# ** **

# **SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2005**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 001-12085**

 

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

(Exact name of registrant as specified in its charter)

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

 

Registrant’s telephone number, including area code: **(951) 943-6007**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES o   NO ý

 

Indicateby check mark whether the registrant is an accelerated filer.

 

YES ý   NO o

 

Indicate by check mark whether the registrantis a shell company (as defined in Exchange Act Rule 12b-2 of the ExchangeAct). Yes o  Noý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Class**               | ** ** | **Outstanding at October 10,  2005** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| Common stock, par value |       | 10,339,484                                |       |
| $0.01 per share         |       |                                      |       |

 

 

----

 

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

 

### **INDEX**

 
| ** ** | **PART I -  FINANCIAL INFORMATION**                                                                        | ** ** |
|------------|-----------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                            |       |
| Item 1.    | Financial Statements (Unaudited)  Consolidated Balance Sheets -   June 30, 2005 and December 31, 2004 |       |
|       |                                                                                                            |       |
|       | Consolidated Statements of  Operations - (restated) - Three and Six Months Ended June 30, 2005 and  2004   |       |
|       |                                                                                                            |       |
|       | Consolidated Statements of  Cash Flows - Six Months Ended June 30, 2005 and 2004                           |       |
|       |                                                                                                            |       |
|       | Notes to Consolidated  Financial Statements                                                                     |       |
|       |                                                                                                            |       |
| Item 2.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                     |       |
|       |                                                                                                            |       |
| Item 3.    | Quantitative and Qualitative  Disclosures about Market Risk                                                     |       |
|       |                                                                                                            |       |
| Item 4.    | Controls and Procedures                                                                                         |       |
|       |                                                                                                            |       |
| ** ** | **PART II  - OTHER INFORMATION**                                                                           | ** ** |
|       |                                                                                                            |       |
| Item 3.    | Defaults Upon Senior  Securities                                                                                |       |
|       |                                                                                                            |       |
| Item 6.    | Exhibits                                                                                                        |       |
|       |                                                                                                            |       |
|       | Signature                                                                                                       |       |

 

2

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**PART I, ITEM 1**

**ConsolidatedFinancial Statements**

 

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

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share and per share amounts)**

 
| ** **                                                                                                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                    | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                                                                                          |       |                    |       |                        |       |
| ASSETS                                                                                                                        |       |                    |       |                        |       |
| Current assets:                                                                                                               |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                     |       | $                       | 187        |                        | $          | 11 |   |
| Restricted cash                                                                                                               |       | 25                      |       | 251                         |       |
| Receivables, less allowance for doubtful accounts of  $210 and $137, respectively                                             |       | 24,201                  |       | 20,276                      |       |
| Inventories, net                                                                                                              |       | 81,891                  |       | 74,826                      |       |
| Deferred income taxes                                                                                                         |       | 1,089                   |       | 1,294                       |       |
| Note receivable                                                                                                               |       | 484                     |       | 1,913                       |       |
| Prepaid expenses                                                                                                              |       | 1,847                   |       | 2,924                       |       |
| Total current assets                                                                                                          |       | 109,724                 |       | 101,495                     |       |
| Property, plant and equipment, net                                                                                            |       | 38,878                  |       | 37,809                      |       |
| Other assets                                                                                                                  |       | 1,301                   |       | 1,338                       |       |
|                                                                                                                          |       | $                       | 149,903    |                        | $          | 140,642 |   |
|                                                                                                                          |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       |                    |       |                        |       |
| Current liabilities:                                                                                                          |       |                    |       |                        |       |
| Accounts payable                                                                                                              |       | $                       | 30,063     |                        | $          | 16,612 |   |
| Accrued expenses                                                                                                              |       | 26,451                  |       | 22,242                      |       |
| Line of credit                                                                                                                |       | 12,218                  |       | 12,690                      |       |
| Book overdraft                                                                                                                |       | —                  |       | 803                         |       |
| Current portion of capital leases                                                                                             |       | 51                      |       | 51                          |       |
| Total current liabilities                                                                                                     |       | 68,783                  |       | 52,398                      |       |
| Long-term accrued expenses                                                                                                    |       | 6,902                   |       | 7,069                       |       |
| Deferred income taxes                                                                                                         |       | 1,089                   |       | 1,294                       |       |
| Long-term portion of capital leases                                                                                           |       | 171                     |       | 185                         |       |
| Total liabilities                                                                                                             |       | 76,945                  |       | 60,946                      |       |
|                                                                                                                          |       |                    |       |                        |       |
| Commitments and contingent liabilities                                                                                        |       | —                  |       | —                      |       |
|                                                                                                                          |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                    |       |                    |       |                        |       |
| Preferred stock - $0.01 par value; 5,000 shares  authorized, 4,000 issued and outstanding                                     |       | —                  |       | —                      |       |
| Common stock - $0.01 par value; 25,000,000 shares  authorized, 10,339,484 and 10,302,109 issued and outstanding, respectively |       | 103                     |       | 103                         |       |
| Additional paid-in capital                                                                                                    |       | 37,563                  |       | 37,423                      |       |
| Retained earnings                                                                                                             |       | 35,292                  |       | 42,170                      |       |
| Total stockholders’ equity                                                                                               |       | 72,958                  |       | 79,696                      |       |
|                                                                                                                          |       | $                       | 149,903    |                        | $          | 140,642 |   |

 

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

 

3

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

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Three-Months Ended  June 30,** | ** ** | **Six-Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                            | ** ** | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net sales                                                     |       | $                                     | 123,225    |                                | $          | 119,282 |   | $ | 248,850 |   | $ | 222,428 |   |
| Cost of goods sold                                            |       | 121,124                               |       | 109,678                             |       | 241,134 |   | 205,730 |   |
| Gross profit                                                  |       | 2,101                                 |       | 9,604                               |       | 7,716 |   | 16,698 |   |
| Selling expenses                                              |       | 3,315                                 |       | 2,586                               |       | 6,954 |   | 5,294 |   |
| General and administrative expenses                           |       | 3,891                                 |       | 3,144                               |       | 7,143 |   | 5,579 |   |
| Operating (loss) income                                       |       | (5,105                                | )          | 3,874                               |       | (6,381 | ) | 5,825 |   |
| Interest expense                                              |       | 311                                   |       | 16                                  |       | 588 |   | 78 |   |
| Other expense (income)                                        |       | 18                                    |       | 1                                   |       | (91 | ) | (47 | ) |
| (Loss) income from continuing operations before  income taxes |       | (5,434                                | )          | 3,857                               |       | (6,878 | ) | 5,794 |   |
| Provision for income taxes                                    |       | —                                |       | 1,508                               |       | — |   | 2,228 |   |
| (Loss) income from continuing operations                      |       | (5,434                                | )          | 2,349                               |       | (6,878 | ) | 3,566 |   |
| Income (loss) from discontinued operations                    |       | —                                |       | 249                                 |       | — |   | (623 | ) |
| Provision (benefit) for income taxes                          |       | —                                |       | 111                                 |       | — |   | (213 | ) |
| Net income (loss) from discontinued operations                |       | —                                |       | 138                                 |       | — |   | (410 | ) |
| Net (loss) income                                             |       | $                                     | (5,434     | )                                   | $          | 2,487 |   | (6,878 | ) | 3,156 |   |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic (loss) earnings per common share:                       |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                                         |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.35 |   |
| Discontinued operations                                       |       | $                                     | —     |                                | $          | 0.01 |   | — |   | $ | (0.04 | ) |
| Total                                                         |       | $                                     | (0.53      | )                                   | $          | 0.24 |   | $ | (0.67 | ) | $ | 0.31 |   |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted (loss) earnings per common share:                     |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                                         |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.34 |   |
| Discontinued operations                                       |       | $                                     | —     |                                | $          | 0.01 |   | — |   | $ | (0.04 | ) |
| Total                                                         |       | $                                     | (0.53      | )                                   | $          | 0.24 |   | $ | (0.67 | ) | $ | 0.30 |   |
|                                                          |       |                                  |       |                                |       |   |   |   |   |
| Weighted average number of shares:                            |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                         |       | 10,339                                |       | 10,197                              |       | 10,337 |   | 10,194 |   |
| Diluted                                                       |       | 10,339                                |       | 10,440                              |       | 10,337 |   | 10,377 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

