| **Table of Contents** |
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# **SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

** **

**Amendment No.1**

** **

**(MarkOne)**

 

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

 

**For thequarterly period ended March 31, 2005**

 

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

 

**Commissionfile number 001-12085**

 

 

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

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

 

YES o   NO ý

 

Indicateby check mark whether the registrant is an accelerated filer.

 

YES ý   NO o

 

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

 

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

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

 

 

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****EXPLANATORY NOTE****

 

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”)amends and restates the Company’s Quarterly Report on Form 10-Q for thethree months ended March 31, 2005, as initially filed with the Securitiesand Exchange Commission (the “SEC”) on October 26, 2005 (the “Original Form 10-Q”).This Form 10-Q/A is being filed to restate the consolidated statement ofoperations and the consolidated statement of cash flows for the three monthsended March 31, 2004 and to restate the consolidated balance sheets as of March 31,2005 and as of December 31, 2004 as described under the heading “NewRestatement” below and to clarify the presentation of the consolidatedfinancial information for the three months ended March 31, 2004 appearingin certain sections of this filing as described under “Clarification ofPresentation” below. These restatements were reflected in the Company’s 2004Form 10-K/A filed on March 21, 2006 and its 2005 Form 10-K filedon March 30, 2006.

 

New Restatement

 

The Company is restating the consolidated statement of operations andthe consolidated statement of cash flows for the three months ended March 31,2004 and is restating the consolidated balance sheets as of March 31, 2005and as of December 31, 2004 for the correction of accounting for theamortization of certain leasehold improvements. Statement of FinancialAccounting Standards (SFAS) No. 13, “Accounting for Leases,” as furtherclarified by Emerging Issues Task Force (EITF) No. 05-6, “Determining theAmortization Period of Leasehold Improvements,” requires that leaseholdimprovements by the lessee be amortized over the shorter of their estimateduseful lives or the lease term. With respect to one of the Company’s leasedproperties, the Company amortized certain leasehold improvements over a periodthat exceeded the lease term. The use of the incorrect amortization period onthese leasehold improvements caused a cumulative understatement of leaseholdamortization expense of $0.41 million at December 31, 2004. Although thiserror was not material to any individual prior period, the cumulativeadjustment to correct the error would be material to the quarter in which itwere to be corrected. Accordingly, the Company has concluded to restate priorperiods to correct this error. As a result of this restatement, the restatedcost of goods sold, selling and general and administrative combined quarterlyexpense was increased by $0.01 million in the first quarter of 2004. Thisrestatement is in addition to the prior restatement reflected in the Company’sOriginal Form 10-Q as described below under “****Restatement of Prior Periods Previously Reflected inthe Original Form 10-Q.”****

 

Clarification of Presentation

 

Additionally, the Company is clarifying the presentation of theconsolidated statement of operations and the consolidated statement of cashflows for the three months ended March 31, 2004.

 

**In Note 2 to the ConsolidatedFinancial Statements and in Item 2, the Original Form 10-Q presented theconsolidated financial information for the three months ended March 31,2004 under the columns “As Previously Reported” (which represented theoriginally reported consolidated financial statements adjusted for discontinuedoperations) followed by “As Restated” (which represented the originallyreported consolidated financial statements adjusted for discontinued operationsand for the correction of certain errors discussed therein). In order toclarify the presentation of the restated consolidated financial information forthe three months ended March 31, 2004, the Company is restating thefinancial tables on pages 9 and 16 of this Form 10-Q/A to presentsuch information “As Originally Reported” (which represents the originallyreported consolidated financial statements for such periods), then “As Restatedfor Correction of Errors” (which restates such financial information for thecorrection of certain errors), and finally “As Restated for Correction ofErrors and Discontinued Operations” (which includes the reclassification ofdiscontinued operations and the restatements for the correction of certainerrors).**

** **

**Changes Reflected in this Form 10-Q/A**

** **

**As a result of the restatement andclarifications, the disclosures in the following items related to the threemonths ended March 31, 2005 and 2004 and the year ended December 31,2004 have been revised:**

 

**Part I, Item 1 – ConsolidatedFinancial Statements and Notes to Consolidated Financial Statements**

** **

**•**                    ConsolidatedFinancial Statements

** **

**•**                     Note1 – Basis of Presentation (History of Recent Losses section)

** **

**•**                     Note2 – Restatement of a Prior Period

** **

**•**                     Note7 – Stock-Based Compensation

** **

**•**                     Note8 – Income Taxes

** **

**•**                    Note10 – (Loss) Earnings Per Share

 

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**Part I, Item 2 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

**•**                     Restatementof Financial Statements

** **

**•**                     ExecutiveOverview

** **

**•**                    Resultsof Operations

** **

**Part I, Item 4 – Controls andProcedures**

** **

**Part II, Item 6 – Exhibits**

** **

Except for the foregoing restatement and clarified presentation, this Form 10-Q/Acontinues to describe conditions as presented in the Original Form 10-Q.Except in the sections identified above, this Form 10-Q/A does not reflectevents occurring after the filing of the Original Form 10-Q, or modify orupdate those disclosures, including exhibits to the Form 10-Q affected bysubsequent events. Information not affected by the restatement is unchanged andreflects the disclosures made at the time of the Original Form 10-Q.Accordingly, this Form 10-Q/A should be read in conjunction with filingsmade with the SEC subsequent to the filing of the Original Form 10-Q,including any amendments to those filings.

 

****Restatement of Prior Periods PreviouslyReflected in the Original Form 10-Q****

 

**As discussed and included in theOriginal Form 10-Q, in addition to providing financial statements andother required information for the three months ended March 31, 2005, thisQuarterly Report on Form 10-Q/A also includes a restated consolidatedstatement of operations for the three months ended March 31, 2004, asdiscussed in Note 2 to the Company’s Consolidated Financial Statements. TheCompany’s previously issued financial statements for this period should not berelied upon.**

** **

**As discussed and included in theOriginal Form 10-Q, the Company is restating the consolidated statement ofoperations for the three months ended March 31, 2004 in this Form 10-Q/Afor the following item:**

** **

##### **•**                  Correction of accounting for dealer sales incentives

 

3

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

 

### **INDEX**

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

 

4

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**PART I,ITEM 1**

**ConsolidatedFinancial Statements**

 

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

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share and per share amounts)**

**(Unaudited)**

 
| ** **                                                                                                                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Restated)**           | ** ** | **(Restated)**              | ** ** |
|                                                                                                                           |       |                     |       |                        |       |
| ASSETS                                                                                                                         |       |                     |       |                        |       |
| Current assets:                                                                                                                |       |                     |       |                        |       |
| Cash and  cash equivalents                                                                                                     |       | $                        | 11         |                        | $          | 11 |   |
| Restricted  cash                                                                                                               |       | 25                       |       | 251                         |       |
| Receivables,  less allowance for doubtful accounts of $211 and $137, respectively                                              |       | 36,357                   |       | 19,976                      |       |
| Inventories                                                                                                                    |       | 82,874                   |       | 74,826                      |       |
| Deferred  income taxes                                                                                                         |       | 1,266                    |       | 1,291                       |       |
| Note  receivable                                                                                                               |       | 1,264                    |       | 2,213                       |       |
| Prepaid  expenses                                                                                                              |       | 2,715                    |       | 2,924                       |       |
| Total  current assets                                                                                                          |       | 124,512                  |       | 101,492                     |       |
| Property,  plant and equipment, net                                                                                            |       | 37,811                   |       | 37,403                      |       |
| Other assets                                                                                                                   |       | 1,397                    |       | 1,338                       |       |
|                                                                                                                           |       | $                        | 163,720    |                        | $          | 140,233 |   |
|                                                                                                                           |       |                     |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                      |       |                     |       |                        |       |
| Current liabilities:                                                                                                           |       |                     |       |                        |       |
| Accounts  payable                                                                                                              |       | $                        | 28,651     |                        | $          | 16,612 |   |
| Accrued  expenses                                                                                                              |       | 23,167                   |       | 22,242                      |       |
| Line of  credit                                                                                                                |       | 15,588                   |       | 12,690                      |       |
| Book  overdraft                                                                                                                |       | 9,747                    |       | 803                         |       |
| Current  portion of capital leases                                                                                             |       | 51                       |       | 51                          |       |
| Total current  liabilities                                                                                                     |       | 77,204                   |       | 52,398                      |       |
| Long-term  accrued expenses                                                                                                    |       | 7,085                    |       | 7,069                       |       |
| Deferred  income taxes                                                                                                         |       | 1,266                    |       | 1,291                       |       |
| Long-term  portion of capital leases                                                                                           |       | 179                      |       | 185                         |       |
| Total  liabilities                                                                                                             |       | 85,734                   |       | 60,943                      |       |
|                                                                                                                           |       |                     |       |                        |       |
| Commitments and contingent liabilities  (Note 6)                                                                               |       |                     |       |                        |       |
|                                                                                                                           |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                     |       |                     |       |                        |       |
| Preferred  stock - $0.01 par value; 5,000 shares authorized, 4,000 issued and  Outstanding                                     |       | —                   |       | —                      |       |
| Common stock  - $0.01 par value; 25,000,000 shares authorized, 10,339,484 and 10,302,109  issued and outstanding, respectively |       | 103                      |       | 103                         |       |
| Additional  paid-in capital                                                                                                    |       | 37,563                   |       | 37,423                      |       |
| Retained  earnings                                                                                                             |       | 40,320                   |       | 41,764                      |       |
| Total  stockholders’ equity                                                                                               |       | 77,986                   |       | 79,290                      |       |
|                                                                                                                           |       | $                        | 163,720    |                        | $          | 140,233 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                             | ** ** | **(Restated)** | ** ** |
|                                                          |       |                                   |       |   |   |
| Net sales                                                     |       | $                                      | 125,625    |   | $ | 103,146 |   |
| Cost of  goods sold                                           |       | 120,010                                |       | 96,063 |   |
| Gross profit                                                  |       | 5,615                                  |       | 7,083 |   |
| Selling  expenses                                             |       | 3,639                                  |       | 2,708 |   |
| General and  administrative expenses                          |       | 3,252                                  |       | 2,436 |   |
| Operating  (loss) income                                      |       | (1,276                                 | )          | 1,939 |   |
| Interest  expense                                             |       | 277                                    |       | 62 |   |
| Other income                                                  |       | (109                                   | )          | (48 | ) |
| (Loss)  income from continuing operations before income taxes |       | (1,444                                 | )          | 1,925 |   |
| Provision  for income taxes                                   |       | —                                 |       | 716 |   |
| (Loss)  income from continuing operations                     |       | (1,444                                 | )          | 1,209 |   |
| Loss from  discontinued operations                            |       | —                                 |       | (872 | ) |
| Income taxes  related to discontinued operations              |       | —                                 |       | 324 |   |
| Loss from  discontinued operations, net of taxes              |       | —                                 |       | (548 | ) |
| Net (loss)  income                                            |       | $                                      | (1,444     | ) | $ | 661 |   |
|                                                          |       |                                   |       |   |   |
| Basic (loss)  earnings per common share:                      |       |                                   |       |   |   |
| Continuing  operations                                        |       | $                                      | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                                      |       | —                                 |       | (0.06 | ) |
| Total                                                         |       | $                                      | (0.14      | ) | $ | 0.06 |   |
|                                                          |       |                                   |       |   |   |
| Diluted  (loss) earnings per common share:                    |       |                                   |       |   |   |
| Continuing  operations                                        |       | $                                      | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                                      |       | —                                 |       | (0.06 | ) |
| Total                                                         |       | $                                      | (0.14      | ) | $ | 0.06 |   |
|                                                          |       |                                   |       |   |   |
| Weighted  average number of shares:                           |       |                                   |       |   |   |
| Basic                                                         |       | 10,335                                 |       | 10,190 |   |
| Diluted                                                       |       | 10,335                                 |       | 10,334 |   |

