         <C>         <C>         <C>  
Unit shipments from manufacturers to dealers:
  All recreational vehicles                            518.8       475.2       466.8       438.8       441.3
  All motor coaches                                     58.1        52.8        55.3        55.0        63.5
  Class A motor coaches                                 37.3        33.0        36.5        37.6        42.9

Unit retail sales and market share data:
  High-line motor coaches                                3.6         3.9         4.2         4.4         4.1
  SMC percentage of high-line market:*                  24.6%       24.5%       29.1%       27.6%       25.3%
                                                       =====       =====       =====       =====       =====

===========================================================================================================

*    For all years includes sales for both Safari and Beaver motor coaches
     (excluding Trek).
</TABLE>

                                                                               3
<PAGE>
     SMC focuses primarily on the high-line segment of the Class A motor coach
market. Class A motor coaches incorporate kitchen, sleeping and bathroom
facilities built on a self-powered chassis. The term "high-line motor coach" is
almost synonymous with "diesel pusher." For reasons of cooling and drive train
engineering, almost all motor coaches are powered either by a gasoline engine
mounted in the front or a diesel engine mounted in the rear. Diesel pushers are
more expensive, but can be built longer and are generally more powerful. Thus
most high-line coaches are diesel pushers - with horse power ratings over 300,
and at this time nearly all high-line diesel pushers retail for over $150,000.

     All of SMC's products except the Trek, Desperado, Safari Class C, and
Renegade models are high-line coaches with retail prices over $150,000. Although
the Trek shares many high-line features of the Company's other models, its
retail price ranges from $83,000 to $105,000, and it is therefore excluded from
market data compiled for high-line products. The Desperado is a Class C motor
coach with retail prices ranging from $61,000 to $80,000. The Safari Class C
price ranges from $66,000 to 85,000. The new Class A Renegade model retails in
the price range of $134,000 to $145,000.

     The high-line segment of the Class A RV market has seen consistent growth
since 1989, and in recent years this market has attracted many other companies.
Many "mainstream" RV builders, such as Fleetwood, Winnebago, and Coachmen, have
developed offerings in this market. Meanwhile, some luxury builders, such as
Monaco Coach and Country Coach, have broadened their product lines. Some
companies are not surviving. Beaver Coaches was acquired by SMC in 1994, Holiday
Rambler was purchased by Monaco Coach in early 1996, and Country Coach was
acquired by National RV Holdings in late 1996.

     Several long-term trends favor the luxury segment of the RV industry. The
most significant indicator of future growth potential is the change in RV-owner
demographics. Households over fifty years old form the principal market for
luxury RVs. As the "baby-boom" generation ages, this demographic group is
expected to increase from approximately 50 million people today to 70 million by
the year 2005. The Company believes that on average this generation is expected
to retire earlier and have more discretionary income than preceding generations,
which is expected to provide a growing base for RV sales.

     This trend is also reflected in the substantial increase in the number and
quality of facilities available for RV use and in companies serving the RV
market. The increased availability of accessories and facilities will continue
to make the RV lifestyle more attractive.

                                                                               4
<PAGE>
     Three other factors also have a lesser impact on the RV industry:

     Fuel Availability and Price Stability

     Diesel fuel has been relatively abundant and inexpensive since the
beginning of the 1980's. The Company believes the needs of the transportation
industry for diesel fuel may contribute to continued availability and pricing
stability. All of the Company's Class A motor coaches are powered by diesel
engines. Consequently, an interruption in the supply or a significant increase
in the price of or tax on the sale of diesel fuel on a regional or national
basis could have a material adverse effect on the Company's results of
operations. Diesel fuel has from time to time been difficult to obtain, and
there is no assurance that the supply of diesel fuel will continue
uninterrupted, that rationing of diesel fuel will not be imposed or that the
price of or tax on diesel fuel will not significantly increase in the future.

     Low Interest Rates

         Interest rate levels affect the cost of a motor coach for consumers who
finance their purchase and, more significantly, the cost of inventory
maintenance for motor coach dealers. Recent periods of relatively low interest
rates have facilitated dealer financing resulting in generally higher dealer
stocking levels.

     Favorable Tax Treatment

     U.S. tax laws generally allow individuals who itemize deductions to deduct
interest paid on loans used to finance the purchase of either a first or second
residence. The definition of "residence" has been interpreted to include motor
coaches of the type manufactured by the Company. The Company believes the tax
deductibility of interest paid on loans used to purchase a Class A motor coach
increases the attractiveness of ownership. These laws, however, have
historically been amended frequently, and it is likely that further amendments
and additional tax laws will be applicable to financing the purchase of motor
coaches in the future. There is no assurance that favorable tax treatment for
financing the purchase of motor coaches will not be amended or repealed.

                                                                               5
<PAGE>
Sales and Marketing

     SMC has two distinctive brands that are marketed through separate dealer
networks. (Sales of Class C motor coaches to date have not been a significant
part of the Company's business.) The Beaver and Safari product are deliberately
kept differentiated to help increase total penetration of the high-line market.
The Beaver product is marketed as a "traditional" luxury RV. Its fiberglass wall
construction, air suspension, and "classic" RV styling places the Beaver models
near the mainstream of high-line coaches. The Safari product is avant-garde in
comparison. Its aluminum exterior is unique in this market, and innovations such
as the Velvet-Ride(TM) Suspension and power disk brakes further separate the
Safari from the rest of the luxury RV market. This two-pronged attack on the
luxury market has allowed SMC to successfully maintain a market share in this
niche, with an estimated market share of over 25% in 1998.

     The Company markets its products through independent dealers throughout the
United States and Canada. Few dealers carry both the Safari and Beaver brand
products. SMC has made dealer development a priority, because it believes that
an expanded dealer base results in greater retail sales exposure and ultimately
more retail sales volume. Total Class A dealer locations were 94, 87 and 107 as
of December 31, 1998, 1997 and 1996 respectively.

     The Company grants exclusive distribution rights to a dealer within a
geographic region. Dealers are selected based on location, financial stability,
marketing expertise, sales history, integrity and repair and service capability.
The Company provides a variety of support services to its dealers, including
promptly supplied product literature, display materials and space rental
subsidies for trade shows and exhibitions and a dealer newsletter with updates
on product development and other product information. The Company offers
training and technical support to dealer salespeople, including a plant tour
video and a product handbook, and Company representatives visit dealers on a
regular basis for sales training and assistance.

     The Company focuses its advertising on consumer publications which
emphasize the RV lifestyle. In 1995, the Company consolidated all of its media
production in-house because it was cost-effective to do so. In-house media
development has also added flexibility and responsiveness to the process, which
frequently involves "rush" jobs to take advantage of market opportunities.

     A key part of the Company's marketing effort is the sponsorship and active
promotion of Safari International and the Beaver Ambassador Club, both of which
are active owners clubs for owners of Safari and Beaver products, respectively.
Members of these groups socialize, discuss common experiences and enjoy motor
coaching activities together, thus helping to build customer loyalty and
enthusiasm. The Company publishes quarterly newsletters for members of the
owners' clubs, as well as a quarterly magazine, the "Rendezvous," which is
circulated to owners, prospective purchasers, suppliers, dealers 

                                                                               6
<PAGE>
and employees. In addition, the Company annually sponsors "homecoming" rallies
at the Safari and Beaver factories, open to all Safari and Beaver coach owners.

     Dealers typically finance their inventory through revolving credit
facilities established with asset-based lending institutions, including
specialized finance companies and banks. It is industry practice for these
"floor plan" financiers to require motor coach manufacturers to repurchase motor
coaches previously sold to the dealer if the dealer defaults on its financing
agreements or if the lender otherwise has a reasonable basis to be concerned
about the ability of the dealer to meet its obligations to the lender. This
agreement typically applies for a period of 12 to 18 months from the date of the
dealer's purchase from the manufacturer. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

     The Company takes several steps to reduce its exposure to coach repurchase
risk. A dealer is typically required to make periodic payments of principal,
referred to as "curtailment," to the flooring financing institution commencing
in the seventh month after purchase of the coach. A coach manufacturer may waive
these curtailment payments at the request of a dealer, but the Company generally
will not do so and, in any event, will do so only if the dealer owes to the
flooring institution no more than 90% of the wholesale price of the coach. The
Company also monitors the inventory levels and financial circumstances of its
dealers through reports generated by the flooring institutions and through
frequent contact by its sales personnel with the dealers. If a dealer is
experiencing undue difficulty in selling the Company's coaches, the Company will
often work with that dealer to voluntarily move the coaches to a dealer that can
sell additional inventory. The Company believes, however, that its most
fundamental protection against significant loss due to repurchase obligations is
the production and marketing of motor coaches that are sufficiently popular to
enable the Company quickly to resell, at satisfactory prices, any coaches it may
be required to repurchase. For 1996 the Company made no repurchase payments
under flooring arrangements. In both 1997 and 1998, the Company repurchased a
total of 8 motor homes in each year under the requirements of the repurchase
obligations with two of its flooring financing institutions when two separate
motor home dealerships went out-of-business. No significant losses were incurred
upon the subsequent resale of the motor homes.

     For 1997, sales to one of the largest motor coach dealers in the U.S. and
located just a few miles from the Safari facility, accounted for approximately
10% of net sales. Another large dealer, with two locations in Oregon, accounted
for 12% of net sales in 1997, and 14% of net sales in 1998.

                                                                               7
<PAGE>
Product Information By Subsidiary

     Beaver

     Marquis

     The Marquis is positioned at the top of the Beaver product line. With
retail prices of over $390,000, it is one of the most expensive and luxurious
motor coaches in production today. The Marquis has traditionally been the most
visible and best recognized of the Beaver models. The Marquis motor coach was
further upgraded in 1997 to its current ultra-luxury position. As part of this
strategy, production of the Marquis was slowed and a craftsman-intensive team
production program was developed to produce each vehicle. New cabinet
technologies were introduced, allowing the use of exotic veneers and richer
lacquers. The Marquis is now positioned as a limited production, prestige
product. Previously built on a chassis supplied by an outside supplier, in 1997
the Company began building the Marquis on a chassis developed by Magnum at an
overall cost savings for the Company.

     Patriot

     In July 1995, SMC introduced the 1996 Patriot on the all-new Magnum
B-Series chassis. This new Magnum chassis replaced a chassis from an outside
chassis vendor used since the Patriot model was introduced in 1992. The Patriot
model has a retail price ranging from $223,000 to $309,000, depending upon
options which include the upgraded Thunder option which features a powerful
425-horsepower engine and a heavy-duty transmission.

     Contessa

     In 1997, the Company introduced the completely redesigned Contessa, which
had been a Beaver model prior to the acquisition of Beaver in 1994. The Contessa
is a high-end coach powered by a 330-horsepower engine which retails from
$196,000 to $244,000, depending upon options.

     Monterey

     The Monterey was the first all-new Beaver product since the acquisition of
Beaver in 1994. Retailing from $156,000 to $201,000, depending upon options, the
Monterey provides Beaver with a product priced for broader appeal. The Monterey
uses chassis and floor plans that are similar to the Safari Sahara, but differs
considerably from the Safari product in styling options. In addition, an
air-ride option has been developed to provide the traditional RV owner an
alternative which is typically seen in high-line motor coaches.

                                                                               8
<PAGE>
     Safari

     Continental

     The Continental is the flagship product from Safari. Its design and
technology features include disk brakes, B.F. Goodrich's Torsilastic suspension
system, and Magnum Intellidrive computerized monitoring display, all as standard
equipment. The Continental retails from $233,000 to $298,000, depending upon
options, including the Panther option which features a powerful 425-horsepower
engine and a heavy-duty transmission.

     Serengeti and Ivory

     As the oldest of the Safari brand names, the Serengeti has been the core
Safari product since its introduction in 1988. The Serengeti retails from
$191,000 to $251,000, depending upon options, and its sibling, the Ivory model,
occupies the higher end of that price range.

