# **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(Mark One)**
| **x**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** ** | ** **                                                                                    |
| **For the  quarterly period ended June 30, 2006** |
| ** **                                        | ** ** | ** **                                                                                    |
| **OR**                                            |
| ** **                                        | ** ** | ** **                                                                                    |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number 001-12085**

**NATIONAL R.V. HOLDINGS,INC.**(Exact name of registrant as specified in its charter)
| **Delaware**                                 | ** ** | **33-0371079**                       |
|----------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of              |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)               |       |                                 |
|                                         |       |                                 |
| **3411 N. Perris Blvd., Perris, California** | ** ** | **92571**                            |
| (Address of principal executive  offices)    |       | (Zip Code)                           |

 

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

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

Yes ý   Noo

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

 

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

Yes o   Noý

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.
| Class                                    | ** ** | **Outstanding at July26, 2006** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| Common stock,  par value $0.01 per share |       | 10,339,484                                     |       |

 

 

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**NATIONAL R.V. HOLDINGS,INC.INDEX**
| **PART I - FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |   |   |   |   |
| Item  1.                                 |   | Consolidated  Financial Statements (Unaudited) |   |   |
|                                     |   |   |   |   |
|                                     |   | Consolidated  Balance Sheets — June 30, 2006 and December 31, 2005 |   |   |
|                                     |   |   |   |   |
|                                     |   | Consolidated  Statements of Operations — Three and Six Months Ended June 30, 2006 and 2005 |   |   |
|                                     |   |   |   |   |
|                                     |   | Consolidated  Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005 |   |   |
|                                     |   |   |   |   |
|                                     |   | 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 1.                                  |   | Legal Proceedings |   |   |
|                                     |   |   |   |   |
| Item  1A.                                |   | Risk  Factors |   |   |
|                                     |   |   |   |   |
| Item 5                                   |   | Other Information |   |   |
|                                     |   |   |   |   |
| Item  6.                                 |   | Exhibits |   |   |
|                                     |   |   |   |   |
|                                     |   | Signature |   |   |

 

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**Tableof Contents**

**PART I.  FINANCIAL INFORMATION**

**Item 1.  Consolidated Financial Statements**

**NATIONAL R.V.HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**
| ** **                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                       | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                                                                           |       |                    |       |                        |       |
| Current assets:                                                                                  |       |                    |       |                        |       |
| Cash and cash equivalents                                                                        |       | $                       | 4          |                        | $          | 11 |   |
| Restricted cash                                                                                  |       | 380                     |       | 201                         |       |
| Receivables, less allowance for doubtful accounts of  $503 and $392, respectively                |       | 32,190                  |       | 21,533                      |       |
| Inventories                                                                                      |       | 72,323                  |       | 61,940                      |       |
| Prepaid expenses                                                                                 |       | 3,241                   |       | 2,359                       |       |
| Deferred income taxes                                                                            |       | 1,072                   |       | 1,281                       |       |
| Total current assets                                                                             |       | 109,210                 |       | 87,325                      |       |
| Property, plant and equipment, net                                                               |       | 39,074                  |       | 38,457                      |       |
| Other assets                                                                                     |       | 1,369                   |       | 1,608                       |       |
| Total assets                                                                                     |       | $                       | 149,653    |                        | $          | 127,390 |   |
|                                                                                             |       |                    |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                       |       |                    |       |                        |       |
| Current liabilities:                                                                             |       |                    |       |                        |       |
| Book overdraft                                                                                   |       | $                       | 10,461     |                        | $          | 2,582 |   |
| Accounts payable                                                                                 |       | 24,597                  |       | 20,218                      |       |
| Accrued expenses                                                                                 |       | 25,668                  |       | 26,273                      |       |
| Current portion of capital leases                                                                |       | 60                      |       | 57                          |       |
| Line of credit                                                                                   |       | 32,291                  |       | 12,059                      |       |
| Total current liabilities                                                                        |       | 93,077                  |       | 61,189                      |       |
| Long-term portion of capital leases                                                              |       | 148                     |       | 169                         |       |
| Deferred income taxes                                                                            |       | 1,072                   |       | 1,281                       |       |
| Long-term accrued expenses                                                                       |       | 4,280                   |       | 5,089                       |       |
| Total liabilities                                                                                |       | 98,577                  |       | 67,728                      |       |
|                                                                                             |       |                    |       |                        |       |
| 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 issued and outstanding |       | 103                     |       | 103                         |       |
| Additional paid-in capital                                                                       |       | 38,160                  |       | 37,563                      |       |
| Retained earnings                                                                                |       | 12,813                  |       | 21,996                      |       |
| Total stockholders’ equity                                                                  |       | 51,076                  |       | 59,662                      |       |
| Total  liabilities and stockholders’ equity                                                 |       | $                       | 149,653    |                        | $          | 127,390 |   |

 

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

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**NATIONALR.V. HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)(Unaudited)**
| ** **                           | ** ** | **Three-Months Ended  June 30,** | ** ** | **Six-Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                       |       |                                     |       |   |   |   |   |
| Net sales                            |       | $                                          | 110,214    |                                     | $          | 123,225 |   | $ | 223,108 |   | $ | 248,850 |   |
| Cost of goods  sold                  |       | 110,272                                    |       | 121,124                                  |       | 217,840 |   | 241,134 |   |
| Gross profit (loss)                  |       | (58                                        | )          | 2,101                                    |       | 5,268 |   | 7,716 |   |
| Selling expenses                     |       | 3,373                                      |       | 3,315                                    |       | 6,627 |   | 6,954 |   |
| General and  administrative expenses |       | 3,100                                      |       | 3,891                                    |       | 6,844 |   | 7,143 |   |
| Operating loss                       |       | (6,531                                     | )          | (5,105                                   | )          | (8,203 | ) | (6,381 | ) |
| Interest expense                     |       | 610                                        |       | 311                                      |       | 1,034 |   | 588 |   |
| Other expense  (income)              |       | (30                                        | )          | 18                                       |       | (91 | ) | (91 | ) |
| Loss before income taxes             |       | (7,111                                     | )          | (5,434                                   | )          | (9,146 | ) | (6,878 | ) |
| Provision for  income taxes          |       | 18                                         |       | —                                   |       | 37 |   | — |   |
| Net loss                             |       | $                                          | (7,129     | )                                        | $          | (5,434 | ) | $ | (9,183 | ) | (6,878 | ) |
|                                 |       |                                       |       |                                     |       |   |   |   |   |
| Loss per common share:               |       |                                       |       |                                     |       |   |   |   |   |
| Basic                                |       | $                                          | (0.69      | )                                        | $          | (0.53 | ) | $ | (0.89 | ) | $ | (0.67 | ) |
| Diluted                              |       | $                                          | (0.69      | )                                        | $          | (0.53 | ) | $ | (0.89 | ) | $ | (0.67 | ) |
|                                 |       |                                       |       |                                     |       |   |   |   |   |
| Weighted average number  of shares:  |       |                                       |       |                                     |       |   |   |   |   |
| Basic                                |       | 10,339                                     |       | 10,339                                   |       | 10,339 |   | 10,337 |   |
| Diluted                              |       | 10,339                                     |       | 10,339                                   |       | 10,339 |   | 10,337 |   |

 