 

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

 

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

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Three Months Ended   March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                               | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | ** **                                             | ** ** | **(Restated)** | ** ** |
| Cash flows  from operating activities                                                 |       |                                                   |       |   |   |
| Net (loss)  income                                                                    |       | $                                                      | (1,444     | ) | $ | 661 |   |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities: |       |                                                   |       |   |   |
| Depreciation  and amortization                                                        |       | 933                                                    |       | 1,001 |   |
| Bad debt  expense (recovery)                                                          |       | 80                                                     |       | (30 | ) |
| Provision  for excess and obsolete inventories                                        |       | 982                                                    |       | 372 |   |
| Gain on  asset disposal                                                               |       | (19                                                    | )          | (46 | ) |
| Deferred  income taxes                                                                |       | —                                                 |       | (4 | ) |
| Changes in  assets and liabilities:                                                   |       |                                                   |       |   |   |
| Decrease in  restricted cash                                                          |       | 226                                                    |       | — |   |
| Increase in  receivables                                                              |       | (16,161                                                | )          | (3,878 | ) |
| Increase in  inventories                                                              |       | (9,030                                                 | )          | (12,945 | ) |
| Decrease  (increase) in prepaid expenses                                              |       | 209                                                    |       | (347 | ) |
| Increase in  accounts payable                                                         |       | 12,039                                                 |       | 12,778 |   |
| Increase in  accrued expenses                                                         |       | 941                                                    |       | 789 |   |
|                                                                                  |       |                                                   |       |   |   |
| Net cash  used in operating activities                                                |       | (11,244                                                | )          | (1,649 | ) |
|                                                                                  |       |                                                   |       |   |   |
| Cash flows  from investing activities                                                 |       |                                                   |       |   |   |
| (Increase)  decrease in other assets                                                  |       | (59                                                    | )          | 95 |   |
| Repayments  on note receivable                                                        |       | 649                                                    |       | — |   |
| Proceeds  from sale of assets                                                         |       | 20                                                     |       | 1,932 |   |
| Purchase of  property, plant and equipment                                            |       | (1,342                                                 | )          | (1,341 | ) |
|                                                                                  |       |                                                   |       |   |   |
| Net cash  (used in) provided by investing activities                                  |       | (732                                                   | )          | 686 |   |
|                                                                                  |       |                                                   |       |   |   |
| Cash flows  from financing activities                                                 |       |                                                   |       |   |   |
| Net advances  under line of credit                                                    |       | 2,898                                                  |       | — |   |
| Increase in  book overdraft                                                           |       | 8,944                                                  |       | — |   |
| Principal  payments on capital leases                                                 |       | (6                                                     | )          | — |   |
| Principal  payments on long-term debt                                                 |       | —                                                 |       | (6 | ) |
| Proceeds  from issuance of common stock                                               |       | 140                                                    |       | — |   |
|                                                                                  |       |                                                   |       |   |   |
| Net cash  provided by (used in) financing activities                                  |       | 11,976                                                 |       | (6 | ) |
| Net decrease  in cash and cash equivalents                                            |       | —                                                 |       | (969 | ) |
| Cash and  cash equivalents, beginning of the year                                     |       | 11                                                     |       | 2,059 |   |
| Cash and  cash equivalents, end of period                                             |       | $                                                      | 11         |   | $ | 1,090 |   |

 

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

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**NOTE 1 – BASIS OF PRESENTATION**

 

**General**

 

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

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions toForm 10-Q/A and do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete consolidated financial statements. These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statement for the year ended December 31, 2004 andnotes thereto included in the Company’s Annual Report on Form 10-K/A filedwith the Securities and Exchange Commission on March 21, 2006.

 

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

 

***SeasonalNature of Business Activities***

 

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

 

***Use of Accounting Estimates***

 

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

 

***History of Recent Losses***

 

The Company experienced a net loss in the first three months of 2005 of$1.4 million compared to a net income of $0.7 million during the same periodlast year. The Company used cash in operating activities in the first threemonths of 2005 of $11.2 million compared to a use of cash of $1.6 million forthe same period last year.

 

The Company has incurred net losses of $9.5 million and $8.5 millionfor the years ended December 31, 2004 and 2003, respectively. The Companyhas used cash in operating activities of $15.8 million for the year ended December 31,2004 and provided cash from operating activities of $8.4 million for the yearended December 31, 2003. The RV industry has been historically cyclicaland subject to downturns during periods of weak economic conditions. Withrising fuel prices and continued economic uncertainty, the Company experienceda further decline in demand for its products in 2005. These conditions led theCompany to assess its short-term liquidity needs and plans to achieveprofitability.

 

Management’s plan to achieve operational profitability includescontinuing or starting a variety of initiatives to improve its earnings andworking capital position, including: i) new product introductions in the fourthquarter of 2005 with additional new product and floor plan introductions in thefirst half of 2006, ii) new dealer additions to fill open market areas orreplace under-performing dealers, iii) reductions in all categories ofinventory, iv) head count re-balancings to current retail sales-supportedproduction levels, v) engineering reviews of material components for theremoval of non-value added items to reduce both material and assembly costs,vi) continued thorough motorhome inspections to improve quality and to moretimely report failures, and vii) manufacturing cost reductions resulting fromthe continued implementation of lean manufacturing concepts.

 

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Inorder to fund on-going operations in the short-term, the Company remainsdependent upon its ability to utilize outside financing through borrowings onits line of credit until it achieves sustained operational profitabilitythrough a combination of increased sales, cost reductions and improved productmargins. After consideration of the restrictions of the borrowing capacitynoted in Note 5, the Company believes it has sufficient financial resources tofund its operations in the short-term. However, the Company’s ability to meetits obligations in the long-term is dependent on its ability to generatepositive cash flows from operations and is dependent on continued borrowingsunder its line of credit. If management is unable to achieve its operationalprofitability plan or unforeseen events occur and its existing line of creditis insufficient to allow the Company to meet its obligations, the Company may needto implement alternative plans that could include long-term financingcollateralized by real estate (which is presently unencumbered) or obtainingadditional debt financing, additional reductions in operating costs, deferralof capital expenditures, and further reductions in working capital. While theCompany believes that it could successfully complete the alternative plans, ifnecessary, there can be no assurance that such alternatives would be availableon acceptable terms and conditions or that the Company would be successful inits implementation of such plans.

 

**NOTE 2 – RESTATEMENT OF A PRIOR PERIOD**

 

##### **Theconsolidated financial statements have been restated to correct an errorrelated to the amortization of leasehold improvements. Emerging Issues TaskForce (EITF) No. 05-6, “Determining the Amortization Period of LeaseholdImprovements” requires that leasehold improvements by the lessee be amortizedover the shorter of their estimated useful lives or the lease term. Withrespect to one of the Company’s leased properties, the Company amortizedcertain leasehold improvements over a period that exceeded the lease term. Theuse of the incorrect amortization period on these leasehold improvements causeda cumulative understatement of leasehold amortization expense of $0.41 millionat December 31, 2004. As a result of this restatement, the restated costof goods sold, selling and general and administrative combined quarterlyexpense was increased by $0.01 million in the first quarter of 2004. Also, as aresult of this restatement, the basic net earnings per share amount was reducedto $0.06 from $0.07 and the diluted net earnings per share amount wasunchanged.**

##### ** **

In addition, the consolidated financial statements for the three monthsended March 31, 2004 previously reflected the restatement of certaindealer sales incentives, which include rebates and floorplan interestreimbursement paid to dealers to promote the sale of the product and retailincentives paid directly to dealer retail salespersons to promote the sale ofthe product and the return of sale and warranty information. The consolidatedstatement of operations for the three months ended March 31, 2004 has beenrestated to reclassify these sales incentives from selling expenses to areduction of revenue, as required by EITF No. 01-09, “Accounting forConsideration Given by a Vendor to a Customer (including a Reseller) of theVendor’s Products.” As a result of this restatement, both the restated netsales and the restated selling expenses were reduced by $0.69 million. Also, asa result of this restatement, both the basic and diluted net earnings per shareamounts were unchanged.