     Sahara

     The Sahara model was introduced in 1993 and then repositioned in 1994 to
stand as a value-oriented luxury coach. The Sahara model retails from $148,000
to $200,000, depending upon options. The product provides many of the features
of the Serengeti and Ivory at a lower cost to the customer.

     Zanzibar

     The Zanzibar was introduced in 1998. The standard equipment offers an array
of features found on higher priced models, but at an entry level price. It is
constructed on the Magnum `R' chassis. The Zanzibar model retails from $147,000
to $160,000, depending on the options.

     Trek

     The Trek is constructed on a Chevrolet chassis. As the lowest priced SMC
Class A motor coach, it also has a lower profit margin and is intended to
acquaint new customers with SMC's products and attract them to the RV lifestyle.
The Trek retails from $83,000 to $105,000, depending upon options.

Harney County Operations (DBA Harney Coach Works)

     Safari Class C and Desperado

     The Safari Class C and the Desperado are both constructed on a Ford or
Chevrolet van chassis. The first sales of the Safari Class C were made in 1997
and initial sales of the Desperado were in 1998. These units retail from $61,000
to $85,000, depending upon options, and occupy the high-end of the Class C motor
home market.

                                                                               9
<PAGE>
     Renegade Class A

     The Renegade is presently constructed on Magnum `R' series chassis with a
Cat 275 engine. Shipments began in January 1998. With retail sales prices
ranging from $134,000 to $145,000, depending upon options, the Renegade is
priced lower than any of the Company's Class A product, except for the Safari
Trek. The Renegade is targeted to the expanding entry level Class A market which
offers many features of the higher-line models, but at a more affordable pricing
structure.

Backlog

     Motor coach dealers, particularly those with a relatively large sales
volume, from time to time indicate to motor coach manufacturers the number of
coaches they expect to purchase in the following months. While the Company
regularly receives such indications, the Company includes in its backlog only
purchase orders it has received that are sufficiently complete as to
specifications (color, floor plan, options, etc.) to permit the Company to
schedule production of the coach. Consequently, backlog generally represents
orders for coaches scheduled to be manufactured and shipped in the following 45
to 60 days. The Company's backlog at December 31, 1998 was $12.8 million,
compared to backlog of $21.3 million at December 31, 1997. Backlog can fluctuate
substantially as the result of the receipt of purchase orders in connection with
various major motor coach shows and rallies, which are not held at even
intervals throughout the year. Consequently, and because orders are generally
cancelable without penalty, the amount of backlog at any date is not necessarily
indicative of sales in future periods. To date, order cancellations have not
been material.

Customer Service

     The Company believes one of the most important elements in the success of
its business is understanding its customers and their preferences and providing
excellent customer service. Customer service is important because many of the
Company's customers are repeat purchasers and because a high level of service is
expected by purchasers of high quality coaches. In addition, because motor coach
purchasers tend to communicate freely their views on the quality of various
coaches and business reputations of motor coach manufacturers, the quality of
post-sale customer service provided by a motor coach manufacturer is a key
factor in establishing a manufacturer's reputation among this group.

     The Company offers a one-year or 12,000-mile warranty, whichever occurs
first, on all coaches. Customers have the option to purchase extended
warranties, written by others, from Company dealers. The Company's warranty
covers all manufacturing-related problems and parts and system failures,
regardless of whether the repair is made at a Company service facility or by one
of the Company's dealers or authorized service centers. In addition to the
Company's warranty, the chassis, drive train, engine and transmission are
covered by separate warranties offered by the manufacturers of those components,
or by the Company on the chassis manufactured by its Magnum Manufacturing
subsidiary. The Company's warranty on the Magnum chassis and drive train is for
three years or 36,000 miles, whichever occurs first. Appliances in the coaches
are covered by the warranties of manufacturers of those items.

                                                                              10
<PAGE>
     The Company maintains toll-free telephone lines for customers to call with
repair or operating questions or problems. Although many questions can be
resolved by telephone, the Company often refers the customer to a local dealer
or repair facility for additional assistance.

     The Company also opened a 24-bay service center in Harrisburg in November
1995 to better serve its customers. In 1997, a leased service center was opened
in Tampa, Florida to expand its customer service opportunities further. In late
1998, the Company purchased a service center in Tampa, Florida and moved its
service activities from the leased facility in that area. The Company also
operates a service center adjacent to its Beaver manufacturing facility in Bend,
Oregon.

Manufacturing

     The Company uses "lean production" techniques in its coach manufacturing
process. These techniques emphasize teamwork, include significant input from
worker teams and employ just-in-time inventory controls to improve product
quality and manufacturing efficiencies.

     The Company believes its coach manufacturing operations are vertically
integrated to a substantial degree compared to most other high-line motor coach
builders. Components of the Company's motor coaches produced by the Company
include chassis constructed by Magnum Manufacturing, Inc., the shell or "house"
portion of the coach, fiberglass, countertops, hardwood cabinetry and portions
of the interior upholstery. The Company believes this in-house production of
certain components results in cost savings to the Company and greater control
over quality and inventory.

     The construction of each motor coach begins with the preparation of the
chassis on which the superstructure of the "house" is built. The floors, walls
and roof of the motor coach "house" are built off-line. The coach's front and
rear caps are each single pieces molded from fiberglass resins that provide
favorable strength-to-weight ratios. The Company believes the lightweight
construction of its motor coaches combined with the diesel engines used in
nearly all models add significantly to the performance of its motor coaches.

     The Company purchases raw materials, parts, subcomponents, electric systems
and appliances from approximately 1,000 suppliers. These items are either placed
directly into the coach or are incorporated into subassemblies by the Company.
All components, subassemblies and finished products are inspected for compliance
with the Company's specifications. The Company attempts to minimize its
inventory costs by ordering inventory only on an as-needed, or just-in-time,
basis. Some supplies, such as fiberglass, are ordered and delivered to the
Company's plant on a daily basis, while other items, particularly engines and
transmissions, are ordered as much as four months in advance of the expected use
date. While the Company generally commences construction on a coach only after
receipt of an order from a dealer, it must nonetheless order certain parts or
components, some of which represent a significant expenditure, in advance of
orders.

     Certain components and subassemblies included in the Company's motor
coaches are obtained from a single or limited number of suppliers. Transmissions
of the type used in the Company's coaches and those of most of its competitors
are manufactured solely by Allison Transmission. Although the Company believes
it would be able to develop alternate sources 

                                                                              11
<PAGE>
for any of the components, other than transmissions, used in its products,
significant delays or interruptions in the delivery of certain components from
suppliers or difficulties or delays in shifting to new suppliers could have a
material adverse effect on the Company. Presently the company is not
experiencing any interruptions or supply limitations from its major suppliers.

     Upon completion of the manufacturing process, each coach undergoes a
thorough inspection and test drive, and problems discovered are corrected prior
to shipment.

Competition

     The market for manufacture of mid- to high-line motor coaches is very
competitive, and the Company has significant competition in each of its product
lines. Other manufacturers of high-line coaches include Blue Bird Corporation,
Country Coach, Inc. (acquired in late 1996 by National RV Holdings, Inc.),
Fleetwood Enterprises, Inc., Foretravel Inc., Gulf Stream Coach, Inc., Monaco
Coach Corporation, and Holiday Rambler Corporation (acquired in early 1996 by
Monaco Coach Corporation). The Company competes with a number of other
manufacturers, some of which are much larger than the Company and have greater
financial and other resources than the Company. Certain of these larger
manufacturers have also identified value-oriented high-line motor coaches as an
attractive market and have recently developed coaches more directly competitive
with the Company's coaches.

     The Company believes the principal competitive factors in the manufacture
and sale of high-line motor coaches are product quality and design, price,
customer service, performance and reliability. The Company believes it is
competitive with respect to each of these factors and believes its customer
service and the performance and reliability of its products compare favorably to
those of its competitors.

Product Design; Patents

     The Company strives to be a design innovator in motor coach floor plans,
interior features, coach amenities and mechanical systems and believes it is
generally recognized in the industry as a design leader. Among the innovations
introduced by the Company are the first use of a side aisle floor plan, the
Electro-Majic bed, a rear-mounted cooling system, 110 volt residential-style
lighting and the successful use of Torsilastic suspension on a high-line motor
coach. The Company updates the fabrics, carpets, fixtures and floor plans of its
coaches each year and plans for a complete redesign of each model every three to
four years.

     The Company began development of its Electro-Majic bed in 1988 and in 1992
obtained a patent for this electric powered bed system. Using a hidden electric
motor, the system uses small gear tracks attached to the living room walls to
lower a double-size bed from the ceiling down to a desired sleeping level. The
Electro-Majic bed is used in most Trek models. In two of the Company's
best-selling Trek floor plans, the Electro-Majic bed is the primary sleeping
space, which allows the entire coach to be used for living, kitchen and bathroom
areas. The Company believes there is no comparable motor coach floor plan on the
market.

     The Company designed and patented an all new air ride suspension system in
1996 for use in its Beaver Patriot and Marquis models. The suspension system is
designed to optimize the stability of the moving coach, while at the same time
maximizing ride comfort.

                                                                              12
<PAGE>
Government Regulation

     Motor coach manufacturers, such as the Company, are subject to federal,
state, and local regulations governing the manufacture and sale of their
products, including the provisions of the Motor Vehicle Act. The Motor Vehicle
Act provides for, among other things, the recall for modification, repair or
replacement of vehicles that contain defects which are potentially dangerous, or
which fail to comply with applicable standards. The Company's motor coaches also
may be subject to recall by chassis manufacturers in the event the chassis fail
to comply with applicable standards. The Company relies upon certifications from
its engine suppliers and chassis manufacturers that the Company's motor coaches
comply with all applicable emission control standards. Although motor coaches
manufactured by the Company have been voluntarily recalled for repair from time
to time in the past, the Company has not incurred significant expenses in
connection with recalls. Because the Company sells its products in Canada, it is
also governed by similar laws and regulations issued by the Canadian government.
There is no assurance that future recalls of the Company's products will not
occur or that any such recalls will not adversely affect the Company's
operations or financial condition.

     The Company is also subject to regulations promulgated by the Occupational
Safety and Health Administration ("OSHA") concerning workplace health and
safety. The Company's plants are periodically inspected by OSHA.

     The business and operations of the Company are affected by federal, state,
and local environmental regulations relating to air and water pollution,
hazardous wastes, and noise. These regulations control the Company's use,
storage, and disposal of production chemicals and other wastes. The regulations
also restrict the Company's air contaminant emissions and waste water discharges
and prohibit noise in excess of certain levels.

     The Company holds a federal operating permit as required by Title V of the
federal Clean Air Act Amendments of 1990 (a "Title V Permit") for its Safari and
Beaver motor coach manufacturing facilities. The combined CTI and HCO facility
holds an air contaminant discharge permit ("ACDP"), issued by the Oregon
Department of Environmental Quality and has applied for a Title V permit. The
Company believes it will be issued the permits necessary to allow it to operate
these facilities. The ACDPs and the Title V permits, however, are issued for
operations at specified levels, and any increase in emissions beyond those
levels, including increases resulting from expanded operations or process
modifications, will require permit amendments.

     To date, the Company has not been required to make significant expenditures
for environmental compliance. The promulgation of additional safety or
environmental regulations, or the need to acquire permit amendments, in the
future, however, could require the Company to incur additional expense which
could adversely impact the Company's results of operations. There is no
assurance that the Company will not be required to make significant expenditures
in the future with respect to such safety or environmental regulations.

     The Company believes it is in material compliance with applicable laws
relating to the manufacture and operation of motor coaches and operations of its
manufacturing facilities. There is no assurance, however, that future
governmental regulations will not be more 

                                                                              13
<PAGE>
stringent, and that compliance with those regulations will not require the
Company to incur additional cost.