4

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

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Six-Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                                  |       |                                |       |   |   |
| Cash flows from operating activities:                                                 |       |                                |       |   |   |
| Net (loss) income                                                                     |       | $                                   | (6,878     | ) | $ | 3,156 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                         |       | 1,811                               |       | 1,935 |   |
| Bad debt expense (recovery)                                                           |       | 93                                  |       | (16 | ) |
| Provision for excess and obsolete inventories                                         |       | 1,635                               |       | 1,179 |   |
| Gain on asset disposal                                                                |       | (23                                 | )          | (45 | ) |
| Changes in assets and liabilities:                                                    |       |                                |       |   |   |
| Decrease in restricted cash                                                           |       | 226                                 |       | — |   |
| Increase in receivables                                                               |       | (4,018                              | )          | (10,178 | ) |
| Increase in inventories                                                               |       | (8,700                              | )          | (13,379 | ) |
| Decrease (increase) in prepaid expenses                                               |       | 1,077                               |       | (335 | ) |
| Increase in accounts payable                                                          |       | 13,451                              |       | 13,030 |   |
| Increase in accrued expenses                                                          |       | 4,042                               |       | 3,273 |   |
|                                                                                  |       |                                |       |   |   |
| Net cash provided by (used in) operating activities                                   |       | 2,716                               |       | (1,380 | ) |
|                                                                                  |       |                                |       |   |   |
| Cash flows from investing activities:                                                 |       |                                |       |   |   |
| Decrease in other assets                                                              |       | 37                                  |       | 21 |   |
| Repayments on note receivable                                                         |       | 1,429                               |       | — |   |
| Proceeds from sale of assets                                                          |       | 32                                  |       | 1,932 |   |
| Purchase of property, plant and equipment                                             |       | (2,889                              | )          | (2,351 | ) |
|                                                                                  |       |                                |       |   |   |
| Net cash used in investing activities                                                 |       | (1,391                              | )          | (398 | ) |
|                                                                                  |       |                                |       |   |   |
| Cash flows from financing activities:                                                 |       |                                |       |   |   |
| Net payments on line of credit                                                        |       | (472                                | )          | — |   |
| Decrease in book overdraft                                                            |       | (803                                | )          | — |   |
| Principal payments on capital leases                                                  |       | (14                                 | )          | — |   |
| Principal payments on long-term debt                                                  |       | —                              |       | (12 | ) |
| Proceeds from issuance of common stock                                                |       | 140                                 |       | 94 |   |
|                                                                                  |       |                                |       |   |   |
| Net cash (used in) provided by financing activities                                   |       | (1,149                              | )          | 82 |   |
| Net increase (decrease) in cash and cash equivalents                                  |       | 176                                 |       | (1,696 | ) |
| Cash and cash equivalents, beginning of the year                                      |       | 11                                  |       | 2,059 |   |
| Cash and cash equivalents, end of period                                              |       | $                                   | 187        |   | $ | 363 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

5

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

## **NOTE 1 – BASIS OFPRESENTATION**

 

**General**

 

The consolidated financial statements include the financial statementsof National RV Holdings, Inc. (the “Company”) and its wholly-ownedsubsidiaries National RV, Inc. (“National RV”) and Country Coach, Inc.(“Country Coach”). As further discussed in Note 9, the operating results of thetravel trailer division have been reclassified as a discontinued operation forthe prior periods.

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete consolidated financial statements.These consolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31,2004 and notes thereto included in the Company’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on October 11, 2005.

 

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting of normal recurring adjustments, to statefairly the financial position, the results of operations and cash flows for allperiods presented, including the elimination of significant intercompanyaccounts in consolidation. In addition to the restatement adjustments discussedin Note 2, certain reclassifications have been made to prior period amounts toconform to current period presentation.

 

***SeasonalNature of Business Activities***

 

Results for theinterim period are not necessarily indicative of the results for an entireyear. Seasonal factors, over which the Company has no control, has an effect onthe demand for the Company’s products. Demand in the RV industrycharacteristically declines over the winter season, while sales are generallyhighest during the spring and summer months.

 

***Useof Accounting Estimates***

 

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and judgments that affect the reportedamount of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reportedamount of revenues and expenses for each period. On an on-going basis,management evaluates its estimates and judgments. Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying value of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

***Historyof Recent Losses***

 

The Company experienced anet loss in the first six months of 2005 of $6.9 million compared to a netprofit of $3.2 during the same period last year.  The Company provided cash from operatingactivities in the first six months of 2005 of $2.7 million compared to a use ofcash of $1.4 million for the same period last year.

 

6

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The Company has incurrednet losses of $9.3 million and $8.4 million for the years ended December 31,2004 and 2003, respectively.  The Companyhas used cash from operating activities of $15.8 million for the year ended December 31,2004 and provided cash from operating activities of $8.1 million for the yearended December 31, 2003.  The RV industryhas been historically cyclical and subject to downturns during periods of weakeconomic conditions.  With rising fuelprices and continued economic uncertainty, the Company experienced a furtherdecline in demand for its products in 2005. These conditions led the Company to assess its short-term liquidityneeds and plans to achieve profitability.

 

Management’s plan toachieve operational profitability includes continuing or starting a variety ofinitiatives to improve its earnings and working capital position, including: i)new product introductions in the fourth quarter of 2005 with additional newproduct and floor plan introductions in the first half of 2006, ii) new dealeradditions to fill open market areas or replace under-performing dealers, iii)reductions in all categories of inventory, iv) head count re-balancings tocurrent retail sales-supported production levels, v) engineering reviews ofmaterial components for the removal of non-value added items to reduce bothmaterial and assembly costs, vi) continued thorough motorhome inspections toimprove quality and to more timely report failures, and vii) manufacturing costreductions resulting from the continued implementation of lean manufacturingconcepts.

 

Inorder to fund on-going operations in the short-term, the Company remainsdependent upon its ability to utilize outside financing through borrowings onits line-of-credit until it achieves sustained operational profitabilitythrough a combination of increased sales, cost reductions and improved productmargins.  After consideration of therestrictions of the borrowing capacity noted in Note 5, the Company believes ithas sufficient financial resources to fund its operations in the short-term.  However, the Company’s ability to meet itsobligations in the long-term is dependent on its ability to generate positivecash flows from operations and is dependent on continued borrowings under itsline of credit.  If management is unableto achieve its operational profitability plan or unforeseen events occur andits existing line of credit is insufficient to allow the Company to meet itsobligations, the Company may need to implement alternative plans that couldinclude long-term financing collateralized by real estate (which is presentlyunencumbered) or obtaining additional debt financing, additional reductions inoperating costs, deferral of capital expenditures, and further reductions inworking capital.  While the Companybelieves that it could successfully complete the alternative plans, if necessary,there can be no assurance that such alternatives would be available onacceptable terms and conditions or that the Company would be successful in itsimplementation of such plans.

 

## **NOTE 2 – RESTATEMENT OF APRIOR PERIOD**

 

The consolidatedfinancial statements for the three and six-months ended June 30, 2004 reflectthe restatement of certain dealer sales incentives, which include rebates andfloorplan interest reimbursement paid to dealers to promote the sale of theproduct and retail incentives paid directly to dealer retail salespersons topromote the sale of the product and the return of sale and warrantyinformation. The consolidated statement of operations for the three andsix-months ended June 30, 2004 has been restated to reclassify these salesincentives from selling expenses to a reduction of revenue, as required byEmerging Issues Task Force (“EITF”) Issue No. 01-09, “Accounting forConsideration Given by a Vendor to a Customer (including a Reseller) of theVendor’s Products. 

 

The following tablepresents the effect of changes in the consolidated statement of operationscaused by the restatement.

 

7

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**Statementsof Operations**

 
| ** **         | ** ** | **Three-Months Ended  June 30, 2004** | ** ** | **Six-Months Ended  June 30, 2004** | ** ** |
|--------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)** | ** ** | **As  previously  reported**               | ** ** | **As  restated**                         | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| Net sales          |       | $                                          | 119,736    |                                     | $          | 119,282 |   | $ | 223,520 |   | $ | 222,428 |   |
| Gross profit       |       | $                                          | 10,058     |                                     | $          | 9,604 |   | $ | 17,790 |   | $ | 16,698 |   |
| Selling expenses   |       | $                                          | 3,040      |                                     | $          | 2,586 |   | $ | 6,386 |   | $ | 5,294 |   |
| Net income         |       | $                                          | 2,487      |                                     | $          | 2,487 |   | $ | 3,156 |   | $ | 3,156 |   |

 

**NOTE 3 –RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In November 2004,the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,“Inventory Costs-an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151requires that accounting for items such as idle facility expense, freight,handling costs, and wasted materials (spoilage) be recognized as current periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. This Statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The provision of thisStatement shall be applied prospectively. The Company has not determined theimpact that adoption of this standard will have on its consolidated financialstatements.

