**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2007**

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

**Commission file number 001-12085**

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

(Exact name of registrant as specified in its charter)

| **Delaware**                                      |   | **33-0371079**                        |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                  |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                   |   |                                  |
|                                              |   |                                  |
| **100  West Sinclair Street, Perris, California** |   | **92571**                             |
| (Address of  principal executive offices)         |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **(951) 436-3000**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bysection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

YES x    NO  o

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

YES  o    NO  x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Class**                                |   | **Outstanding at August 8, 2007** |
|------------------------------------------|--------|-------------------------------------------------------|
| Common stock,  par value $0.01 per share |   | 10,339,484                                            |

 

 

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

### **INDEX**

| **PART I  — FINANCIAL INFORMATION** |
|-----------------------------------------------|
|                                               | ** ** | ** ** |   |   |
| Item 1.                                       |   | Consolidated  Financial Statements (Unaudited) |   |   |
|                                          |   | Consolidated Balance  Sheets - June 30, 2007 and December 31, 2006 |   |   |
|                                          |   | Consolidated  Statements of Operations - Three and Six Months Ended June 30, 2007 and  2006 |   |   |
|                                          |   | Consolidated  Statements of Cash Flows -Six Months Ended June 30, 2007 and 2006 |   |   |
|                                          |   |   |   |   |
|                                          |   | 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  1A.                                     |   | Risk  Factors |   |   |
|                                          |   |   |   |   |
| Item  6.                                      |   | Exhibits |   |   |
|                                          |   |   |   |   |
|                                          |   | Signature |   |   |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item 1. Consolidated Financial Statements**

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

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**
| ** **                                                                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                 |       |                    |       |                        |       |
| Current assets:                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                             |       | $                       | 7,898      |                        | $          | 14 |   |
| Restricted cash  and cash equivalents                                                                  |       | 409                     |       | 387                         |       |
| Receivables,  less allowance for doubtful accounts of $352 and $239, respectively                      |       | 8,072                   |       | 9,800                       |       |
| Inventories                                                                                            |       | 22,629                  |       | 28,896                      |       |
| Prepaid expenses                                                                                       |       | 965                     |       | 826                         |       |
| Deferred income  taxes                                                                                 |       | 103                     |       | 148                         |       |
| Assets of  discontinued operations (Note 2)                                                            |       | 3⁄4                  |       | 67,768                      |       |
| Total current  assets                                                                                  |       | 40,076                  |       | 107,839                     |       |
| Long-term  restricted cash and cash equivalents                                                        |       | 7,542                   |       | 341                         |       |
| Property, plant  and equipment, net                                                                    |       | 5,589                   |       | 25,662                      |       |
| Other assets                                                                                           |       | 1,235                   |       | 1,355                       |       |
| Total assets                                                                                           |       | $                       | 54,442     |                        | $          | 135,197 |   |
|                                                                                                   |       |                    |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                             |       |                    |       |                        |       |
| Current liabilities:                                                                                   |       |                    |       |                        |       |
| Book overdraft                                                                                         |       | $                       | 3⁄4     |                        | $          | 1,720 |   |
| Accounts payable                                                                                       |       | 4,838                   |       | 17,828                      |       |
| Accrued expenses                                                                                       |       | 8,902                   |       | 9,595                       |       |
| Current portion  of capital leases                                                                     |       | 57                      |       | 63                          |       |
| Current portion  of deferred gain on sale and leaseback (Note3)                                        |       | 1,044                   |       | 3⁄4                      |       |
| Line of credit                                                                                         |       | 3⁄4                  |       | 29,012                      |       |
| Liabilities of  discontinued operations (Note 2)                                                       |       | 3⁄4                  |       | 35,928                      |       |
| Total current  liabilities                                                                             |       | 14,841                  |       | 94,146                      |       |
| Long-term  portion of capital leases                                                                   |       | 96                      |       | 124                         |       |
| Deferred gain on  sale and leaseback (Note 3)                                                          |       | 10,813                  |       | 3⁄4                      |       |
| Deferred income  taxes                                                                                 |       | 103                     |       | 148                         |       |
| Long-term  accrued expenses                                                                            |       | 4,275                   |       | 4,660                       |       |
| Total  liabilities                                                                                     |       | 30,128                  |       | 99,078                      |       |
|                                                                                                   |       |                    |       |                        |       |
| Commitments and  contingent liabilities (Note 8)                                                       |       | 3⁄4                  |       | 3⁄4                      |       |
|                                                                                                   |       |                    |       |                        |       |
| Stockholders’ equity:                                                                             |       |                    |       |                        |       |
| Preferred stock  — $0.01 par value; 5,000 shares authorized, 4,000 issued and outstanding         |       | 3⁄4                  |       | 3⁄4                      |       |
| Common stock —  $0.01 par value; 25,000,000 shares authorized, 10,339,484 issued and  outstanding |       | 103                     |       | 103                         |       |
| Additional  paid-in capital                                                                            |       | 38,499                  |       | 38,353                      |       |
| Retained deficit                                                                                       |       | (14,288                 | )          | (2,337                      | )          |
| Total  stockholders’ equity                                                                       |       | 24,314                  |       | 36,119                      |       |
| Total liabilities and  stockholders’ equity                                                       |       | $                       | 54,442     |                        | $          | 135,197 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                        | ** ** | **2006(1)**                                   | ** ** | **2007** | ** ** | **2006(1)** | ** ** |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Net sales                                           |       | $                                               | 23,361     |                                          | $          | 40,636 |   | $ | 45,291 |   | $ | 95,265 |   |
| Cost of goods  sold                                 |       | 27,467                                          |       | 45,127                                        |       | 54,170 |   | 97,982 |   |
| Gross loss                                          |       | (4,106                                          | )          | (4,491                                        | )          | (8,879 | ) | (2,717 | ) |
| Selling expenses                                    |       | 1,166                                           |       | 1,331                                         |       | 2,146 |   | 2,567 |   |
| General and  administrative expenses                |       | 2,681                                           |       | 2,061                                         |       | 5,360 |   | 4,736 |   |
| Operating loss                                      |       | (7,953                                          | )          | (7,883                                        | )          | (16,385 | ) | (10,020 | ) |
| Interest expense                                    |       | 169                                             |       | 597                                           |       | 710 |   | 1,017 |   |
| Other income                                        |       | (163                                            | )          | (45                                           | )          | (351 | ) | (106 | ) |
| Loss from continuing operations before income taxes |       | (7,959                                          | )          | (8,435                                        | )          | (16,744 | ) | (10,931 | ) |
| Provision for  income taxes                         |       | 33                                              |       | 10                                            |       | 56 |   | 20 |   |
| Loss from  continuing operations                    |       | (7,992                                          | )          | (8,445                                        | )          | (16,800 | ) | (10,951 | ) |
| Income (loss)  from discontinued operations         |       | 3⁄4                                          |       | 1,324                                         |       | (2,409 | ) | 1,785 |   |
| Gain from sale  of discontinued operations          |       | 3⁄4                                          |       | 3⁄4                                        |       | 7,328 |   | 3⁄4 |   |
| Income taxes  related to discontinued operations    |       | 3⁄4                                          |       | (8                                            | )          | (70 | ) | (17 | ) |
| Net income from  discontinued operations            |       | 3⁄4                                          |       | 1,316                                         |       | 4,849 |   | 1,768 |   |
| Net loss                                            |       | $                                               | (7,992     | )                                             | $          | (7,129 | ) | $ | (11,951 | ) | $ | (9,183 | ) |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Earnings (loss)  per share — basic and diluted |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                               |       | $                                               | (0.77      | )                                             | $          | (0.82 | ) | $ | (1.63 | ) | $ | (1.06 | ) |
| Discontinued operations                             |       | 3⁄4                                          |       | 0.13                                          |       | 0.47 |   | 0.17 |   |
| Total                                               |       | $                                               | (0.77      | )                                             | $          | (0.69 | ) | $ | (1.16 | ) | $ | (0.89 | ) |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  number of shares outstanding:     |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                               |       | 10,339                                          |       | 10,339                                        |       | 10,339 |   | 10,339 |   |
| Diluted                                             |       | 10,339                                          |       | 10,339                                        |       | 10,339 |   | 10,339 |   |

----

(1)             Adjustedto include the effect of discontinued operations.  See Note 2 for additional information.