 

The following table presents the effect of changes in the consolidatedstatement of operations caused by the restatement (in thousands):

 

**Statement of Operations**

 
| ** **                                             | ** ** | **Three Months Ended March 31,  2004** | ** ** | ** **                                  | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **As Originally  Reported**                 | ** ** | **As Restated   for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
| Net sales                                              |       | $                                           | 110,438    |                                        | $          | 109,753 |   | $ | 103,146 |   |   |   |
| Cost of  goods sold                                    |       | $                                           | 103,151    |                                        | $          | 103,162 |   | $ | 96,063 |   |   |   |
| Gross profit                                           |       | $                                           | 7,287      |                                        | $          | 6,591 |   | $ | 7,083 |   |   |   |
| Selling  expenses                                      |       | $                                           | 3,621      |                                        | $          | 2,936 |   | $ | 2,708 |   |   |   |
| General and  administrative expenses                   |       | $                                           | 2,587      |                                        | $          | 2,588 |   | $ | 2,436 |   |   |   |
| Operating  income                                      |       | $                                           | 1,079      |                                        | $          | 1,067 |   | $ | 1,939 |   |   |   |
| Income from  continuing operations before income taxes |       | $                                           | 1,065      |                                        | $          | 1,053 |   | $ | 1,925 |   |   |   |
| Provision  for income taxes                            |       | $                                           | 396        |                                        | $          | 392 |   | $ | 716 |   |   |   |
| Income from  continuing operations                     |       | $                                           | 669        |                                        | $          | 661 |   | $ | 1,209 |   |   |   |
| Loss from  discontinued operations                     |       | $                                           | —     |                                        | $          | — |   | $ | (872 | ) |   |   |
| Income taxes  related to discontinued operations       |       | $                                           | —     |                                        | $          | — |   | $ | 324 |   |   |   |
| Loss from  discontinued operations, net of taxes       |       | $                                           | —     |                                        | $          | — |   | $ | (548 | ) |   |   |
| Net income                                             |       | $                                           | 669        |                                        | $          | 661 |   | $ | 661 |   |   |   |

 

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| ** **                                 | ** ** | **Three Months Ended March 31,  2004** | ** ** | ** **                                 | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **As Originally  Reported**                 | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
|                                       |       |                                        |       |                                       |       |   |   |   |   |
| Basic (loss)  earnings per common share:   |       |                                        |       |                                       |       |   |   |   |   |
| Continuing  operations                     |       | $                                           | 0.07       |                                       | $          | 0.06 |   | $ | 0.12 |   |   |   |
| Discontinued  operations                   |       | $                                           | —     |                                       | $          | — |   | $ | (0.06 | ) |   |   |
| Total                                      |       | $                                           | 0.07       |                                       | $          | 0.06 |   | $ | 0.06 |   |   |   |
|                                       |       |                                        |       |                                       |       |   |   |   |   |
| Diluted  (loss) earnings per common share: |       |                                        |       |                                       |       |   |   |   |   |
| Continuing  operations                     |       | $                                           | 0.06       |                                       | $          | 0.06 |   | $ | 0.12 |   |   |   |
| Discontinued  operations                   |       | $                                           | —     |                                       | $          | — |   | $ | (0.06 | ) |   |   |
| Total                                      |       | $                                           | 0.06       |                                       | $          | 0.06 |   | $ | 0.06 |   |   |   |

 

**Statement of Cash Flows**

 
| ** **                                    | ** ** | **Three Months Ended March 31,  2004** | ** ** | ** **                                 | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **As Originally  Reported**                 | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
| Net income                                    |       | $                                           | 669        |                                       | $          | 661 |   | $ | 661 |   |   |   |
| Depreciation and amortization                 |       | $                                           | 989        |                                       | $          | 1,001 |   | $ | 1,001 |   |   |   |
| Bad debt recovery                             |       | $                                           | —     |                                       | $          | (30 | ) | $ | (30 | ) |   |   |
| Provision for excess and obsolete inventories |       | $                                           | —     |                                       | $          | 372 |   | $ | 372 |   |   |   |
| Deferred income taxes                         |       | $                                           | —     |                                       | $          | (4 | ) | $ | (4 | ) |   |   |
| Increase in receivables                       |       | $                                           | (3,908     | )                                          | $          | (3,878 | ) | $ | (3,878 | ) |   |   |
| Increase in inventories                       |       | $                                           | (12,573    | )                                          | $          | (12,945 | ) | $ | (12,945 | ) |   |   |

 

**Balance Sheet**

 
| ** **                                      | ** ** | **March 31, 2005**     | ** ** | **December 31, 2004**                 | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **As Originally  Reported** | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Originally  Reported** | ** ** | **As Restated  for Correction  of Errors** | ** ** |
| Deferred income taxes                           |       | $                           | 1,269      |                                       | $          | 1,266 |   | $ | 1,294 |   | $ | 1,291 |   |
| Total current assets                            |       | $                           | 124,515    |                                       | $          | 124,512 |   | $ | 101,495 |   | $ | 101,492 |   |
| Property, plant and equipment, net              |       | $                           | 38,217     |                                       | $          | 37,811 |   | $ | 37,809 |   | $ | 37,403 |   |
| Total assets                                    |       | $                           | 164,129    |                                       | $          | 163,720 |   | $ | 140,642 |   | $ | 140,233 |   |
| Deferred income taxes (long-term  liabilities)  |       | $                           | 1,269      |                                       | $          | 1,266 |   | $ | 1,294 |   | $ | 1,291 |   |
| Total liabilities                               |       | $                           | 85,737     |                                       | $          | 85,734 |   | $ | 60,946 |   | $ | 60,943 |   |
| Retained earnings                               |       | $                           | 40,726     |                                       | $          | 40,320 |   | $ | 42,170 |   | $ | 41,764 |   |
| Total stockholders’ equity                 |       | $                           | 78,392     |                                       | $          | 77,986 |   | $ | 79,696 |   | $ | 79,290 |   |
| Total liabilities and stockholders’ equity |       | $                           | 164,129    |                                       | $          | 163,720 |   | $ | 140,642 |   | $ | 140,233 |   |

 

**NOTE 3 –RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In November 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs-an Amendment of ARB No. 43,Chapter 4.” SFAS No. 151 requires that accounting for items such as idlefacility expense, freight, handling costs, and wasted materials (spoilage) berecognized as current period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. This Statement is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005. The provision of this Statement shall be applied prospectively. TheCompany has not determined the impact that adoption of this standard will haveon its consolidated financial statements.

 

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In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,“Application of FASB Statement No. 109, Accounting for Income Taxes, tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004.” The American Jobs Creation Act, or AJCA, introducesa special 9% tax deduction on qualified production activities. FSP 109-1clarifies that this tax deduction should be accounted for as a special taxdeduction in accordance with SFAS No. 109, “Accounting for Income Taxes”.FSP 109-1 is effective upon its issuance. The adoption of FSP 109-1 did nothave a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (revised2004),”Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123,“Accounting for Stock-Based Compensation,” (SFAS No. 123) andsupercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previouslypermitted under SFAS No. 123 no longer will be an alternative tofinancial statement recognition. The Company is required to adopt SFAS No. 123Rin the first calendar quarter of 2006, beginning January 1, 2006. UnderSFAS No. 123R, the Company must determine the appropriate fair value modelto be used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition methods include modified prospective and modified retrospectiveadoption options. Under the modified retrospective option, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The modified prospective method requires that compensation expensebe recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS No. 123R, while themodified retrospective method would record compensation expense for all unvestedstock options and restricted stock beginning with the first period restated.The Company is evaluating the requirements of SFAS No. 123R. TheCompany has not yet determined the method of adoption or the effect of adoptingSFAS No. 123R, and the Company has not determined whether the adoptionwill result in amounts that are similar to the current pro forma disclosuresunder SFAS No. 123.

 

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

 

**NOTE 4 – SUPPLEMENTAL BALANCE SHEET INFORMATION**

 

Inventories consist of the following (in thousands):

 
| ** **        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
|              |       |                     |       |                        |       |
| Finished goods    |       | $                        | 9,076      |                        | $          | 16,379 |   |
| Work-in-process   |       | 48,836                   |       | 35,388                      |       |
| Raw materials     |       | 18,084                   |       | 18,398                      |       |
| Chassis           |       | 6,878                    |       | 4,661                       |       |
| Total inventories |       | $                        | 82,874     |                        | $          | 74,826 |   |

 

Accrued expenses consist of the following (in thousands):

 
| ** **                                         | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                               |       |                     |       |                        |       |
| Current  accrued expenses:                         |       |                     |       |                        |       |
| Workers’  compensation self-insurance reserve |       | $                        | 2,618      |                        | $          | 2,720 |   |
| Warranty  reserve                                  |       | 8,449                    |       | 8,330                       |       |
| Payroll and  other accrued expenses                |       | 12,100                   |       | 11,192                      |       |
| Total  current accrued expenses                    |       | $                        | 23,167     |                        | $          | 22,242 |   |
| Long-term  accrued expenses:                       |       |                     |       |                        |       |
| Workers’  compensation self-insurance reserve |       | $                        | 6,063      |                        | $          | 6,151 |   |
| Warranty  reserve                                  |       | 279                      |       | 175                         |       |
| Deferred  compensation                             |       | 743                      |       | 743                         |       |
| Total  long-term accrued expenses                  |       | $                        | 7,085      |                        | $          | 7,069 |   |

 

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**NOTE 5 – CREDIT FACILITY**

 

At March 31, 2005, the Company had an asset-based revolving creditfacility of $20 million with UPSC, which was scheduled to expire in August 2005.At March 31, 2005 and December 31, 2004, the Company had outstandingloans under the line of credit of $15.6 million and $12.7 million,respectively. At March 31, 2005, the Company was in default with thecovenant requiring delivery of the Company’s annual financial statements withina required period of time and on that date the Company received an extensionletter from UPSC waiving the default on the Company’s required delivery date ofits annual financial statements and extending the required delivery date of theannual financial statements to August 31, 2005 (which date was extended toDecember 15, 2005 as part of the execution of the new credit facilitydiscussed below). At March 31, 2005, the interest rate on the outstandingborrowings under the line of credit was 6.50%. The weighted average interestrate for the borrowings under the line of credit during the three-month periodended March 31, 2005 and 2004 was 6.19% and 4.80%, respectively.