Employees

     At December 31, 1998 the Company had 1,661 full-time employees. None of the
Company's employees are represented by a labor union, and the Company has never
experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations.

ITEM 2.  PROPERTIES

     The Company's Safari and Magnum manufacturing facilities are located in
Harrisburg, Oregon on property owned by the Company. The Safari manufacturing
facility consists of buildings totaling 163,000 square feet on 16 acres, with
11,300 square feet of office space and 151,700 square feet of manufacturing
space. The Magnum manufacturing facility consists of four buildings with a
combined size of approximately 93,000 square feet on 12 acres. The Company's
Beaver manufacturing facility and corporate headquarters are located in Bend,
Oregon and consist of four buildings totaling 34,600 square feet on 3.5 acres
that are owned by the Company, and an additional 90,100 square feet on 7.8 acres
that are leased on a long-term basis. In January 1996, the Company purchased a
172,000 square foot building on 16 acres in Hines, Oregon to meet future
production requirements. The Company leases a 13,000 square foot facility in
Bend, Oregon where ED&A operates. The present lease has an option to renew
through December of 2005.

     The Company also owns a 39,000 square foot facility on 5 acres in Tampa,
Florida where it operates a service center and leases about 12,000 feet of this
facility to an RV dealer. The Company also leases a facility in Bend, Oregon as
a service center. Its service center in Harrisburg, Oregon is located on the
Magnum Manufacturing property.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is involved from time to time in litigation arising out of its
operations in the normal course of business, including claims under the "lemon
laws" of various states. The Company believes such legal proceedings, if
determined adversely to the Company, would not have a material impact on the
Company.

     As a manufacturer and seller of motor coaches, the Company is subject to a
risk of loss resulting from claims that its products or components of its
products caused or contributed to damage or injury. The Company has obtained
product liability insurance under terms it considers acceptable. In the past,
the Company has not incurred material expenses for product liability; however,
such liabilities, if incurred in the future, could have a material adverse
effect on the Company's operations if they exceed the insurance coverage
maintained. Furthermore, there can be no assurance that the Company will be able
to obtain insurance coverage in the future at adequate levels or for a
reasonable cost.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                                                              14
<PAGE>
ITEM 4(a).  EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information with respect to the
executive officers of the Company as of March 18, 1999.

Name                       Age       Position
----                       ---       --------

Mathew M. Perlot           62        Chief Executive Officer and Chairman
                                     of the Board

William L. Rich            44        Chief Financial Officer

Janet Engles-Kehoe         54        Vice President - Administration

Thomas G. Kay              52        Vice President - Manufacturing

Mathew M. Perlot co-founded the Company in November 1986 and has served as Chief
Executive Officer and Chairman of the Board since that time. Mr. Perlot also
served as President until May of 1997. Mr. Perlot served as Director of Sales
and Marketing for Monaco Coach Corporation from 1982 to 1985 and for Beaver
Coaches, Inc. from 1985 to 1987. Mr. Perlot also served as President of RV
Marketing, Inc. from 1980 to 1987. Mr. Perlot is married to Connie M. Perlot, a
director and Secretary-Treasurer of the Company.

William L. Rich joined the Company as Chief Financial Officer in November 1998.
Prior to joining the Company, Mr. Rich served as Vice President of Finance at
Marus Dental International, a subsidiary of the Henry Schein Corporation. Prior
to that, Mr. Rich held senior financial positions at manufacturing companies in
the Midwest. Mr. Rich obtained his B.S. degree in Business from Miami University
(Ohio). Mr. Rich is a CPA, CMA and holds a M.B.A. degree.

Janet Engles-Kehoe joined the Company in June 1994 as Personnel Manager for
Beaver Motor Coaches. From July 1996 to December 1997 she served as Corporate
Human Resources Director and now serves as Vice President of Administration.
From April 1987 to June 1994 she held the position of Personnel Manager for
Beaver Coaches, Inc., which was purchased in June 1994 by SMC corporation. Ms.
Kehoe holds a Senior certification from the Society of Resources Management and
a B.S. degree in Business Management from Linfield College.

Thomas G. Kay joined the Company in July 1998 as Vice President of
Manufacturing. From 1978 to 1998 Mr. Kay was employed by the Dana Corporation, a
major manufacturer of automotive and industrial components. Mr. Kay's most
recent position at the Dana Corporation was General Manager for a group of three
manufacturing facilities. Mr. Kay holds a B.S. degree in Industrial Systems
Engineering from San Jose State University.

                                                                              15
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         SHAREHOLDER MATTERS

The Company's Common Stock has been traded on the Nasdaq National Market System
since January 20, 1995 under the symbol SMCC. Information with respect to the
high and low sales prices for the Common Stock is set forth on page F-19.

At March 17, 1999 there were 91 shareholders of record of the Company's Common
Stock and 5,890,208 shares were outstanding. The Company believes the number of
beneficial owners is substantially greater than the number of record holders
because a large portion of the Company's outstanding Common Stock is held of
record in broker "street names" for the benefit of individual investors.

The Company did not pay any dividends in 1997 or 1998. The Company intends to
retain future earnings for use in its business and therefore does not anticipate
paying cash dividends in the foreseeable future.

                                                                              16
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data presented below for, and as of the end of, each of
the years in the five-year period ended December 31, 1998 have been derived from
the audited financial statements of the Company. This data should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this report.

<TABLE>
<CAPTION>
                                                               Year Ended December 31
                                        -----------------------------------------------------------------
                                             1994          1995          1996          1997          1998
                                        ---------     ---------     ---------     ---------     ---------
                                               (In thousands, except per share and other operating data)
<S>                                     <C>           <C>           <C>           <C>           <C>      
Statement of Income Data:
Sales                                   $ 124,247     $ 148,189     $ 200,835     $ 203,019     $ 217,485
Cost of sales                             108,833       128,846       174,457       175,809       195,405
                                        ---------     ---------     ---------     ---------     ---------
Gross profit                               15,414        19,343        26,378        27,210        22,080
Selling, general and administrative
expenses                                    8,429        11,702        16,668        17,968        17,610
Restructuring expense                          --            --         2,392            --            --
Litigation and settlement costs                --            --           933         1,385         2,849
                                        ---------     ---------     ---------     ---------     ---------
Income from operations                      6,985         7,641         6,385         7,857         1,621
Other expense                                 212           774           418           813           940
                                        ---------     ---------     ---------     ---------     ---------
Income before provision for
   income taxes                             6,773         6,867         5,967         7,044           681
Provision for income taxes(1)                  --         1,926         2,384         2,798           272
                                        ---------     ---------     ---------     ---------     ---------
Net income                              $   6,773     $   4,941     $   3,583     $   4,246     $     409
                                        =========     =========     =========     =========     =========
Net income per share - basic            $    1.18     $     .76     $     .55     $     .65     $     .06
                                        =========     =========     =========     =========     =========
Net income per share - diluted          $    1.18     $     .74     $     .54     $     .65     $     .06
                                        =========     =========     =========     =========     =========
Weighted average shares outstanding
    basic                                   5,763         6,469         6,563         6,506         6,429
                                        =========     =========     =========     =========     =========
Weighted average shares outstanding
   diluted                                  5,763         6,647         6,661         6,507         6,429
                                        =========     =========     =========     =========     =========

Pro Forma Statement of 
Income Data:
Income before provision for
   income taxes                         $   6,773     $   6,867           N/A           N/A           N/A
Pro forma provision for income
   taxes (1)                                2,614         2,612           N/A           N/A           N/A
                                        ---------     ---------
Pro forma net income (1)                $   4,159     $   4,255           N/A           N/A           N/A
                                        =========     =========
Pro forma net income per
share - basic (1)(2)                    $     .72     $     .66           N/A           N/A           N/A
                                        =========     =========
Pro forma net income per
   share - diluted (1)(2)               $     .72     $     .64           N/A           N/A           N/A
                                        =========     =========
Pro forma common shares - basic (2)         5,763         6,469           N/A           N/A           N/A
                                        =========     =========
Pro forma common shares -
    diluted  (2)                            5,763         6,647           N/A           N/A           N/A
                                        =========     =========
Other Operating Data:
Coaches sold                                1,199         1,405         1,859         1,765         1,706

                                                                              17
<PAGE>
                                                                   December 31,
                                        -----------------------------------------------------------------
                                             1994          1995          1996          1997          1998
                                        ---------     ---------     ---------     ---------     ---------
                                                                  (In thousands)
Balance Sheet Data:

Current assets                          $  20,093     $  26,109     $  39,740     $  39,081     $  45,453
Property and equipment                      8,911        12,061        19,584        18,585        20,551
Total assets                               32,504        41,198        61,920        59,842        68,020
Current liabilities                        25,222        18,254        34,225        29,335        36,492
Long-term debt                              4,169         4,676         6,626         5,376         7,353
Shareholders' equity                        2,263        17,411        20,994        24,293        23,209

--------------

(1)  The Company was an S corporation and accordingly was not subject to federal
     and state income taxes prior to 1995. Pro forma net income reflects federal
     and state income taxes as if the Company had been a C corporation, based on
     the effective tax rates that would have been in effect during those
     periods. Effective January 1, 1995 the Company elected C corporation tax
     status. In accordance with SFAS No. 109, "Accounting For Income Taxes," the
     Company recorded a transition adjustment to establish a deferred asset for
     prepaid taxes, reducing the Company's reported tax provision by $686,000
     for 1995. The 1995 pro forma provision for income taxes reflects the
     provision for income taxes as if this transition adjustment were excluded.

(2)  Shares used in pro forma computations of income per share include the
     estimated number of shares required to be sold by the Company in its
     initial public offering to make final S corporation distributions to the
     Company's shareholders.
</TABLE>

                                                                              18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This analysis of the Company's financial condition and operating results
should be viewed in conjunction with the accompanying financial statements,
including the notes thereof.

Results of Operations

     The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales, and the
percentage change in such data from the comparable prior period.

<TABLE>
<CAPTION>
                                                                              Percentage change in
                                                                              dollar amounts from
                                      Year ended December 31,                ----------------------
                                 --------------------------------              1996           1997
                                     1996        1997        1998            to 1997        to 1998
                                 --------    --------    --------            -------        -------
<S>                                 <C>         <C>         <C>                  <C>            <C> 
Sales                               100.0%      100.0%      100.0%               1.1%           7.1%
Cost of sales                        86.9        86.6        89.8                0.8           11.1
                                 --------    --------    --------
Gross profit                         13.1        13.4        10.2                3.2          (18.9)
Selling, general and
 administrative expenses              8.3         8.9         8.1                 7.8          (2.0)
Restructuring expense                 1.2          --          --              (100.0)           --
Litigation and
 settlement costs                     0.4         0.6         1.3                48.4         105.7
                                 --------    --------    --------
Income from operations                3.2         3.9          .8                23.1         (79.4)
Interest expense                      0.3         0.5         0.4                36.2         (12.9)
Other (income) expense               (0.1)       (0.1)        0.1               (55.1)        205.8
                                 --------    --------    --------

Pretax income                         3.0         3.5         0.3                18.1         (90.3)
Provision for income taxes            1.2         1.4         0.1                17.4         (90.3)
                                 --------    --------    --------
Net income                            1.8         2.1          .2                18.5         (90.4)
                                 ========    ========    ========
</TABLE>

                                                                              19
<PAGE>
1998 Compared to 1997

     Consolidated sales increased by $14.5 million or 7.1% to $217.5 million in
1998 from $203.0 million for 1997. Safari sales decreased from 1997 levels by
$1.9 million or 1.8% to $102.2 million in 1998. Beaver sales increased from 1997
levels by $8.0 million or 9.5% to $92.2 million in 1998. Sales at the HCO
division increased by $16.3 million or 206.3% to $24.2 million for 1998 from
$7.9 million for 1997.