 

In December 2004,the FASB issued FSP 109-1, “Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities Provided by the American Jobs Creation Act of 2004.” The AmericanJobs Creation Act, or AJCA, introduces a special 9% tax deduction on qualifiedproduction activities. FAS 109-1 clarifies that this tax deduction should beaccounted for as a special tax deduction in accordance with Statement 109. FSP109-1 is effective upon its issuance. The adoption of FSP 109-1 did not have amaterial impact on the Company’s consolidated financial statements.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R),which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,”(SFAS 123) and supercedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” SFAS No. 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the first annualperiod after June 15, 2005, with early adoption encouraged. The pro formadisclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. The Company is required toadopt SFAS No. 123R in the first calendar quarter of 2006, beginning January 1,2006. Under SFAS No. 123R, the Company must determine the appropriate fairvalue model to be used for valuing share-based payments, the amortizationmethod for compensation cost and the transition method to be used at date ofadoption. The transition methods include modified prospective and modifiedretrospective adoption options.

 

8

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Under the modifiedretrospective option, prior periods may be restated either as of the beginningof the year of adoption or for all periods presented. The modified prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS No. 123R, while the modified retrospective method would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. The Company is evaluating therequirements of SFAS 123R. The Company has not yet determined the methodof adoption or the effect of adopting SFAS No. 123R, and the Company hasnot determined whether the adoption will result in amounts that are similar tothe current pro forma disclosures under SFAS No. 123.

 

InJune 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections–a replacement of APB No. 20 and FAS No. 3” (“SFAS154”). SFAS 154 provides guidance on the accounting for and reporting ofaccounting changes and error corrections. It establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. SFAS 154 also providesguidance for determining whether retrospective application of a change inaccounting principle is impracticable and for reporting a change whenretrospective application is impracticable. The correction of an error inpreviously issued financial statements is not an accounting change. However,the reporting of an error correction involves adjustments to previously issuedfinancial statements similar to those generally applicable to reporting anaccounting change retrospectively. Therefore, the reporting of a correction of anerror by restating previously issued financial statements is also addressed bySFAS 154. SFAS 154 is required to be adopted in fiscal years beginning after December 15,2005. The Company does not believe that adoption of this standard will have animpact on its consolidated financial statements.

 

## **NOTE 4 – SUPPLEMENTALBALANCE SHEET INFORMATION**

 

Inventories consist ofthe following (in thousands):

 
| ** **        | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
|              |       |                    |       |                        |       |
| Finished goods    |       | $                       | 13,997     |                        | $          | 16,379 |   |
| Work-in-process   |       | 40,540                  |       | 35,388                      |       |
| Raw materials     |       | 20,073                  |       | 18,398                      |       |
| Chassis           |       | 7,281                   |       | 4,661                       |       |
| Total inventories |       | $                       | 81,891     |                        | $          | 74,826 |   |

 

Accrued expenses consistof the following (in thousands):

 
| ** **                                        | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                              |       |                    |       |                        |       |
| Current accrued expenses:                         |       |                    |       |                        |       |
| Workers’ compensation self-insurance reserve |       | $                       | 3,032      |                        | $          | 2,720 |   |
| Warranty reserve                                  |       | 9,775                   |       | 8,330                       |       |
| Payroll and other accrued expenses                |       | 13,644                  |       | 11,192                      |       |
| Total current accrued expenses                    |       | $                       | 26,451     |                        | $          | 22,242 |   |
|                                              |       |                    |       |                        |       |
| Long-term accrued expenses:                       |       |                    |       |                        |       |
| Workers’ compensation self-insurance reserve |       | $                       | 6,083      |                        | $          | 6,151 |   |
| Warranty reserve                                  |       | 142                     |       | 175                         |       |
| Deferred compensation                             |       | 677                     |       | 743                         |       |
| Total long-term accrued expenses                  |       | $                       | 6,902      |                        | $          | 7,069 |   |

 

9

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## **NOTE 5 – CREDIT FACILITY**

 

At June 30, 2005, the Company had an asset-based revolving creditfacility of $20 million with UPSC, which was scheduled to expire in August 2005.At June 30, 2005 and December 31, 2004, the Company had outstandingloans under the line-of-credit totaling $12.2 and $12.7 million, respectively.At June 30, 2005, the Company was in default with the covenant requiringdelivery of the Company’s annual financial statements within a required periodof time and on that date the Company received an extension letter from UPSCwaiving the default on the Company’s required delivery date of its annualfinancial statements and extending the required delivery date of the annualfinancial statements to August 31, 2005 (which date was extended to December 15,2005 as part of the execution of the new credit facility discussed below).  At June 30, 2005, the interest rate onthe outstanding borrowings under the line-of-credit was 7.00%. The weightedaverage interest rate for the borrowings under the line-of-credit during thesix-month period ended June 30, 2005 and 2004 was 6.47% and 4.80%,respectively.

 

On August 12, 2005, the original facility was replaced by a newthree-year asset-based revolving credit facility with UPSC and Wells Fargo Bankfor $25 million, with the Company having the option, subject to certainconditions, of increasing the revolver in $5 million increments up to a totalcredit facility of $40 million. On September 29, 2005, the Companyeffected such an increase in the amount of the credit facility from $25 millionto $30 million. The new credit facility is collateralized by all of the Company’sassets other than real estate. Borrowing availability is based on eligibleaccounts receivable and inventory. The facility also includes a requirement tomaintain a blocked account arrangement, whereby remittances from the Company’scustomers reduce the debt outstanding. The new credit facility contains, amongother provisions, certain financial covenants, including funded debt to EBITDA,and a fixed charge coverage ratio. If these financial covenants are not met,the Company’s availability under the credit facility will be reduced. The Company did not meet these financialcovenants as of June 30, 2005, and currently does not expect to until September 30,2006.  Until these covenants are met, theCompany’s borrowing availability under its $40 million facility is limited toan amount between $27 to $32 million, depending on eligible inventory andaccounts receivable. Initial amounts borrowed under the revolving creditfacility bear interest at the prime rate listed in the Wall Street Journal plus0.50 percentage points and may be subsequently adjusted down based on atrailing twelve month funded debt to EBITDA calculation.

 

## **NOTE 6 – COMMITMENTS ANDCONTINGENCIES**

 

Mostof the Company’s motorhome sales are made on terms requiring payment within 15business days or less of the dealer’s receipt of the unit. Most dealers financeall, or substantially all, of the purchase price of their inventory under floorplan arrangements with banks or finance companies under which the lender paysthe Company directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s maximum potential exposure underthese agreements approximated $177 million at June 30, 2005. As withreceivables, the risk of loss under the repurchase agreements was spread over anumber of dealers and lenders and was reduced by the resale value of the RVs,which the Company would be required to repurchase. Losses under theseagreements have not been material in the past and management does not believethat any future losses under such

 

10

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agreementswill have a material adverse effect on the Company’s consolidated financialposition, results of operations, or cash flows.

 

TheCompany is involved in legal proceedings in the ordinary course of business,including a variety of warranty, “lemon law” and product liability claimstypical in the recreation vehicle industry. With respect to product liabilityclaims, the Company’s insurance policies cover, in whole or in part, defensecosts and liability costs for personal injury or property damage (excludingdamage to Company motorhomes). While it is not possible to estimate withcertainty the ultimate legal and financial liability with respect to this litigation,management is of the opinion that while the final resolution of any suchlitigation may have an impact on the Company’s consolidated results for aparticular reporting period, the ultimate disposition of such litigation willnot have any material adverse effect on the Company’s financial position,results of operations or liquidity.

 

The Company’s warrantyreserve is established based on its best estimate of the amounts necessary tosettle future and existing claims on products sold as of the balance sheetdate. The Company records an estimate for future warranty-related costs basedon recent actual warranty claims. Also, as part of the warranty reserve theCompany’s recall reserve is established, as necessary, based on management’sestimate of the cost per unit to remedy the problem and the estimated number ofunits that will ultimately be brought in for the repair.