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

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**NATIONALR.V. HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                                         |       |                                              |       |   |   |
| Cash flows from  operating activities:                                       |       |                                              |       |   |   |
| Net loss                                                                     |       | $                                                 | (9,183     | ) | $ | (6,878 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              |       |   |   |
| Bad debt expense                                                             |       | 92                                                |       | 93 |   |
| Reserve and write down of inventories                                        |       | 3,257                                             |       | 1,635 |   |
| Depreciation and amortization                                                |       | 2,044                                             |       | 1,811 |   |
| (Gain) loss on asset disposal                                                |       | 10                                                |       | (23 | ) |
| Stock-based compensation                                                     |       | 597                                               |       | — |   |
| Changes in  assets and liabilities:                                          |       |                                              |       |   |   |
| Increase in receivables                                                      |       | (10,749                                           | )          | (4,018 | ) |
| Increase in inventories                                                      |       | (13,640                                           | )          | (8,700 | ) |
| (Increase) decrease in prepaid expenses                                      |       | (882                                              | )          | 1,077 |   |
| Increase in accounts payable                                                 |       | 4,379                                             |       | 11,996 |   |
| (Decrease) increase in accrued expenses                                      |       | (1,414                                            | )          | 5,497 |   |
| Net cash (used for) provided by operating activities                         |       | (25,489                                           | )          | 2,490 |   |
|                                                                         |       |                                              |       |   |   |
| Cash flows from  investing activities:                                       |       |                                              |       |   |   |
| (Increase) decrease in restricted cash                                       |       | (179                                              | )          | 226 |   |
| Repayments on note receivable                                                |       | —                                            |       | 1,429 |   |
| Purchase of property, plant and equipment                                    |       | (2,760                                            | )          | (2,889 | ) |
| Proceeds from sale of assets                                                 |       | 128                                               |       | 32 |   |
| Decrease in other assets                                                     |       | 200                                               |       | 37 |   |
| Net cash used in investing activities                                        |       | (2,611                                            | )          | (1,165 | ) |
|                                                                         |       |                                              |       |   |   |
| Cash flows from  financing activities:                                       |       |                                              |       |   |   |
| Increase (decrease) in book overdraft                                        |       | 7,879                                             |       | (803 | ) |
| Principal payments on capital leases                                         |       | (18                                               | )          | (14 | ) |
| Net receipts (payments) on the line of credit                                |       | 20,232                                            |       | (472 | ) |
| Proceeds from issuance of common stock                                       |       | —                                            |       | 140 |   |
| Net cash provided by (used for) financing activities                         |       | 28,093                                            |       | (1,149 | ) |
| Net (decrease)  increase in cash and cash equivalents                        |       | (7                                                | )          | 176 |   |
| Cash and cash  equivalents, beginning of the year                            |       | 11                                                |       | 11 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                 | 4          |   | $ | 187 |   |

 

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

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**NATIONAL R.V.HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE 1 — BASIS OF PRESENTATION**

**General**

The consolidated financial statements include thefinancial statements of National RV Holdings, Inc. (the “Company”) and itswholly-owned subsidiaries National RV, Inc. (“National RV”) and CountryCoach, Inc. (“Country Coach”).

The accompanying consolidated balance sheet as ofDecember 31, 2005, which has been derived from audited consolidated financialstatements, and the unaudited interim consolidated financial statements havebeen prepared pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission (“SEC”). Certain information and notedisclosures normally included in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to those rules and regulations, although the Company believesthat the disclosures made are adequate to make the information not misleading.These consolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31, 2005and notes thereto included in the Company’s Annual Report on Form 10-K filedwith the SEC on March 30, 2006.

In the opinion of management, the accompanyingunaudited consolidated financial statements contain all adjustments necessary,consisting of normal recurring adjustments, to state fairly the consolidatedfinancial position, the results of operations and cash flows for all periodspresented, including the elimination of significant intercompany accounts inconsolidation. Certain reclassifications have been made to prior period amountsand classification in order to conform to current period presentation.

***Seasonal Nature of Business Activities***

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

***Use of Accounting Estimates***

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and judgmentsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amount of revenues and expenses for each period. Onan on-going basis, management evaluates its estimates and judgments. Managementbases its estimates and judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying value of assetsand liabilities that are not readily apparent from other sources. Actualresults may materially differ from these estimates under different assumptionsor conditions.

***History of Recent Losses***

The Company experienced net losses for the threemonths ended June 30, 2006 and 2005 of $7.1 million and $5.4 million,respectively, and for the six months ended June 30, 2006 and 2005 the Companyexperienced net losses of  $9.2 millionand $6.9 million, respectively. For the six months ended June 30, 2006, theCompany used $25.5 million of cash in operating activities and for the sixmonths ended June 30, 2005 the Company provided $2.5 million of cash fromoperating activities. The RV industry has been historically cyclical andsubject to downturns during periods of weak economic conditions. With thecontinued decline of RV industry wholesale shipments, rising interest rates,increased gas prices and continued economic uncertainty, the Companyexperienced continued net losses for the three and six months ended June 30,2006. These conditions combined with recent historical losses led the Companyto assess its short-term liquidity needs and plans to achieve profitability.

Management’s initiatives to improve the Company’searnings and working capital position by achieving operational profitabilityinclude: (i) introducing new products and floor plans in 2006, (ii) adding newdealers to fill open market areas or replace under-performing dealers, (iii)decreasing overall sales incentives by tailoring programs that provide themaximum value to the Company, (iv) reducing material and related obsolescencecosts, (v) improving manufacturing efficiencies, (vi) further reducingmanufacturing and other overhead costs and (vii) decreasing the costs ofwarranty.

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Inorder to fund on-going operations through at least the next twelve months, theCompany remains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional orreplacement debt financings it may be able to complete until it achievessustained operational profitability through a combination of increased sales,cost reductions and improved product margins. After consideration of itsavailable borrowing capacity, the Company believes it has sufficient financialresources to fund its operations through at least the next twelve months.However, the Company’s ability to meet its obligations beyond the next twelvemonths is dependent on its ability to generate positive cash flows fromoperations and is dependent on continued borrowings under its existing line ofcredit. If management is unable to successfully implement the Company’s operationalprofitability plan or the Company’s existing line of credit is insufficient toallow the Company to meet its obligations, the Company may need to implementalternative plans that could include long-term financing collateralized by realestate or additional debt financing, equity financing, additional reductions inoperating costs, deferral of capital expenditures, and further reductions inworking capital.  In order to lessen theCompany’s reliance on its existing line of credit to fund its day-to-dayoperations and to improve its working capital position, the Company is activelypursuing long-term debt financing opportunities. There can be no assurance thatany such long-term financing will be available on acceptable terms andconditions or that the Company will be successful in obtaining such financing.

**NOTE 2 — INVENTORIES**

Inventoriesconsist of the following (in thousands):

|                   | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
| Inventories:      |       |                    |       |                        |       |
| Raw materials     |       | $                       | 23,452     |                        | $          | 19,289 |   |
| Chassis           |       | 6,020                   |       | 3,236                       |       |
| Work-in-process   |       | 31,869                  |       | 30,870                      |       |
| Finished goods    |       | 10,982                  |       | 8,545                       |       |
| Total inventories |       | $                       | 72,323     |                        | $          | 61,940 |   |

 

For the three months ended June 30, 2006 and 2005, the Company recordeda write-down of inventories to the lower of cost or market of $3.1 million and$0.3 million, respectively. A total of $1.7 million of the $3.1 millionwrite-down was for units in inventory affected by the defective fiberglass asdiscussed below in Note 6. For the six months ended June 30, 2006, the Companyrecorded a write-down of inventories to the lower of cost or market of $3.3million and $0.4 million, respectively.

**NOTE 3 — ACCRUED EXPENSES**

Accruedexpenses consist of the following (in thousands):

|                                                   | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                              |       |                    |       |                        |       |
| Current accrued  expenses:                        |       |                    |       |                        |       |
| Accrued compensation and related taxes            |       | $                       | 6,405      |                        | $          | 7,913 |   |
| Accrued sales incentives                          |       | 3,995                   |       | 4,129                       |       |
| Warranty reserve                                  |       | 12,272                  |       | 11,705                      |       |
| Workers’ compensation self-insurance reserve |       | 1,546                   |       | 2,209                       |       |
| Other accrued expenses                            |       | 1,450                   |       | 766                         |       |
| Total current  accrued expenses                   |       | $                       | 25,668     |                        | $          | 26,722 |   |
|                                              |       |                    |       |                        |       |
| Long-term accrued  expenses:                      |       |                    |       |                        |       |
| Warranty reserve                                  |       | $                       | 128        |                        | $          | 130 |   |
| Workers’ compensation self-insurance reserve |       | 3,539                   |       | 4,280                       |       |
| Deferred compensation                             |       | 613                     |       | 679                         |       |
| Total long-term accrued  expenses                 |       | $                       | 4,280      |                        | $          | 5,089 |   |

 

## **NOTE4 — WARRANTY RESERVE**

The Company’s warranty reserve, which is included inthe consolidated financial statements under the “Accrued expenses” caption, isestablished based on the Company’s best estimate of the amounts necessary tosettle future and existing claims on products sold as of the balance sheetdate. The Company records an estimate for future warranty-related costs basedon recent actual warranty claims. Also, as part of the warranty reserve theCompany’s recall reserve is established, as necessary, based on management’sestimate of the cost per unit to remedy a given problem and the estimatednumber of units that will ultimately be brought in for the repair.