     Excluding coach sales from discontinued operations, consolidated unit coach
sales increased by 4 units or .2% to 1,706 units in 1998 from 1,702 units in
1997. Safari unit coach sales decreased by 124 units or 12.1% to 901 units in
1998 from 1,025 units in 1997. Beaver unit coach sales decreased by 20 units or
3.9% to 499 units in 1998 from 519 in 1997. HCO unit sales increased by 148 or
93.7% to 306 units in 1998 from 158 units in 1997.

     Although unit sales were flat in 1998 compared to 1997, sales dollars
increased due to a shift in mix towards the Company's higher priced coaches. A
2% price increase for all models was implemented during the fourth quarter,
however its impact on annual revenues was not significant. The sales revenue
increase is attributed to the decrease in sale units of the lower priced Trek
model that were offset by increased units of the relatively higher priced
Renegade. The Renegade began shipping in 1998.

     Consolidated gross profit margins decreased $5.1 million or 18.9% and
decreased as a percentage of sales to 10.2% from 13.4% in 1997. A number of
factors led to this decrease. The new Class A Renegade model sales contributed
to sales growth. However, the profit margins of this coach were low, due to the
higher costs of introduction and production startup. It is anticipated that the
profit margin on this coach will increase as it moves further into full
production. Also, the gross margin was impacted by production difficulties of
the Safari 1999 model changeover during the second and third quarters of 1998.
However, these issues have been addressed and it is anticipated that the gross
profit margin will improve in 1999.

     Selling, general, and administrative expenses decreased by $358,000 or 2.0%
to $17.6 million in 1998 from $18.0 million in 1997. As a percentage of sales,
selling, general and administrative expenses decreased from 8.9% to 8.1% of
sales for 1997 and 1998, respectively. Management will continue to focus on
efforts to reduce these costs in 1999. During 1998, the Company recognized and
reserved for costs associated with product claims. During the third quarter of
1998, the Company increased its reserves for these costs by approximately $1.1
million. The increase from 1997 levels represents reserves established on
certain claims presently being appealed by the Company. The Company believes it
has established proper control to limit these costs in the future.

     Interest expense decreased 12.9% to $813,000 in 1998 from $933,000 in 1997.
The operating revolving facility had no utilization as of December 31, 1998.

                                                                              20
<PAGE>
     The Company's effective tax rate was 40.0%, resulting in an income tax
provision of $272,000 compared to an effective rate of 39.7% and an income tax
provision of $2.8 million for 1997.

     Net income after tax decreased $3.8 million or 90.4% to $409,000 from
1997's net income after tax of $4.2 million. This is a result from the factors
affecting gross margin, as discussed earlier.

1997 Compared to 1996

     Consolidated sales increased by $2.2 million or 1.1% to $203.0 million for
1997 from $200.8 million for 1996. Safari sales were down by $12.7 million or
10.9% to $104.1 million in 1997 compared to 1996. Beaver sales were up by $7.2
million or 9.4% to $84.2 million in 1997 compared to 1996. Sales at the
Company's newest division, HCO, were $7.9 million with no sales being generated
in the start-up operation in 1996. Sales generated before the shut-down at
Midwest were down by $1.1 million or 29.7% to $2.6 million in 1997 compared to
1996. Increases in parts and service sales of approximately $900,000 made up the
rest of the increase in consolidated sales from 1996 to 1997.

     Consolidated unit coach sales decreased by 94 units or 5.06% to 1,765 units
in 1997 from 1,859 units in 1996. Safari unit coach sales decreased by 180 units
or 14.9% to 1,025 units in 1997 from 1,205 units in 1996. Beaver unit coach
sales decreased by 48 units or 8.5% to 519 units in 1997 from 567 in 1996. HCO
unit sales were 158 in 1997. Midwest unit sales decreased by 24 units or 27.6%
to 63 units in 1997 from 87 units in 1996.

     Although unit sales decreased in 1997 compared to 1996, sales dollars
increased due to a shift in mix towards the Company's higher valued coaches,
which are generally more profitable. As discussed in Item 1 under the
"Manufacturing" section, the Company was unable to obtain all of the medium-duty
transmissions necessary to meet its initially planned production schedule. In
response to this, the Company shifted its production to its higher-end models
which use a heavy-duty transmission which was in available supply. This shift
resulted in lower than planned unit sales, but higher sales dollars per unit.
The Company believes that the lowered overall unit sales volume was also
reflective of increased competition in 1997 compared to 1996. The Company
believes that its overall market share of the high-line motor home market
dropped slightly from the prior year, and it continues to monitor the
performance of each of its model lines in relation to the competition.

     Consolidated gross profit margin increased $832,000 or 3.2% and increased
as a percentage of sales to 13.4% from 13.1% in 1996. A number of factors led to
the overall increase in consolidated gross profit margin. On the positive side,
in the prior year, gross margin was negatively impacted by the Company's
start-up operations at Midwest. This facility was shut down in 1997 resulting in
an overall $1.0 million positive impact on gross margin compared to the prior
year. Additionally, sales of Beaver product continue to became a larger portion
of the overall sales mix. Since most of Beaver's products sell at higher average
prices than the Safari models, and the Company's products generally achieve a
greater gross margin on higher priced products, the increase in Beaver sales in

                                                                              21
<PAGE>
1997 contributed approximately an additional $500,000 to gross margin compared
to 1996. On the negative side, gross margin was negatively impacted by the
Company's start up of HCO and CTI, which reduced gross margin by approximately
$700,000 compared to 1996. The start-up phase was completed in 1997 during which
time extra costs for set-up and training of the labor force were incurred.

     Selling, general, and administrative expenses increased by $1.3 million or
7.8% to $18.0 million in 1997 from $16.7 million in 1996. As a percentage of
sales, selling, general and administrative expenses were 8.9% and 8.3% of sales
for 1997 and 1996, respectively. The Company incurred approximately $1.3 million
in higher marketing related expenses in 1997 compared to 1996 in an effort to
boost the lower than expected sales demand which was described above.
Additionally, the decrease of approximately $300,000 in expenses associated with
the shut-down of Midwest was offset by an increase of approximately $500,000 in
costs related to the start up of HCO and CTI.

     The Company recorded a pre-tax restructuring expense of $2.4 million in the
fourth quarter of 1996. No further restructuring expense was required in 1997.

     Given the factors affecting gross margin and selling, general, and
administrative expenses, and the impact of the restructuring charge from 1996,
operating income increased $1.5 million or 23.1% to $7.9 million from $6.4
million in 1996. As a percentage of sales, operating income was 3.9% of sales in
1997 compared to 3.2% of sales in 1996.

     Interest expense increased 36.2% to $933,000 in 1997 from $685,000 in 1996.
The increase was due to higher overall borrowings on the Company's revolving
lines of credit during 1997 compared to 1996. Higher borrowings were required
during the first half of the year when finished goods inventory levels were
higher than expected due to the slower than anticipated sales demand described
above. Production rates were lowered later in the year, and sales also
increased, which resulted in reducing the finished goods inventory and the
substantial payoff of the short-term borrowings; however, the net impact for the
year was higher interest expense compared to 1996.

     The Company's effective tax rate was 39.7%, resulting in an income tax
provision of $2.8 million compared to an effective rate of 40.0% and an income
tax provision of $2.4 million for 1996.

     Net income after tax increased $663,000 or 18.5% to $4.3 million from
1996's net income after tax of $3.6 million.

Inflation

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

                                                                              22
<PAGE>
Factors Affecting Future Operating Results

     The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Short-term fluctuations in operating
results may be caused by a variety of factors, including the relatively high
unit cost of the Company's motor coaches, the timing of orders from dealers,
dealer cancellations of orders, the repurchase of coaches from dealers, new
product introductions, production delays and the timing of trade shows and
rallies. Because the Company's gross profit is generally greater with respect to
its more expensive coaches, changes in the product mix of coaches sold can
affect the Company's operating results. Over longer periods, the cyclical nature
of the recreational vehicle industry, changes in interest rates and changes in
the level of discretionary consumer spending may also adversely affect the
Company's results of operations. The impact of these and other factors on the
Company's sales and operating results in any future period cannot be predicted
with certainty, and the results for any prior period may not be indicative of
results for any future period.

     The Company believes that the high-line motor coach market is much less
volatile than the RV industry as a whole, and believes buyers purchasing
high-line products are making lifestyle decisions largely independent of factors
such as the state of the economy or interest rates. High-line coach sales have
increased every year since 1989, while the sale of all Class A motor coaches
have seen both increases and decreases during this period.

Liquidity and Capital Resources

     During 1998 SMC generated $6.8 million in cashflows from operations, which
was a decrease from the prior year level of $7.5 million. The change in net
income levels from 1998 to 1997 (a decrease of $3.8 million) was offset by
better management of working capital. Short term and long term debt was reduced
by about $200,000. The Company repurchased 705,000 shares of its stock for $3.4
million without increasing its borrowings from its operating credit facility.
The Company received $1.9 million from a former employee and officer who
exercised his options to purchase stock during the year. The Company maintains a
$10 million operating credit facility. At December 31, 1998 there was no
utilization of this facility.

     The Company made capital expenditures of $3.9 million during 1998. The
primary expenditure was approximately $2.8 million for the service center in
Florida. The other major expenditures included the completion of the geothermal
project in Hines, Oregon and certain material handling equipment at the Hines,
Oregon facility. The remaining expenditures were made on various capital
projects needed to maintain the existing facilities.

     The Company has an operating line of credit of $10 million and a real
estate line of credit of $8.3 million, plus an additional $4.0 million equipment
financing line of credit. There was no utilization of the operating and
equipment lines. There was approximately $4.5 million utilized of the real
estate line of credit at December 31, 1998. Amounts 

                                                                              23
<PAGE>
outstanding under these lines of credit bear interest at prime (7.75% at
December 31, 1998) and are secured by all assets not specifically identified in
other financing obligations. The terms of the revolving credit and equipment
financing agreements require compliance with certain financial covenants and
other covenants which provide that the Company receive consent from the lender
to declare or pay dividends in cash, stock or other property. The covenants also
include restrictions relating to (1) mergers, consolidations and sale of assets,
(2) guarantees by the Company of debts or obligations of other persons or
entities, and (3) acquisition of the Company's own stock. The Company was in
compliance with all covenants and agreements at December 31, 1998. The Company
does not believe any of these covenants will have a material impact on the
Company's ability to meet its cash obligations. See Notes 4 and 5 of Notes to
Consolidated Financial Statements.

     Most dealer purchases of motor coaches from the Company are financed under
flooring financing arrangements between the dealer and a bank or finance
company. Under these flooring arrangements, the financing institution lends the
dealer all or substantially all of the wholesale purchase price of a motor coach
and retains a security interest in the coach purchased. These financing
arrangements provide that, for a period of time after a coach is financed
(generally 12 to 18 months), if the dealer defaults on its payment or other
obligations to the lender, the Company is obligated to repurchase the dealer's
inventory for the amount then due from the dealer plus, in certain
circumstances, costs incurred by the lender in connection with repossession of
the inventory. The repurchase price may be more than the resale value of the
coach. The Company's contingent liability under its repurchase obligations
varies from time to time. As of December 31, 1998, the Company estimates its
total contingent liability under repurchase obligations to be approximately
$106.8 million. To date, losses incurred by the Company pursuant to repurchase
obligations have not been material. The Company cannot predict with certainty
its future losses, if any, pursuant to repurchase obligations, and these amounts
may vary materially from the expenditures historically made by the Company.
Furthermore, even in circumstances where losses in connection with repurchase
obligations are not material, a repurchase obligation can represent a
significant cash requirement for the Company. See "Business -- Sales and
Marketing" and Note 10 of Notes to Consolidated Financial Statements.

Year 2000 Issue

     The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. To be in "Year 2000 compliance" a computer
program must be written using four digits to define years. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.

     The Company has completed its evaluation of both information technology
systems ("IT") and non-IT systems to determine Year 2000 compliance. Non-IT
systems typically include embedded technology such as microcontrollers.