The accompanying notes are an integral part of theconsolidated financial statements.

4

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**
| ** **                                                                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                              |       |                                          |       |   |   |
| Net loss                                                                                            |       | $                                             | (11,951    | ) | $ | (9,183 | ) |
| Less: Loss (income) from discontinued operations,  net of taxes                                     |       | 2,409                                         |       | (1,768 | ) |
| Less: Gain from sale of discontinued operations, net  of taxes                                      |       | (7,258                                        | )          | — |   |
| Loss from continuing operations                                                                     |       | (16,800                                       | )          | (10,951 | ) |
| Adjustments to reconcile loss from continuing  operations to net cash used in operating activities: |       |                                          |       |   |   |
| Bad debt expense                                                                                    |       | 175                                           |       | 46 |   |
| Reserve and write down of inventories                                                               |       | 451                                           |       | 2,029 |   |
| Depreciation and amortization                                                                       |       | 1,124                                         |       | 1,275 |   |
| Gain on asset disposal                                                                              |       | (25                                           | )          | (5 | ) |
| Amortization of deferred gain on sale and leaseback                                                 |       | (132                                          | )          | — |   |
| Share-based compensation                                                                            |       | 146                                           |       | 521 |   |
| Changes in assets and liabilities:                                                                  |       |                                          |       |   |   |
| Decrease (increase) in receivables                                                                  |       | 1,553                                         |       | (4,441 | ) |
| Decrease (increase) in inventories                                                                  |       | 5,816                                         |       | (7,583 | ) |
| Increase in prepaid expenses                                                                        |       | (139                                          | )          | (843 | ) |
| (Decrease) increase in accounts payable                                                             |       | (12,990                                       | )          | 4,007 |   |
| Decrease in accrued expenses                                                                        |       | (1,078                                        | )          | (2,594 | ) |
| Net cash used in operating activities by continuing  operations                                     |       | (21,899                                       | )          | (18,539 | ) |
| Net cash used in discontinued operations                                                            |       | (2,061                                        | )          | (6,950 | ) |
| Net cash flow used in operating activities                                                          |       | (23,960                                       | )          | (25,489 | ) |
|                                                                                                |       |                                          |       |   |   |
| Cash flows from  investing activities:                                                              |       |                                          |       |   |   |
| Increase in restricted cash                                                                         |       | (7,223                                        | )          | (179 | ) |
| Purchase of property, plant and equipment                                                           |       | (247                                          | )          | (539 | ) |
| Proceeds from sale and leaseback transaction                                                        |       | 31,057                                        |       | — |   |
| Proceeds from sale of assets                                                                        |       | 185                                           |       | 127 |   |
| Decrease in other assets                                                                            |       | 88                                            |       | 200 |   |
| Net cash provided by (used in) investing activities  by continuing operations                       |       | 23,860                                        |       | (391 | ) |
| Proceeds from sale of discontinued operations                                                       |       | 38,750                                        |       | — |   |
| Net cash flow used in discontinued operations                                                       |       | —                                        |       | (2,220 | ) |
| Net cash flow provided by (used in) investing  activities                                           |       | 62,610                                        |       | (2,611 | ) |
|                                                                                                |       |                                          |       |   |   |
| Cash flows from  financing activities:                                                              |       |                                          |       |   |   |
| (Decrease) increase in book overdraft                                                               |       | (1,720                                        | )          | 2,639 |   |
| Principal payments on capital leases                                                                |       | (34                                           | )          | (18 | ) |
| Net (payments on) advances under line of credit                                                     |       | (29,012                                       | )          | 16,300 |   |
| Net cash (used in) provided by financing activities  by continuing operations                       |       | (30,766                                       | )          | 18,921 |   |
| Net cash flow provided by discontinued operations                                                   |       | —                                        |       | 9,172 |   |
| Net cash (used in) provided by financing activities                                                 |       | (30,766                                       | )          | 28,093 |   |
| Net increase  (decrease) in cash and cash equivalents                                               |       | 7,884                                         |       | (7 | ) |
| Cash and cash  equivalents, beginning of the year                                                   |       | 14                                            |       | 11 |   |
| Cash and cash  equivalents, end of period                                                           |       | $                                             | 7,898      |   | $ | 4 |   |

 

SeeNote 11 for supplemental cash flow information.

The accompanying notes are an integral part of theconsolidated financial statements.

5

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**NATIONALR.V. HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

## **NOTE 1 — BASIS OF PRESENTATION**

***General***

The consolidated financial statements include thefinancial statements of National R.V. Holdings, Inc. and its wholly-ownedsubsidiary National RV, Inc. (“NRV”) (collectively, the “Company”).

The accompanying consolidated balance sheet as ofDecember 31, 2006, which has been derived from audited consolidated financialstatements, and the unaudited interim consolidated financial statements havebeen prepared pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission (“SEC”). Certain information and notedisclosures normally included in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to those rules and regulations, although the Company believesthat the disclosures made are adequate to make the information not misleading.These consolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31, 2006and notes thereto included in the Company’s Annual Report on Form 10-K filedwith the SEC on April 2, 2007.

In the opinion of management, the accompanyingunaudited consolidated financial statements contain all adjustments necessary,consisting of normal recurring adjustments, to state fairly the consolidatedfinancial position, the results of operations and cash flows for all periodspresented, including the elimination of significant intercompany accounts inconsolidation.

Certain reclassifications, none of which affected netloss or retained earnings, have been made to prior period amounts to conform tothe current period presentation.  Asdiscussed in Note 2 below, in February 2007, the Company completed the sale ofits former wholly-owned subsidiary, Country Coach Inc. (“CCI”) whose results ofoperations have been reported as discontinued operations for all periodspresented.

***Seasonal Nature of Business Activities***

Results for the interim period are not necessarilyindicative of the results for an entire year. Seasonal factors, over which theCompany has no control, have an effect on the demand for the Company’sproducts. Demand in the recreational vehicle (“RV”) industry characteristicallydeclines over the winter season, while sales are generally highest during thespring and summer months.

***Use of Accounting Estimates***

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and judgmentsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amount of revenues and expenses for each period. Onan on-going basis, management evaluates its estimates and judgments. Managementbases its estimates and judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which 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.

## **NOTE 2 — DISCONTINUED OPERATIONS**

On February 7, 2007, management committed to a plan todiscontinue its CCI operations and to place all tangible assets and liabilitiesoperating as the CCI business unit up for sale. The decision to sell CCI wasmade based on management’s determination and subsequent Board approval that thesale would enable the Company to raise capital to reduce its debt and providefunding and resources to support the turnaround of the NRV business.  The Company was successful in identifying and securing a buyer laterthat month and finalized the sale of CCI to a related party on February 20,2007.  The Company received totalconsideration of $38.7 million in connection with this sale.

6

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In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS No. 144”), the CCI operating results are reported asdiscontinued operations in the accompanying consolidated financial statementsand notes thereto for all periods presented. Additionally, as defined by SFAS No. 144, the CCI assets and liabilitiesare reported as “held for sale” as of December 31, 2006.  Prior year financial statements have beenrestated to present the CCI accounts in this manner.