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Thefollowing table summarizes the activity related to the warranty reserve for thesix months ended June 30, 2006 and 2005, respectively (in thousands):

|                                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Balance at  January 1,                                                                    |       | $                                                 | 11,835     |   | $ | 9,270 |   |
| Warranties issued during the period and changes in  liability for pre-existing warranties |       | 9,059                                             |       | 9,792 |   |
| Settlements made during the period                                                        |       | (8,494                                            | )          | (8,385 | ) |
| Balance at June 30,                                                                       |       | $                                                 | 12,400     |   | $ | 10,677 |   |

 

**NOTE 5 — CREDIT FACILITY**

AtJune 30, 2006, the Company had an asset-based revolving credit facility withUPS Capital Corporation (“UPSC”) and Wells Fargo Bank for $40 million, afterexercising two consecutive $5 million increases to the line of credit in Mayand June 2006. At June 30, 2006, the credit facility was collateralized by allof the Company’s assets other than real estate. Borrowing availability is basedon eligible accounts receivable and inventory. The facility also includes a requirementto maintain a blocked account arrangement, whereby remittances from the Company’scustomers reduce the debt outstanding. The credit facility contains, amongother provisions, certain financial covenants, including funded debt toEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and afixed charge coverage ratio. If these financial covenants are not met, theCompany’s availability under the credit facility will be reduced. On August 10,2006, the Company entered into an amendment of its credit facility in order totemporarily increase the credit line to $50 million through September 30, 2006.Borrowing availability will continue to be based on eligible accountsreceivable and inventory. The Company estimates that availability during thetime when the credit line will be temporarily increased will range from $40 to$47 million.  The amendment provides thatthe $50 million credit facility is reduced incrementally to the original $40million over a five-week period to be completed the last week inSeptember.  The amendment also providesthat all financial covenants are waived for the months of July, August andSeptember of 2006. In connection with the amendment, the Company provided itsPerris, California real estate as collateral to secure the credit facility.

AtJune 30, 2006 and December 31, 2005, the Company had outstanding loans underthe line of credit of $32.3 million and $12.1 million, respectively. Initialamounts borrowed under the revolving credit facility bear interest at the primerate listed in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At June 30, 2006, the interest rate for the borrowingsunder the line of credit was 8.75%. The weighted average interest rate for theborrowings on the credit facility during the three months ended June 30, 2006and 2005 were 8.51% and 6.74%, respectively. The weighted average interest ratefor the borrowings on the credit facility during the six months ended June 30,2006 and 2005 were 8.26% and 6.47%, respectively.

**NOTE 6 — COMMITMENTS AND CONTINGENCIES**

Litigation:

The Company is involvedin legal proceedings in the ordinary course of business, including a variety ofwarranty, “lemon law,” product liability and other miscellaneous litigation,all of which are typical in the recreation vehicle industry. With respect toproduct liability claims, the Company’s insurance policies cover, in whole orin part, defense costs and liability costs for personal injury or propertydamage (excluding damage to Company motorhomes). While it is impossible toestimate with certainty the ultimate legal and financial liability with respectto this litigation, management is of the opinion that while the finalresolution of any such litigation could have a material adverse effect on theCompany’s financial position, results of operations or liquidity in a reportingperiod, an adequate reserve has been estimated to account for such losses.However, actual results may significantly vary from these estimates.

Contingent LiabilitiesRelated to Faulty Material Used in Manufacture:

InApril 2006, the Company identified an issue relating to a supply of defectivefiberglass which it estimated to affect approximately 50 motorhomes at theNational RV subsidiary. Since these initial estimates, the Company has foundapproximately 20 additional defective units. Management has made its bestefforts to identify all affected units as of August 10, 2006. However, theremay still be be additional unidentified units that management cannot reasonablyestimate; consequently, no reserve has been recorded for potential futurelosses on the repair and resale of unidentified defective units in theconsolidated financial statements for the three and six months ended June 30,2006.    On June 29, 2006, NRV filed acivil action in the Riverside County, California Superior Court against thesupplier of the defective fiberglass. The lawsuit seeks, among other remedies, compensatory damages for therepair costs and diminution in value of the affected motorhomes, lost profits,loss of goodwill, and other damages incurred by NRV arising from the defectivematerial.  There can be no assurance thatthe Company will be successful in the lawsuit or that the Company will be ableto recover all of the costs incurred as a result of the defective material.

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Recall:

****In June2006, Country Coach determined that certain tires installed on some motorhomesbetween 1995 and 2001 were defective. As a result, Country Coach is conductinga recall to replace these tires. For the three and six months ended June 30,2006, the Company reserved $1.1 million as an initial estimate of the cost ofthe recall. The Company intends to seek recovery of most of those costs fromthe tire manufacturer.****

Recourse of Dealer Financing:

Most of the Company’smotorhome sales are made on terms requiring payment within 15 business days orless of the dealer’s receipt of the unit. Most dealers finance all, orsubstantially all, of the purchase price of their inventory under floor planarrangements with banks or finance companies under which the lender pays theCompany directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s maximum potential exposure underthese agreements approximated $167.0 million at June 30, 2006. The risk of lossunder the repurchase agreements is spread over a number of dealers and lendersand is reduced by the resale value of the RVs, which the Company would berequired to repurchase. Losses under these agreements have not been material inthe past and management does not believe that any future losses under suchagreements will have a material adverse effect on the Company’s consolidatedfinancial position, results of operations, or cash flows; consequently, noliability has been recognized in the consolidated financial statements.

OtherCommitments:

InAugust 2004, the Company entered into an agreement to acquire, for $3million, approximately 73 acres of land adjacent to its CountryCoach, Inc. facility in Junction City, Oregon. The Company paid a depositof $0.1 million. The closing of the purchase is subject to customary closingconditions and is expected to occur before February 2007.

**NOTE 7 — STOCK BASED COMPENSATION**

#### **Stock Option Plans**

As of June 30, 2006, the Company had threeservice-based fixed option plans (the “Plans”): the 1996 Stock Option Plan, the1997 Stock Option Plan and the 1999 Stock Option Plan. The Plans are furtherdescribed below:

##### ***1996 Stock Option Plan***

In October 1996, the Company’s Board of Directorsadopted and approved the 1996 Stock Option Plan (the “1996 Option Plan”). The1996 Option Plan is designed to serve as an incentive for retaining qualifiedand competent directors, employees and consultants. The 1996 Option Planprovides for the award of options to purchase up to 675,000 shares of CommonStock. The 1996 Option Plan is administered by the Compensation Committee ofthe Board of Directors. The Compensation Committee has, subject to theprovisions of the 1996 Option Plan, full authority to select Companyindividuals eligible to participate in such plan, including officers, directors(whether or not employees) and consultants. The 1996 Option Plan provides forthe awarding of incentive stock options (as defined in Section 422 of theUnited States of America Internal Revenue Service (“IRS”) Code) andnon-incentive stock options. Options granted pursuant to the 1996 Option Planwill have such vesting schedules and expiration dates as the CompensationCommittee shall establish for each participant in the 1996 Option Plan, whichterms shall be reflected in an option agreement executed in connection with thegranting of the option. There were no options granted under the 1996 OptionPlan for the three months ended June 30, 2006 and 145,000 options granted forthe six months ended June 30, 2006.

##### ***1997 Stock Option Plan***

In June 1997, the Company’s Board of Directors adoptedand approved the 1997 Stock Option Plan (the “1997 Option Plan”). The 1997Option Plan is designed to serve as an incentive for retaining qualified andcompetent directors, employees and consultants. The 1997 Option Plan providesfor the award of options to purchase up to 900,000 shares of Common Stock. The1997 Option Plan is administered by the Board of Directors or, at its option, acommittee of the Board of Directors. The Board (or a designated committee) has,subject to the provisions of the 1997 Option Plan, full authority to selectCompany individuals eligible to participate in such plan, including officers,directors (whether or not employees) and consultants. The

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1997 Option Plan provides for the awarding ofincentive stock options (as defined in Section 422 of the IRS Code) andnon-incentive stock options. Options granted pursuant to the 1997 Option Planwill have such vesting schedules and expiration dates as the Board (or adesignated committee) shall establish for each participant in the 1997 OptionPlan, which terms shall be reflected in an option agreement executed inconnection with the granting of the option. There were no options granted underthe 1997 Option Plan for the three and six months ended June 30, 2006,respectively.