                                                                              24
<PAGE>
     For most of the Company's IT systems, Year 2000 compliance issues have been
identified and a remediation plan has been developed. Many of the Company's IT
systems have been made Year 2000-compliant or require insignificant costs to
become Year 2000 compliant. The Company estimates its costs for software and
hardware upgrades to its systems to total approximately $75,000. The Company
spent approximately $40,000 for the year ending December 31, 1998 for system
upgrades to make its primary IT system Year-2000 compliant.

     Additionally, the Company has begun to evaluate the readiness of its
significant suppliers, financial institutions and customers to determine the
extent to which the Company is vulnerable to those parties failing to remediate
their own Year 2000 issues. Until additional information about such parties is
received, the Company cannot complete that phase of its Year 2000 assessment. To
date, the Company has not received notice of or become aware of a material Year
2000 deficiency by a significant vendor, financial institution, or customer.

     At this time, the Company believes total costs incurred in responding to
other parties' Year 2000 computer system deficiencies, together with the cost of
any required modifications to the Company's internal systems, will not have a
material impact on the Company's results of operations or financial condition.
This analysis may be modified as the Company receives responses to inquiries
from its significant vendors, financial institutions and customers. While the
Company expects that the Year 2000 will not pose significant operational
problems, delays in the installation of the new systems or upgrades to existing
systems, or a failure of its vendors, customers or financial institutions to
become Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations. To address this
contingency, the Company is in the process of developing a risk management plan
which will be completed and tested during 1999.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary data required by this item are
included on pages F-1 to F-19 of this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     Not applicable.

                                                                              25
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1999
annual meeting of shareholders (the "1999 Proxy Statement") to be filed not
later than 120 days after the end of the fiscal year covered by this Report and
is incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this Report.

ITEM 11. EXECUTIVE COMPENSATION

     Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1999 Proxy Statement and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
1999 Proxy Statement and is incorporated herein by reference.

                                                                              26
<PAGE>
                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)   Financial Statements                                          Page in
                                                                     this Report

         Report of Independent Accountants                                F-1

         Consolidated Balance Sheet at December 31, 1997
         and 1998                                                         F-2

         Consolidated Statement of Income for the Years
         Ended December 31, 1996, 1997 and 1998                           F-3

         Consolidated Statement of Changes in Shareholders'
         Equity for the Years Ended December 31, 1996, 1997
         and 1998                                                         F-4

         Consolidated Statement of Cash Flows for the Years
         Ended December 31, 1996, 1997 and 1998                           F-5

         Notes to Consolidated Financial Statements                       F-6

(a)(2)   Financial Statement Schedules - None

(a)(3)   Exhibits

         3.1     Restated Articles of Incorporation; incorporated by reference
                 to Exhibit 3.1 to the 1995 S-1

         3.2     Restated Bylaws; incorporated by reference to Exhibit 3.2 to
                 the Registrant's Annual Report on Form 10-K for the year ended
                 December 31, 1994

         4.1     See Articles II and V of Exhibit 3.1 and Articles I and VI of
                 Exhibit 3.2

         *10.1   1994 Stock Incentive Plan, as amended; incorporated by
                 reference to Exhibit 10.1 to the Registrant's Annual Report on
                 Form 10-K for the year ended December 31, 1994

         10.2    Stock Purchase Agreement dated March 28, 1988 among Curtis
                 Lawler and Sandra Lawler, Mathew M. Perlot and the Registrant;
                 incorporated by reference to Exhibit 10.2 to the 1995 S-1

                                                                              27
<PAGE>
         10.3    Revised form of Representatives' Warrant Agreement, including
                 form of warrant; incorporated by reference to Exhibit 10.5 to
                 the 1995 S-1

         10.4    Manufacturer Agreement dated June 24, 1987 between General
                 Electric Credit Corporation and the Registrant; incorporated by
                 reference to Exhibit 10.7 to the 1995 S-1

         10.5    Repurchase Agreement dated November 30, 1993 between the
                 Registrant and General Motors Acceptance Corporation;
                 incorporated by reference to Exhibit 10.9 to the 1995 S-1

         +10.6   Floorplan Agreement dated April 14, 1994 between ITT Commercial
                 Finance Corp. and the Registrant, and amendment and amendment
                 letters thereto; incorporated by reference to Exhibit 10.10 to
                 the 1995 S-1

         10.7    Lease Assignment and Assumption Agreement dated June 1994
                 between Beaver Coaches, Inc. and Beaver Motor Coaches, L.L.C.,
                 with Lease dated May 15, 1989 by and between Frank Storch and
                 James Hogue, dba S&H Associates, and Beaver Coaches, Inc., and
                 amendments thereto; incorporated by reference to Exhibit 10.11
                 to the 1995 S-1

         21.1    Subsidiaries of the Registrant

         23.1    Consent of PricewaterhouseCoopers LLP

         27.1    Financial Data Schedule

--------------

     *    This exhibit constitutes a management contract or compensatory plan or
          arrangement.

     +    Confidential treatment has been granted by the Commission for certain
          portions of this agreement.

                                                                              28
<PAGE>
(b)      Reports on Form 8-K.

         No report on Form 8-K was filed by the Company in the last quarter of
         1998.

                                                                              29
<PAGE>
                        Report of Independent Accountants


To the Board of Directors and Shareholders of
SMC Corporation


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
SMC Corporation and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.


PRICEWATERHOUSECOOPERS LLP


Portland, Oregon
February 10, 1999

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Balance Sheet
(in thousands)
----------------------------------------------------------------------------------------------------------------

                                                                                         December 31,
                                                                                          1997              1998
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>          
Assets

Current assets:
   Cash and cash equivalents                                                     $         103     $       1,310
   Accounts receivable, net (Note 4)                                                    12,397            12,857
   Inventories (Notes 2 and 4)                                                          23,038            26,715
   Prepaid expenses and other                                                              709               530
   Prepaid taxes                                                                            --               897
   Deferred tax asset (Note 6)                                                           2,834             3,144
                                                                                 -------------     -------------

      Total current assets                                                              39,081            45,453

Property, plant and equipment, net (Notes 3, 4 and 5)                                   18,585            20,551
Intangible assets, net (Note 9)                                                          2,129             1,942
Other assets                                                                                47                74
                                                                                 -------------     -------------

      Total assets                                                               $      59,842     $      68,020
                                                                                 =============     =============

Liabilities and Shareholders' Equity Current liabilities:
   Notes payable (Note 4)                                                        $       1,695     $          --
   Current portion of long-term debt (Note 5)                                            1,381               953
   Accounts payable                                                                     17,342            24,789
   Income taxes payable (Note 6)                                                           405                --
   Product warranty liabilities                                                          3,769             3,766
   Current portion of capital lease obligation (Note 8)                                     18                19
   Accrued liabilities                                                                   4,725             6,965
                                                                                 -------------     -------------

      Total current liabilities                                                         29,335            36,492

Long-term debt, net of current portion (Note 5)                                          5,376             7,353
Capital lease obligation, less current portion (Note 8)                                     57                38
Deferred income taxes (Note 6)                                                             781               928
                                                                                 -------------     -------------

      Total liabilities                                                                 35,549            44,811
                                                                                 -------------     -------------

Commitments and contingencies (Notes 7 and 10)

Shareholders' equity:
   Preferred stock, 5,000 shares authorized, none issued or
     outstanding (Note 12)                                                                   -                 -
   Common stock, 30,000 shares authorized, 6,343 and 5,890 shares
     issued and outstanding, respectively (Note 11)                                     10,810             9,604
   Additional paid-in capital (Note 11)                                                  1,488             1,472
   Retained earnings (Note 11)                                                          11,995            12,133
                                                                                 -------------     -------------

      Total shareholders' equity                                                        24,293            23,209
                                                                                 -------------     -------------

   Total liabilities and shareholders' equity                                    $      59,842     $      68,020
                                                                                 =============     =============

    The accompanying notes are an integral part of this financial statement.
</TABLE>

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------------


                                                                                   Year ended December 31,

                                                                                1996            1997             1998
                                                                       -------------   -------------    -------------
<S>                                                                    <C>             <C>              <C>          
Sales                                                                  $     200,835   $     203,019    $     217,485

Cost of sales                                                                174,457         175,809          195,405
                                                                       -------------   -------------    -------------

    Gross profit                                                              26,378          27,210           22,080

Selling, general and administrative expenses                                  16,668          17,968           17,610
Restructuring expense (Note 9)                                                 2,392               -                -
Litigation and settlement costs                                                  933           1,385            2,849
                                                                       -------------   -------------    -------------

Income from operations                                                         6,385           7,857            1,621

Interest expense                                                                 685             933              813
Other (income) expense, net                                                     (267)           (120)             127
                                                                       -------------   -------------    -------------

Income before tax provision                                                    5,967           7,044              681

Provision for income taxes (Note 6)                                            2,384           2,798              272
                                                                       -------------   -------------    -------------

Net income                                                             $       3,583   $       4,246    $         409
                                                                       =============   =============    =============

Net income per share - basic                                           $         .55   $         .65    $         .06
                                                                       =============   =============    =============

Net income per share - diluted                                         $         .54   $         .65    $         .06
                                                                       =============   =============    =============

Weighted average number of shares - basic                                      6,563           6,506            6,429
                                                                       =============   =============    =============

Weighted average number of shares - diluted                                    6,661           6,507            6,429
                                                                       =============   =============    =============

    The accompanying notes are an integral part of this financial statement.
</TABLE>

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
--------------------------------------------------------------------------------------------------------------


                                             Common Stock               Additional
                                      --------------------------           paid-in      Retained
                                         Shares         Amount             capital      earnings         Total
                                      ---------       ----------        ----------    ----------    ----------
<S>                                       <C>         <C>               <C>           <C>           <C>       
Balance, December 31, 1995                6,563       $   10,914        $    1,556    $    4,941    $   17,411

Net income                                    -                -                 -         3,583         3,583
                                      ---------       ----------        ----------    ----------    ----------

Balance, December 31, 1996                6,563           10,914             1,556         8,524        20,994

Net income                                    -                -                 -         4,246         4,246

Stock repurchase (Note 11)                 (220)            (104)              (68)         (775)         (947)
                                      ---------       ----------        ----------    ----------    ----------

Balance, December 31, 1997                6,343           10,810             1,488        11,995        24,293

Net income                                    -                -                 -           409           409

Common Stock issued upon
  exercise of options                       252            1,954                 -             -         1,954

Stock repurchase (Note 11)                 (705)          (3,160)              (16)         (271)       (3,447)
                                      ---------       ----------        ----------    ----------    ----------

Balance, December 31, 1998                5,890      $     9,604        $    1,472    $   12,133    $   23,209
                                      =========      ===========        ==========    ==========    ==========

    The accompanying notes are an integral part of this financial statement.
</TABLE>

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
---------------------------------------------------------------------------------------------------------------------------


                                                                                         Year ended December 31,

                                                                                      1996              1997           1998
                                                                              ------------      ------------    -----------
<S>                                                                           <C>               <C>             <C>        
Cash flows from operating activities:
 Net income                                                                   $      3,583      $      4,246    $       409
 Adjustments to reconcile net income to net cash provided
   by operating activities:
    Noncash restructuring charges                                                    2,392                 -              -
    Depreciation and amortization                                                    1,838             2,092          2,133
    Deferred taxes                                                                  (2,326)              648           (163)
    (Gain) loss on asset dispositions                                                 (183)              (44)             2
    Litigation and settlement costs                                                      -                 -          1,070
    Changes in certain assets and liabilities (excluding
      impact of acquisition of a business and noncash
      restructuring charges):
       Accounts receivable                                                          (4,294)              462           (460)
       Inventories                                                                  (7,270)              595         (3,677)
       Prepaid expenses and other                                                     (162)             (135)          (718)
       Other assets                                                                    547                52            (27)
       Accounts payable                                                              6,198                91          7,447
       Income taxes payable                                                          1,365              (960)          (405)
       Accrued liabilities and other obligations                                     2,946               451          1,167
                                                                              ------------      ------------    -----------
Net cash provided by operating activities                                            4,634             7,498          6,778
                                                                              ------------      ------------    -----------