The following are thesummarized results of the discontinued CCI operations for the periods presented(in thousands):
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                        |       | $                                               | 3⁄4     |                                          | $          | 69,579 |   | $ | 19,933 |   | $ | 127,844 |   |
| Income (loss)  before taxes                     |       | $                                               | 3⁄4     |                                          | $          | 1,324 |   | $ | (2,409 | ) | $ | 1,785 |   |
| Net income (loss) from  discontinued operations |       | $                                               | 3⁄4     |                                          | $          | 1,316 |   | $ | (2,409 | ) | $ | 1,768 |   |

 

The assets andliabilities of CCI are presented separately under the captions “assets ofdiscontinued operations” and “liabilities of discontinued operations,”respectively, and consist of the following (in thousands):

|                                                           | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| Assets of  discontinued operations:                       |       |                        |       |
| Cash and cash equivalents                                 |       | $                           | 2          |   |
| Receivables, less allowance for doubtful accounts of  $60 |       | 9,195                       |       |
| Inventories                                               |       | 45,521                      |       |
| Prepaid expenses                                          |       | 1,282                       |       |
| Property, plant and equipment, net                        |       | 11,768                      |       |
| Other assets                                              |       | 3⁄4                      |       |
| Total assets of discontinued operations                   |       | $                           | 67,768     |   |
|                                                      |       |                        |       |
| Liabilities of  discontinued operations:                  |       |                        |       |
| Book overdraft                                            |       | $                           | 507        |   |
| Accounts payable                                          |       | 21,724                      |       |
| Accrued expenses                                          |       | 13,555                      |       |
| Long-term accrued expenses                                |       | 142                         |       |
| Total  liabilities of discontinued operations             |       | $                           | 35,928     |   |

 

Duringthe first quarter of this year, the Company recognized a $7.3 million gain, netof selling expenses and taxes of $0.7 million and $0.1 million, respectively,on the sale of CCI and  reported thisgain  in its statement of operations inthat  quarter..

**NOTE 3 — SALE AND LEASEBACK**

On May 22, 2007, theCompany and First Industrial Acquisitions, Inc. (the “Buyer”), an unrelatedparty, closed a transaction pursuant to a purchase and sale agreement (the “Agreement”)for the sale and conveyance of property owned by the Company in Perris, California.  Proceeds from the sale of this property,primarily defined as land, inclusive of five buildings and improvements,totaled $31.8 million. Pursuant to the terms of the Agreement a leasebackcontract for this property was entered into and took effect concurrently withthe closing of the Agreement, with the Buyer acting as landlord and NRV astenant, which is to be guarantied by the Company.  As such, in May 2007, the Company obtained a$5 million letter of credit to secure the performance of NRV under this lease.

7

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An amendment to theCompany’s revolving credit facility was also required to, among other things,secure the release of the liens on the Perris property previously held by WellsFargo Bank.  In connection with thisamendment, which is discussed further in Note 7, the Company agreed to pledge acash deposit of $7.5 million to Wells Fargo Bank.

The initial term of thelease is for 10 years, with two 5-year option periods.  Scheduled rent increases are provided, whichwill result in an operating lease with annual straight-line rent expense ofapproximately $3 million per year.  TheCompany recognized a $12.0 million gain, net of expenses of $0.7 million, ofwhich $1.0 million is short-term.  Thedeferred gain will be amortized over the term of the lease and recognized as areduction of rent expense.  As of June30, 2007 the unamortized gain was $11.9 million.

## **NOTE 4 — INVENTORIES**

Inventoriesconsist of the following (in thousands):

|                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
|              |       |                    |       |                        |       |
| Finished goods    |       | $                       | 5,972      |                        | $          | 9,474 |   |
| Work-in-process   |       | 7,261                   |       | 7,370                       |       |
| Raw materials     |       | 5,592                   |       | 6,361                       |       |
| Chassis           |       | 3,804                   |       | 5,691                       |       |
| Total inventories |       | $                       | 22,629     |                        | $          | 28,896 |   |

 

As of June 30, 2007 and December 31, 2006, the Company recorded awrite-down of inventories to the lower of cost or market of $1.1 million.

## **NOTE 5 — ACCRUED EXPENSES**

Accruedexpenses consist of the following (in thousands):

|                                                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                              |       |                    |       |                        |       |
| Current accrued  expenses:                        |       |                    |       |                        |       |
| Payroll and other accrued expenses                |       | $                       | 1,449      |                        | $          | 1,518 |   |
| Accrued sales incentives                          |       | 1,131                   |       | 1,301                       |       |
| Warranty reserve                                  |       | 3,643                   |       | 3,834                       |       |
| Workers’ compensation self-insurance reserve |       | 1,601                   |       | 1,752                       |       |
| Other accrual expense                             |       | 1,078                   |       | 1,190                       |       |
| Total current  accrued expenses                   |       | $                       | 8,902      |                        | $          | 9,595 |   |
|                                              |       |                    |       |                        |       |
| Long-term  accrued expenses:                      |       |                    |       |                        |       |
| Workers’ compensation self-insurance reserve |       | $                       | 3,741      |                        | $          | 4,041 |   |
| Deferred compensation                             |       | 534                     |       | 619                         |       |
| Total long-term accrued  expenses                 |       | $                       | 4,275      |                        | $          | 4,660 |   |

##  

## **NOTE6 — WARRANTY RESERVE**

The Company’s warranty reserve, which is included inthe consolidated financial statements under the “accrued expenses” caption, isestablished based on its best estimate of the amounts necessary to settlefuture and existing claims on products sold as of the balance sheet date. TheCompany records an estimate for future warranty-related costs based on recentactual warranty claims. Also, as part of the warranty reserve the Company’srecall reserve is established, as necessary, based on management’s estimate ofthe cost per unit to remedy a given problem and the estimated number of unitsthat will ultimately be brought in for the repair.

8

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Thefollowing table summarizes the activity related to the warranty reserve for thesix months ended June 30, 2007 and 2006, respectively (in thousands):

|                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
|                                                                   |       |                                          |       |   |   |
| Balance at  January 1,                                                 |       | $                                             | 3,834      |   | $ | 4,306 |   |
| Accruals for current liabilities and preexisting  warranty adjustments |       | 2,531                                         |       | 2,432 |   |
| Payments in cash or in kind                                            |       | (2,722                                        | )          | (2,517 | ) |
| Balance at June 30,                                                    |       | $                                             | 3,643      |   | $ | 4,221 |   |

## **NOTE 7 — CREDIT FACILITY**

In May and July2007 the Company amended its asset-based revolving credit facility inconjunction with the completion of the sale and leaseback of its Perris,California property. These  amendments tothe credit facility provided the consent from Wells Fargo Bank for thecompletion of the sale and leaseback transaction and the release of liens onthe property and required the Company to pledge a cash deposit of $7.5 millionto Wells Fargo Bank. Additionally, these amendments provided for an increase inthe letter of credit sub-facility amount, the establishment of EBITDA covenantsand limited capital expenditures to $2 million for 2007. These amendments alsoprovide that any failure to meet the EBITDA covenants would not constitute anevent of default if the average daily sum of all obligations is less than $10million. As of June 30, 2007, this total obligations amount was $5.4 million,$5.0 million of which was a letter of credit securing the lease of the Perris,California property. Finally, these amendments provided that by November 30,2007, the Company will provide financial projections for 2008.