##### ***1999 Stock Option Plan***

The Company’s Board of Directors adopted and approvedthe 1999 Stock Option Plan in April 1999, which was amended and restated inApril 2000 and again in April 2001 (together, the “1999 Option Plan”). The 1999Option Plan is designed to serve as an incentive for retaining qualified andcompetent directors, employees and consultants. The 1999 Option Plan providesfor the award of options to purchase up to 1,150,000 shares of Common Stock.The 1999 Option Plan is administered by the Compensation Committee. TheCompensation Committee has, subject to the provisions of the 1999 Option Plan,full authority to select Company individuals eligible to participate in suchplan, including officers, directors (whether or not employees) and consultants.The 1999 Option Plan provides for the awarding of incentive stock options (asdefined in Section 422 of the IRS Code) and non-incentive stock options.Options granted pursuant to the 1999 Option Plan will have such vestingschedules and expiration dates as the Compensation Committee shall establishfor each participant in the 1999 Option Plan, which terms shall be reflected inan option agreement executed in connection with the granting of the option.There were no options granted under the 1997 Option Plan for the three and sixmonths ended June 30, 2006, respectively.

Optionsgranted to non-employee directors generally vest immediately upon grant andgenerally expire five to ten years from the date of grant. Options granted toemployees, including employee directors, generally vest in three equalinstallments and expire five to ten years from the date of grant. The price ofoptions granted pursuant to these plans will not be less than 100 percent ofthe market value of the shares on the date of grant.

**Adoption of Statement of Financial Accounting Standards No.123(R) “Share-Based Payment”**

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment”, (“SFAS No. 123(R)”) andall related financial statement guidance and interpretations using the modifiedprospective application transition method. The modified prospective methodapplies the expense recognition requirements of SFAS No. 123(R) to new awardsand to awards outstanding at the effective date and subsequently modified orcanceled and does not restate prior periods for comparative purposes.Previously, the Company had accounted for employee stock based compensationusing the intrinsic value method as proscribed under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No.25”), and related interpretations and the fair value method for stock optiongrants that do not meet the requirements for use of the intrinsic value methodas proscribed by Statement of Financial Accounting Standards No. 123 “Accountingfor Stock-Based Compensation” (“SFAS No. 123”). Due to the difference in thevaluation methods between APB No. 25 and SFAS No. 123(R), the adoption of SFASNo. 123(R) had a significant impact on the Company’s financial position,results of operations and cash flows. For the three and six months ended June30, 2006, the Company recognized compensation expenses and additionalpaid-in-capital of $0.1 million and $0.6 million related to the stock-basedcompensation arrangements, respectively.

OnNovember 10, 2005, the FASB issued FASB Staff Position (“FSP”) FAS No. 123(R)-3“Transition Election Related to Accounting for Tax Effects of Share-BasedPayment Awards” (“FSP FAS No. 123(R)-3”). The alternative transition methodincludes simplified methods to establish the beginning balance of theadditional paid-in-capital pool (“APIC pool”) related to the tax effects ofemployee share-based compensation, and to determine the subsequent impact onthe APIC pool and consolidated statements of cash flows of the tax effects ofemployee share-based compensation awards that are outstanding upon adoption ofSFAS No. 123(R). An entity may make a one-time election to adopt the transitionmethod described in this guidance and may take up to one year from the later ofits initial adoption of SFAS No. 123(R) or the effective date of this guidance,which was November 11, 2005. The Company is in the process of determiningwhether to adopt the alternative transition method provided in FSP FAS No.123(R)-3 for calculating the tax effects of share-based compensation pursuantto SFAS No. 123(R).

Thefair value of service-based stock option awards is estimated on the date ofgrant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model.The Black-Scholes model contains certain significant assumptions in order toestimate the fair value of a stock option at the date of grant. The expectedterm is based on analyses of historical exercise patterns in order to determinethe average time in which an option is held before being exercised. The riskfree interest rate is based on the U.S. Treasury yield curve for a periodconsistent with the expected term of the option in effect at the time of grant.The expected volatility is based on the historical volatility of the Company’scommon stock over the expected term and considerations regarding expectedfuture volatility of the common stock. The expected dividend is based on thehistorical dividend rate paid by the Company.

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Assumptionsused in the Black-Scholes model for stock option grants during the six monthsended June 30, 2006 are as follows:

|                              | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|
| Expected term  (in years)    |       | 5.0                                                     |       |
| Risk-free  interest rate     |       | 4.69                                                    | %          |
| Expected  volatility         |       | 45.0                                                    | %          |
| Weighted average  volatility |       | 45.0                                                    | %          |
| Expected dividend yield      |       | 0.0                                                     | %          |

 

Sharebased compensation expense recognized in the consolidated statement ofoperations for the three and six months ended June 30, 2006 is based on theawards ultimately expected to vest and therefore has been reduced for estimatedforfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Pre-vesting forfeitures were estimated based onhistorical employee termination rates, which were estimated to be approximately1% for both officers and directors and 10% for employees at June 30, 2006. Theestimated fair value, less the estimated forfeitures, is amortized tocompensation expense using the straight-line attribution method. In the proforma information required under SFAS No. 123 for the periods prior to January1, 2006, the Company accounted for pre-vesting forfeitures in the pro-formadisclosure as incurred.

Asummary of option activity under the Plans for the three and six months endedJune 30, 2006 is presented below:

| Options                         | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term(years)** | ** ** |
|---------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                      | ** ** | ** **                           | ** ** | ** **                                                    | ** ** |
| Outstanding at  January 1, 2006 |       | 1,080                           |       | $                                    | 9.94       |                                                          |       |   |
| Granted                         |       | 145                             |       | 6.09                                 |       |                                                          |       |
| Exercised                       |       | —                          |       | —                               |       |                                                          |       |
| Forfeited                       |       | (6                              | )          | 12.50                                |       |                                                          |       |
| Canceled                        |       | (3                              | )          | 12.50                                |       |                                                          |       |
| Outstanding at  March 31, 2006  |       | 1,216                           |       | 9.46                                 |       | 4.4                                                           |       |
| Granted                         |       | —                          |       | —                               |       |                                                          |       |
| Exercised                       |       | —                          |       | —                               |       |                                                          |       |
| Forfeited                       |       | (13                             | )          | 9.36                                 |       |                                                          |       |
| Canceled                        |       | (6                              | )          | 6.80                                 |       |                                                          |       |
| Outstanding at  June 30, 2006   |       | 1,197                           |       | $                                    | 9.49       |                                                          | 4.1        |   |
| Exercisable at June 30,  2006   |       | 982                             |       | $                                    | 9.97       |                                                          | 3.0        |   |

 

Theweighted-average grant date fair value of options granted during the six monthsended June 30, 2006 was $2.79. Because the Plans established that the exerciseprice will not be less than 100 percent of the market value of the shares onthe date of grant, there are no compensation costs related to the intrinsicvalue of share-based compensation.

Asummary of the status of the Company’s non-vested shares for the three and sixmonths ended June 30, 2006 is presented below:

| Options                        | ** ** | **Shares (in thousands)** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|--------------------------------|------------|--------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | ** **                     | ** ** | ** **                                        | ** ** |
| Non-vested at  January 1, 2006 |       | 310                            |       | $                                                 | 3.17       |   |
| Granted                        |       | —                         |       | —                                            |       |
| Vested                         |       | (70                            | )          | 3.47                                              |       |
| Forfeited                      |       | (6                             | )          | 4.56                                              |       |
| Non-vested at  March 31, 2006  |       | 234                            |       | 3.05                                              |       |
| Granted                        |       | —                         |       | —                                            |       |
| Vested                         |       | (5                             | )          | 3.79                                              |       |
| Forfeited                      |       | (13                            | )          | 2.93                                              |       |
| Non-vested at June 30,  2006   |       | 216                            |       | $                                                 | 3.03       |   |

 

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As ofJune 30, 2006, there was $0.5 million of total unrecognized compensation costrelated to non-vested share-based compensation arrangements granted under thePlans that is expected to be recognized over a weighted-average period of 1.4years. The total fair value of shares vested during the three and six monthsended June 30, 2006 was $0.1 million and $0.6 million, respectively. Since theCompany had net operating loss carryforwards (before valuation) as of June 30,2006, no excess tax benefit for the tax deductions related to stock-basedcompensation was recognized for the three and six months ended June 30, 2006.Additionally, no incremental tax benefits were recognized from stock optionsexercised for the three and six months ended June 30, 2006, which would haveresulted in a reclassification to reduce net cash provided by operatingactivities with an offsetting increase in net cash provided by financingactivities.