 

Six Months Ended June 30, 2005 (in thousands)

 
| ** **       | ** ** | **Beginning  Balance** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Ending  Balance** | ** ** |
|------------------|------------|------------------------|------------|---------------|------------|----------------|------------|---------------------|------------|
| Warranty reserve |       | $                      | 8,505      |          | $          | 9,792          |       | $                   | 8,380      |   | $ | 9,917 |   |
|                  |            |                        |            |               |            |                |            |                     |            |  |  |  |  |

 

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

 

## **NOTE 7 – STOCK BASEDCOMPENSATION**

 

The Company has stockoption plans that enable it to offer equity participation to employees,officers, and directors as well as certain non-employees. Stock options may begranted as incentive or nonqualified options. The Company has four fixed optionplans that reserve shares of common stock for issuance to executives, keyemployees, consultants, and directors. The Company has also issued fixedoptions outside of such plans pursuant to individual stock option agreements.Options granted to non-employee directors generally vest immediately upon grantand expire five to ten years from the date of grant. Options granted toemployees, including employee directors, generally vest in three equal annualinstallments and expire five to ten years from the date of grant. The price ofthe options granted pursuant to these plans will not be less than 100 percentof the market value of the shares on the date of grant. There were no optionsgranted for the three-month period ended June 30, 2005. There were 24,000options granted during the three-month period ended June 30, 2004.

 

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

 

11

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The following tableillustrates the effect on net (loss) income and (loss) earnings per share ifthe Company had applied the fair value recognition provisions to stock-basedemployee compensation (in thousands, except per share amounts):

 
| ** **                                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| (Loss) income from continuing operations                                                                                              |       | $                                     | (5,434)    |                                | $          | 2,349 |   | $ | (6,878) |   | $ | 3,566 |   |
| Income (loss) from discontinued operations                                                                                            |       | —                                |       | 138                                 |       | — |   | (410 | ) |
| Net (loss) income - as reported                                                                                                       |       | (5,434                                | )          | 2,487                               |       | (6,878 | ) | 3,156 |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 147                                   |       | 170                                 |       | 341 |   | 289 |   |
| Pro forma net (loss) income                                                                                                           |       | $                                     | (5,581     | )                                   | $          | 2,317 |   | $ | (7,219 | ) | $ | 2,867 |   |
|                                                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Basic (loss) earnings per share as reported                                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                                                                                                                 |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.35 |   |
| Discontinued operations                                                                                                               |       | —                                |       | 0.01                                |       | — |   | (0.04 | ) |
| Total basic (loss) earnings per share                                                                                                 |       | (0.53                                 | )          | 0.24                                |       | (0.67 | ) | 0.31 |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.01                                  |       | 0.01                                |       | 0.03 |   | 0.03 |   |
| Basic earnings (loss) per share pro forma                                                                                             |       | $                                     | (0.54      | )                                   | $          | 0.23 |   | $ | (0.70 | ) | $ | 0.28 |   |
|                                                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Diluted (loss) earnings per share as reported                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                                                                                                                 |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.34 |   |
| Discontinued operations                                                                                                               |       | —                                |       | 0.01                                |       | — |   | (0.04 | ) |
| Total diluted (loss) earnings per share                                                                                               |       | (0.53                                 | )          | 0.24                                |       | (0.67 | ) | 0.30 |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.01                                  |       | 0.02                                |       | 0.03 |   | 0.02 |   |
| Basic earnings (loss) per share pro forma                                                                                             |       | $                                     | (0.54      | )                                   | $          | 0.22 |   | $ | (0.70 | ) | $ | 0.28 |   |

 

The weighted-average fairvalue of the stock options has been estimated on the date of grant using theBlack-Scholes option-pricing model. There were no new stock option grantsduring the six-month period ended June 30, 2005. The assumptions used tocalculate weighted-average fair value are listed below for new grants duringthe three-month period ended June 30, 2004.

 
| ** **              | ** ** | **June 30, 2004** | ** ** |
|-------------------------|------------|------------------------|------------|
|                    |       |                   |       |
| Dividend yield          |       | 0.0                    | %          |
| Expected volatility     |       | 279.1                  | %          |
| Risk-free interest rate |       | 3.45                   | %          |
| Expected lives          |       | 4 years                |       |

 

## **NOTE 8 – INCOME TAXES**

 

As of June 30, 2005,the Company has a current deferred tax asset of $1.1 million and a long-termdeferred tax liability of $1.1 million. During the three and six-month

 

12

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periods ended June 30,2005, the Company recorded a non-cash charge of $1.8 million and $2.4 million,respectively, to increase the valuation allowance to offset the change in netdeferred tax assets.  Recent cumulativelosses, the downturn in current market conditions and its impact on near termearnings led the Company to conclude that it was more likely than not that itsrecorded net deferred tax asset will not be realized. The Company expects torecord a full valuation allowance on future tax benefits until it can sustainan appropriate level of profitability and until such time, the Company wouldnot expect to recognize any significant tax benefits in its future results ofoperations.

 

## **NOTE 9 – DISCONTINUEDOPERATIONS**

 

On September 24,2004, the Company sold its travel trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The sale wasdesigned to allow the Company to further concentrate its efforts and resourceson its growing motorhome business. The total selling price of the business was$3.2 million. The sale included inventory totaling $2.8 million and equipmenttotaling $0.1 million. In addition, the Company recognized a $0.3 million gainon the sale. Weekend Warrior paid $0.5 million at closing with the balance tobe paid in ten equal monthly payments. Furthermore, a payment of 1% of monthlysales for other assets and trademarks will be made on a monthly basis over atwelve-month period ending October 10, 2005 with a minimum due of $0.3million which has been included in note receivable in the accompanyingconsolidated balance sheets. The Company also entered into a subleaseagreement, which allows Weekend Warrior to lease a portion of the Company’sfacilities for up to twelve months.  Netsales from discontinued operations were $6.7 million and $13.3 million for thethree and six-months ended June 30, 2004.

 

## **NOTE 10 – (LOSS) EARNINGSPER SHARE**

 

Basic (loss) earnings per share is computed by dividing net (loss)earnings by the weighted average number of common shares outstanding for theperiod. Diluted earnings per share reflect the potential dilution that couldoccur if options were exercised or converted into common stock. Shares attributableto the exercise of outstanding options that are anti-dilutive are excluded fromthe calculation of diluted loss per share.

 

All amounts in thousands except per share amounts.

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| (Loss) income from continuing operations           |       | $                                     | (5,434)    |                                | $          | 2,349 |   | $ | (6,878) |   | $ | 3,566 |   |
| Income (loss) from discontinued operations         |       | —                                |       | 138                                 |       | — |   | (410 | ) |
| Net (loss) income                                  |       | $                                     | (5,434     | )                                   | $          | 2,487 |   | $ | (6,878 | ) | $ | 3,156 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic weighted average common shares outstanding   |       | 10,339                                |       | 10,197                              |       | 10,337 |   | 10,194 |   |
| Effect of dilutive stock options                   |       | —                                |       | 243                                 |       | — |   | 183 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Diluted weighted average common shares outstanding |       | 10,339                                |       | 10,440                              |       | 10,337 |   | 10,377 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic (loss) earnings per share as reported        |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                              |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.35 |   |
| Discontinued operations                            |       | —                                |       | 0.01                                |       | — |   | (0.04 | ) |
| Total basic (loss) earnings per share              |       | $                                     | (0.53      | )                                   | $          | 0.24 |   | $ | (0.67 | ) | $ | 0.31 |   |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Diluted (loss) earnings per share as reported      |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                              |       | $                                     | (0.53      | )                                   | $          | 0.23 |   | $ | (0.67 | ) | $ | 0.34 |   |
| Discontinued operations                            |       | —                                |       | 0.01                                |       | — |   | (0.04 | ) |
| Total diluted (loss) earnings per share            |       | $                                     | (0.53      | )                                   | $          | 0.24 |   | $ | (0.67 | ) | $ | 0.30 |   |

 

13

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For the three monthsended June 30, 2005 and 2004, excluded from the computation of diluted earningsper share were stock options to purchase 911,844 shares and 12,000 shares,respectively. For the six months ended June 30, 2005 and 2004, excludedfrom the computation of diluted earnings per share were stock options topurchase 911,844 and 227,000 shares, respectively.

 

## **NOTE 11 – SUBSEQUENTEVENTS**

 

Asmore fully discussed in Note 5, the Company executed a new three-yearasset-based revolving credit facility on August 12, 2005 with UPSC andWells Fargo Bank for $25 million, with the Company having the option, subjectto certain conditions, of increasing the revolver in $5 million increments upto a total credit facility of $40 million. On September 29, 2005, the Company effected such an increase in theamount of the credit facility from $25 million to $30 million.