At June 30, 2007,the Company had no outstanding borrowings under the line of credit. The Companyhad $29.0 million outstanding on the line of credit at December 31, 2006.Amounts borrowed under the revolving credit facility bear interest at the primerate listed in the Wall Street Journal plus 1.50 percentage points. At June 30,2007, the interest rate for the borrowings under the line of credit was 9.75%.  The weighted average interest rate for theborrowing under the line of credit during the three months ended June 30, 2007and 2006 was 9.75% and 8.42%, respectively. The weighted average interest ratefor the borrowings on the credit facility during the six months ended June 30,2007 and 2006 was 9.01% and 8.21%, respectively.

## **NOTE 8 — COMMITMENTS AND CONTINGENCIES**

***Litigation***

TheCompany is involved in legal proceedings in the ordinary course of business,including a variety of warranty, “lemon law,” product liability (all of whichare typical in the recreation vehicle industry) and employment claims. Withrespect to product liability claims, the Company’s insurance policies cover, inwhole or in part, defense costs and liability costs for personal injury orproperty damage (excluding damage to Company motorhomes). While it isimpossible to estimate with certainty the ultimate legal and financialliability with respect to this litigation, management is of the opinion thatthe final resolution of any such litigation could have an adverse effect on theCompany’s financial position and results of operations or liquidity in areporting period, and has provided an estimated reserve at June 30, 2007 andDecember 31, 2006 of approximately $0.5 million , for such contingencies in theconsolidated financial statements.

***Recourse ofDealer Financing***

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 

9

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elapsedbetween invoice date and demand for repurchase being no longer than a specifiedperiod which is typically 18 months or less. The Company’s undiscounted maximumpotential exposure under these agreements approximated $52.1 million at June30, 2007. As with its receivables, the risk of loss under the repurchaseagreements was spread over a number of dealers and lenders and was reduced bythe resale value of the RVs, which the Company would be required to repurchase.Losses under these agreements have not been material in the past and managementdoes not believe that any future losses under such agreements will have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows. Consequently, no liability has beenrecognized in the consolidated financial statements.

## **NOTE 9 — SHARE BASED COMPENSATION**

Duringthe six months ended June 30, 2007 and 2006, the Company issued stock optionstotaling 510,241 and 145,000, respectively. The fair value of each grant was estimated on the dates of grant usingthe Black-Scholes option-pricing model and the following assumptions:

|                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                       |       | 0.0      | %          | 0.0      | %          |
| Expected  volatility                 |       | 42.0     | %          | 45.0     | %          |
| Risk-free interest  rate             |       | 4.83     | %          | 4.69     | %          |
| Expected lives  (in years)           |       | 4.0      |       | 5.0      |       |
| Fair value of stock  options granted |       | $        | 1.66       |     | $          | 2.79 |   |
|                                      |            |          |            |          |            |  |  |

 

Shared-basedcompensation expense recognized in the consolidated statements of operationsfor the three and six months ended June 30, 2007 is based on the awardsultimately expected to vest and therefore has been reduced for estimatedforfeitures. Revised SFAS No. 123(R) “Share-BasedPayment” requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Pre-vesting forfeitures wereestimated based on expected employee termination rates, which were estimated tobe approximately 1% for both officers and directors and 15% for employees forthose options granted in the period ended June 30, 2007. The estimated fairvalue, less the estimated forfeitures, is amortized to compensation expenseusing the straight-line attribution method.

Asummary of option activity for the three and six months ended June 30, 2007 ispresented below:

| Options                         | ** ** | **Shares  (in  thousands)** | ** ** | **Weighted-  Average Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** |
|---------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Outstanding at  January 1, 2007 |       | 818                         |       | $                                           | 8.89       |                                                              |       |   |
| Granted                         |       | 510                         |       | $                                           | 4.25       |                                                              |       |   |
| Exercised                       |       | —                      |       | $                                           | —     |                                                              |       |   |
| Forfeited                       |       | (156                        | )          | $                                           | 4.66       |                                                              |       |   |
| Canceled                        |       | (74                         | )          | $                                           | 8.89       |                                                              |       |   |
| Outstanding at  March 31, 2007  |       | 1,098                       |       | $                                           | 7.34       |                                                              | 6.3        |   |
| Granted                         |       | —                      |       | $                                           | —     |                                                              |       |   |
| Exercised                       |       | —                      |       | $                                           | —     |                                                              |       |   |
| Forfeited                       |       | (36                         | )          | $                                           | 4.34       |                                                              |       |   |
| Canceled                        |       | (320                        | )          | $                                           | 10.07      |                                                              |       |   |
| Outstanding at  June 30, 2007   |       | 742                         |       | $                                           | 6.31       |                                                              | 8.5        |   |
| Exercisable at June 30,  2007   |       | 430                         |       | $                                           | 7.57       |                                                              | 7.8        |   |

 

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Asummary of the status of the Company’s non-vested shares for the three and sixmonths ended June 30, 2007 is presented below:

| Options                        | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-Average  Grant Date Fair  Value** | ** ** |
|--------------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|
| Non-vested at  January 1, 2007 |       | 154                             |       | $                                                      | 3.11       |   |
| Granted                        |       | 510                             |       | $                                                      | 1.66       |   |
| Vested                         |       | (158                            | )          | $                                                      | 2.46       |   |
| Forfeited                      |       | (156                            | )          | $                                                      | 1.89       |   |
| Non-vested at  March 31, 2007  |       | 350                             |       | $                                                      | 1.84       |   |
| Granted                        |       | —                          |       | $                                                      | —     |   |
| Vested                         |       | (2                              | )          | $                                                      | 3.92       |   |
| Forfeited                      |       | (36                             | )          | $                                                      | 1.66       |   |
| Non-vested at June 30,  2007   |       | 312                             |       | $                                                      | 1.83       |   |

 

As ofJune 30, 2007, there was $0.5 million of total unrecognized compensation costrelated to nonvested share-based compensation arrangements that is expected tobe recognized over a weighted-average period of 2.8 years. For the three andsix months ended June 30, 2007 the total share-based compensation expensetotaled $0.06 million and $0.15 million, respectively.  Since the Company had net operating losscarryforwards (before valuation) as of June 30, 2007, no excess tax benefit forthe tax deductions related to share-based compensation was recognized for thethree and six months ended June 30, 2007. Additionally, no incremental taxbenefits were recognized from stock options exercised for the three and sixmonths ended June 30, 2007, which would have resulted in a reclassification toreduce net cash provided by operating activities with an offsetting increase innet cash provided by financing activities.

**NOTE 10 — INCOME TAXES**

Statementof Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFASNo. 109”) requires that a valuation allowance be established when it is morelikely than not that a company’s deferred tax assets will not be realized. Indetermining whether a valuation allowance is required, the Company must takeinto account all positive and negative evidence with regard to the utilizationof deferred tax assets. SFAS No. 109 further states that it is difficult toconclude that a valuation allowance is not needed when there is negativeevidence such as cumulative losses in recent years. For the six months endedJune 30, 2007 and 2006, the Company recorded respective non-cash charges of$4.4 million and $3.4 million, respectively, to fully reserve against the netdeferred tax assets realized during those periods. Allocating the valuationallowance on a pro rata basis, in accordance with SFAS No. 109, resulted incurrent net deferred tax assets and long-term net deferred tax liabilities of$0.1 million at June 30, 2007 and $0.1 million at December 31, 2006.

OnJanuary 1, 2007, the Company adopted the recognition and disclosure provisionsof FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB statement No. 109” (“FIN 48”). Under FIN 48, taxpositions are evaluated for recognition using a more-likely-than-not threshold,and those tax positions requiring recognition are measured as the largestamount of tax benefit that is greater than 50 percent likely of being realizedupon ultimate settlement with a taxing authority that has full knowledge of allrelevant information.

As ofJanuary 1, 2007, the Company had no unrecognized tax benefits, includinginterest and penalties, and does not expect a significant change in theunrecognized tax benefits in the next twelve months.