**Pro-formaInformation Required Under SFAS No. 123 for Periods Prior to Fiscal 2006**

Prior to adopting the provisions of SFAS No. 123(R),the Company recorded estimated compensation expense for employee stock optionsunder the intrinsic value method promulgated by APB No. 25 and providedpro-forma disclosure of the fair value method in its interim and annualconsolidated financial statements as required by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure” (“SFAS No. 148”) and SFASNo. 123.

For the purposes of pro-forma disclosures requiredunder SFAS No. 123 and SFAS No. 148 for the three and six months ended June 30,2005, the estimated value of the stock options were assumed to be amortized toexpense over the stock options’ vesting periods. The pro-forma effects ofrecognizing the compensation expense under the fair value method on net lossand loss per common share for the three and six months ended June 30, 2005 wereas follows (all amounts in thousands, except per share amounts):
| ** **                                                                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                            | ** ** | **June 30, 2005**      | ** ** |
|                                                                                                                                  |       |                             |       |                           |       |
| Net loss                                                                                                                              |       | $                                | (5,434     | )                              | $          | (6,878 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 147                              |       | 341                            |       |
| Pro forma net  loss                                                                                                                   |       | $                                | (5,581     | )                              | $          | (7,219 | ) |
|                                                                                                                                  |       |                             |       |                           |       |
| Basic loss per  share                                                                                                                 |       | $                                | (0.53      | )                              | $          | (0.67 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.01                             |       | 0.03                           |       |
| Basic loss per  share pro forma                                                                                                       |       | $                                | (0.54      | )                              | $          | (0.70 | ) |
|                                                                                                                                  |       |                             |       |                           |       |
| Diluted loss per  share                                                                                                               |       | $                                | (0.53      | )                              | $          | (0.67 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.01                             |       | 0.03                           |       |
| Diluted loss per share  pro forma                                                                                                     |       | $                                | (0.54      | )                              | $          | (0.70 | ) |

 

Becausethe Plans established that the exercise price will not be less than 100 percentof the market value of the shares on the date of grant, there were nocompensation costs related to the intrinsic value of stock options. The Companydid not grant stock options during the six months ended June 30, 2005.

**NOTE 8 — INCOME TAXES**

Statementof Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFASNo. 109”) requires that a valuation allowance be established when it is morelikely than not that a company’s deferred tax assets will not be realized. Indetermining whether a valuation allowance is required, the Company must takeinto account all positive and negative evidence with regard to the utilizationof deferred tax assets. SFAS No. 109 further states that it is difficult toconclude that a valuation allowance is not needed when there is negativeevidence such as cumulative losses in recent years. The Company recordedrespective non-cash charges for the three months ended June 30, 2006 and 2005of $2.5 million and $1.8 million and for the six months ended June 30, 2006 and2005, the Company recorded respective non-cash charges of $3.4 million and $2.4million to fully reserve against the net deferred tax assets realized duringthose periods. Allocating the valuation allowance on a pro rata basis, inaccordance with SFAS No. 109, resulted in current net deferred tax assets andlong-term net deferred tax liabilities of $1.1 million at June 30, 2006 and$1.3 million at December 31, 2005.

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**NOTE 9 — LOSS PER SHARE**

Basicloss per share is computed by dividing net loss by the weighted average numberof common shares outstanding for the period. Diluted loss per share reflectsthe potential dilution that could occur if options were exercised or convertedinto common stock. Shares attributable to the exercise of outstanding optionsthat are anti-dilutive are excluded from the calculation of diluted loss pershare.

The Company excluded stock options to purchase 1,196,997 and 1,064,654 shares from the computation of diluted earnings per share at June 30, 2006 and 2005, respectively.

**NOTE 10 — RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

In November 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.151, “Inventory Costs-an Amendment of ARB No. 43, Chapter 4” (“SFAS No.151”). SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4 (“ARB43”), to clarify that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized ascurrent-period charges. In addition, SFAS No. 151 requires that allocation offixed production overhead to the costs of conversion be based on the normalcapacity of the production facilities. This standard was effective forinventory costs incurred during fiscal years beginning after June 15,2005. This standard was applied prospectively. While the adoption of thisstandard did not have a material impact on the consolidated financial position,results of operations or cash flows of the Company, the requirements of SFASNo. 151 could potentially have a significant future impact based on certaineconomic factors and management’s judgments and estimates about whatconstitutes abnormal costs and normal capacity in which actual results couldsignificantly differ from these estimates.

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets” (“SFAS No. 153”), which eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. SFAS No. 153 was effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.Adoption of SFAS No. 153 did not significantly affect the financialcondition, results of operations or cash flows of the Company.

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004),”Share-BasedPayment” (“SFAS No. 123(R)”), which replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” (“SFAS No. 123”) and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the consolidated financial statements basedon 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 to consolidatedfinancial statement recognition. The Company was required to adopt SFAS No.123(R) in the first calendar quarter of 2006, beginning January 1, 2006. UnderSFAS No. 123(R), the Company must determine the appropriate fair valuemodel to 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. 123(R), while themodified retrospective method would record compensation expense for allunvested stock options and restricted stock beginning with the first periodrestated. After evaluating the requirements of SFAS No. 123(R), theCompany determined to adopt SFAS No. 123(R) using the modified prospectivemethod and use the Black-Scholes model to value service stock option plans thatare currently in effect. The adoption of SFAS No. 123(R) and all of itsinterpretations had a material effect on the consolidated financial position,results of operations and cash flows of the Company. Note 7 to the consolidatedfinancial statements discusses the effects of the implementation of SFAS No.123(R) and its related interpretations.

InMarch 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-BasedPayment” (“SAB No. 107”), which provides interpretive guidance related to theinteraction between SFAS No. 123(R) and certain SEC rules and regulations. Italso provides the SEC staff’s views regarding valuation of share-based paymentarrangements. In April 2005, the SEC amended the compliance dates for SFAS No.123(R), to allow companies to implement the standard at the beginning of theirnext fiscal year, instead of the next reporting period beginning after June 15,2005. The adoption of SFAS No. 123(R) and all of its interpretations had amaterial effect on the consolidated financial position, results of operationsand cash flows of the Company. Note 7 to the consolidated financial statementsdiscusses the effects of the implementation of SFAS No. 123(R) and its relatedinterpretations.

In March 2005, the FASB issued FASB Interpretation No.47, “Accounting for Conditional Asset Retirement Obligations”  (“FIN No.47”). FIN 47 provides guidance relating to the identification of and financialreporting for legal obligations to perform an asset retirement activity. TheInterpretation requires recognition of a liability for the fair value of aconditional

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asset retirement obligation when incurred if theliability’s fair value can be reasonably estimated. FIN No. 47 also defineswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. The provision was effective nolater than the end of fiscal years ending after December 15, 2005. The adoptionof FIN No. 47 did not have a material impact on the consolidated financialposition, results of operations or cash flows of the Company.

In June 2005, the Emerging Issues Task Force, or EITF,reached a consensus on Issue 05-6, “Determining the Amortization Period forLeasehold Improvements” (“EITF 05-6”), which requires that leaseholdimprovements acquired in a business combination or purchased subsequent to theinception of a lease be amortized over the lesser of the useful life of theassets or a term that includes renewals that are reasonably assured at the dateof the business combination or purchase. EITF 05-6 was effective for periodsbeginning after July 1, 2005. The provisions of this consensus did not have amaterial impact on the consolidated financial position, results of operationsor cash flows of the Company.