 

14

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**NATIONALR.V. HOLDINGS, INC.**

**PART I, ITEM 2 - MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## **Disclosure RegardingForward Looking Statements**

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Investors are cautioned that forward-looking statements are inherentlyuncertain. Actual performance and results may differ materially from thatprojected or suggested herein due to certain risks and uncertainties including,without limitation, potential fluctuations in the Company’s operating results;any material weaknesses in the Company’s internal control over financialreporting or the failure to remediate any of the previously disclosed materialweaknesses; any failure to implement required new or improved controls;resumption of losses; seasonality and economic conditions; dependence oncertain dealers and concentration of dealers in certain regions; dependence onchassis suppliers; potential liabilities under repurchase agreements;competition; government regulation; warranty claims; and product liabilityclaims. Certain risks and uncertainties that could cause actual results todiffer materially from that projected or suggested are set forth in the Form 10-K,in the Company’s filings with the Securities and Exchange Commission (the “SEC”)and the Company’s public announcements, copies of which are available from theSEC or from the Company upon request. The Company undertakes no obligation torevise or update publicly any forward-looking statements for any reason.

 

## **Restatement of FinancialStatements**

 

Thefollowing discussion and analysis gives effect to the restatement for the threeand six-months ended June 30, 2004 described in Note 2 to the unaudited consolidatedfinancial statements for the three and six-months ended June 30, 2005 containedherein.  Accordingly, certain of the dataset forth in this section is not comparable to discussions and data in ourpreviously filed annual and quarterly reports for corresponding periods.

 

The following tablepresents the effect of changes in the consolidated statement of operationscaused by the restatement.

 

**Statementsof Operations**

 
| ** **         | ** ** | **Three-Months Ended  June 30, 2004** | ** ** | **Six-Months Ended  June 30, 2004** | ** ** |
|--------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)** | ** ** | **As  previously  reported**               | ** ** | **As  restated**                         | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| Net sales          |       | $                                          | 119,736    |                                     | $          | 119,282 |   | $ | 223,520 |   | $ | 222,428 |   |
| Gross profit       |       | $                                          | 10,058     |                                     | $          | 9,604 |   | $ | 17,790 |   | $ | 16,698 |   |
| Selling expenses   |       | $                                          | 3,040      |                                     | $          | 2,586 |   | $ | 6,386 |   | $ | 5,294 |   |
| Net income         |       | $                                          | 2,487      |                                     | $          | 2,487 |   | $ | 3,156 |   | $ | 3,156 |   |

 

## **Critical AccountingPolicies**

 

Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States of Americarequires management to make judgements, assumptions and estimates that affectthe amounts reported.  See the discussionof critical accounting policies in our Annual Report on Form 10-K for theyear ended December 31, 2004.  Forthe quarter ended June 30, 2005, there were no unusual uncertainties of amaterial nature involved in the application of these principles nor anyunusual, material variation in estimates related to these principles.

 

## **Executive Overview**

 

National R.V. Holdings, Inc. (“the Company”) operates in onebusiness segment that designs, manufactures, and markets motorhomes through itswholly owned subsidiaries, National R.V., Inc. (NRV) and Country Coach, Inc.(CCI). The RVs are marketed primarily in the United States of America by NRVunder the Dolphin, Islander, Sea Breeze, Tradewinds and Tropi-Cal brand namesand by CCI under brand names including Affinity, Allure, Inspire, Intrigue,Magna and Prevost by Country Coach.

 

The following table setsforth for the periods indicated the percentage of net sales represented by certainitems reflected in the Company’s Consolidated Statements of Operations:

 

15

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| ** **                                                    | ** ** | **Three-Months Ended  June 30,** | ** ** | **Six-Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                            | ** ** | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net sales                                                     |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                            |       | 98.3                                  |       | 91.9                                |       | 96.9 |   | 92.5 |   |
| Gross profit                                                  |       | 1.7                                   |       | 8.1                                 |       | 3.1 |   | 7.5 |   |
| Selling expenses                                              |       | 2.7                                   |       | 2.2                                 |       | 2.8 |   | 2.4 |   |
| General and administrative expenses                           |       | 3.1                                   |       | 2.7                                 |       | 2.9 |   | 2.5 |   |
| Operating (loss) income                                       |       | (4.1                                  | )          | 3.2                                 |       | (2.6 | ) | 2.6 |   |
| Interest expense                                              |       | 0.3                                   |       | 0.0                                 |       | 0.2 |   | 0.0 |   |
| Other expense (income)                                        |       | 0.0                                   |       | 0.0                                 |       | (0.0 | ) | (0.0 | ) |
| (Loss) income from continuing operations before  income taxes |       | (4.4                                  | )          | 3.2                                 |       | (2.8 | ) | 2.6 |   |
| Provision for income taxes                                    |       | 0.0                                   |       | 1.2                                 |       | 0.0 |   | 1.0 |   |
| (Loss) income from continuing operations                      |       | (4.4                                  | )          | 2.0                                 |       | (2.8 | ) | 1.6 |   |
| (Income) loss from discontinued operations                    |       | 0.0                                   |       | (0.2                                | )          | 0.0 |   | 0.3 |   |
| Provision (benefit) for income taxes                          |       | 0.0                                   |       | 0.1                                 |       | 0.0 |   | (0.1 | ) |
| Net income (loss) from discontinued operations                |       | 0.0                                   |       | 0.1                                 |       | 0.0 |   | (0.2 | ) |
| Net (loss) income                                             |       | (4.4                                  | )%         | 2.1                                 | %          | (2.8 | )% | 1.4 |   |

 

During the second quarterof 2005, the Company incurred a net loss of $5.4 million compared to net incomeof $2.3 million from continuing operations for the same quarter last year. Thesecond quarter of 2005 loss per diluted share was $0.53 compared to earningsper diluted share from continuing operations of $0.23 for the second quarter of2004. The net loss for the first six months ended June 30, 2005 was $6.9million, or $0.67 per diluted share, as compared to net income of $3.6 millionfrom continuing operations, or $0.34 per diluted share, for the first sixmonths ended June 30, 2004.

 

## **Looking Forward**

 

Many of the sameobjectives the Company addressed last year remain in place for the currentyear, including aggressive product development, improved productivity and costcontrol, and increasing its dealer body.

 

During the second quarterof 2005, the Company rolled out its remaining 2006 model-year products.

 

Improved productivity andcost control remain significant objectives. The Company is making a significantinvestment this year in manufacturing engineers at its Country Coach facilitiesin an effort to increase productivity. Controlling costs also remains a highpriority, specifically in the manufacturing cost areas, warranty, and workers’compensation. The Company continues to focus on improving the quality of itsmotorhomes to increase consumer satisfaction and decrease future warrantycosts. Also, the Company has instituted a number of safety programs, which haveresulted in measurably reduced workers’ compensation costs. The Company expectsfurther progress in containing its costs as it continues to implement leanmanufacturing concepts.

 

A continued focus ondealer acquisition and enhanced training programs for the Company’s workforce,service centers, dealers, and consumers are also key initiatives. The Companyhas undertaken efforts in the areas of safety; with new distance learningcapabilities, the Company is looking forward to broadcasting its servicetraining programs directly to dealers and service providers, driving themovement for increased customer satisfaction in areas of technical maintenance.In addition, factory-training programs are providing the Company’s

 

16

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customers a basis forself-diagnostics and a better understanding of the equipment they areoperating.

 

The Recreational VehicleIndustry Association’s (RVIA) market expansion campaign, GO RVing, now in itseighth year, is fostering greater awareness and garnering media attention.Though RVIA expects substantial growth for the industry in the long-term ordecade ahead, RVIA expects a decline in the industry in the near term or eachof the years 2005 and 2006.

 

## **Results of Operations**

 

**Comparisonof Continuing Operations for the Three and Six Months Ended June 30, 2005to the Three and Six Months Ended June 30, 2004:**

 

(Amounts in tables are inthousands, except percentages)

 

**Net sales**

 
| ** **                | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | **(As Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
|                      |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Net sales                 |       | $                                                     | 123,225    |                                                | 3.3        | % | $ | 119,282 |   | $ | 248,850 |   | 11.9 | % | $ | 222,428 |   |
| as a percent of net sales |       | 100.0                                                 | %          |                                                |       | 100.0 | % | 100.0 | % |   |   | 100.0 | % |
|                           |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

Net sales of $123.2million for the three-month period ended June 30, 2005 increased $3.9million or 3.3% from the same three-month period ended June 30, 2004.Wholesale unit shipments of diesel motorhomes for the three-month period ended June 30,2005 were 379, down 15% from 444 units during the same period last year.Shipments of gas motorhomes for three-month period ended June 30, 2005were 369, flat compared to the 369 gas units sold during the same period lastyear.

 

Net sales of $248.9million for the six months ended June 30, 2005 increased $26.4 million or11.9% from the same period last year. Wholesale unit shipments of dieselmotorhomes were 785, up 7% from 737 units during the same period last year.Wholesale unit shipments of gas motorhomes were 770, down 11% from 868 unitsduring the same period last year.