 

On August 12, 2005, the original facility was replaced by a newthree-year asset-based revolving credit facility with UPSC and Wells Fargo Bankfor $25 million, with the Company having the option, subject to certainconditions, of increasing the revolver in $5 million increments up to a totalcredit facility of $40 million. On September 29, 2005, the Companyeffected such an increase in the amount of the credit facility from $25 millionto $30 million. The new credit facility is collateralized by all of the Company’sassets other than real estate. Borrowing availability is based on eligibleaccounts receivable and inventory. The facility also includes a requirement tomaintain a blocked account arrangement, whereby remittances from the Company’scustomers reduce the debt outstanding. The new credit facility contains, amongother provisions, certain financial covenants, including funded debt to EBITDAand a fixed charge coverage ratio. If these financial covenants are not met,the Company’s availability under the credit facility will be reduced. TheCompany did not meet these financial covenants as of March 31, 2005, andcurrently does not expect to until September 30, 2006. Until thesecovenants are met, the Company’s borrowing availability under its $40 millionfacility is limited to an amount between $27 to $32 million, depending oneligible inventory and accounts receivable. Initial amounts borrowed under therevolving credit facility bear interest at the prime rate listed in the WallStreet Journal plus 0.50 percentage points and may be subsequentlyadjusted down based on a trailing twelve month funded debt to EBITDAcalculation.

 

**NOTE 6 – COMMITMENTS AND CONTINGENCIES**

 

Mostof the Company’s motorhome sales are made on terms requiring payment within 15business days or less of the dealer’s receipt of the unit. Most dealers financeall, or substantially all, of the purchase price of their inventory under floorplan arrangements with banks or finance companies under which the lender paysthe Company directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s maximum potential exposure underthese agreements approximated $153 million at March 31, 2005. As withreceivables, the risk of loss under the repurchase agreements was spread over anumber of dealers and lenders and was reduced by the resale value of the RVs,which the Company would be required to repurchase. Losses under theseagreements have not been material in the past and management does not believe thatany future losses under such agreements will have a material adverse effect onthe Company’s consolidated financial position, results of operations or cashflows.

 

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

 

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

 

Three Months Ended March 31, 2005 (in thousands)

 
| ** **       | ** ** | **Beginning  Balance** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Ending  Balance** | ** ** |
|------------------|------------|------------------------|------------|---------------|------------|----------------|------------|---------------------|------------|
| Warranty reserve |       | $                      | 8,505      |          | $          | 4,480          |       | $                   | 4,257      |   | $ | 8,728 |   |
|                  |            |                        |            |               |            |                |            |                     |            |  |  |  |  |

 

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

 

**NOTE 7 – STOCK-BASED COMPENSATION**

 

The Company has stock option plans that enable it to offer equityparticipation to employees, officers and directors as well as certainnon-employees. Stock options may be granted as incentive or nonqualifiedoptions.

 

The Company has fourfixed option plans that reserve shares of common stock for issuance toexecutives, key employees, consultants and directors. The Company has alsoissued fixed options outside of such plans pursuant to individual stock optionagreements. Options granted to non-employee directors generally vestimmediately upon grant and generally expire five to ten years from the date ofgrant. Options granted to employees, including employee directors, generallyvest in three equal annual installments and expire five to ten years from thedate of grant. The price of the options granted pursuant to these plans willnot be less than 100 percent of the market value of the shares on the date ofgrant. There were no options granted for the three-month period ended March 31,2005 and 236,500 for the three-month period ended March 31, 2004.

 

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

 

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

 
| ** **                                                                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|                                                                                                                                  |       |                                             |       | **(Restated)** |   |
|                                                                                                                                  |       |                                             |       |   |   |
| (Loss)  income from continuing operations                                                                                             |       | $                                                | (1,444     | ) | $ | 1,209 |   |
| Loss from  discontinued operations, net of taxes                                                                                      |       | —                                           |       | (548 | ) |
| Net (loss)  income – as reported                                                                                                 |       | (1,444                                           | )          | 661 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 194                                              |       | 122 |   |
| Pro forma  net (loss) income                                                                                                          |       | $                                                | (1,638     | ) | $ | 539 |   |
|                                                                                                                                  |       |                                             |       |   |   |
| Basic (loss)  earnings per share as reported:                                                                                         |       |                                             |       |   |   |
| Continuing  operations                                                                                                                |       | $                                                | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                                                                                                              |       | —                                           |       | (0.06 | ) |
| Total basic  (loss) earnings per share                                                                                                |       | (0.14                                            | )          | 0.06 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 0.02                                             |       | 0.01 |   |
| Basic (loss)  earnings per share pro forma                                                                                            |       | $                                                | (0.16      | ) | $ | 0.05 |   |

 

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| ** **                                                                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|                                                                                                                                  |       |                                             |       | **(Restated)** |   |
|                                                                                                                                  |       |                                             |       |   |   |
| Diluted  (loss) earnings per share:                                                                                                   |       |                                             |       |   |   |
| Continuing  operations                                                                                                                |       | $                                                | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                                                                                                              |       | —                                           |       | (0.06 | ) |
| Total  diluted (loss) earnings per share                                                                                              |       | (0.14                                            | )          | 0.06 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 0.02                                             |       | 0.01 |   |
|                                                                                                                                  |       |                                             |       |   |   |
| Diluted  (loss) earnings per share pro forma                                                                                          |       | $                                                | (0.16      | ) | $ | 0.05 |   |

 

The weighted-average fairvalue of the stock options has been estimated on the date of grant using theBlack-Scholes option-pricing model. There were no new stock option grantsduring the three-month period ended March 31, 2005. The assumptions usedto calculate weighted-average fair value are listed below for new grants duringthe three-month period ended March 31, 2004.

 

| ** **              | ** ** | **March 31, 2004** | ** ** |
|-------------------------|------------|-------------------------|------------|
|                    |       |                    |       |
| Dividend yield          |       | 0.0                     | %          |
| Expected volatility     |       | 41.0                    | %          |
| Risk-free interest rate |       | 2.74                    | %          |
| Expected lives          |       | 4.2 years               |       |

 

**NOTE 8 – INCOME TAXES**

 

As of March 31, 2005, the Company has a current deferred tax assetof $1.3 million and a long-term deferred tax liability of $1.3 million. TheCompany recorded a non-cash charge of $0.6 million during the three monthsended March 31, 2005 to increase the valuation allowance to offset thechange in net deferred tax assets. As a result, the valuation allowance fordeferred tax assets increased from $11.2 million at December 31, 2004 to$11.8 million at March 31, 2005. Recent cumulative losses, the downturn incurrent market conditions and its impact on near term earnings led the Companyto conclude that it was more likely than not that all or a portion of the netdeferred tax asset will not be realized. The Company expects to record a fullvaluation allowance on future benefits until it can sustain an appropriatelevel of profitability and until such time, the Company would not expect torecognize any significant tax benefits in its future results of operations.

 

**NOTE 9 – DISCONTINUED OPERATIONS**

 

On September 24, 2004, the Company sold its travel trailerbusiness assets to Weekend Warrior, a privately owned, California-basedramp-trailer manufacturer. The sale was designed to allow the Company tofurther concentrate its efforts and resources on its growing motorhome business.The total selling price of the business was $3.2 million. The sale includedinventory totaling $2.8 million and equipment totaling $0.1 million. Inaddition, the Company recognized a $0.3 million gain on the sale. WeekendWarrior paid $0.5 million at closing with the balance to be paid in ten equalmonthly payments. In addition, a payment of 1% of monthly sales for otherassets and trademarks will be made on a monthly basis over a twelve-monthperiod ending October 10, 2005 with a minimum due of $0.3 million whichhas been included in note receivable in the accompanying consolidated balancesheets. The Company also entered into a sublease agreement, which allowsWeekend Warrior to lease a portion of the Company’s facilities for up to twelvemonths. Net sales from discontinued operations were $6.6 million for the threemonths ended March 31, 2004.

 

**NOTE 10 – (LOSS) EARNINGS PER SHARE**

 

Basic (loss) earnings per share is computed by dividing net (loss)income by the weighted average number of common shares outstanding for theperiod. Diluted (loss) earnings per share reflect the potential dilution thatcould occur if options were exercised or converted into common stock. Sharesattributable to the exercise of outstanding options that are anti-dilutive areexcluded from the calculation of diluted loss per share for the three monthsended March 31, 2005.

 

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All amounts in thousands except per share amounts.