Cash flows used in investing activities:
    Acquisition of a business, net of cash acquired
        (Note 9)                                                                    (1,420)                -              -
    Capital expenditures                                                           (11,059)           (2,468)        (3,952)
    Proceeds from disposal of equipment                                              1,669               275             38
    Other                                                                                -              (195)             -
                                                                              ------------      ------------    -----------
Net cash used in investing activities                                              (10,810)           (2,388)        (3,914)
                                                                              ------------      ------------    -----------
Cash flows from financing activities:
    Net borrowings on notes payable                                                  4,127            (4,103)        (1,695)
    Proceeds from long-term debt                                                     4,330             1,924          4,522
    Repayments of long-term debt                                                    (2,029)           (3,545)        (2,973)
    Principal payments on capital lease obligation                                      (5)              (16)           (18)
    Proceeds from sale-leaseback                                                         -             1,364              -
    Repurchase of capital stock (Note 10)                                                -              (947)        (3,447)
 Proceeds from issuance of common stock                                                  -                 -          1,954
                                                                              ------------      ------------    -----------
Net cash provided by (used in) financing activities                                  6,423            (5,323)        (1,657)
                                                                              ------------      ------------    -----------

Net increase (decrease) in cash and cash equivalents                                   247              (213)         1,207
Cash and cash equivalents, beginning of year                                            69               316            103
                                                                              ------------      ------------    -----------
Cash and cash equivalents, end of year                                        $        316      $        103    $     1,310
                                                                              ============      ============    ===========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
    Interest, net of amount capitalized of $94,000
       and $22,000 in 1996 and 1997, respectively.
       There was no amount to be capitalized for 1998.                        $        626      $        982    $       687
    Income taxes                                                              $      3,011      $      3,128    $     1,725

    The accompanying notes are an integral part of this financial statement.
</TABLE>

                                      F-5
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


1.   Nature of Business and Summary of Significant Accounting Policies

     Nature of business

     SMC Corporation, an Oregon corporation, and its wholly owned subsidiaries
     (collectively, the "Company") design, manufacture, and market Class A and
     Class C motor coaches sold primarily to dealers which are independent of
     the Company throughout the United States and Canada.

     Basis of consolidation
     The accompanying consolidated financial statements include the accounts of
     SMC Corporation and the following seven wholly owned subsidiaries which
     operate under the control of SMC Corporation: Safari Motor Coaches, Inc.
     ("Safari"), Beaver Motor Coaches, Inc. ("Beaver"), Magnum Manufacturing,
     Inc. ("Magnum"), Electronic Design and Assembly, Inc. ("ED&A"), Composite
     Technologies, Inc. ("CTI"), SMC Midwest, Inc. ("Midwest"), and Harney
     County Operations, Inc. ("HCO"). Safari, Beaver, and HCO purchase motor
     coach chassis and other components used in the manufacture of finished
     motor coaches from the other subsidiaries, excluding Midwest which was
     engaged in the manufacture of Class C motor coaches but ceased operations
     in 1997. All significant intercompany transactions have been eliminated for
     purposes of presentation of the consolidated financial statements of SMC
     Corporation.

     Reporting periods
     The Company reports its annual results of operations on the basis of
     52-week periods ending December 31 and its quarterly results of operations
     on the basis of 13-week periods ending on the Saturday nearest the calendar
     month end. For presentation purposes, the Company has indicated its
     quarters as ending March 31, June 30, September 30, and December 31.

     Cash and cash equivalents
     Cash and cash equivalents consist of demand deposits with financial
     institutions. The Company considers all highly liquid short-term
     investments with original maturities of three months or less to be cash
     equivalents for purposes of the consolidated balance sheet and consolidated
     statement of cash flows. Noncash transactions have been excluded from the
     consolidated statement of cash flows (Note 9).

     Accounts receivable
     Accounts receivable are net of an allowance for doubtful accounts of
     $58,000 and $66,000 at December 31, 1997 and 1998, respectively.

     Inventories
     Inventories are stated at the lower of cost or market, with cost determined
     by the first-in, first-out method for raw materials, work-in-progress and
     finished goods and by the specific cost method for chassis. Cost includes
     the purchase price of raw materials, direct labor and an allocation of
     overhead costs. Raw materials inventory consists of component parts and
     motor coach chassis. Chassis manufacturers provide terms calling for
     payment generally upon completion of the motor coach.

                                      F-6
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


1.   Nature of Business and Summary of Significant Accounting Policies
     (Continued)

     Property, plant and equipment
     Property, plant and equipment are stated at cost. Additions, renewals and
     betterments are capitalized. Expenditures for maintenance, repairs, and
     minor renewals and betterments are charged to expense. Gains or losses
     realized from sales or retirements are reflected in earnings. Gains of
     $183,000, $44,000 and $2,000 were recorded during the years ended December
     31, 1996, 1997 and 1998, respectively. Depreciation and amortization are
     provided using the straight-line method over the estimated useful lives of
     15 years for land improvements, 20 to 30 years for buildings and
     improvements, and 5 to 12 years for machinery and equipment.

     Intangible assets
     Costs in excess of the fair value of the assets of Beaver acquired in 1994
     consists primarily of product trade names, which are being amortized using
     the straight-line method over 15 years (Notes 9 and 10). Amortization
     expense for the years ended December 31, 1996, 1997 and 1998 was $189,000,
     $220,000 and $186,000 respectively. At the end of each quarter, the Company
     reviews the recoverability of its intangible assets based on estimated
     undiscounted future cash flows from operating activities compared with the
     carrying value of the intangible assets. If the aggregate future cash flows
     are less than the carrying value, a write-down would be required, measured
     by the difference between the discounted future cash flows and the carrying
     value of the intangible assets. All goodwill recorded related to the
     Midwest acquisition was written-off in 1996 (Note 9).

     Financial instruments
     The Company estimates the fair value of its monetary assets and liabilities
     based upon the existing interest rates related to such assets and
     liabilities compared to the current market rates of interest for
     instruments of a similar nature and degree of risk. Cash and cash
     equivalents, and notes payable to banks approximate fair value as reported
     in the consolidated balance sheet. The fair value of long-term debt is
     estimated using discounted cash flow analyses, based on the Company's
     incremental borrowing rates for similar types of borrowing arrangements.
     The fair value of the Company's long-term debt at December 31, 1997 and
     1998 approximates the carrying value. The Company records all other
     financial instruments, including accounts receivable and accounts payable,
     at cost, which approximates market value.

     Revenue recognition and accounts receivable
     The Company recognizes revenue from the sale of motor coaches when title
     and risk of ownership are transferred to the dealer, which generally is
     upon shipment or dealer pick-up. Motor coaches are shipped to dealers only
     upon verification of dealer financing from the finance company providing
     the motor coach financing. Finance companies remit funds directly to the
     Company upon receipt of the manufacturer's certificate of origin, generally
     within 10 days after shipment. A dealer may be invoiced for and receive
     title to motor coaches prior to taking physical possession when the dealer
     has made a fixed, written commitment to purchase, the motor coaches have
     been completed and are available for pick-up or delivery, and the dealer
     has requested the Company to hold the motor coaches until the dealer
     determines the most economical means of taking physical possession. Upon
     such a request, the Company has no further obligation except to segregate
     the motor coaches, invoice them under normal billing and credit terms and
     hold them for a short period of time as is customary in the industry,
     generally less than two weeks, until pick-up or delivery. Motor coaches are
     built to dealer specification and no right of return or exchange privileges
     are granted. Accordingly, no provision for sales allowances or returns is
     recorded.

                                      F-7
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


1.   Nature of Business and Summary of Significant Accounting Policies
     (Continued)

     Revenue recognition and accounts receivable (continued)
     Sales and the percentage of total sales made to dealers representing more
     than 10% of consolidated sales in any of the following periods were as
     follows (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                                Year ended December 31,

                                                     1996                1997                1998
                                                --------------      --------------      --------------
     <S>                                        <C>                 <C>                 <C>           
     Dealer 1                                   $  23,314   12%     $  20,843   10%                 --
     Dealer 2 (See Note 7)                      $  20,777   10%            --                       --
     Dealer 3 (See Note 7)                             --           $  24,368   12%     $  29,546   14%
</TABLE>

     Certain risks, uncertainties and concentration of credit risk
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of financial
     statements and the reported amounts of revenues and expenses during the
     reporting period. Actual results could differ from these estimates.

     The Company has a concentration of credit risk in the recreational vehicle
     industry, and specifically related to amounts outstanding at any point in
     time in accounts receivable and/or under repurchase agreements (see Note
     10) with any specific dealership to which it has sold motor coaches. The
     Company requires no collateral from its dealers upon sale of a motor coach,
     and most dealer financing arrangements provide for repurchase agreements
     which require the Company to repurchase previously sold motor coaches in
     the event of the dealer's default on its financing arrangement.

     Product warranty
     The Company provides a one year warranty against defects in material and
     workmanship to dealers and purchasers of motor coaches and a similar three
     year warranty for chassis manufactured by the Company. Certain components
     used in the manufacture of the Company's motor coaches carry warranties of
     other manufacturers. Estimated warranty costs are reserved at the time of
     sale of the warranted products.

     Income taxes
     The Company accounts for income taxes under the liability method, as set
     forth in Statement of Financial Accounting Standards No. 109, "Accounting
     for Income Taxes," (SFAS No. 109). Under the liability method, deferred
     taxes are determined based upon the difference between the financial
     statement and tax bases of assets and liabilities at enacted tax rates in
     effect in the years in which the differences are expected to reverse.
     Deferred tax expense represents the change in the deferred tax
     asset/liability balance. A valuation allowance is established for deferred
     taxes if their realization is not likely.

     Comprehensive Income
     The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
     January 1, 1998. Comprehensive income is equal to net income for all
     periods presented.

     Reclassifications
     Certain prior year amounts have been reclassified to conform to the current
     year presentation. These changes had no impact on previously reported
     results of operations or shareholders' equity.

                                      F-8
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


1.   Nature of Business and Summary of Significant Accounting Policies
     (Continued)

     Segment Disclosure
     The Company complies with segment reporting as set forth in Statement of
     Financial Accounting Standards No.131,"Disclosures about Segments of an
     Enterprise and Related Information," (SFAS No. 131) effective December
     1998. Under this statement, the Company employs the aggregation criteria of
     this standard.

     Earnings per Share
     The Company has adopted FASB Statement 128, "Earnings Per Share". FASB 128
     requires dual presentation of basic and diluted EPS. Previously, the
     Company had presented primary EPS. Diluted EPS is calculated by dividing
     net income by the total of the weighted average actual shares outstanding
     for each period plus the number of shares calculated as having a dilutive
     impact, if any, related to the stock options under the Company's Stock
     Incentive Plan, and the warrants issued in conjunction with the Company's
     initial public offering. Previously reported amounts for primary EPS are
     the same as the diluted EPS amounts now reported. Basic EPS is computed by
     dividing the net income by the weighted average actual shares outstanding
     for each period presented with no consideration as to the dilutive impact
     of the Company's outstanding stock options or warrants. Prior periods have
     been restated to conform to FASB 128.