In June 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB No. 20 and SFASNo. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections. It establishes,unless impracticable, retrospective application as the required method forreporting a change in accounting principle in the absence of explicittransition requirements specific to the newly adopted accounting principles.SFAS No. 154 also provides guidance for determining whether retrospectiveapplication of a change in accounting principle is impracticable and for reportinga change when retrospective application is impracticable. The correction of anerror in previously issued consolidated financial statements is not anaccounting change. However, the reporting of a correction of an error involvesadjustments to previously issued consolidated financial statements similar tothose generally applicable to reporting an accounting change retrospectively.Therefore, the reporting of a correction of an error by restating previouslyissued consolidated financial statements is also addressed by SFAS No. 154.SFAS No. 154 was required to be adopted in fiscal years beginning afterDecember 15, 2005. The adoption of this standard did not have a materialimpact on the consolidated financial position, results of operations or cashflows of the Company.

InAugust 2005, the FASB issued FASB Staff Position (“FSP”) FSP FAS No. 123-1, “Classificationand Measurement of Freestanding Financial Instruments Originally Issued inExchange for Employee Services under FASB Statement No. 123(R).” In this FSP,the FASB decided to defer the requirements in SFAS No. 123(R), that make afreestanding financial instrument subject to the recognition and measurementrequirements of other accounting principles generally accepted in the UnitedStates of America when the rights conveyed by the instrument are no longerdependent on the holder being an employee. The guidance in this FSP should beapplied upon initial adoption of SFAS No. 123(R). The adoption of SFAS No.123(R) and all of its interpretations had a material effect on the consolidatedfinancial position, results of operations and cash flows of the Company. Note 7to the consolidated financial statements discusses the effects of theimplementation of SFAS No. 123(R) and its related interpretations.

InOctober 2005, the FASB issued FSP FAS No. 123(R)-2, “Practical Accommodation tothe Application of Grant Date As Defined in FASB Statement No. 123(R)*.”* In this FSP, the FASB is providingcompanies with a “practical accommodation” when determining the grant date ofan award that is subject to the accounting provisions in SFAS No. 123(R)*.* Specifically, assuming a company meetsall of the other criteria in the definition of grant date in SFAS No. 123(R), amutual understanding (between the company and the recipient) of the key termsand conditions of an award is presumed to exist at the date the award isapproved (in accordance with the company’s normal corporate governance policy)if (1) the award is a unilateral grant meaning that the recipient does not havethe ability to negotiate the key terms and conditions of the award, and (2) thekey terms and conditions of the award are expected to be communicated to therecipient within a relatively short period of time (as defined in the FSP)after the grant was approved. The guidance in this FSP shall be applied uponinitial adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R) and all ofits interpretations had a material effect on the consolidated financialposition, results of operations and cash flows of the Company. Note 7 to theconsolidated financial statements discusses the effects of the implementationof SFAS No. 123(R) and its related interpretations.

InNovember 2005, the FASB issued FSP FAS No. 123(R)-3, “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” ThisFSP provides a practical exception when a company transitions to the accountingrequirements in SFAS No. 123(R). SFAS No. 123(R) requires a company tocalculate the pool of excess tax benefits available to absorb tax deficienciesrecognized subsequent to adopting SFAS No. 123(R) (termed the “APIC Pool”),assuming the company had been following the recognition provisions prescribedby SFAS No. 123. The FASB learned that several companies do not have thenecessary historical information to calculate the APIC pool as envisioned bySFAS No. 123(R) and accordingly, the FASB decided to allow a practicalexception as documented in this FSP. The guidance in this FSP was effectiveafter the date the FSP was posted to the FASB website. The adoption of SFAS No.123(R) and all of its interpretations had a material effect on the consolidatedfinancial position, results of operations and cash flows of the Company. Note 7to the consolidated financial statements discusses the effects of theimplementation of SFAS No. 123(R) and its related interpretations.

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In February 2006, the FASB issued FSP FAS No. 123(R)-4, “Classificationof Options and Similar Instruments Issued As Employee Compensation That Allowfor Cash Settlement upon the Occurrence of a Contingent Event.” The guidance inthis FSP amends certain paragraphs in SFAS No. 123(R),**and addresses situations when a companyhas option plans that require the company to settle outstanding options in cashupon the occurrence of certain contingent events. For example, some plansrequire a company to cash settle an option upon a change in control of thecompany, or death or disability of the holder. This FSP amends SFAS No. 123(R)to address such situations and concludes that a probability notion be applied.The guidance in this FSP was effective with the adoption of SFAS No. 123(R). Ifa company had already adopted SFAS No. 123(R), the FASB required retrospectiveapplication if a company applied the standard inconsistent with the conclusionsin this FSP. The guidance in this FSP was applied upon initial adoption of SFASNo. 123(R). The adoption of SFAS No. 123(R) and all of its interpretations hada material effect on the consolidated financial position, results of operationsand cash flows of the Company. Note 7 to the consolidated financial statementsdiscusses the effects of the implementation of SFAS No. 123(R) and its relatedinterpretations.

In June 2006, the Emerging Issue Task Force EITF reached a consensus onissue EITF 06-2 “Accounting for Sabbatical Leave and Other Similar BenefitsPursuant to FASB Statement No. 43” (“EITF 06-2”). Accordingly, an employee’sright to a compensated absence under a sabbatical or other similar benefitarrangement (a) that requires the completion of a minimum service period and(b) in which the benefit does not increase with additional years of serviceaccumulates pursuant to paragraph 6(b) of Statement 43 for arrangements inwhich the individual continues to be a compensated employee and is not requiredto perform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of Statement 43 are met, the compensationcost associated with a sabbatical or other similar benefit arrangement shouldbe accrued over the requisite service period. The provisions of this consensus should be applied in financial reportsfor fiscal years beginning after the date the consensus is ratified by theBoard. Entities should recognize the effects of applying the consensus as achange in accounting principle through retrospective application to all priorperiods unless it is impracticable to do so. The Company had been accountingfor benefits similar to sabbatical leave in accordance with the provisions ofthis consensus. Consequently, the adoption of the provisions of this consensuswill not have a material impact on the consolidated financial position, resultsof operations and cash flows of the Company.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes.” This Interpretation clarifies the accountingfor uncertainty in income taxes recognized in companies’ financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes.” This Interpretationprescribes a recognition threshold and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. The Company does not expect FASBInterpretation No. 48 to have a material impact on the consolidated financialposition, results of operation or cash flows of the Company.

**NOTE 11 — SUBSEQUENT EVENT**

Asdisclosed in Note 5, on August 10, 2006, the Company amended its creditfacility with UPSC and Wells Fargo to temporarily increase the credit line to$50 million through September 30, 2006. Borrowing availability will continue tobe based on eligible accounts receivable and inventory.

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**The following management’s discussion and analysis (“MD& A”) is intended to help the reader understand the financial condition andresults of operations of National RV Holdings, Inc. This MD & A is providedas a supplement to, and should be read in conjunction with, the Company’sconsolidated financial statements and the accompanying notes to theconsolidated financial statements contained within this quarterly Form 10-Qfiling and the Company’s Annual Report filed on Form 10-K for the year endedDecember 31, 2005.**

**Disclosure Regarding Forward Looking Statements**

*This report contains information that may constitute “forward-lookingstatements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”“project,” “will” and similar expressions identify forward-looking statements,which generally are not historical in nature. All statements that addressoperating performance, events or developments that the Company expects oranticipates will occur in the future—including statements relating to volumegrowth, share of sales and earnings per share growth, and statements expressinggeneral optimism about future operating results—are forward-looking statements.As and when made, management believes that these forward-looking statements arereasonable. However, caution should be taken not to place undue reliance on anysuch forward-looking statements because such statements speak only as of thedate when made. The Company undertakes no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise. In addition, forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from the Company’s historical experience and its presentexpectations or projections. These risks and uncertainties include, but are notlimited to, those described in this report, in Part II, “Item 1A. RiskFactors” and elsewhere in the Annual Report on Form 10-K for the year endedDecember 31, 2005, and those described from time to time in future reportsfiled with the Securities and Exchange Commission.*

**Executive Overview**

NationalR.V. Holdings, Inc. (the “Company”) through its two wholly-ownedsubsidiaries National RV, Inc. (“NRV”) and Country Coach, Inc. (“CCI”), is oneof the nation’s leading producers of motorized recreational vehicles, oftenreferred to as RVs or motorhomes. From its Perris, California facility, NRVdesigns, manufactures, and markets Class A gas and diesel motorhomes under the *Dolphin*, *Islander*,*Sea Breeze*, *Surfside*,*Tradewinds*and *Tropical*brand names. From its Junction City, Oregon facility, CCI designs, manufacturesand markets high-end (Highline) Class A diesel motorhomes under the brand names*Affinity*, *Allure*, *Inspire*,*Intrigue*, *Magna* and bus conversions under the *Country Coach Prevost*brand.