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                          |       |                                             |       | **(Restated)** |   |
|                                                |       |                                             |       |   |   |
| (Loss)  income from continuing operations           |       | $                                                | (1,444     | ) | $ | 1,209 |   |
| Loss from  discontinued operations, net of taxes    |       | —                                           |       | (548 | ) |
| Net (loss)  income                                  |       | $                                                | (1,444     | ) | $ | 661 |   |
|                                                |       |                                             |       |   |   |
| Basic  weighted average common shares outstanding   |       | 10,335                                           |       | 10,190 |   |
| Effect of  dilutive stock options                   |       | —                                           |       | 144 |   |
| Diluted  weighted average common shares outstanding |       | 10,335                                           |       | 10,334 |   |
|                                                |       |                                             |       |   |   |
| Basic (loss)  earnings per share:                   |       |                                             |       |   |   |
| Continuing  operations                              |       | $                                                | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                            |       | —                                           |       | (0.06 | ) |
| Total                                               |       | $                                                | (0.14      | ) | $ | 0.06 |   |
|                                                |       |                                             |       |   |   |
| Diluted  (loss) earnings per share:                 |       |                                             |       |   |   |
| Continuing  operations                              |       | $                                                | (0.14      | ) | $ | 0.12 |   |
| Discontinued  operations                            |       | —                                           |       | (0.06 | ) |
| Total                                               |       | $                                                | (0.14      | ) | $ | 0.06 |   |

 

For the three-month periods ended March 31, 2005 and 2004, excluded from the computation of diluted earnings per share were stock options to purchase 910,327 and 265,300 shares, respectively.

 

**NOTE 11 – SUBSEQUENT EVENTS**

 

As more fully discussed in Note 5, the Company executed a newthree-year asset-based revolving credit facility on August 12, 2005 withUPSC and Wells Fargo Bank for $25 million, with the Company having the option,subject to certain conditions, of increasing the revolver in $5 millionincrements up to a total credit facility of $40 million. On September 29,2005, the Company effected such an increase in the amount of the creditfacility from $25 million to $30 million.

 

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

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

** **

**Disclosure Regarding Forward LookingStatements**

 

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

 

**Restatement of Financial Statements**

 

Thefollowing discussion and analysis gives effect to the restatement described inNote 2 to the unaudited consolidated financial statements for the periods endedMarch 31, 2005 and March 31, 2004 contained herein. Accordingly,certain of the data set forth in this section is not comparable todiscussions and data in our previously filed annual and quarterly reports forcorresponding periods.

 

Thefollowing table presents the effect of changes in the consolidated statement ofoperations caused by the restatement (in thousands):

 

**Statement of Operations**

 
| ** **                                             | ** ** | **Three Months Ended March 31,  2004** | ** ** | ** **                                 | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **As Originally  Reported**                 | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
| Net sales                                              |       | $                                           | 110,438    |                                       | $          | 109,753 |   | $ | 103,146 |   |   |   |
| Cost of goods sold                                     |       | $                                           | 103,151    |                                       | $          | 103,162 |   | $ | 96,063 |   |   |   |
| Gross profit                                           |       | $                                           | 7,287      |                                       | $          | 6,591 |   | $ | 7,083 |   |   |   |
| Selling expenses                                       |       | $                                           | 3,621      |                                       | $          | 2,936 |   | $ | 2,708 |   |   |   |
| General and administrative expenses                    |       | $                                           | 2,587      |                                       | $          | 2,588 |   | $ | 2,436 |   |   |   |
| Operating income                                       |       | $                                           | 1,079      |                                       | $          | 1,067 |   | $ | 1,939 |   |   |   |
| Income from continuing operations before  income taxes |       | $                                           | 1,065      |                                       | $          | 1,053 |   | $ | 1,925 |   |   |   |
| Provision for income taxes                             |       | $                                           | 396        |                                       | $          | 392 |   | $ | 716 |   |   |   |
| Income from continuing operations                      |       | $                                           | 669        |                                       | $          | 661 |   | $ | 1,209 |   |   |   |
| Loss from discontinued operations                      |       | $                                           | —     |                                       | $          | — |   | $ | (872 | ) |   |   |
| Income taxes related to discontinued  operations       |       | $                                           | —     |                                       | $          | — |   | $ | 324 |   |   |   |
| Loss from discontinued operations, net of  taxes       |       | $                                           | —     |                                       | $          | — |   | $ | (548 | ) |   |   |
| Net income                                             |       | $                                           | 669        |                                       | $          | 661 |   | $ | 661 |   |   |   |
|                                                   |       |                                        |       |                                       |       |   |   |   |   |
| Basic (loss) earnings per common share:                |       |                                        |       |                                       |       |   |   |   |   |
| Continuing  operations                                 |       | $                                           | 0.07       |                                       | $          | 0.06 |   | $ | 0.12 |   |   |   |
| Discontinued  operations                               |       | $                                           | —     |                                       | $          | — |   | $ | (0.06 | ) |   |   |
| Total                                                  |       | $                                           | 0.07       |                                       | $          | 0.06 |   | $ | 0.06 |   |   |   |

 

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| ** **                                | ** ** | **Three Months Ended  March 31, 2004** | ** ** | ** **                                 | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **As Originally  Reported**                 | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
| Diluted (loss) earnings per common share: |       |                                        |       |                                       |       |   |   |   |   |
| Continuing  operations                    |       | $                                           | 0.06       |                                       | $          | 0.06 |   | $ | 0.12 |   |   |   |
| Discontinued  operations                  |       | $                                           | —     |                                       | $          | — |   | $ | (0.06 | ) |   |   |
| Total                                     |       | $                                           | 0.06       |                                       | $          | 0.06 |   | $ | 0.06 |   |   |   |

 

**Statement of Cash Flows**

 
| ** **                                     | ** ** | **Three Months Ended March 31,  2004** | ** ** | ** **                                 | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **As Originally  Reported**                 | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Restated  for Correction  of Errors and  Discontinued  Operations** | ** ** | ** ** | ** ** |
| Net income                                     |       | $                                           | 669        |                                       | $          | 661 |   | $ | 661 |   |   |   |
| Depreciation and amortization                  |       | $                                           | 989        |                                       | $          | 1,001 |   | $ | 1,001 |   |   |   |
| Bad debt recovery                              |       | $                                           | —     |                                       | $          | (30 | ) | $ | (30 | ) |   |   |
| Provision for excess and obsolete  inventories |       | $                                           | —     |                                       | $          | 372 |   | $ | 372 |   |   |   |
| Deferred income taxes                          |       | $                                           | —     |                                       | $          | (4 | ) | $ | (4 | ) |   |   |
| Increase in receivables                        |       | $                                           | (3,908     | )                                          | $          | (3,878 | ) | $ | (3,878 | ) |   |   |
| Increase in inventories                        |       | $                                           | (12,573    | )                                          | $          | (12,945 | ) | $ | (12,945 | ) |   |   |

 

**Balance Sheet**

 
| ** **                                      | ** ** | **March 31, 2005**     | ** ** | **December 31, 2004**                 | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **As Originally  Reported** | ** ** | **As Restated  for Correction  of Errors** | ** ** | **As Originally  Reported** | ** ** | **As Restated  for Correction  of Errors** | ** ** |
| Deferred income taxes                           |       | $                           | 1,269      |                                       | $          | 1,266 |   | $ | 1,294 |   | $ | 1,291 |   |
| Total current assets                            |       | $                           | 124,515    |                                       | $          | 124,512 |   | $ | 101,495 |   | $ | 101,492 |   |
| Property, plant and equipment, net              |       | $                           | 38,217     |                                       | $          | 37,811 |   | $ | 37,809 |   | $ | 37,403 |   |
| Total assets                                    |       | $                           | 164,129    |                                       | $          | 163,720 |   | $ | 140,642 |   | $ | 140,233 |   |
| Deferred income taxes (long-term  liabilities)  |       | $                           | 1,269      |                                       | $          | 1,266 |   | $ | 1,294 |   | $ | 1,291 |   |
| Total liabilities                               |       | $                           | 85,737     |                                       | $          | 85,734 |   | $ | 60,946 |   | $ | 60,943 |   |
| Retained earnings                               |       | $                           | 40,726     |                                       | $          | 40,320 |   | $ | 42,170 |   | $ | 41,764 |   |
| Total stockholders’ equity                 |       | $                           | 78,392     |                                       | $          | 77,986 |   | $ | 79,696 |   | $ | 79,290 |   |
| Total liabilities and stockholders’ equity |       | $                           | 164,129    |                                       | $          | 163,720 |   | $ | 140,642 |   | $ | 140,233 |   |

 

**Critical Accounting Policies**

 

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

 

**Executive Overview**

 

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

 

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

 
| ** **                                                    | ** ** | **Percentage of Net Sales  Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                                                                 | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                                                                               | ** ** | **(As Restated)** | ** ** |
| Net sales                                                     |       | 100.0                                                                                    | %          | 100.0 | % |
| Cost of  goods sold                                           |       | 95.5                                                                                     |       | 93.1 |   |
| Gross profit                                                  |       | 4.5                                                                                      |       | 6.9 |   |
| Selling  expenses                                             |       | 2.9                                                                                      |       | 2.6 |   |
| General and  administrative expenses                          |       | 2.6                                                                                      |       | 2.4 |   |
| Operating  (loss) income                                      |       | (1.0                                                                                     | )          | 1.9 |   |
| Interest  expense                                             |       | 0.2                                                                                      |       | 0.1 |   |
| Other income                                                  |       | (0.1                                                                                     | )          | (0.1 | ) |
| (Loss)  income from continuing operations before income taxes |       | (1.1                                                                                     | )          | 1.9 |   |
| Provision  for income taxes                                   |       | 0.0                                                                                      |       | 0.7 |   |
| (Loss)  income from continuing operations                     |       | (1.1                                                                                     | )%         | 1.2 | % |
|                                                          |       |                                                                                     |       |   |   |
| Loss from  discontinued operations                            |       | 0.0                                                                                      |       | (0.9 | ) |
| Income taxes  related to discontinued operations              |       | 0.0                                                                                      |       | 0.3 |   |
| Loss from  discontinued operations, net of taxes              |       | 0.0                                                                                      |       | (0.6 | ) |
| Net (loss)  income                                            |       | (1.1                                                                                     | )%         | 0.6 | % |

 

During the first quarterof 2005, the Company incurred a net loss of $1.4 million compared to net incomeof $1.2 million from continuing operations for the same quarter last year. Thefirst quarter of 2005 loss per diluted share was $0.14 compared to earnings perdiluted share from continuing operations of $0.12 for the first quarter of2004. The net loss for the first quarter of 2005 was $1.4 million, or $0.14 perdiluted share, as compared to a net income of $0.7 million, or $0.06 perdiluted share in the first quarter of 2004.