 

The increase in net salesis mainly attributable to the change in the sales mix to include more of thehighline diesel motorhomes, which have higher average sales prices than midlinediesel units and gas powered units.

 

**Grossprofit and gross profit margin**

 
| ** **          | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **          | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **          | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | **(As Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
|                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Gross profit        |       | $                                                     | 2,101      |                                                | (78.1      | )% | $ | 9,604 |   | $ | 7,716 |   | (53.8 | )% | $ | 16,698 |   |
| Gross profit margin |       | 1.7                                                   | %          | (79.0                                               | )%         | 8.1 | % | 3.1 | % | (58.7 | )% | 7.5 | % |
|                     |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The gross profit marginfor the three-month period ended June 30, 2005 was 1.7% compared to an8.1% gross margin for the same period last year. For the first six months of2005, the gross profit margin was 3.1% compared to a 7.5% gross profit marginfor the same period last year. The primary factors that led to the decrease ingross margins were higher sales incentives, higher warranty costs, andproduction inefficiencies, partially offset by reduced workers’ compensationcosts.

 

17

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**Sellingexpenses**

 
| ** **                | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | **(As Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(As Restated)** | ** ** |
|                      |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Selling expenses          |       | $                                                     | 3,315      |                                                | 28.2       | % | $ | 2,586 |   | $ | 6,954 |   | 31.4 | % | $ | 5,294 |   |
| as a percent of net sales |       | 2.7                                                   | %          |                                                |       | 2.2 | % | 2.8 | % |   |   | 2.4 | % |
|                           |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Selling expensesincreased $0.7 million or 28.2% for the three-month period ended June 30,2005 over the same period last year. Selling expenses for the six months ended June 30,2005 increased $1.7 million or 31.4% over the same period last year. Sellingexpenses increased mainly due to higher media and marketing costs to supportthe Company’s dealer expansion and other initiatives, higher dealer conventionexpenses, and higher sales commissions resulting from higher sales.

 

**Generaland administrative expenses**

 
| ** **                          | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
|                                |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| General and administrative expenses |       | $                                                     | 3,891      |                                                | 23.8       | % | $ | 3,144 |   | $ | 7,143 |   | 28.0 | % | $ | 5,579 |   |
| as a percent of net sales           |       | 3.1                                                   | %          |                                                |       | 2.7 | % | 2.9 | % |   |   | 2.5 | % |
|                                     |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses totaling $3.9 million for the three-month period ended June 30,2005 were up $0.7 million, or 23.8%, compared to the same period last year. Forthe first six months of 2005, general and administrative expenses were $7.1million, representing an increase of $1.6 million, or 28.0%, compared to thesame period last year. The increase in general and administrative expenses isdue to higher audit and professional fees, as well as higher staffing levels tosupport increased sales and production and increased staffing to supportongoing Sarbanes-Oxley compliance.

 

**Interestexpense**

 
| ** **                | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
|                      |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest expense          |       | $                                                     | 311        |                                                | 1,843.8    | % | $ | 16 |   | $ | 588 |   | 653.8 | % | $ | 78 |   |
| as a percent of net sales |       | 0.3                                                   | %          |                                                |       | 0.0 | % | 0.2 | % |   |   | 0.0 | % |
|                           |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expense for thethree-month periods ended June 30, 2005 and 2004 was 311,000 and $16,000,respectively. For the first six months of 2005, interest expense was $588,000compared to $78,000 for the same period last year. The increase in interestexpense is attributable to higher borrowings on the line of credit whencompared to the same period last year.

 

**Otherexpense (income)**

 
| ** **                | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
|                      |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Other expense (income)    |       | $                                                     | 18         |                                                | 1,700.0    | % | $ | 1 |   | $ | (91 | ) | 93.6 | % | $ | (47 | ) |
| as a percent of net sales |       | 0.0                                                   | %          |                                                |       | 0.0 | % | 0.0 | % |   |   | 0.0 | % |
|                           |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Otherexpense for the three-month periods ended June 30, 2005 and 2004 wasimmaterial. Other income for the six months ended June 30, 2005 was mainlyinterest and fees related to the note receivable. Other income for the sixmonths ended June 30, 2004 was mainly the gain on the sale of realproperty in Florida. As a percentage of net sales, the amount is immaterial.

 

**Provisionfor income taxes**

 
| ** **                 | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
|                       |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Provision for income taxes |       | $                                                     | —     |                                                | (100.0     | )% | $ | 1,508 |   | $ | — |   | (100.0 | )% | $ | 2,228 |   |
| as a percent of net sales  |       | 0.0                                                   | %          |                                                |       | 1.2 | % | 0.0 | % |   |   | 1.0 | % |
|                            |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As discussed in Note 8 tothe consolidated financial statements included in this Form 10-Q, recentcumulative losses, the downturn in current market conditions and its impact onnear-term earnings led the Company to conclude that it was more likely than notthat its net deferred tax asset will not be realized. As a result, the Companycontinues to record a full valuation allowance against its net deferred taxassets; consequently, the Company’s current effective tax rate for 2005 iszero. The effective tax rate for the three and six months ended June 30,2004 was 39.4% and 39.0%. The Company expects to record a full valuationallowance on future tax benefits until it can sustain an appropriate level ofprofitability.

 

**Netincome (loss) from discontinued operations**

 
| ** **                                     | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                              | ** ** | ** **                                          | ** ** | **2004** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Net income (loss) from discontinued operations |       | $                                                     | —     |                                                | (100.0     | )% | $ | 138 |   | $ | — |   | (100.0 | )% | $ | (410 | ) |
| as a percent of net sales                      |       | 0.0                                                   | %          |                                                |       | 0.1 | % | 0.0 | % |   |   | (0.2 | )% |
|                                                |            |                                                       |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On September 24,2004, the Company sold its Travel Trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The net incomefrom discontinued operations for the three-month period ended June 30,2004 was $0.1 million. The net loss for the six months ended June 30, 2004was $0.4 million.

 

## **Liquidity and CapitalResources**

 

At June 30, 2005 andDecember 31, 2004, the Company had cash and cash equivalents of $187,000and $11,000 (excluding restricted cash totaling $25,000 and $251,000,respectively, required to secure a letter of credit in connection with one ofthe Company’s insurance policies), respectively. During the first six months of2005, the Company financed its operations primarily through its existingworking capital and its line-of-credit with UPS Capital Corporation (UPSC).

 

During the six-monthperiod ended June 30, 2005 the Company provided $2.7 million of cash inits operations, with the two largest contributing factors being a $13.5 millionincrease in accounts payable and a $4.0 million increase in accrued expenses,and the two largest offsetting factors being an $8.7 million increase ininventories and a net loss of $6.9 million. During the six-month period ended June 30,2004 the Company used $1.4 million of cash in its operations, with the twolargest contributing factors being a $13.4 million increase in inventories

 

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and a $10.2 millionincrease in receivables, and the largest offsetting factor being a $13.0million increase in accounts payable.

 

On June 30, 2005,the Company had working capital of $40.9 million compared to $49.1 million at December 31,2004. This decrease of $8.2 million was primarily due to a $13.5 millionincrease in accounts payable and a $4.2 million increase in current accruedexpenses, partially offset by a $7.1 million increase in inventories and a $3.9million increase in receivables.

 

For the six-month period endedJune 30, 2005, net cash used in investing activities was $1.4 million,consisting primarily of $2.9 million in capital expenditures, partially offsetby repayments on note receivable of $1.4 million. Net cash used in financingactivities was $1.1 million, primarily due to a decrease in the book overdraftof $0.8 million and net payments on the line of credit of $0.5 million.

 

At June 30, 2005, the Company had an asset-based revolving creditfacility of $20 million with UPSC, which was scheduled to expire in August 2005.At June 30, 2005 and December 31, 2004, the Company had outstandingloans under the line of credit of $12.2 and $12.7 million, respectively. At June 30,2005, the Company was in default with the covenant requiring delivery of theCompany’s annual financial statements within a required period of time and onthat date the Company received an extension letter from UPSC waiving thedefault on the Company’s required delivery date of its annual financialstatements and extending the required delivery date of the annual financialstatements to August 31, 2005 (which date was extended to December 15,2005 as part of the execution of the new credit facility discussed below).