TheCompany recognizes interest and penalties to unrecognized tax benefits throughinterest and operating expenses, respectively. There were no interest andpenalties recorded as of June 30, 2007.

TheCompany is subject to periodic audits by U.S. federal and state authorities.Currently, the Company is not undergoing any audits by these taxingauthorities. The Company is no longer subject to U.S. federal tax examinationsfor years prior to 2003 and for the majority of state tax jurisdictions foryears prior to 2002. The Company’s loss carryforward amounts are generallysubject to examination and adjustment for a period of three years, beginningwhen such carryovers are utilized to reduce taxes in a future tax year.

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## **NOTE 11 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

(in thousands)
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Supplemental cash flow  information: |       |                                            |       |                                          |       |   |   |   |   |
| Income taxes  paid                   |       | $                                               | 39         |                                          | $          | 65 |   | $ | 74 |   | $ | 92 |   |
| Interest paid                        |       | $                                               | 197        |                                          | $          | 525 |   | $ | 999 |   | $ | 917 |   |

 

**NOTE 12 — LOSS PER SHARE**

Basic earnings(loss) per share is computed by dividing the loss from continuing operations,the net income from discontinued operations and the net loss by the weightedaverage number of common shares outstanding for the period. Diluted loss pershare reflects the potential dilution that could occur if options wereexercised or converted into common stock. Shares attributable to the exerciseof outstanding options that are anti-dilutive are excluded from the calculationof diluted loss per share.  For the sixmonths ended June 30, 2007 and 2006, the Company excluded, from the computationof diluted earnings per share, stock options to purchase 741,965 and 1,196,997shares, respectively.

**NOTE 13 — RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

In June 2006, the Financial Accounting Standards Board (“FASB’) issuedFASB Interpretation No. 48*, “*Accountingfor Uncertainty in Income Taxes*”*  (“FIN 48”). This Interpretation clarifies theaccounting for uncertainty in income taxes recognized in companies’ financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes.” ThisInterpretation prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in a tax return. This Interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. Theprovisions of FIN 48 are effective for fiscal years beginning after December 15,2006. As such, the company adopted these provisions January 1, 2007. Theadoption of FIN 48 did not have a material impact on the consolidated financialstatements.

In September 2006, the FASB issued SFAS No. 157,**“FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principals and expands disclosuresabout fair value measurements.  Thestatement does not require new fair value measurements, but is applied to theextent that other accounting pronouncements require or permit fair valuemeasurements.  The statement emphasizesthat fair value is a market-based measurement that should be determined basedon the assumptions that market participants would use in pricing an asset orliability.  Companies that have assetsand liabilities measured at fair value will be required to disclose informationthat enables the users of its financial statements to access the inputs used todevelop those measurements.  The reportingentity is encouraged, but not required, to combine the fair value informationdisclosed under this statement with the fair value information disclosed underother accounting pronouncements.  SFASNo. 157 is effective for fiscal years beginning after November 15, 2007.  The Company is in the process of evaluatingthe provisions of the statement, but does not anticipate that the adoption ofSFAS No. 157 will have a material impact on the Company’s consolidatedfinancial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - including an amendment of FASBStatement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial andsubsequent measurement attribute for many financial assets and liabilities.Entities electing the fair value option would be required to recognize changesin fair value in earnings.  Entitieselecting the fair value option are required to distinguish, on the face of thestatement of financial position, the fair value of assets and liabilities forwhich the fair value option has been elected and similar assets and liabilitiesmeasured using another measurement attribute. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  The adjustment to reflect thedifference between the fair value and the carrying amount would be accountedfor as a cumulative-effect adjustment to retained earnings as of the date ofinitial adoption. The Company is currently evaluating the impact, if any, ofSFAS No. 159 on its consolidated financial statements.

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

***DisclosureRegarding Forward Looking Statements***

*This report contains information that mayconstitute “forward-looking statements.” Generally, the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “project,” “will” and similar expressionsidentify forward-looking statements, which generally are not historical in nature.All statements that address operating performance, events or developments thatthe Company expects or anticipates will occur in the future—includingstatements relating to volume growth, share of sales and earnings per sharegrowth, and statements expressing general optimism about future operatingresults—are forward-looking statements. As and when made, management believesthat these forward-looking statements are reasonable. However, caution shouldbe taken not to place undue reliance on any such forward-looking statementsbecause such statements speak only as of the date when made. The Companyundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.In addition, forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially from theCompany’s historical experience and its present expectations or projections.These risks and uncertainties include, but are not limited to, those describedin this report, in Part II, “Item 1A. Risk Factors” and elsewhere in theAnnual Report on Form 10-K for the year ended December 31, 2006, and thosedescribed from time to time in future reports filed with the Securities andExchange Commission.*

***ExecutiveOverview***

NationalR.V. Holdings, Inc. (the “Company”) through its wholly-owned subsidiary,National RV, Inc. (“NRV”), is one of the nation’s leading producers ofmotorized recreational vehicles, often referred to as RVs or motorhomes.   NRV began manufacturing RVs in 1964.  From its Perris, California facility, NRVdesigns, manufactures and markets Class A gas and diesel motorhomes undermodel names *Surf Side, Sea Breeze, Dolphin,Tropi-Cal, Pacifica and Tradewinds.*

Priorto February 20, 2007, high-end  (“Highline”)Class A diesel motorhomes were designed, manufactured and marketed throughanother wholly-owned subsidiary, Country Coach, Inc. (“CCI”) operating fromJunction City, Oregon. CCI was sold on February 20, 2007. (See Note 2 in theaccompanying notes to the consolidated financial statements for furtherdiscussion of these discontinued operations.)

Thefollowing management’s discussion and analysis (“MD&A”) is intended to helpthe reader understand the results of operations of National R.V. Holdings, Inc.This MD&A is provided as a supplement to, and should be read in conjunctionwith, the Company’s consolidated financial statements and the accompanyingnotes to the consolidated financial statements contained within this quarterlyForm 10-Q filing. All data and other statistical information concerning theCompany in this MD&A and in Item 1A. Risk Factors give effect to the saleof CCI and, therefore, exclude CCI-related information.

For the three and six months ended June 30, 2007, theCompany incurred a loss from continuing operations of $8.0 million and $16.8million, or $0.77 and $1.63 per share, respectively, as compared to a loss fromcontinuing operations of $8.4 million and $11.0 million, or $0.82 and $1.06 pershare, respectively, for the three and six months ended June 30, 2006. Duringthe first quarter of 2006, the Company showed significant progress in itsturnaround efforts with continued market share gains and reduced losses. Earlyin the second quarter of 2006, the Company discovered a defective fiberglassissue related to a product received from one of its suppliers. This defectivefiberglass issue resulted in substantial unexpected costs and created aliquidity strain, which was compounded by a continued decline in the Class Aindustry. This created an environment of severe uncertainty that began tosignificantly adversely affect the Company, its employees, suppliers, customersand dealers. These challenges increased in the third and fourth quarters of2006 and significantly impacted the Company’s first and second quarter salesand operating results of 2007.

On June 1, 2007, the State of California, Departmentof Industrial Relations Self-Insurance Plans (the “State”) notified NRV that itdoes not meet the minimum credit rating criteria for participation in the State’salternative security program with regard to its self-insured workers’compensation program. Therefore, a security deposit will be required in theamount of $5.5 million. During August, the Company secured a letter of creditfrom Wells Fargo Bank for $2.0 million and forwarded $3.5 million in cash tothe State of California for the balance of the security deposit. This cashdeposit will be maintained by the State in an interest bearing account thataccrues to the benefit of the Company. Early in the second quarter of 2008, theState will reevaluate the Company’s minimum credit rating for participation inthe alternative security program. If the Company again qualifies forparticipation in this program, the security deposit requirement will beeliminated at that time.