 

**Looking Forward**

 

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

 

During the first quarterof 2005, the Company rolled out the majority of its 2006 model-year “Highline”products, including the completely redesigned Country Coach Intrigue. Inaddition, the 2006 model-year National RV Tradewinds and Islander, which beginto hit the market in meaningful numbers in the second quarter of 2005,represent significant additions to the Company’s offerings given the relativestrength of the Class A motorhome diesel segment. In its peak year, theCompany sold more than 600 of these units and believes it has a large customerbase that has been awaiting a product in which to upgrade their aged units.

 

Improved productivity and cost control remain significant objectives.The Company is making a significant investment this year in manufacturingengineers at its Country Coach facilities in an effort to increaseproductivity. Controlling costs also remains a high priority, specifically inthe manufacturing cost areas, warranty, and workers’ compensation. The Companycontinues to focus on improving the quality of its motorhomes to increase consumersatisfaction and decrease future warranty costs.

 

A continued focus on dealer acquisition and enhanced training programsfor the Company’s workforce, service centers, dealers, and consumers are alsokey initiatives. The Company has undertaken efforts in the areas of safety;with new distance learning capabilities, the Company is looking forward tobroadcasting its service training programs directly to dealers and serviceproviders, driving the movement for increased customer satisfaction in areas oftechnical maintenance. In addition, factory-training programs are providing theCompany’s customers a basis for self-diagnostics and a better understanding ofthe equipment they are operating.

 

The Recreational Vehicle Industry Association’s (RVIA) market expansioncampaign, GO RVing, now in its eighth year, is fostering greater awareness andgarnering media attention. Though RVIA expects substantial growth for theindustry in the long-term or decade ahead, RVIA expects a decline in theindustry in the near term or each of the years 2005 and 2006.

 

**Results of Operations**

 

Comparison of Continuing Operations for the Three Months Ended March 31,2005 to the Three Months Ended March 31, 2004:

 

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(Amounts in tables are in thousands, except percentages)

 

**Net sales**

 
| ** **                | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**               | ** ** |
|---------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------------------|------------|
| ** **                | ** ** | ** ** | ** ** | ** **                                             | ** ** | **(As Restated)** | ** ** |
|                      |       |       |       |                                                   |       |                   |       |
| Net sales                 |       | $          | 125,625    |                                                   | 21.8       | %                      | $          | 103,146 |   |
| as a percent of net sales |       | 100.0      | %          |                                                   |       | 100.0                  | %          |
|                           |            |            |            |                                                        |            |                        |            |  |  |

 

Net sales of $125.6million for the three-month period ended March 31, 2005 represent anincrease of $22.5 million or 21.8% from the three-month period ended March 31,2004. Wholesale unit shipments of diesel motorhomes for the three-month periodended March 31, 2005 were 406, up 38.6% from 293 units for the three-monthperiod ended March 31, 2004. Shipments of gas motorhomes for thethree-month period ended March 31, 2005 were 401, down 19.6% from 499 unitsfor the three-month period ended March 31, 2004. The increase in net salesis mainly attributable to the change in the sales mix. The Company sold morediesel units, which have higher average sales prices, than gas powered units.

 

**Grossprofit margin**

 
| ** **          | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**               | ** ** |
|---------------------|------------|------------|------------|--------------------------------------------------------|------------|------------------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                             | ** ** | **(As Restated)** | ** ** |
|                |       |       |       |                                                   |       |                   |       |
| Gross profit        |       | $          | 5,615      |                                                   | (20.7      | )%                     | $          | 7,083 |   |
| Gross profit margin |       | 4.5        | %          |                                                   |       | 6.9                    | %          |
|                     |            |            |            |                                                        |            |                        |            |  |  |

 

The gross profit marginfor the three-month period ended March 31, 2005 was 4.5% compared to a6.9% gross margin for the three-month period ended March 31, 2004. Theprimary factors that led to the decrease in gross margins were increasedmanufacturing overhead costs (including higher inventory control-relatedcosts), increased engineering costs to support a more aggressive productintroduction schedule and higher warranty costs. To a lesser degree, grossmargin was affected by somewhat higher direct labor costs, partially related tothe introduction of the Tradewinds and Islander products to the National RVmanufacturing environment, and increased discounting due to the overallweakening sales environment.

 

**Sellingexpenses**

 
| ** **                | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**               | ** ** |
|---------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------------------|------------|
| ** **                | ** ** | ** ** | ** ** | ** **                                             | ** ** | **(As Restated)** | ** ** |
|                      |       |       |       |                                                   |       |                   |       |
| Selling expenses          |       | $          | 3,639      |                                                   | 34.4       | %                      | $          | 2,708 |   |
| as a percent of net sales |       | 2.9        | %          |                                                   |       | 2.6                    | %          |
|                           |            |            |            |                                                        |            |                        |            |  |  |

 

Selling expensesincreased $0.9 million or 34.4% for the three-month period ended March 31,2005 over the three-month period ended March 31, 2004. Sales expensesincreased mainly due to increased sales commissions resulting from highersales, but also from increased media and marketing costs to support the Company’sdealer expansion initiative.

 

**Generaland administrative expenses**

 
| ** **                           | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**               | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** **                                                            | ** ** | **(As Restated)** | ** ** |
|                                 |       |       |       |                                                                  |       |                   |       |
| General and  administrative expenses |       | $          | 3,252      |                                                                  | 33.5       | %                      | $          | 2,436 |   |
| as a percent  of net sales           |       | 2.6        | %          |                                                                  |       | 2.4                    | %          |
|                                      |            |            |            |                                                                       |            |                        |            |  |  |

 

Generaland administrative expenses totaling $3.3 million for the three-month periodended March 31, 2005 were up $0.8 million, or 

 

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33.5%,compared to the three-month period ended March 31, 2004. The increase isprimarily due to increased personnel costs required to support the increasedsales volume and Sarbanes-Oxley Section 404 compliance costs and increasedcosts in the current year for audit fees.

 

**Interestexpense**

 
| ** **                 | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**   | ** ** |
|----------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Interest  expense          |       | $          | 277        |                                                                  | 346.8      | %          | $          | 62 |   |
| as a percent  of net sales |       | 0.2        | %          |                                                                  |       | 0.1        | %          |
|                            |            |            |            |                                                                       |            |            |            |  |  |

 

Interest expense for thethree-month periods ended March 31, 2005 and 2004 were $0.3 million and$0.1 million, respectively. The increase in interest expense is a result of increasedborrowing on the line of credit as well as rising interest rates directlyrelated to the increases in the prime interest rate by the Federal Reserve.

 

**Otherincome**

 
| ** **                 | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**   | ** ** |
|----------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Other income               |       | $          | (109       | )                                                                     | 127.1      | %          | $          | (48 | ) |
| as a percent  of net sales |       | (0.1       | )%         |                                                                  |       | (0.1       | )%         |
|                            |            |            |            |                                                                       |            |            |            |  |  |

 

Other income for thethree-month periods ended March 31, 2005 and 2004 were $0.11 million and$0.05 million, respectively. The increase in other income is the result ofinterest and fees related to the note receivable.

 

**Provisionfor (benefit from) income taxes**

 
| ** **                                     | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**               | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                                                            | ** ** | **(As Restated)** | ** ** |
|                                           |       |       |       |                                                                  |       |                   |       |
| Provision  for (benefit from) for income taxes |       | $          | —     |                                                                  | N/A        |                   | $          | 716 |   |
| as a percent  of net sales                     |       | 0.0        | %          |                                                                  |       | 0.7                    | %          |
|                                                |            |            |            |                                                                       |            |                        |            |  |  |

 

As discussed in Note 8 tothe consolidated financial statements included in this Form 10-Q/A, recentcumulative losses, the downturn in current market conditions and its impact onnear-term earnings led the Company to conclude that it was more likely than notthat its net deferred tax asset will not be realized. As a result, the Companycontinues to record a full valuation allowance against its net deferred taxassets; consequently, the Company’s current effective tax rate for 2005 iszero. The effective tax rate for the three-month period ended March 31,2004 was 37.2%.

 

The Company expects torecord a full valuation allowance on future tax benefits until it can sustainan appropriate level of profitability.

 

**Loss fromdiscontinued operations, net of taxes**

 
| ** **                                       | ** ** | **2005**   | ** ** | **Three Months Ended  March 31,  Percent Change** | ** ** | **2004**          | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** **                                             | ** ** | **(As Restated)** | ** ** |
|                                             |       |       |       |                                                   |       |              |       |
| Loss from discontinued operations, net of  taxes |       | $          | —     |                                                   | N/A        |              | $          | (548 | ) |
| as a percent of net sales                        |       | 0.0        | %          |                                                   |       | (0.6              | )%         |
|                                                  |            |            |            |                                                        |            |                   |            |  |  |

 

On September 24,2004, the Company sold its Travel Trailer business assets to Weekend Warrior, aprivately owned, California-based ramp-trailer manufacturer. The loss fromdiscontinued operations, net of taxes, for the three-month period ended March 31,2004 was $0.5 million.

 

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## **Liquidity and CapitalResources**

 

At March 31, 2005 and December 31, 2004, the Company had cashand cash equivalents of $0.01 million (excluding restricted cash totaling $0.03million and $0.25 million, respectively, required to secure a letter of creditin connection with one of the Company’s insurance policies). During the firstthree months of 2005, the Company financed its operations primarily through itsexisting working capital and its line of credit with UPS Capital Corporation(UPSC).