2.   Inventories

     Inventories by major classification are as follows (in thousands):

                                                 December 31,

                                                 1997             1998
                                        -------------     ------------
        Raw materials                   $      11,418     $     14,982
        Work-in-progress                        9,581            8,527
        Finished goods                          2,039            3,206
                                        -------------     ------------

        Total                           $      23,038     $     26,715
                                        =============     ============

3.   Property, Plant and Equipment

     The components of property, plant and equipment are as follows (in
     thousands):

                                                       December 31,
 
                                                       1997             1998
                                              -------------     ------------
        Land and improvements                 $       2,950     $      3,094
        Buildings and improvements                   10,344           10,449
        Machinery and equipment                      10,404           11,042
        Construction in progress                        171            3,150
                                              -------------     ------------
                                                     23,869           27,735

        Less accumulated depreciation                (5,284)          (7,184)
                                              -------------     ------------
        Property, plant and equipment, net    $      18,585     $     20,551
                                              =============     ============

                                      F-9
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


4.   Notes Payable

     The Company has a $10.0 million revolving line of credit for working
     capital requirements. The available borrowings under the line of credit are
     limited to 80% of eligible accounts receivable plus 90% of eligible
     finished goods inventory plus 50% of eligible raw and work-in progress
     inventory. As of December 31, 1998, the operating credit utilization was
     zero. Outstanding borrowings under the line of credit are due on demand.
     The line of credit is secured by accounts receivable, inventory (excluding
     chassis inventory purchased from third parties), and equipment.

     Further, the line of credit is cross-collateralized among the companies.
     The terms of the respective credit agreements require compliance with
     certain financial covenants, including working capital requirements.

     The Company has entered into a credit agreement which enable borrowings of
     up to $4.0 million for equipment purchases, as needed. No amounts have been
     borrowed under this credit agreement at December 31, 1998.

     As of December 31, 1998, the Company was in compliance with all of its
     financial covenants associated with its line of credit facilities and other
     bank loans.

                                      F-10
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


5.    Long-Term Debt

<TABLE>
<CAPTION>
      Long-term debt consists of the following:
                                                                                       December 31,

                                                                                       1997            1998
                                                                                -----------     -----------
                                                                                      (in thousands)
        <S>                                                                     <C>             <C>        
        Bank loan secured by equipment with monthly payments of
          $35,000 plus interest at LIBOR plus 1.5%, or 6.875% at
          December 31, 1998, with the balance due October 12, 2003              $     2,468     $     2,050
        Bank loan secured by equipment, with monthly payments of
          $35,000 including interest at 7.625%, with the balance due
          December 31, 2002                                                           1,750           1,454
        Bank loan secured by a first trust deed on the Beaver manu-
          facturing facility, with monthly payments of $13,000
          plus interest at the bank's prime rate plus .75%, or 8.5% at
          December 31, 1998, with the balance due October 18, 1999                      287             138
        Promissory note secured by a mortgage on the related
          property, with annual payments of $24,000 including
          interest at 6%, with the balance due no later than
          January 15, 2007                                                              156             142

        Real estate line of credit, with a maximum amount of $8.3
          million, of which $3.8 million is available as of
          December 31, 1998, with interest only for the first
          twelve months, then monthly payments based on a 20 year
          amortization with a 10 year maturity                                            -           4,522
        Bank loan secured by a first trust deed on the Magnum
          manufacturing facility, with monthly payments of $9,000 plus
          interest at 8.22%, repaid October 27, 1998                                  1,421               -
        Bank loan secured by a first trust deed on the Safari manu-
          facturing facility, with monthly payments of $31,000 plus
          interest at the bank's prime rate plus .75%, repaid
          October 27, 1998                                                              675               -
                                                                                -----------     -----------
                                                                                      6,757           8,306
        Less portion due within one year                                             (1,381)           (953)
                                                                                -----------     -----------
        Long-term debt less current portion                                     $     5,376     $     7,353
                                                                                ===========     ===========
</TABLE>


      The aggregate maturities of long-term debt for the next five years and
      thereafter as of December 31, 1998 are $953,000, $1,234,000, $1,263,000,
      $1,294,000, $888,000 and $2,674,000, respectively.

      Certain of the borrowings are subject to restrictive covenants, including
      working capital requirements, with which the Company is in compliance at
      December 31, 1998. Other terms of the borrowings require the lending
      bank's written consent prior to the issuance of any dividends.

                                      F-11
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


6.   Provision for Income Taxes

     The provision for income taxes for the years ended December 31, 1996,
     1997 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         Year ended December 31,

                                                                       1996             1997             1998
                                                               ------------     ------------     ------------
        <S>                                                    <C>              <C>              <C>         
        Current:
           Federal                                             $      3,897     $      1,961     $        391
           State                                                        813              189               45
                                                               ------------     ------------     ------------
                                                                      4,710            2,150              436
                                                               ------------     ------------     ------------

        Deferred:
           Federal                                                   (1,925)             574             (145)
           State                                                       (401)              74              (19)
                                                               ------------     ------------     ------------
                                                                     (2,326)             648             (164)
                                                               ------------     ------------     ------------


                                                               $      2,384     $      2,798     $        272
                                                               ============     ============     ============
</TABLE>

     Deferred tax assets (liabilities) are comprised of the following components
     (in thousands):

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                          1997             1998
                                                                                  ------------     ------------
        <S>                                                                       <C>              <C>         
        Current:
           Vacation reserve                                                       $        278     $        369
           Accrued workers' compensation claim liabilities                                  69               87
           Warranty reserves                                                             1,610            1,916
           Inventory reserves                                                               40               43
           Other liabilities                                                               815              718
           Allowance for doubtful accounts                                                  22               11
                                                                                  ------------     ------------
                                                                                  $      2,834     $      3,144
                                                                                  ============     ============

        Noncurrent:
           Tax depreciation in excess of book depreciation                        $       (781)    $       (950)
           Other                                                                            --               22
                                                                                  ------------     ------------
                                                                                  $       (781)    $       (928)
                                                                                  ============     ============
</TABLE>

                                      F-12
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


6.   Provision for Income Taxes (continued)


     The effective tax rate differs from the U.S. statutory federal tax rate due
     to the following:

                                                    Year ended December 31,

                                                 1996        1997        1998
                                               ------      ------      ------
     Statutory federal tax rate                 34.0%       34.0%       34.0%
     State taxes, net of federal benefit         4.4         3.7         4.0
     Nondeductible expenses                      1.6         1.1         5.0
     Other, net                                   --         0.9        (3.0)
                                               ------      ------      ------
                                                40.0%       39.7%       40.0%
                                               ======      ======      ======

7.   Related Parties

     A dealer is owned by principals related to a former officer of the Company.
     The Company's sales of motor coaches to this party are at prices consistent
     with sales to unrelated third parties. Sales to this dealer for the years
     ended December 31, 1997 and 1998 were $24.4 million and $29.5 million
     respectively. There were no sales to this dealer in 1996. The Company had
     accounts receivable due from this dealer of $799,000 and $888,000 at
     December 31, 1997 and 1998, respectively, related to the sales of motor
     coaches.

     In 1998, the Company began purchasing electronic parts from a supplier
     company that is owned by a principal related to an officer. The total
     amount of purchases for the year ending December 31, 1998 was $449,000.

     As part of the Company's program to repurchase 800,000 shares of stock, the
     Company repurchased 100,000 shares from an officer of the Company for
     $4.2375 per share. See note 11 for further details.

8.   Leases

     The Company is obligated under a capital lease for computer software that
     expires in September of 2001. At December 31, 1997 and December 31, 1998,
     the gross amount of equipment and related accumulated amortization recorded
     under capital leases was $95,000 and $24,000, and $95,000 and $55,000,
     respectively.

     The Company also has noncancelable operating leases, primarily for
     facilities space, manufacturing equipment, telecommunications,
     transportation equipment, and computer software and hardware, which expire
     over the next five years and thereafter. Rental expense under operating
     leases was, $511,000, $783,000, and $944,000 for the years ended December
     31, 1996, 1997, and 1998, respectively.

                                      F-13
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


8.   Leases (continued)

     Future minimum lease payments under noncancelable operating leases and
     future minimum capital lease payments as of December 31, 1998 are:

<TABLE>
<CAPTION>
     Year ending December 31:                    Capital Lease       Operating Leases
     ------------------------                    -------------       ----------------
     <S>                                           <C>                    <C>        
     1999                                          $    23,000            $   944,000
     2000                                               23,000                915,000
     2001                                               18,000                711,000
     2002                                                   --                463,000
     2003                                                   --                294,000
     Thereafter                                             --              2,967,000
                                                   -----------            -----------

     Total minimum lease payments                       64,000            $ 6,294,000

     Less amount representing interest
       (at 8.52%)                                        7,000
                                                   -----------
     Minimum lease payments,
       excluding interest                               57,000

     Current installments of obligation
       under capital lease                              19,000
                                                   -----------
     Obligation under capital lease
       excluding current installments              $    38,000
                                                   ===========
</TABLE>

9.   Acquisition of the Assets of Honorbuilt Industries, Inc.

     Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
     Industries, Inc. ("Honorbuilt") for cash. Honorbuilt was primarily engaged
     in the design, manufacture, distribution and sale of Class C motor coaches
     (under the name brand of El Dorado) from its facility in Minneapolis,
     Kansas. The Company formed a new subsidiary, SMC Midwest, Inc., to operate
     the facility.

     The acquisition was accounted for by the purchase method. Accordingly, the
     purchase price of $1.4 million was allocated to the assets acquired based
     on their estimated values as of the date of acquisition. The excess of the
     consideration paid over the estimated fair value of assets acquired totaled
     $561,000 and was written off in 1996.

     The estimated fair value of assets acquired is summarized as follows:

           Inventory                                  $     327,000
           Equipment                                        432,000
           Goodwill                                         561,000
           Other Assets                                     100,000
                                                      -------------
           Total Purchase Price                       $   1,420,000

                                      F-14
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


9.   Acquisition of the Assets of Honorbuilt Industries, Inc. (continued)

     On December 26, 1996, the Company announced the planned exit and closure of
     the operations at the Minneapolis, Kansas facility in an effort to reduce
     excessive costs that were not anticipated when the Company acquired the
     assets of Honorbuilt. The closure has been treated as a restructuring for
     financial reporting purposes, and a total charge of $2.4 million was made
     for the year ended December 31, 1996 related to the Midwest restructuring.
     Restructuring activities primarily involve the separation of the workforce,
     the closing of the facility, and the termination of existing leases. Costs
     for restructuring activities are limited to incremental costs that directly
     result from the restructuring activities and that provide no future benefit
     to the Company.

     A reserve of $488,000 to cover expected future costs of the restructuring
     was recorded as of December 31, 1996. Additionally, the remaining
     unamortized goodwill, deferred acquisition costs, and certain property,
     plant, and equipment was charged to restructuring expense during the year
     ended December 31, 1996. Recording of the reserves for book purposes but
     not for tax purposes created a related deferred tax asset (Note 6) that was
     realized when the exit plan was completed during 1997. The restructuring
     reserve recorded at December 31, 1996 was adequate to cover the
     restructuring costs incurred during 1997, and no further restructuring
     charges were made or are expected to be made.

     Commencing June 14, 1996, results of operations of Honorbuilt are included
     in the consolidated statement of income for the year ended December 31,
     1996. The following unaudited pro forma summary presents information as if
     the acquisition of Honorbuilt had occurred at the beginning of 1996. The
     pro forma information is provided for informational purposes only. It is
     based on historical information and includes adjustments for interest
     expense that would have been incurred to finance the purchase, depreciation
     adjustments related to asset valuations, and amortization of intangibles.
     The pro forma information is not indicative of future results of operations
     of the combined companies.

                              Pro Forma Information
                    (in thousands, except per share amounts)

                                                     Year Ended December 31,
                                                                      1996
                                                                      ----

      Net sales ............................................... $  207,763
      Net income  ............................................. $    2,975
      Earnings per share - basic............................... $      .45
      Earnings per share - diluted ............................ $      .45


10.  Commitments and Contingencies

     As is customary in the recreational vehicle industry, the Company is
     contingently liable under the terms of repurchase agreements with finance
     companies which provide secured inventory financing for dealers of the
     Company's products. These agreements require the Company to repurchase its
     products from the finance company in the event of a dealer's default. The
     contingent liability under these agreements approximates the sales price of
     the motor coaches, less principal payments made by the dealer. The Company
     expects to resell any products repurchased to reduce any liabilities
     incurred. Historically, the Company has not experienced significant losses
     under these repurchase agreements.