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***Looking Forward***

Giventhe significant reduction in sales levels, the Company is in the process ofreducing costs, including reducing its operating foot print in order to lowerboth fixed and variable costs and increase its capacity utilization. At itsPerris, California facilities, the Company essentially has two operatingfacilities—one on each side of the street comprised of 607,000 square feet infive buildings. The Company is working on leasing out excess property.  The Company expects that the remainingproperty not subleased will still provide ample space for future growth.

TheCompany continues to pursue its strategy of adding new dealers. To this end, ithas divided the country into five geographic regions, and in each region hasidentified the specific markets where it needs to add a dealer, or in somecases, work with an existing dealer to enhance the Company’s market share. TheCompany was handicapped during the latter part of 2006 in this effort byuncertainty in the market place regarding its future.  However, the sale of CCI and the sale andleaseback of the Company’s Perris, California property, and the resultinginfusions of cash, have once again put the Company in a position toaggressively pursue this effort. Several large, multi-location dealers wereacquired in the second quarter of 2007.

TheCompany continues to invest heavily in the area of product development. Inaddition to launching the Pacifica diesel motorhome in 2006, the Company’s NRVsubsidiary also introduced a new full-length slide room and a teleslide(telescoping slide) for use in its units. The latter innovation has a patentpending, as it is the first of its kind in the industry. Both of these latterinnovations will be implemented into several of the Company’s brands during2007. The Company also continues to pursue methods of construction for itsmotorhomes that will accomplish all of the following: reduce cost ofconstruction, reduce the weight of the motorhomes, and add strength. Severalprojects to this end are well under way. Additionally, the Company plans tointroduce an entry-level gas product and a value line diesel product in late2007, along with several new floor plans.

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

TheCompany has engaged a public relations firm to assist with the communication ofthese multiple efforts to its dealers and prospective and existingcustomers.  This effort will allow theCompany to effectively communicate its upcoming initiatives and begin to offsetcertain negative publicity the Company has experienced over the last ninemonths.

TheRecreation Vehicle Industry Association’s (RVIA) market expansion campaign, GORVing, now in its ninth year, is fostering greater awareness and garneringmedia attention. Though RVIA expects substantial growth for the industry in thelong-term or decade ahead, RVIA expects minimal growth for 2007.

Thisanalysis of the Company’s financial condition and operating results should beread in conjunction with the accompanying consolidated financial statementsincluding the notes thereto.

***Critical Accounting Policies***

The preparation of theconsolidated financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States of Americarequires management to make judgments, assumptions and estimates that affectthe amounts reported. See the discussion of critical accounting policies belowand in the Annual Report on Form 10-K for the year ended December 31, 2006. Forthe six months ended June 30, 2007, 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.

***Results ofOperations***

Thefollowing is management’s discussion and analysis of certain significantfactors, which have affected the Company’s financial condition, results ofoperations and cash flows during the periods included in the accompanyingconsolidated financial statements.

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The following table summarizes the increases(decreases) in the consolidated statement of operations for both the three- andsix-month periods ended June 30, 2007 as compared to the three- and six-monthperiods ended June 30, 2006: (dollar amounts in thousands).
| ** **                                                          | ** ** | **Three Month Comparison** | ** ** | **Six Month Comparison** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **Consolidated Statements of Operations Data:** | ** ** | **$ Change**                    | ** ** | **% Change**                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Net sales                                                           |       | $                                    | (17,275    | )                                  | (42.5      | )% | $ | (49,974 | ) | (52.5 | )% |
| Cost of goods  sold                                                 |       | (17,660                              | )          | (39.1                              | )          | (43,812 | ) | (44.7 | ) |
| Gross loss                                                          |       | (385                                 | )          | (8.6                               | )          | 6,162 |   | 226.8 |   |
| Selling expenses                                                    |       | (165                                 | )          | (12.4                              | )          | (421 | ) | (16.4 | ) |
| General and  administrative expenses                                |       | 620                                  |       | 30.1                               |       | 624 |   | 13.2 |   |
| Operating loss                                                      |       | 70                                   |       | 0.9                                |       | 6,365 |   | 63.5 |   |
| Interest expense                                                    |       | (428                                 | )          | (71.7                              | )          | (307 | ) | (30.2 | ) |
| Other income                                                        |       | 118                                  |       | 262.2                              |       | 245 |   | 231.1 |   |
| Loss from continuing operations before income taxes                 |       | (476                                 | )          | (5.6                               | )          | 5,813 |   | 53.2 |   |
| Provision for  income taxes                                         |       | 23                                   |       | 230.0                              |       | 36 |   | 180.0 |   |
| Loss from  continuing operations                                    |       | (453                                 | )          | (5.4                               | )          | 5,849 |   | 53.4 |   |
| Income (loss) from  discontinued operations                         |       | (1,324                               | )          | (100.0                             | )          | 4,194 |   | N/A |   |
| Gain from sale  of discontinued operations                          |       | —                               |       | —                             |       | 7,328 |   | N/A |   |
| Income taxes  related to discontinued operations                    |       | (8                                   | )          | (100.0                             | )          | 53 |   | 311.8 |   |
| Net income from  discontinued operations                            |       | (1,316                               | )          | (100.0                             | )          | 3,081 |   | 174.3 |   |
| Net loss                                                            |       | $                                    | 863        |                               | 12.1       | % | $ | 2,768 |   | 30.1 | % |

 

***Net sales***

Net sales decreased $17.3 million or 42.5% for thethree months ended June 30, 2007 as compared to the three months ended June 30,2006. Net sales decreased $50.0 million or 52.5% for the six months ended June30, 2007 as compared to the corresponding period last year. Wholesale unitshipments of diesel motorhomes for the three months ended June 30, 2007were 69, down 36% from 107 units for the three months ended June 30, 2006.Shipments of gas motorhomes for the three months ended June 30, 2007 were147, down 54% from 323 units for the three months ended June 30, 2006.Wholesale unit shipments of diesel motorhomes for the six months endedJune 30, 2007 were 119, down 57% from 279 units for the six months endedJune 30, 2006. Shipments of gas motorhomes for the six months endedJune 30, 2007 were 312, down 55% from 691 units for the six months endedJune 30, 2006. The substantial decline in shipments is believed to be theresult of uncertainty in the market place regarding the Company’s financialcondition resulting from the defective fiberglass problem in 2006 and itsfinancial aftermath.  The Companybelieves that with the substantial infusion of cash and the reduction in debtfrom the sale of CCI and the sale and leaseback transaction, it can now beginto reverse the uncertainty and trend of declining sales.

***Gross loss***

The gross loss for the three months ended June 30,2007 decreased $0.4 million or 8.6% from the corresponding period in 2006. Theprimary factor leading to the decreased gross loss was the fact that the costsresulting from the defective fiberglass material in 2006 were not a part of the2007 results.  However, the gross lossreduction was significantly offset by substantially lower sales over which tospread the fixed overhead costs. Included in cost of goods sold were $1.6million for fixed overhead costs below normal production levels which wereincurred in the three-month period ended June 30, 2007.  The gross loss for the six months ended June30, 2007 increased $6.2 million or 226.8% from the corresponding period in 2006.The primary factors that led to this significant increase in gross loss, as theCompany struggled to ship units amidst the recent severe uncertainty regardingits financial condition, were substantially lower sales over which to spreadthe fixed overhead costs, increased sales incentives and increased warrantycosts, partially offset by the costs resulting from the defective fiberglassmaterial in 2006 not being a part of the 2007 results.  The Company incurred for the six-month periodended June 30, 2007, current period charges of $3.2 million for fixed overheadcosts below normal production levels.