 

During the three-monthperiod ended March 31, 2005 the Company used $11.2 million of cash in itsoperations, which was primarily due to a net loss of $1.4 million, increases inreceivables and inventories of $16.1 million and $9.0 million, respectively,partially offset by a $12.0 million and $0.9 million increase in accountspayable and accrued expenses, respectively. During the three-month period endedMarch 31, 2004 the Company used $1.6 million of cash in its operations,which was primarily due to a $3.9 million and $12.9 million increase inreceivables and inventories, respectively, significantly offset by a $12.8million increase in accounts payable.

 

On March 31, 2005,the Company had working capital of $47.3 million compared to $49.1 million at December 31,2004. This decrease of $1.8 million was primarily due to a $0.2 milliondecrease in restricted cash, $16.1 million increase in trade receivables, $8.0increase in inventory, $0.7 million of repayments on note receivable, $0.2million decrease in prepaid expenses, $12.0 million increase in accountspayable, $0.9 million increase in accrued expenses, $2.9 million borrowings onthe line of credit and a $8.9 million increase in the book overdraft.

 

For the three monthperiod ended March 31, 2005, net cash used in investing activities was$0.7 million, consisting primarily of $1.3 million in capital expenditures,partially offset by repayments on note receivable of $0.7 million. Net cashprovided by financing activities was $12.0 million, primarily due to anincrease in the book overdraft of $8.9 million and net advances under on theline of credit of $2.9 million.

 

AtMarch 31, 2005, the Company had an asset-based revolving credit facilityof $20 million with UPSC, which was scheduled to expire in August 2005. AtMarch 31, 2005 and December 31, 2004, the Company had outstandingloans under the line of credit of $15.6 million and $12.7 million,respectively. At March 31, 2005, the Company was in default with thecovenant requiring delivery of the Company’s annual financial statements withina required period of time and on that date the Company received an extensionletter from UPSC waiving the default on the Company’s required delivery date ofits annual consolidated financial statements and extending the requireddelivery date of the annual financial statements to August 31, 2005 (whichdate was extended to December 15, 2005 as part of the execution ofthe new credit facility discussed below).

 

OnAugust 12, 2005, the original facility was replaced by a new three-yearasset-based revolving credit facility with UPSC and Wells Fargo Bank for $25million, with the Company having the option, subject to certain conditions, ofincreasing the revolver in $5 million increments up to a total credit facilityof $40 million. On September 29, 2005, the Company effected such anincrease in the amount of the credit facility from $25 million to $30 million. Thenew credit facility is collateralized by all of the Company’s assets other thanreal estate. Borrowing availability is based on eligible accounts receivableand inventory. The facility also includes a requirement to maintain a blockedaccount arrangement, whereby remittances from the Company’s customers reducedthe debt outstanding. The new credit facility contains, among other provisions,certain financial covenants, including funded debt to EBITDA, as defined, and afixed charge coverage ratio. If these financial covenants are not met, theCompany’s availability under the credit facility will be reduced. The Companydid not meet these financial covenants as of March 31, 2005, and does notexpect to until September 30, 2006. Until these covenants are met, theCompany’s borrowing availability under its $40 million facility is limited toan amount between $27 to $32 million, depending on eligible inventory andaccounts receivable. Initial amounts borrowed under the revolving creditfacility bear interest at the prime rate listed in the Wall Street Journal plus0.50 percentage points and may be subsequently adjusted down based on atrailing twelve month funded debt to EBITDA calculation. At March 31, 2005the interest rate on the outstanding borrowings under the line of credit was6.50%. The weighted average interest rate for the borrowings under the line ofcredit during the three-month period ended March 31, 2005 and 2004 was6.19% and 4.80%, respectively.

 

Management’s plan toachieve operational profitability includes continuing or starting a variety ofinitiatives to improve the Company’s earnings and working capital position,including: i) new product introductions in the fourth quarter of 2005 withadditional new product and floor plan introductions in the first half of 2006,ii) new dealer additions to fill open market areas or replace under-performingdealers, iii) reductions in all categories of inventory, iv) head countre-balancings to current retail sales-supported production levels, v) engineeringreviews of material components for the removal of non-value added items toreduce both material and assembly costs, vi) continued thorough motorhomeinspections to improve quality and to more timely report failures, and vii)manufacturing cost reductions resulting from the continued implementation oflean manufacturing concepts.

 

In order to fund on-going operations in the short-term, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its line of credit until it achieves sustained operationalprofitability through a combination of increased sales, cost reductions andimproved product margins. The Company believes it has sufficient financialresources to fund its operations in the short-term. However, the Company’sability to meet its obligations in the long-term is dependent on its ability togenerate positive 

 

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cash flows from operations and continue borrowings under its line ofcredit. If management is unable to achieve its operational profitability planor unforeseen events occur and its existing line of credit is insufficient toallow the Company to meet its obligations, the Company may need toimplement alternative plans that could include long-term financingcollateralized by real estate or obtaining additional debt financing,additional reductions in operating costs, deferral of capital expenditures, andfurther reductions in working capital. While the Company believes that it couldsuccessfully complete the alternative plans, if necessary, there can be noassurance that such alternatives would be available on acceptable terms andconditions or that the Company would be successful in its implementation ofsuch plans.

 

Asfurther discussed in Note 6 to the consolidated financial statements includedin this Form 10-Q/A, the Company generally agrees with its dealers’lenders to repurchase any unsold RVs in the event of various circumstances. TheCompany’s maximum potential exposure under these agreements approximated $153million at March 31, 2005. As with receivables, the risk of loss under therepurchase agreements was spread over a number of dealers and lenders and wasreduced by the resale value of the RVs, which the Company would be required torepurchase. Losses under these agreements have not been material in the pastand management does not believe that any future losses under such agreementswill have a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

 

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

 

**Recent Accounting Pronouncements**

 

In November 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs-an Amendment of ARB No. 43,Chapter 4.” SFAS No. 151 requires that accounting for items such as idlefacility expense, freight, handling costs, and wasted materials (spoilage) berecognized as current period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. This Statement is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005. The provision of this Statement shall be applied prospectively. TheCompany has not determined the impact that adoption of this standard will haveon its consolidated financial statements.

 

In December 2004, the FASB issued FASB Staff Position (FSP) 109-1,“Application of FASB Statement No. 109, Accounting for Income Taxes, tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004.” The American Jobs Creation Act, or AJCA, introducesa special 9% tax deduction on qualified production activities. FSP 109-1clarifies that this tax deduction should be accounted for as a special taxdeduction in accordance with SFAS No. 109, “Accounting for Income Taxes”.FSP 109-1 is effective upon its issuance. The adoption of FSP 109-1 did nothave a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (revised2004),”Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123,“Accounting for Stock-Based Compensation,” (SFAS No. 123) andsupercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previouslypermitted under SFAS No. 123 no longer will be an alternative tofinancial statement recognition. The Company is required to adopt SFAS No. 123Rin the first calendar quarter of 2006, beginning January 1, 2006. UnderSFAS No. 123R, the Company must determine the appropriate fair value modelto be used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition methods include modified prospective and modified retrospectiveadoption options. Under the modified retrospective option, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The modified prospective method requires that compensation expensebe recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS No. 123R, while themodified retrospective method would record compensation expense for allunvested stock options and restricted stock beginning with the first periodrestated. The Company is evaluating the requirements of SFAS No. 123R.The Company has not yet determined the method of adoption or the effect ofadopting SFAS No. 123R, and the Company has not determined whether theadoption will result in amounts that are similar to the current pro formadisclosures under SFAS No. 123.

 

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections–areplacement of APB No. 20 and FAS No. 3” (SFAS No. 154). SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS No. 154 also provides guidancefor determining whether retrospective application of a change in accountingprinciple is impracticable and for 

 

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reporting a change whenretrospective application is impracticable. The correction of an error inpreviously issued financial statements is not an accounting change. However,the reporting of an error correction involves adjustments to previously issuedfinancial statements similar to those generally applicable to reporting anaccounting change retrospectively. Therefore, the reporting of a correction ofan error by restating previously issued financial statements is also addressedby SFAS No. 154. SFAS No. 154 is required to be adopted in fiscalyears beginning after December 15, 2005. The Company does not believe thatadoption of this standard will have an impact on its consolidated financialstatements.

 

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**NATIONALR.V. HOLDINGS, INC.PART I, ITEM 3 - Quantitative and Qualitative Disclosures about MarketRisk**

 

The Company has nosignificant financial instruments. The Company does not have any significantforeign currency exposure because it does not transact business in foreigncurrencies. However, the Company is exposed to interest rate changes relatedprimarily to cash borrowings on the Company’s credit facility. The weightedaverage interest rate for the borrowings on the credit facility during the yearended March 31, 2005 was 6.19%. For every 0.25% increase in interestrates, the Company would expect a quarterly increase in interest expense ofapproximately $0.6 thousand for each $1.0 million borrowed.

 

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

**PART I, ITEM 4 – CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s reports under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto management, including the Company’s Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as theCompany’s are designed to do, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

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

 

**InternalControl over Financial Reporting**

 

A materialweakness is a control deficiency, or a combination of control deficiencies,that results in more than a remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected.As of December 31, 2004, we identified the following material weaknessesin the Company’s internal control over financial reporting, which continued toexist as of March 31, 2005:

 

*1.Insufficient personnel resources and technical expertise within its accountingfunction -*The Company did not maintain effectivecontrols over the financial reporting process because of insufficient personnelresources and technical expertise within the accounting function. This materialweakness contributed to the following individual material weaknesses: (a) errorsin the preparation and review of schedules and reconciliations supportingcertain general ledger account balances. As a result, errors were not detectedin the amortization of leasehold improvements and certain accrued liabilityaccounts, including sales and marketing, warranty, legal and workers’compensation, and the related income statement accounts, including cost ofgoods sold, selling and general and administrative expenses; (b) inadequatefinancial statement disclosures, primarily related to the presentation ofcertain balances within the restatement footnote, sale of a division andcapital leases were not identified by the corporate accounting staff; and (c) accountingcutoff errors primarily related to marketing accrued expenses and an inabilityto properly and timely account for capital leases entered into during the yearwere not identified at the NRV division. This control deficiency resulted inaudit adjustments to the 2004 annual consolidated financial statementsaffecting accrued liabilities, property, plant and equipment, and the relatedincome statement accounts, primarily cost of goods sold, selling, general andadministrative, amortization and interest, and restatement of disclosures inthe 2004 annual consolidated financial statements. Insufficient personnelresources and technical expertise also contributed to the material weaknessesdiscussed in 2, 3, 4 and 5 below. Additionally, these control deficienciescould result in misstatements in the aforementioned accounts that would resultin a material misstatement to the annual or interim consolidated financialstatements that would not be prevented or detected.