 

On August 12, 2005, the original facility was replaced by a newthree-year asset-based revolving credit facility with UPSC and Wells Fargo Bankfor $25 million, with the Company having the option, subject to certainconditions, of increasing the revolver in $5 million increments up to a totalcredit facility of $40 million. On September 29, 2005, the Companyeffected such an increase in the amount of the credit facility from $25 millionto $30 million. The new credit facility is collateralized by all of the Company’sassets other than real estate. Borrowing availability is based on eligibleaccounts receivable and inventory. The facility also includes a requirement tomaintain a blocked account arrangement, whereby remittances from the Company’scustomers reduce the debt outstanding. The new credit facility contains, amongother provisions, certain financial covenants, including funded debt to EBITDA,and a fixed charge coverage ratio. If these financial covenants are not met,the Company’s availability under the credit facility will be reduced. The Company did not meet these financialcovenants as of June 30, 2005, and does not expect to until September 30,2006. Until these covenants are met, the Company’s borrowing availability underits $40 million facility is limited to an amount between $27 to $32 million,depending on eligible inventory and accounts receivable. Initial amountsborrowed under the revolving credit facility bear interest at the prime ratelisted in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At June 30, 2005 the interest rate on the outstandingborrowings under the line-of-credit was 7.00%. The weighted average interestrate for the borrowings under the line-of-credit during the six-month periodended June 30, 2005 and 2004 was 6.47% and 4.80%, respectively.

 

Management’s plan toachieve operational profitability includes continuing or starting a variety ofinitiatives to improve its earnings and working capital position, including: i)new product introductions in the fourth quarter of 2005 with additional newproduct and floor plan introductions in the first half of 2006, ii) new dealeradditions to fill open market areas or replace under-performing dealers, iii)reductions in all categories of inventory, iv) head count re-balancings tocurrent retail sales-supported production levels, v) engineering reviews ofmaterial components for the removal of non-value added

 

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items to reduce bothmaterial and assembly costs, vi) continued thorough motorhome inspections toimprove quality and to more timely report failures, and vii) manufacturing costreductions resulting from the continued implementation of lean manufacturingconcepts.

 

In order to fund on-goingoperations in the short-term, the Company remains dependent upon its ability toutilize outside financing through borrowings on its line-of-credit until itachieves sustained operational profitability through a combination of increasedsales, cost reductions and improved product margins. The Company believes ithas sufficient financial resources to fund its operations in the short-term.However, the Company’s ability to meet its obligations in the long-term isdependent on its ability to generate positive cash flows from operations. Ifmanagement is unable to achieve its operational profitability plan orunforeseen events occur, the Company may need to implement alternative plansthat could include long-term financing collateralized by real estate or obtainingadditional debt financing, additional reductions in operating costs, deferralof capital expenditures, and further reductions in working capital.  While the Company believes that it couldsuccessfully complete the alternative plans, if necessary, there can be noassurance that such alternatives would be available on acceptable terms andconditions or that the Company would be successful in its implementation ofsuch plans.

 

Asfurther discussed in Note 6 to the consolidated financial statements includedin this Form 10-Q, the Company generally agrees with its dealers’ lendersto repurchase any unsold RVs in the event of various circumstances. The Company’smaximum potential exposure under these agreements approximated $177 million at June 30,2005. As with receivables, the risk of loss under the repurchase agreements wasspread over a number of dealers and lenders and was reduced by the resale valueof the RVs, which the Company would be required to repurchase. Losses underthese agreements have not been material in the past and management does notbelieve that any future losses under such agreements will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, or cash flows.

 

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

 

## **Recent AccountingPronouncements**

 

In November 2004,the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,“Inventory Costs-an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151requires that accounting for items such as idle facility expense, freight,handling costs, and wasted materials (spoilage) be recognized as current periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. This Statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The provision of thisStatement shall be applied prospectively. The Company has not determined theimpact that adoption of this standard will have on its consolidated financialstatements.

 

In December 2004,the FASB issued FSP 109-1, “Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities Provided by the American Jobs Creation Act of 2004.” The AmericanJobs Creation Act, or AJCA, introduces a special 9% tax deduction on qualifiedproduction activities. FAS 109-1 clarifies that this tax deduction should beaccounted for as a special tax deduction in accordance with Statement

 

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109. FSP 109-1 iseffective upon its issuance. The adoption of FSP 109-1 did not have a materialimpact on the Company’s consolidated financial statements.

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R),which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,”(SFAS 123) and supercedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” SFAS No. 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the first annualperiod after June 15, 2005, with early adoption encouraged. The pro formadisclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. The Company is required toadopt SFAS No. 123R in the first calendar quarter of 2006, beginning January 1,2006. Under SFAS No. 123R, the Company must determine the appropriate fairvalue model to be used for valuing share-based payments, the amortizationmethod for compensation cost and the transition method to be used at date ofadoption. The transition methods include modified prospective and modifiedretrospective adoption options. Under the modified retrospective option, priorperiods may be restated either as of the beginning of the year of adoption orfor all periods presented. The modified prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS No. 123R,while the modified retrospective method would record compensation expense forall unvested stock options and restricted stock beginning with the first periodrestated. The Company is evaluating the requirements of SFAS 123R. TheCompany has not yet determined the method of adoption or the effect of adoptingSFAS No. 123R, and the Company has not determined whether the adoptionwill result in amounts that are similar to the current pro forma disclosuresunder SFAS No. 123.

 

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections–areplacement of APB No. 20 and FAS No. 3” (“SFAS 154”). SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The correction of an error in previously issuedfinancial statements is not an accounting change. However, the reporting of anerror correction involves adjustments to previously issued financial statementssimilar to those generally applicable to reporting an accounting changeretrospectively. Therefore, the reporting of a correction of an error byrestating previously issued financial statements is also addressed by SFAS 154.SFAS 154 is required to be adopted in fiscal years beginning after December 15,2005. The Company does not believe that adoption of this standard will have animpact on its consolidated financial statements.

 

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

**PART I,ITEM 3 - Quantitativeand Qualitative Disclosures about Market Risk**

 

The Company has nosignificant financial instruments. The Company does not have any significantforeign currency exposure because it does not transact business in foreigncurrencies. However, the Company is exposed to interest rate changes relatedprimarily to cash borrowings on the Company’s credit facility. The weightedaverage interest rate for the borrowings on the credit facility during thesix-month period ended June 30, 2005 was 6.47%. For every 0.25% increasein interest rates, the Company would expect a quarterly increase in interestexpense of approximately $0.6 thousand for each $1.0 million borrowed.

 

23

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**NATIONALR.V. HOLDINGS, INC.**

**PART I,ITEM 4 – CONTROLS ANDPROCEDURES**

 

**DisclosureControls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s reports under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to management,including the Company’s Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, as the Company’s are designed to do, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

In connection with thepreparation of this Quarterly Report on Form 10-Q, as of June 30,2005, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the CEO and CFO, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) under the Exchange Act).In light of the material weaknesses referenced below which the Company firstidentified in connection with the assessment required by Section 404 ofthe Sarbanes-Oxley Act of 2002 and disclosed in its Form 10-K for the yearended December 31, 2004 and which continued to exist as of the end of theperiod covered by this report, the Company’s CEO and CFO concluded that, as ofthe end of the period covered by this report, the disclosure controls andprocedures were not effective at a reasonable assurance level as of June 30,2005.

 

A material weakness is acontrol deficiency, or a combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. We identifiedthe following material weaknesses in the Company’s internal control overfinancial reporting:

 

*1.**                          Insufficientpersonnel resources and technical expertise within its accounting function.*The Company did not maintain effective controls over the financial reportingprocess at its NRV division and at corporate because of insufficient personnelresources and technical expertise within the accounting function. This materialweakness contributed to the following individual material weaknesses:  (a) errors in the preparation and reviewof schedules and reconciliations supporting certain general ledger accountbalances. As a result, errors were not detected in certain accrued liabilityaccounts, including sales and marketing, warranty, legal and workers’compensation, and the related income statement accounts, including cost ofgoods sold, selling and general and administrative expenses at the NRVdivision; (b) inadequate financial statement disclosures, primarilyrelated to the sale of a division and capital leases were not identified by thecorporate accounting staff; and  (c) accountingcutoff errors primarily related to marketing accrued expenses and an inabilityto properly and timely account for capital leases entered into during the yearwere not identified at the NRV division. This control deficiency resulted inaudit adjustments to the 2004 annual consolidated financial statementsaffecting accrued liabilities, property, plant and equipment, and the relatedincome statement accounts, primarily cost of goods sold, selling, general andadministrative, amortization and interest. Insufficient personnel resources andtechnical expertise also contributed to the material weaknesses discussed in 2,3, 4 and 5 below. Additionally, these control deficiencies could result inmisstatements in the aforementioned

 

24

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accountsthat would result in a material misstatement to the annual or interimconsolidated financial statements that would not be prevented or detected.