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***Selling expenses***

Selling expenses decreased $0.2 million or 12.4% forthe three months ended June 30, 2007 compared to the three months ended June30, 2006. Selling expenses decreased $0.4 million or 16.4% for the six monthsended June 30, 2007 compared to the corresponding period last year. Thesedecreases were primarily due to reductions in personnel, promotions andadvertising costs within the marketing function.

***General and administrative expenses***

General and administrative expenses increased $0.6million or 30.1% for the three months ended June 30, 2007 compared to thecomparable period in 2006. General and administrative expenses increased $0.6million or 13.2% for the six months ended June 30, 2007 compared to thesix months ended June 30, 2006. These increases were caused primarily by attorneyfees incurred in a lawsuit the Company has filed against Crane Composites Inc.,the supplier of the defective fiberglass material. High one-time costsassociated with the sale of CCI in the current year and loan costs were othercontributing factors, while reductions in personnel costs, share-basedcompensation expense per SFAS No. 123(R) and audit fees were three significantoffsetting factors.

***Interest expense***

Interest expense for the three and six months endedJune 30, 2007 decreased $0.4 million and $0.3 million, respectively, from thecorresponding periods in 2006. The decrease in interest expense is due to theCompany completely paying off its line of credit upon receiving cash proceedsfrom the sale of CCI on February 22, 2007 and the sale of its Perris,California property on May 22, 2007.

***Income taxes***

The overall effective tax rate for the six months ended June 30, 2007was 1.1% compared to an effective tax rate of 0.4% for the six months endedJune 30, 2006. The effective tax rate gives effect of full valuation allowancein the amount of $4.4 million and $3.4 million at June 30, 2007 and June 30,2006.

***Liquidity andCapital Resources***

The Company incurred losses from continuing operationsof $16.8 million and $11.0 million for the six months ended June 30, 2007and June 30, 2006, respectively.  TheCompany showed significant progress in its turnaround efforts with market sharegains and reduced losses in the first quarter of 2006 but early in the second quarterof 2006 it discovered a defective fiberglass issue related to a productreceived from one of its suppliers. This defective fiberglass issue resulted insubstantial unexpected costs and created a liquidity strain, which wascompounded by a continued decline in the Class A industry. This created anenvironment of severe uncertainty that began to significantly adversely affectthe Company, its employees, suppliers, customers and dealers. These challengesincreased in the third and fourth quarters of 2006 and significantly impactedthe Company’s year to date sales and operating results in 2007.

The Company completedthe sale of CCI in February 2007 and received a total consideration of$38.7 million that was primarily used to reduce debt and infuse workingcapital.  On May 22, 2007, the Companycompleted the sale and leaseback of its Perris, California property, whichprovided $31.1 million of net proceeds that was used to pay off the line ofcredit, diminish vendor interest charges, fund the capital required toconsolidate operations and provide working capital to support the turnaroundeffort. The Company’s continuing operations had net working capital of $25.2million and $(18.1) million at June 30, 2007 and December 31, 2006,respectively. The $43.3 million increase in working capital was the result ofthe $29.0 million payoff of the line of credit, a $13.0 million decrease inaccounts payable and a $7.9 million increase in cash, partially offset by a$6.3 million decrease in inventories.

In conjunction with the sale of CCI and the sale andleaseback, the Company entered into amendments to modify its credit agreementthat among other things reduced the credit facility to $15 million. The Company’sborrowing availability is limited to its borrowing base, less its letters ofcredit reserve balance, which as of June 30, 2007 was $9.4 million. Additionally,these amendments provided for an increase in the letter of credit sub-facilityamount, the establishment of EBITDA covenants and limited capital expendituresto $2 million for 2007.  These amendmentsalso provide that any failure to meet the EBITDA covenant would not constitutean event of default if the average daily sum of all obligations is less than$10 million.  As of June 30, 2007, this totalobligations amount was $5.4 million, $5.0 million of which was a letter ofcredit securing the lease of the Perris, California property.  Finally, these amendments provided that byNovember 30, 2007, the Company will provide financial projections for 2008.

At June 30, 2007, the Company had no outstandingborrowings under the line of credit.  TheCompany had $29.0 million outstanding on the line of credit at December 31,2006.  Amounts borrowed under therevolving credit facility bear interest at the prime rate listed in the WallStreet Journal plus 1.50 percentage points. At June 30, 2007, the interest rate for the borrowings under the line ofcredit was 9.75%.  The weighted averageinterest rate for the borrowing under the line of credit during the threemonths ended June 30, 2007 and 2006 were 9.75% and 8.42%, respectively.  The weighted average interest rate for theborrowings on the credit facility during the six months ended June 30, 2007 and2006 were 9.01% and 8.21%, respectively.

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Duringthe six months ended June 30, 2007, the Company’s continuing operations used$21.8 million of cash in its operations, which was primarily due to a loss fromcontinuing operations of $16.8 million and a decrease in accounts payable of$13.0 million, partially offset by a $5.8 million decrease in inventories.During the six months ended June 30, 2006, the Company’s continuing operationsused $18.5 million of cash in its operations, which was primarily due to a lossfrom continuing operations of $11.0 million and increases in inventories andreceivables of $7.6 million and $4.4 million, respectively, partially offset bya $4.0 million increase in accounts payable. For the six months ended June 30,2007, net cash provided by investing activities from continuing operations was$23.7 million, primarily due to the $31.1 million of proceeds from the sale ofthe Perris, California property, partially offset by the $7.2 million increasein restricted cash. Net cash used in investing activities for the six monthsended June 30, 2006 was $0.4 million, primarily due to the $0.5 million inpurchases of property, plant and equipment. Cash used in financing activitiesby continuing operations for the six months ended June 30, 2007 was $30.8million, primarily due to the $29.0 million payoff of the line of credit. Netcash provided by financing activities for the six months ended June 30, 2006was $18.9 million, primarily due to net advances under the line of credit of$16.3 million.

On June 1, 2007, theState of California, Department of Industrial Relations Self-Insurance Plans(the “State”) notified NRV that it does not meet the minimum credit ratingcriteria for participation in the State’s alternative security program withregard to its self-insured workers’ compensation program. Therefore, a securitydeposit will be required in the amount of $5.5 million. During July, theCompany amended its credit facility to increase its letter of creditsub-facility to $7.5 million and during August secured a letter of credit fromWells Fargo Bank for $2.0 million and forwarded $3.5 million in cash to theState of California for the balance of the security deposit. This cash depositwill be maintained by the State in an interest bearing account that accrues tothe benefit of the Company. Early in the second quarter of 2008, the State willreevaluate the Company’s minimum credit rating for participation in thealternative security program. If the Company again qualifies for participationin this program, the security deposit requirement will be eliminated at thattime.

Management’s plan to achieve operational profitabilityincludes continuing or starting a variety of initiatives to improve the Company’searnings and working capital position, including: (i) introducing new productsand floor plans in 2007, (ii) adding new dealers to fill open market areas orreplace under-performing dealers, (iii) decreasing overall sales incentives bytailoring programs that provide the maximum value to the Company, (iv) reducingmaterial and related obsolescence costs, (v) improving manufacturingefficiencies, (vi) further reducing manufacturing and other overhead costs and(vii) decreasing the costs of warranty.