 

*2. RevenueRecognition*– The Company did not maintain effectivecontrols over the timing of the revenue recognition related to the sale ofcertain motorhomes at its NRV division. Specifically, under a deferred paymentarrangement the Company held the manufacturer’s certificate of origin assecurity for payment. This control deficiency resulted in the restatement ofthe Company’s third quarter 2004 consolidated financial statements to correctthe timing of revenue recognition. This control deficiency also resulted inaudit adjustments to the 2004 annual consolidated financial statements.Additionally, this control deficiency could result in a misstatement of revenueand deferred revenue that would result in a material misstatement to the annualor interim consolidated financial statements that would not be prevented ordetected.

 

*3.Accounting for Sales Incentives*- The Company did notmaintain effective controls over the accounting for sales incentives.Specifically, certain sales incentive programs which are paid directly todealers or dealers’ sales representatives were improperly classified as sellingexpenses and should have been classified as a reduction of revenue. Thiscontrol deficiency resulted in the restatement of the Company’s 2003 and 2002consolidated financial statements. This control deficiency also resulted inaudit 

 

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adjustments tothe 2004 annual consolidated financial statements. Additionally, this controldeficiency could result in a misstatement of revenue and selling expenses thatwould result in a material misstatement to the annual or interim consolidatedfinancial statements that would not be prevented or detected.

 

*4.Accounting for Income Taxes -*The Company did notmaintain effective controls over the determination and reporting of theprovision for income taxes and related deferred income tax balances.Specifically, the Company did not maintain effective controls to review andmonitor the accuracy of the valuation allowance as well as other components ofthe income tax provision calculations and related deferred income taxes. Thiscontrol deficiency resulted in an audit adjustment to the fourth quarter 2004annual consolidated financial statements. Additionally, this control deficiencycould result in a misstatement of the income tax provision or related deferredincome tax balances that would result in a material misstatement to the annualor interim consolidated financial statements that would not be prevented ordetected.

 

*5. Physicalinventory process*- The Company did not maintaineffective controls over the accuracy of the physical inventory process at itsNRV division. Specifically, the NRV division did not have controls to ensureall of the individuals involved in the physical inventory count were properlytrained and supervised and that discrepancies between quantities counted andthe accounting records were properly investigated. Further, the NRV divisiondid not have controls to ensure the accounting records were adjusted to reflectthe actual quantities counted during the physical inventory process. This controldeficiency resulted in an audit adjustment to the fourth quarter 2004 annualconsolidated financial statements. Additionally, this control deficiency couldresult in a misstatement of inventory and cost of goods sold that would resultin a material misstatement to the annual or interim consolidated financialstatements that would not be prevented of detected.

 

*6.Unrestricted access to programs and data*- The Companydid not maintain effective controls over access to certain financialapplication programs and data at its NRV division. Specifically, there wereinstances in which information technology personnel and users with accountingand reporting responsibilities had access to financial accounting applicationprograms and data that was incompatible with their functional businessrequirements. Further, the activities of these individuals were not subject toindependent monitoring. These control deficiencies applied to certain systemsand processes including the financial statement preparation, human resources,payroll, purchasing, receiving and revenue and billing. These controldeficiencies did not result in an adjustment to the 2004 interim or annualconsolidated financial statements. However, these control deficiencies couldresult in a misstatement to financial statement accounts that would result in amaterial misstatement to the annual or interim consolidated financialstatements that would not be prevented or detected.

 

**Remediationof Material Weaknesses**

 

As of thefiling date of this Form 10-Q/A, the Company had not fully remediated oneof the material weaknesses in the Company’s internal control over financialreporting identified as of December 31, 2004 which continued to exist asof March 31, 2005. We have taken the following actions to address thematerial weaknesses described above:

 

1. *Insufficient personnel resources and technical expertise within itsaccounting function*

 

Management hasassessed the organization of its accounting personnel and the technicalexpertise within the accounting function. As a result, the Company hasestablished an accounting function at the parent company level. The NRVdivisional controller was promoted to Corporate Controller and will beresponsible for setting and establishing accounting policies for the Company andits two divisions in accordance with generally accepted accounting principles (“GAAP”)and guidelines required by the Securities and Exchange Commission (“SEC”). Toassist the Corporate Controller, the Company has also promoted an individual toa newly created position of Manager of Financial Reporting. In addition, theCompany has subscribed to an on-line research tool to assist this group instaying abreast of new accounting pronouncements, proper accounting disclosureand also research technical accounting issues relating to the Company’s ongoingbusiness transactions. At the NRV division, the Company has hired a newController and Accounting Manager. As a result of the re-organization of itsaccounting personnel and increased technical expertise within the accountingfunction, management believes that these actions will remediate the materialweaknesses described in items (a), (b) and (c) above. As of the dateof the filing of the 2005 Form 10-K, the Company has not fully remediatedthe material weakness in the Company’s internal control over financialreporting. However, during fiscal year 2006, management has taken a number ofsteps that it believes will impact the effectiveness of our internal controlover financial reporting. Management has not completed its 2006 assessment ofinternal control over financial reporting. Upon completion of the 2006assessment, management will report on internal control over financial reportingand the status of remediation.

 

2. *Revenue Recognition*

 

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

 

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for in theproper period. As a result of the discontinued deferred payments arrangementsand additional control procedures implemented, management believes that theseactions will remediate this material weakness. This material weakness wasremediated as of December 31, 2005.

 

3. *Accounting for Sales Incentives*

 

Effective May 31,2005, the Company changed its method of accounting for sales incentive programsthat are paid directly to the dealers’ sales representatives. These salesincentives are now classified as a reduction of revenue rather than as aselling expense. These sales incentives were restated for all years presentedin the fiscal year 2004 Form 10-K and have been properly classified in thefirst and second quarters of fiscal year 2005. As more fully discussed in 1above, the Company has increased its personnel and expertise within theaccounting function. In addition, the Company has revised its quarterly closingprocedures to strengthen its review of all existing sales incentive programs toensure they are accounted for properly. As a result of the re-organization ofits accounting personnel and increased technical expertise within theaccounting function and additional control procedures implemented, managementbelieves that these actions will remediate this material weakness. Thismaterial weakness was remediated as of December 31, 2005.

 

*4.Accounting for Income Taxes*

 

As more fullydiscussed in 1 above, the Company has recently increased its personnel andtechnical expertise within the accounting function. In addition, the Companyrevised its quarterly closing procedures to strengthen its review of the incometax provision to ensure the accuracy of the components of the income taxprovision and related deferred income taxes. As a result of the reorganization ofits accounting personnel and technical expertise within the accounting functionand additional control procedures implemented, management believes that theseactions will remediate this material weakness. This material weakness wasremediated as of December 31, 2005.

 

*5. Physicalinventory process*

 

Beginning withthe first quarter of 2005, management increased its training of all personnelinvolved in the physical inventory process at the NRV division, particularlythose individuals performing the data entry function. Additionally, thephysical inventory report was revised such that any inventory item, which doesnot include a corresponding item number, will result in an exception requiringfollow-up by management. In addition, the NRV division has implemented enhancedreview procedures by senior management of the reconciliation process betweenthe quantities obtained from the physical inventory tags and the quantitiesobtained from the updated perpetual inventory report. As a result of theincreased training of all personnel involved in the physical inventory process,the revision of certain physical inventory reports and additional controlprocedures implemented, management believes that these actions will remediatethis material weakness. This material weakness was remediated as of December 31,2005.

 

6. *Unrestricted access to programs and data*

 

The NRVdivision has corrected access rights for known instances in which informationtechnology personnel and users with accounting and reporting responsibilities hadaccess to financial accounting applications programs and data that wasincompatible with their functional business requirements. The NRV division isalso in the process of refining and developing ongoing processes to ensure thatproper access rights are granted, reviewed and maintained in a timely manner.As a result of the correction of access rights of information technologypersonnel and users with accounting and reporting responsibilities andadditional control procedures implemented, management believes that theseactions will remediate this material weakness. This material weakness wasremediated as of December 31, 2005.

 

The Companybelieves that it has improved its disclosure controls and procedures and willbe able to remedy the remaining material weakness identified as part ofits assessment process at December 31, 2004 and 2005. Notwithstanding theCompany’s remediation efforts, because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

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

#### ** **

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

 

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

 

**PART II - OTHERINFORMATION**

** **

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

 

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

 

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

 

Exhibits

 

31.1             Certificationof Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe Exchange Act.

 

31.2             Certificationof Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) ofthe Exchange Act.

 

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

 

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**SIGNATURE**

 

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

 

 
| ** **             | **NATIONAL R.V. HOLDINGS, INC.** |                            |
|------------------------|---------------------------------------|---------------------------------|
|                   | (Registrant)                          |                            |
|                   |                                  |                            |
| Date: May 2, 2006 | By                                    | /s/ THOMAS J. MARTINI, CPA |   |
|                   |                                  |                            |
|                   | Thomas J. Martini                     |                            |
|                   | Chief Financial Officer               |                            |
|                   |  (Principal Accounting and       |                            |
|                   | Financial  Officer)                   |                            |
|                        |                                       |                                 |  |

 

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