 

*2.**                              RevenueRecognition*– The Company did not maintain effective controls over thetiming of the revenue recognition related to the sale of certain motorhomes atits NRV division. Specifically, under a deferred payment arrangement theCompany held the manufacturer’s certificate of origin as security for payment.This control deficiency resulted in the restatement of the Company’s thirdquarter 2004 consolidated financial statements to correct the timing of revenuerecognition. This control deficiency also resulted in audit adjustments to the2004 annual consolidated financial statements. Additionally, this controldeficiency could result in a misstatement of revenue and deferred revenue thatwould result in a material misstatement to the annual or interim consolidatedfinancial statements that would not be prevented or detected.

 

*3.*                          *Accounting for Sales Incentives –* The Company did notmaintain effective controls over the accounting for sales incentives.Specifically, certain sales incentive programs which are paid directly to thedealer or dealer sales representatives were improperly classified as sellingexpenses and should have been classified as a reduction of revenue. Thiscontrol deficiency resulted in the restatement of the Company’s 2003 and 2002consolidated financial statements. This control deficiency also resulted inaudit adjustments to the 2004 annual consolidated financial statements.Additionally, this control deficiency could result in a misstatement of revenueand selling expenses that would result in a material misstatement to the annualor interim consolidated financial statements that would not be prevented ordetected.

 

*4.**                              Accountingfor Income Taxes –*The Company did not maintain effective controls over thedetermination and reporting of the provision for income taxes and related deferredincome tax balances. Specifically, the Company did not maintain effectivecontrols to review and monitor the accuracy of the valuation allowance as wellas other components of the income tax provision calculations and relateddeferred income taxes. This control deficiency resulted in an audit adjustmentto the fourth quarter 2004 annual consolidated financial statements.Additionally, this control deficiency could result in a misstatement of theincome tax provision or related deferred income tax balances that would resultin a material misstatement to the annual or interim consolidated financialstatements that would not be prevented or detected.

 

*5.**                              Physicalinventory process* – The Company did not maintain effective controls overthe accuracy of the physical inventory process at its NRV division.Specifically, the NRV division did not have controls to ensure all of theindividuals involved in the physical inventory count were properly trained andsupervised and that discrepancies between quantities counted and the accountingrecords were properly investigated. Further, the NRV division did not havecontrols to ensure the accounting records were adjusted to reflect the actualquantities counted during the physical inventory process. This control deficiencyresulted in an audit adjustment to the fourth quarter 2004 annual consolidatedfinancial statements. Additionally, this control deficiency could result in amisstatement of inventory and cost of goods sold that would result in amaterial misstatement to the annual or interim consolidated financialstatements that would not be prevented of detected.

 

*6.**                              Unrestrictedaccess to programs and data* – The Company did not maintain effectivecontrols over access to certain financial application programs and data at itsNRV division. Specifically, there were instances in which informationtechnology personnel and users with accounting and reporting responsibilitieshad access to financial accounting application programs and data that wasincompatible with their functional business requirements. Further, theactivities of these individuals were not subject to independent monitoring.These control deficiencies applied to certain systems and processes includingthe financial

 

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statement preparation,human resources, payroll, purchasing, receiving and revenue and billing. Thesecontrol deficiencies did not result in an adjustment to the 2004 interim orannual consolidated financial statements. However, these control deficienciescould result in a misstatement to financial statement accounts that wouldresult in a material misstatement to the annual or interim consolidatedfinancial statements that would not be prevented or detected.

 

#### **Remediation of Material Weaknesses**

 

During fiscal year 2005,management has taken a number of steps that it believes will impact theeffectiveness of our internal control over our financial reporting includingthe following:

 

**1.****              *Insufficientpersonnel resources and technical expertise within its accounting function*

 

Management has assessedthe organization of its accounting personnel and the technical expertise withinthe accounting function. As a result, the Company has established an accountingfunction at the parent company level. The NRV divisional controller waspromoted to Corporate Controller and will be responsible for setting andestablishing accounting policies for the Company and its two divisions inaccordance with generally accepted accounting principles (“GAAP”) andguidelines required by the Securities and Exchange Commission (“SEC”). Toassist the Corporate Controller, the Company has also promoted an individual toa newly-created position of Manager of Financial Reporting. In addition, theCompany has subscribed to an on-line research tool to assist this group instaying abreast of new accounting pronouncements, proper accounting disclosureand also research technical accounting issues relating to the Company’s ongoingbusiness transactions. At the NRV division, the Company has hired a newController and Accounting Manager.

 

2.               *Revenue Recognition*

 

Effective April 1,2005, the NRV division discontinued the deferred payment arrangement underwhich it held the manufacturer’s certificate of origin as security for payment.During the second quarter of 2005, the NRV division revised its quarterlyclosing procedures to strengthen its review of any new agreements or otherterms to determine whether the related transactions are accounted for in theproper period.

 

3.               *Accounting for Sales Incentives*

 

Effective May 31,2005, the Company changed its method of accounting for sales incentive programsthat are paid directly to the dealer sales representatives. These salesincentives are now classified as a reduction of revenue rather than as a sellingexpense. These sales incentives were restated for all years presented in thefiscal year 2004 Form 10-K and have been properly classified in the firstand second quarters of fiscal year 2005. As more fully discussed in 1 above,the Company has increased its personnel and expertise within the accountingfunction. In addition, the Company has revised its quarterly closing proceduresto strengthen its review of all existing sales incentive programs to ensurethey are accounted for properly.

 

*4.**              Accountingfor Income Taxes*

 

As more fully discussedin 1 above, the Company has recently increased its personnel and technicalexpertise within the accounting function. In addition, the Company revised itsquarterly closing procedures to strengthen its review of the income taxprovision to ensure the accuracy of the components of the income tax provisionand related deferred income taxes.

 

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*5.**              Physicalinventory process*

 

Beginning with the firstquarter of 2005, management increased its training of all personnel involved inthe physical inventory process at the NRV division, particularly thoseindividuals performing the data entry function. Additionally, the physicalinventory report was revised such that any inventory item, which does notinclude a corresponding item number, will result in an exception-requiringfollow-up by management. In addition, the NRV division has implemented enhancedreview procedures by senior management of the reconciliation process between thequantities obtained from the physical inventory tags and the quantitiesobtained from the updated perpetual inventory report.

 

6.               *Unrestricted access to programs and data*

 

TheNRV division has corrected access rights for known instances in which informationtechnology personnel and users with accounting and reporting responsibilitieshad access to financial accounting applications programs and data that wasincompatible with their functional business requirements. The NRV division isalso in the process of refining and developing ongoing processes to ensure thatproper access rights are granted, reviewed and maintained in a timely manner.

 

The Company believes thatit will be able to improve its disclosure controls and procedures and remedythe material weaknesses and additional control deficiencies identified as partof its assessment process. Notwithstanding the Company’s remediation efforts,because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

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

 

Except as disclosedabove, there have been no changes in the Company’s internal control overfinancial reporting during the most recently completed fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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

 

**PART II - OTHER INFORMATION**

 

**ITEM 3.****DEFAULTS UPON SENIOR SECURITIES**

 

At June 30, 2005,the Company was in default with the covenant of its credit facility with UPSCapital Corporation (“UPSC”) requiring delivery of the Company’s annualconsolidated financial statements within a required period of time and on thatdate the Company received an extension letter from UPSC waiving the default onthe Company’s required delivery date of the annual consolidated financialstatements to August 31, 2005. Such date was extended to December 15,2005 as part of the execution by the Company of a new credit facility on August 12,2005 with UPSC and Wells Fargo Bank. The Company filed its Annual Report on Form 10-Kwith the Securities and Exchange Commission on October 11, 2005.

 

**ITEM 6.****EXHIBITS**

 

Exhibits

 
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Exchange Act.                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the  Exchange Act.                      |
|   |   |                                                                                                                                |
| 32.1   |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         | **NATIONAL R.V. HOLDINGS, INC.** |                             |
|------------------------------|----------------------------------|----------------------------------|
|                         | (Registrant)                     |                             |
|                         |                             |                             |
| Date:  October 25, 2005 | By                          | /s/ THOMAS  J. MARTINI, CPA |   |
|                         |                             |                             |
|                         | Thomas J.  Martini               |                             |
|                         | Chief Financial  Officer         |                             |
|                         | (Principal  Accounting and       |                             |
|                         | Financial Officer)               |                             |
|                              |                                  |                                  |  |

 

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