For the three months ended June 30, 2006, the Companyincurred a net loss of $7.1 million or $0.69 per share as compared to a netloss of $5.4 million or $0.53 per share for the three months ended June 30,2005. For the six months ended June 30, 2006, the Company incurred a net lossof $9.2 million or $0.89 per share as compared to a net loss of $6.9 million or$0.67 per share for the six months ended June 30, 2005. Despite its losses, theCompany increased market share by 17.5% as reported by Statistical Surveys,Inc. for the five months ended May 31, 2006 (the most recent period available)as compared to 2005, even though the Class A motorhome industry experienced a 17.5%decline in wholesale shipments as reported by the Recreation Vehicle IndustryAssociation (“RVIA”) for the six months ended June 30, 2006 as compared to2005. While net sales for the three and six months ended June 30, 2006 declined11% and 10% respectively, despite the even larger overall industry decline, theCompany’s profitability was negatively affected. During the three and sixmonths ended June 30, 2006, the Company incurred significant lower of cost ormarket reductions to inventories due to units affected by defective fiberglassmaterial supplied by a third party supplier to the Company’s National RVsubsidiary and production inefficiencies with the introduction of two newproduct lines released by the Country Coach subsidiary. Additionally, theCompany incurred significant additional expense resulting from a recall ofdefective tires installed on certain of the Company’s motorhomes between 1995and 2001 and the expense of stock options now required under SFAS No. 123(R).

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment”, and all related financial statement guidance and interpretationsusing the modified prospective application transition method. The modifiedprospective method applies the expense recognition requirements of SFAS No.123(R) to new awards and to awards outstanding at the effective date andsubsequently modified or canceled and does not restate prior periods forcomparative purposes. Previously, the Company had accounted for employeestock-based compensation using the intrinsic value method as proscribed underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB No. 25”) and related interpretations and the fair valuemethod for stock option grants that do not meet the requirements for use of theintrinsic value method as proscribed by SFAS No. 123. Due to the difference inthe valuation methods between APB No. 25 and SFAS No. 123(R), the adoption ofSFAS No. 123(R) had a significant impact on the Company’s financial position,results of operations and cash flows. For the three and six months ended June30, 2006, the Company recognized compensation expenses and additionalpaid-in-capital of $0.1 million and $0.6 

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million, respectively, related to the stock-basedcompensation arrangements. Because the Company’s stock option plans establishedthat the exercise price will not be less than 100 percent of the market valueof the shares on the date of grant, no compensation costs related to theintrinsic value of stock options were recognized in periods prior to January 1,2006.

Share-basedcompensation expense recognized in the consolidated statement of operations isbased on the awards ultimately expected to vest and therefore has been reducedfor estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Pre-vesting forfeitures were estimatedbased on historical employee termination rates, which were estimated to beapproximately 1% for both officers and directors and 10% for employees at June30, 2006. The estimated fair value, less the estimated forfeitures areamortized to compensation expense using the straight-line attribution method.In the pro forma information required under SFAS No. 123 for the periods priorto January 1, 2006, the Company accounted for pre-vesting forfeitures in thepro-forma disclosure required by SFAS No. 123 as incurred.

At June 30, 2006, there was $0.5 million of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Plans that is expected to be recognized over aweighted-average period of 1.4 years. The total fair value of shares vestedduring the three and six months ended June 30, 2006 was $0.01 million and $0.06million, respectively. Since the Company had net operating loss carryforwards(before valuation) as of June 30, 2006, no excess tax benefit for the taxdeductions related to stock-based compensation was recognized for the three andsix months ended June 30, 2006. Additionally, no incremental tax benefits wererecognized from stock options exercised for the three and six months ended June30, 2006 which would have resulted in a reclassification to reduce net cashprovided by operating activities with an offsetting increase in net cashprovided by financing activities.

**LookingForward**

The Company continues to focus on growth andprofitability. At CCI, the focus is on improving margins through continuedinvestment in manufacturing engineering, while continuing aggressive productdevelopment to maintain market position. At NRV, the focus remains on growth and cost containment. In addition,the Company continues to focus on increasing its dealer body in open markets.

The Company’s continuous re-design and introduction ofnew product offerings at NRV and CCI are aimed at continuing to increase in theCompany’s market share during 2006. The introductions of additional newproducts are planned at both divisions during the year. NRV will introduce itsnew Pacifica diesel motorhome early in the third quarter of 2006, while CCIwill introduce its new Tribute and Rhapsody lines in the second half of theyear.

Cost containment remains a high priority, specificallyin the manufacturing cost, warranty and workers’ compensation areas. TheCompany continues to focus on improving the quality of its motorhomes. Also,the Company has instituted a number of safety programs, which have resulted inmeasurably reduced year-to-date workers’ compensation costs. Both NRV and CCIhave recently staffed full-time manufacturing engineers to assist in increasingmanufacturing efficiency gain.

The Company is continually striving to increase itscustomer support by improving club support, telephone support for owners anddealers, and parts fulfillment. The Company utilizes various techniques such assurveys and focus groups to ensure that it is improving in the area of customersatisfaction. A continued focus on dealer acquisition and enhanced trainingprograms, such as factory-training programs provide the Company’s customers abasis for self-diagnostics and a better understanding of the equipment they areoperating.

The RVIA’s market expansion campaign, GO RVing, isfostering greater awareness and garnering media attention. Though RVIA expectssubstantial growth for the industry in the long-term or decade ahead, RVIAexpects a continued decline in the industry during 2006.

**Critical Accounting Policies**

The preparation of theconsolidated financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States of Americarequires management to make judgments, assumptions and estimates that affectthe amounts reported. See the discussion of critical accounting policies belowand in the Annual Report on Form 10-K for the year ended December 31, 2005.Besides the adoption of SFAS No. 123(R), there were no unusual uncertainties ofa material nature involved in the application of these principles nor anyunusual, material variation in estimates related to these principles for thethree and six months ended June 30, 2006.

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**Stock-BasedCompensation**

Effective January 1, 2006, the Company adopted Statement of SFAS No.123(R), and all related financial statement guidance and interpretations usingthe modified prospective application transition method. Under the provisions ofSFAS No. 123(R), the fair value of the stock options are estimated using theBlack Scholes option pricing model. The assumptions used in the Black-Scholesoption pricing model requires managements to make estimates about the term inwhich the option holder will exercise, the risk free interest rate, volatilityof the stock, future dividend yield and pre-vesting forfeiture rates. Theseestimates are based on historical experience and on various other judgmentsthat management believes to be reasonable under the circumstances. Actualresults could significantly differ from these estimates, and the results ofoperations could be materially impacted.

Effective January 1,2006, the Company adopted SFAS No. 151. SFAS No. 151 amends ARB No. 43, Chapter4, to clarify that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges. In addition, SFAS No. 151 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Compliance with SFAS No. 151 requires significantjudgments and estimates as to what constitutes abnormal amounts of idlefacility, freight, handling costs, and wasted materials (spoilage) as well asthe threshold of “normal capacity” of a production facility. The requirementsof SFAS No. 151 could potentially have a future impact on the Company’s financialposition, results of operations and cash flow of the Company based on certaineconomic factors and management’s judgments and estimates about whatconstitutes abnormal costs and normal capacity in which actual results couldsignificantly differ from theses estimates.

**Results of Operations**

Comparisonof the Results of Operations for the three and six months ended June 30, 2006to the three and six months ended June 30, 2005:

(Amountsin tables are in thousands, except wholesale sales and percentages)

**Net sales**
| ** **                 | ** ** | **Three Months Ended   June 30,  Percent Change** | ** ** | **Six Months Ended   June 30,  Percent Change** | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                                   | ** ** | ** **                                                               | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                       |       |                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Net sales                  |       | $                                                                          | 110,214    |                                                                     | (10.6      | )% | $ | 123,225 |   | $ | 223,108 |   | (10.3 | )% | $ | 248,850 |   |
| as a percent of net  sales |       | 100.0                                                                      | %          | ** **                                                               |       | 100.0 | % | 100.0 | % | ** ** |   | 100.0 | % |
|                            |            |                                                                            |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company operates in one business segment whichdesigns, markets and manufactures Class A motorhomes which are sold to anetwork of dealers throughout the United States and Canada. Nets sales arecomprised of sales of motorhomes, parts and services. Net sales are reduced bysales returns and allowances and cash-based sales incentive programs.