                                      F-15
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


10.  Commitments and Contingencies (continued)

     The risk of loss is spread over various dealers and finance companies.
     Total secured inventory financing obligations of the Company's dealers, for
     which the Company was contingently liable, were approximately $86.3 million
     and $106.8 million at December 31, 1997 and December 31, 1998,
     respectively.

     From time to time, the Company is involved in various customer complaints
     which arise in the ordinary course of business. The Company does not
     believe that losses, if any, incurred under outstanding repurchase
     agreements or customer complaint settlements will have a significant impact
     on the Company's financial position or results of operations.

11.  Common Stock Matters and Earnings Per Share

     In conjunction with the Company's initial public offering, a total of
     125,000 warrants were issued to the Underwriters of the Offering. Such
     warrants entitle the holder to purchase an equal amount of shares of common
     stock of the Company anytime after January 20, 1996 until their expiration
     on January 20, 2000 at a price of $9.30 per share. No stock has been
     purchased related to the warrants as of the date of this report.

     Stock Incentive Plan
     Effective October 20, 1994, the Company adopted a stock incentive plan for
     key employees and directors of the Company. In 1997, the shareholders of
     the Company voted to increase the number of shares authorized under the
     plan from 1.1 million to 1.4 million shares of common stock; accordingly,
     these shares have been reserved for by the Company. The stock options
     generally become exercisable ratably over a period of three years from the
     date of grant at prices equal to the fair market value at the date of
     grant. The maximum option term is 10 years. The following table summarizes
     option transactions under the plan:

<TABLE>
<CAPTION>
                                                         1996           1997           1998
                                                    ---------      ---------      ---------
      <S>                                             <C>            <C>            <C>    
      Shares subject to option:
      Balance at January 1                            781,000        883,000        937,785
      Options granted                                 117,000        152,500        333,000
      Options exercised                                     -              -       (252,285)
      Options terminated                              (15,000)       (97,715)       (90,000)
                                                    ---------      ---------      ---------
      Balance at December 31                          883,000        937,785        928,500
                                                    ---------      ---------      ---------

      Weighted average option
        price in dollars:
      At January 1                                  $    7.82      $    7.97      $    7.84
      Options granted                                    9.29           7.76           9.05
      Options exercised                                     -              -           7.75
      Options terminated                                 7.75           7.75           8.49
      At December 31                                     7.97           7.84           8.23

      Shares available for
      grant at December 31:                           206,436        451,651        208,651
</TABLE>

                                      F-16
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


11.  Common Stock Matters and Earnings Per Share (continued)

     Stock Incentive Plan (continued)

     The exercise prices of the 928,500 options granted as of December 31, 1998
     range between $6.00 and $9.375 and have a weighted average remaining
     contractual life of 7.5 years; 630,694 of the total options granted are
     fully vested, and therefore may be exercised, as of December 31, 1998 at a
     weighted average exercise price of $8.83.

     The Company applies ABP Opinion 25 and related Interpretations in
     accounting for the stock incentive plan. Had compensation cost for the
     stock incentive plan been determined based on the fair value at the grant
     dates for awards under the plan consistent with the method of FASB
     Statement 123, "Accounting for Stock-Based Compensation," the Company's net
     income and income per share would have been reduced to the pro forma
     amounts indicated below:

<TABLE>
<CAPTION>
                              Pro Forma Information
                    (in thousands, except per share amounts)

                                                                             Year ended December 31,
                                                                          1996          1997          1998
                                                                      --------      --------      --------
        <S>                                                           <C>           <C>           <C>     
        Net Income                      As reported                   $  3,583      $  4,246      $    409
                                        Pro Forma                     $  3,306      $  3,882      $     14

        Income per share - basic        As reported                   $    .55      $    .65      $    .06
                                        Pro Forma                     $    .50      $    .60             -

        Income per share - diluted      As reported                   $    .54      $    .65      $    .06
                                        Pro Forma                     $    .50      $    .60             -
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option pricing model with the following weighted-average
     assumptions used for grants in 1996: expected dividend yield: 0.0%,
     expected volatility: 68.17%, risk-free interest rate: 6.5%, expected life:
     10 years. For both 1997 and 1998, the expected dividend yield and expected
     life were the same as 1996. However, the expected volatility was 71.49% and
     72.11% for 1997 and 1998 respectively. The risk-free interest rate used was
     6.3% and 5.5% for 1997 and 1998 respectively. Results may not be
     representative of future years because options are generally granted on an
     annual basis and vest over time.

     Stock Repurchase
     During 1998, the Company repurchased 50,000 of its common shares from a
     director of the Company. The shares were purchased subject to the terms of
     Stock Purchase Agreement between the Company and the director. Under the
     terms of the agreement, the Company had first option to purchase the
     subject shares for two-thirds of the current market value. The shares were
     purchased for a price per share of $6.00, resulting in an overall purchase
     price of $300,000. The shares have been returned and canceled.

     Pursuant to a board resolution, the Company authorized 800,000 shares of
     stock to be repurchased by the Company for the year ending December 31,
     1998. Under this program, 655,000 shares were repurchased at the average
     price of $4.80, for an overall amount of $3,147,000.

                                      F-17
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


11.  Common Stock Matters and Earnings Per Share (continued)

     Stock Repurchase (continued)

     During 1997, the Company purchased 220,000 of its common shares from a
     former officer of the Company. The shares were purchased subject to the
     terms of Stock Purchase Agreement between the Company and the former
     officer. Under the terms of the agreement, the Company had first option to
     purchase the subject shares for two-thirds of the current market value. The
     shares were purchased for a price of $4.30, resulting in an overall
     purchase price of $947,000. The shares have been returned and canceled.


12.  Preferred Stock

     The Company has authorized 5,000,000 shares of Preferred Stock which may be
     issued from time to time in one or more series as authorized by the
     Company's Board of Directors. The Board of Directors, without any further
     approval by the shareholders of the Company is authorized to fix the
     dividend rights and terms, dividend rates, voting rights, terms of
     redemption price, conversion rights and liquidation preferences related to
     the Preferred Stock. There have been no shares of Preferred Stock issued,
     and the Company has no plans to issue any as of the date of this report.

13.  Incentive and Deferred Compensation Plans

     The Company has an incentive compensation plan for its key officers. The
     amounts charged to expense for the years ended December 31, 1996, 1997, and
     1998 aggregated $487,000, $245,000, and $326,000, respectively.

     The Company has established a joint 401(k) and Profit Sharing Plan which
     allows eligible employees to contribute up to 15% of their compensation
     annually. The plan allows for a Company matching percentage based upon the
     discretion of management, and $4,000 and $2,000 were contributed by the
     Company and its subsidiaries to the plan during the years ended December
     31, 1996, and 1997, respectively. There were no contributions for 1998. To
     date there have been no amounts contributed by the Company or its
     subsidiaries to the profit sharing element of the plan.

                                      F-18
<PAGE>
SMC Corporation

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


14.  Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                                      First            Second            Third           Fourth
                                                    quarter           quarter          quarter          quarter
                                                   ------------------------------------------------------------
                                                            (In thousands, except per share amounts)
        <S>                                          <C>              <C>               <C>              <C>   
        Year ended December 31, 1997:
           Revenue                                   50,087           48,977            51,578           52,377
           Gross profit                               6,597            5,282             6,901            8,430
           Net Income                                 1,190              164             1,206            1,686
           Net income (loss) per share - basic          .18              .02               .18              .27
           Net Income per share - diluted               .18              .02               .18              .27

        Year ended December 31, 1998:
           Revenue                                   47,805           52,324            50,276           67,079
           Gross profit                               6,006            5,869             2,793            7,412
           Net income                                   916              838            (2,482)           1,137
           Net income (loss) per share - basic          .14              .13              (.38)             .18
           Net Income per share - diluted               .14              .13              (.38)             .18
</TABLE>

15.  Market Information (Unaudited)

     The Company's common stock is traded on the Nasdaq National Market System
     under the symbol SMCC. The following table sets forth the high and low
     daily closing prices of the stock for each quarter of 1997 and 1998:

<TABLE>
<CAPTION>
                                                        1997                  1998

                                                    High        Low       High        Low
                                                 -------    -------    -------    -------
     <S>                                           <C>        <C>        <C>        <C>  
     First Quarter                                 8.500      6.875      9.750      6.875

     Second quarter                                9.250      5.625     10.875      6.750

     Third quarter                                 8.000      5.625      7.875      5.563

     Fourth quarter                                8.250      5.000      6.000      4.000
</TABLE>

                                      F-19
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

     Date:  March 26, 1999             SMC CORPORATION



                                       By: WILLIAM L. RICH
                                           -------------------------------------
                                           William L. Rich
                                           Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on March 26, 1999.

Signature                              Title
---------                              -----


MATHEW M. PERLOT
----------------------------------     Chief Executive Officer
Mathew M. Perlot                       and Chairman of the Board
                                       (Principal Executive Officer)


WILLIAM L. RICH
----------------------------------     Chief Financial Officer
William L. Rich                        (Principal Financial and Accounting
                                        Officer)

CURTIS W. LAWLER
----------------------------------     Director
Curtis W. Lawler


CONNIE M. PERLOT
----------------------------------     Director
Connie M. Perlot


LAWRENCE S. BLACK
----------------------------------     Director
Lawrence S. Black


JIM L. TRAUGHBER
----------------------------------     Director
Jim L. Traughber

                                                                              30
<PAGE>
                                  EXHIBIT INDEX

Exhibit
   No.      Description
-------     -----------

  3.1       Restated Articles of Incorporation; incorporated by reference to
            Exhibit 3.1 to the 1995 S-1

  3.2       Restated Bylaws; incorporated by reference to Exhibit 3.2 to the
            Registrant's Annual Report on Form 10-K for the year ended December
            31, 1994

  4.1       See Articles II and V of Exhibit 3.1 and Articles I and VI of
            Exhibit 3.2

*10.1       1994 Stock Incentive Plan, as amended; incorporated by reference to
            Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
            year ended December 31, 1994

 10.2       Stock Purchase Agreement dated March 28, 1988 among Curtis Lawler
            and Sandra Lawler, Mathew M. Perlot and the Registrant; incorporated
            by reference to Exhibit 10.2 to the 1995 S-1

 10.3       Revised form of Representatives' Warrant Agreement, including form
            of warrant; incorporated by reference to Exhibit 10.5 to the 1995
            S-1

 10.4       Manufacturer Agreement dated June 24, 1987 between General Electric
            Credit Corporation and the Registrant; incorporated by reference to
            Exhibit 10.7 to the 1995 S-1

 10.5       Repurchase Agreement dated November 30, 1993 between the Registrant
            and General Motors Acceptance Corporation; incorporated by reference
            to Exhibit 10.9 to the 1995 S-1

+10.6       Floorplan Agreement dated April 14, 1994 between ITT Commercial
            Finance Corp. and the Registrant, and amendment and amendment
            letters thereto; incorporated by reference to Exhibit 10.10 to the
            1995 S-1

 10.7       Lease Assignment and Assumption Agreement dated June 1994 between
            Beaver Coaches, Inc. and Beaver Motor Coaches, L.L.C., with Lease
            dated May 15, 1989 by and between Frank Storch and James Hogue, dba
            S&H Associates, and Beaver Coaches, Inc., and amendments thereto;
            incorporated by reference to Exhibit 10.11 to the 1995 S-1

 21.1       Subsidiaries of the Registrant

 23.1       Consent of PricewaterhouseCoopers LLP

 27.1       Financial Data Schedule

--------------

     *    This exhibit constitutes a management contract or compensatory plan or
          arrangement.

     +    Confidential treatment has been granted by the Commission for certain
          portions of this agreement.

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