In order to fund on-going operations, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional orreplacement debt and or equity financings it may be able to complete.  Obtaining additional or replacement financingwould help to eliminate certain restrictions on the Company’s current cashposition that may not otherwise be eliminated without the Company achievingsustained operational profitability. After consideration of its available borrowing capacity and fundingneeds, the Company believes that the availability of funds under its existingline of credit will provide sufficient financial resources to fund itsoperations for the next twelve months.  However,the Company is currently exploring its alternative debt financing options inorder to lessen the Company’s reliance on its existing line of credit and toimprove its working capital position. There can be no assurance that any such financing can be completed withacceptable terms and conditions.  If theCompany is unable to restructure its financing, it may be required to preserveits available resources by various methods such as the further reduction ofexpenses, deferring the introduction of new products or otherwise scaling backits operations.  Such measures may have amaterial adverse effect on the Company’s financial position, results ofoperations and prospects.

Most ofthe 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 

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lenders.In general, the repurchase agreements require the Company to repurchase a unitif the dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s undiscounted maximum potentialexposure under these agreements approximated $52.1 million at June 30, 2007. Aswith receivables, the risk of loss under the repurchase agreements was spreadover a number of dealers and lenders and was reduced by the resale value of theRVs, which the Company would be required to repurchase. Losses under theseagreements have not been material in the past and management does not believethat any future losses under such agreements will have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows. Consequently, no liability has been recognized in theconsolidated financial statements.

Theleaseback contract associated with the sale of the Perris, California propertyon May 22, 2007, resulted in NRV entering into two operating leases.  These leases are for an initial term of 10years with annual escalation in the base rent. The first year cash obligation is $2.7 million with the total obligationapproximating $31.3 million.

***RecentAccounting Pronouncements***

In June 2006, the Financial Accounting Standards Board (“FASB’) issuedFASB Interpretation No. 48*, “*Accountingfor Uncertainty in Income Taxes*”*  (“FIN 48”). This Interpretation clarifies theaccounting for uncertainty in income taxes recognized in companies’ financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes.” ThisInterpretation prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in a tax return. This Interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. Theprovisions of FIN 48 are effective for fiscal years beginning afterDecember 15, 2006. As such, the company adopted these provisionsJanuary 1, 2007. The adoption of FIN 48 did not have a material impact onthe consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,**“FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principals and expands disclosuresabout fair value measurements.  Thestatement does not require new fair value measurements, but is applied to theextent that other accounting pronouncements require or permit fair valuemeasurements.  The statement emphasizesthat fair value is a market-based measurement that should be determined basedon the assumptions that market participants would use in pricing an asset orliability.  Companies that have assetsand liabilities measured at fair value will be required to disclose informationthat enables the users of its financial statements to access the inputs used todevelop those measurements.  Thereporting entity is encouraged, but not required, to combine the fair valueinformation disclosed under this statement with the fair value informationdisclosed under other accounting pronouncements.  SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany is in the process of evaluating the provisions of the statement, butdoes not anticipate that the adoption of SFAS No. 157 will have a materialimpact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - including an amendment of FASBStatement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial andsubsequent measurement attribute for many financial assets and liabilities.Entities electing the fair value option would be required to recognize changesin fair value in earnings.  Entitieselecting the fair value option are required to distinguish, on the face of thestatement of financial position, the fair value of assets and liabilities forwhich the fair value option has been elected and similar assets and liabilitiesmeasured using another measurement attribute. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  The adjustment to reflect thedifference between the fair value and the carrying amount would be accountedfor as a cumulative-effect adjustment to retained earnings as of the date ofinitial adoption. The Company is currently evaluating the impact, if any, ofSFAS No. 159 on its consolidated financial statements.

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

Market riskrepresents the risk of loss that may impact the Company’s financial position,results of operations or cash flows due to adverse changes in market prices,including interest rate risk and other relevant market rate or price risks. TheCompany does not have any significant risks related to derivative financialinstruments or foreign currency translation. However, the Company is exposed tointerest rate changes related primarily to cash borrowings on the Company’scredit facility. The weighted average interest rate for the borrowings underthe line of credit during the three months ended June 30, 2007 and 2006 were9.75% and 8.42%, respectively. The weighted average interest rate for theborrowings on the credit facility during the six months ended June 30, 2007 and2006 were 9.01% and 8.21%, respectively.

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**Item 4.Controls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s reports under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to management, includingthe Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, as they are designed to do, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

In connection with the preparation of this QuarterlyReport on Form 10-Q, as of June 30, 2007, an evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe CEO and CFO, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e)under the Exchange Act). Based on our assessment and those criteria, managementbelieves that the Company maintained effective internal control over financialreporting as of June 30, 2007.

#### ***Changes in Internal Controlover Financial Reporting***

There were no changes in the Company’s internalcontrol over financial reporting for the six months ended June 30, 2007 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

**PART II — OTHER INFORMATION**

**Item 1A.****Risk Factors**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inthe Annual Report on Form 10-K for the year ended December 31, 2006, whichcould materially affect the Company’s business, financial condition or futureresults. The risks described in the Company’s Annual Report on Form 10-K arenot the only risks facing the Company. Additional risks and uncertainties notcurrently known to the Company or that the Company currently deems to beimmaterial also may materially adversely affect the Company’s business,financial condition and/or operating results. Other than with respect to therisk factor below, there have been no material changes from the risk factorsdisclosed in the “Risk Factors” section of the Company’s Annual Report on Form10-K for the year ended December 31, 2006 and the Company’s Form 10-Q for thequarter ended March 31, 2007.

**We believe we will needalternative debt financing in the near term, and it may not be available onacceptable terms, or at all, and if we do not receive the alternative debtfinancing, it could have a material adverse effect on our financial conditionand future prospects.**

In order to fund on-going operations, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional orreplacement debt and or equity financings it may be able to complete.  Obtaining additional or replacement financingwould help to eliminate certain restrictions on the Company’s current cashposition that may not otherwise be eliminated without the Company achievingsustained operational profitability. After consideration of its available borrowing capacity and fundingneeds, the Company believes that the availability of funds under its existingline of credit will provide sufficient financial resources to fund itsoperations for the next twelve months.  However,the Company is currently exploring its alternative debt financing options inorder to lessen the Company’s reliance on its existing line of credit and toimprove its working capital position. There can be no assurance that any such financing can be completed withacceptable terms and conditions.  If theCompany is unable to restructure its financing, it may be required to preserveits available resources by various methods such as the further reduction ofexpenses, deferring the introduction of new products or otherwise scaling backits operations.  Such measures may have amaterial adverse effect on the Company’s financial position, results ofoperations and prospects.

 

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**Item 6.****Exhibits**

Exhibits

2.1                                             Purchaseand Sale Agreement dated as of December 27, 2006 between the Company and FirstIndustrial Acquisitions, Inc.

10.1                                       Leasedated May 18, 2007 between NRV and First Industrial for property known as 100West Sinclair Street located in County of Riverside, State of California.

10.2                                       Leasedated May 18, 2007 between NRV and First Industrial for property known as 3411N. Perris Boulevard located in County of Riverside, State of California.

10.3             Loan Modification Agreement No. 5,dated May 22, 2007, between the Company, NRV and Wells Fargo Bank, as lender.

10.4                                       LoanModification Agreement No. 6, dated July 3, 2007, between the Company, NRV andWells Fargo Bank, as lender.

31.1                                       Certificationof Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the ExchangeAct.

31.2                                       Certificationof Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the ExchangeAct.

32.1                                       Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.

**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                       | **NATIONAL R.V. HOLDINGS, INC.**                 |
|-----------------------|--------------------------------------------------|
|                  | (Registrant)       |
|                  |                                             |
| Date: August 13, 2007 | By                                               | /s/ Thomas J. Martini |
|                  |                                             |   |
|                  | Thomas J. Martini                                |
|                  | Chief Financial Officer                          |
|                  | (Principal Accounting and                        |
|                  |    Financial Officer)                  |

 

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