Thefollowing tables presents the number of diesel and gas Class A motorhomeswholesale sold for the three and six months ended June 30, 2006 and the threeand six months ended June 30, 2005:

 
| ** ** | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** ** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Diesel     |       | 313                                             |       | 379                                           |       | (17.4 | )% | 665 |   | 785 |   | (15.3 | )% |
| Gas        |       | 323                                             |       | 369                                           |       | (12.5 | )% | 691 |   | 770 |   | (10.3 | )% |
| Total      |       | 636                                             |       | 748                                           |       | (15.0 | )% | 1,356 |   | 1,555 |   | (12.8 | )% |

 

The decrease in net sales and the overall sales volumeof both diesel and gas motorhomes is attributable to an overall decrease in theClass A RV market. While the RVIA reports an overall 17.5% decline in Class Awholesale shipments for the same period, the Company has experienced a 17.5%increase in the Class A market share, according to Statistical Surveys, Inc.for the five-month period ended May 31, 2006 as compared to May 31, 2005 (themost recent published information).

In addition to an overall slowing in the Class A RVmarket, the Company experienced a significant decline in sales at the Perrisproduction facility as management and production resources were shifted fromnormal production to rework the units affected by defective fiberglass materialsupplied by a third party supplier to the Company’s National RV subsidiary. InApril 2006, the Company first identified an issue relating to a supply ofdefective fiberglass affecting an unknown number of units produced, andapproximately 70 have been identified to date. The Company continues to assesswhether any other units have been affected by this defect; however, at thistime, the Company is unable to determine the extent to which other units mayhave been affected.  The costs associatedwith dealing 

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with the defective fiberglass had a material impact onthe Company’s results of operations for the second quarter and the Companyexpects that it will continue to sustain some level of costs related to therepair and resale of affected units in future periods.

**Gross profit margin**
| ** **          | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|---------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                             | ** ** | ** **                                                         | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                |       |                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gross profit        |       | $                                                                    | (58        | )                                                                  | (102.8     | )% | $ | 2,101 |   | $ | 5,268 |   | (31.7 | )% | $ | 7,716 |   |
| Gross profit margin |       | (0.1                                                                 | )%         | (105.9                                                             | )%         | 1.7 | % | 2.4 | % | (22.6 | )% | 3.1 | % |
|                     |            |                                                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Grossprofit margin represents net sales less cost of goods sold. Cost of goods soldinclude materials, labor and overhead (including research, development andengineering costs) directly associated with the production of Class Amotorhomes, the cost of parts sold, costs of providing service, warrantyexpense and delivery costs.

During the three months ended June 30, 2006, theCompany realized a decrease in gross margins. The $5.3 million decrease ingross margin was due primarily to the defective fiberglass supplied to theCompany by a third party supplier, which the Company first identified in April2006. The costs incurred related to this defective material include, amongother items, production rework costs, discounts related to the sale of affectedunits, plant shutdowns and other costs. In addition, gross margins for thequarter were impacted by a $1.1 million reserve accrual for the recall ofdefective tires used in the manufacture of certain motorhomes between 1995 and2000. The decrease in gross profit margin for the six months ended June 30,2006 as compared to June 30, 2005 was caused by the substantial reduction ingross profit margins for the three months ended June 30, 2005 as compared toJune 30, 2006.

**Selling expenses**
| ** **                 | ** ** | **Three Months Ended   June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                                   | ** ** | ** **                                                         | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling expenses           |       | $                                                                          | 3,373      |                                                               | 1.7        | % | $ | 3,315 |   | $ | 6,627 |   | (4.7 | )% | $ | 6,954 |   |
| as a percent of net  sales |       | 3.1                                                                        | %          |                                                               |       | 2.7 | % | 3.0 | % |   |   | 2.8 | % |
|                            |            |                                                                            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Selling expenses include payroll, employee benefitsand other head-count related costs associated with sales and marketingpersonnel, advertising, promotion, customer clubs, dealer trade shows andrallies.

For the three months ended June 30, 2006 as comparedto June 30, 2005 selling expenses increased slightly. While sales and marketingexpenses were reduced for the three months ended June 30, 2006, the increase inthe number and cost of rallies more than offset the reductions. Sellingexpenses decreased for the six months ended June 30, 2006 as compared to thesix months ended June 30, 2005 due to decreased sales commissions resultingfrom a decrease in sales and a reduction in dealer promotions and marketingservices, which were partially offset by increased expenses for additionalrallies.

**General andadministrative expenses**
| ** **                           | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                             | ** ** | ** **                                                         | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                                 |       |                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| General and  administrative expenses |       | $                                                                    | 3,100      |                                                               | (20.3      | )% | $ | 3,891 |   | $ | 6,844 |   | (4.2 | )% | $ | 7,143 |   |
| as a percent of net  sales           |       | 2.8                                                                  | %          |                                                               |       | 3.2 | % | 3.1 | % |   |   | 2.9 | % |
|                                      |            |                                                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

General and administrative costs include payroll,employee benefits, stock-based compensation and other headcount related costsassociated with human resource management, information technology, finance andexecutive management. General and administrative costs also include the cost ofprofessional services such as accountants, consultants and attorneys and costsassociated with being a publicly held corporation.

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The decrease in general and administrative costs forthe three and six months ended June 30, 2006 resulted from the Company’s costcontainment iniatives. For the three and six months ended June 30, 2006, theshare-based compensation component of general and administrative costsincreased $0.1 million and $0.5 million from the three and six months endedJune 30, 2005 due to the modified prospective application of SFAS No. 123(R).Share-based compensation was not recognized for the three and six months endedJune 30, 2005, but has been included in the pro-forma information in the Note 7to consolidated financial statements for comparative purposes.

**Interest expense**
| ** **                 | ** ** | **Three Months Ended  June 30,  Percent Change** | ** ** | **Six Months Ended  June 30,  Percent Change** | ** ** |
|----------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                             | ** ** | ** **                                                         | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest expense           |       | $                                                                    | 610        |                                                               | 96.1       | % | $ | 311 |   | $ | 1,034 |   | 75.9 | % | $ | 588 |   |
| as a percent of net  sales |       | 0.6                                                                  | %          |                                                               |       | 0.3 | % | 0.5 | % |   |   | 0.2 | % |
|                            |            |                                                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interestexpense primarily represents the interest charged on the Company’s line ofcredit with UPSC and Wells Fargo Bank.

The increase in interest expense is a result ofincreased borrowing on the line of credit as well as rising interest ratesdirectly related to the increases in the prime interest rate by the FederalReserve.

**Liquidity, Capital Resources and FinancialCondition**

TheCompany incurred net losses of $7.1 million and $5.4 million for the threemonths ended June 30, 2006 and June 30, 2005, respectively, and $9.2 millionand $6.9 million for the six months ended June 30, 2006 and 2005, respectively.The Company used $25.5 million of cash in operating activities for the sixmonths ended June 30, 2006 as compared to providing $2.5 million in cash fromoperating activities for the six months ended June 30, 2005. The RV industryhistorically has been cyclical and subject to down turns during periods of weakeconomic conditions. Swings in consumer confidence, rising interest rates,increased gas prices and continued economic uncertainty have led to an overalldecline in the RV industry since the third quarter of 2004; consequently, duein part to such industry conditions, the Company has experienced continuedlosses.

Duringthe six months ended June 30, 2006, the Company financed its operationsprimarily through its existing working capital and line of credit with UPSC andWells Fargo Bank. At June 30, 2006, the Company had $4,000 in cash and cashequivalents (excluding restricted cash totaling $0.4 million required to securea letter of credit in connection with one of the Company’s insurance policiesand in order to provide security for the Company’s credit cards.) The Companyhad net working capital of $16.1 million and $26.1 million at June 30, 2006 andDecember 31, 2005, respectively. The decrease in working capital at June 30,2006 compared to December 31, 2005 was primarily due to an increase in the lineof credit of $20.2 million, an increase in the book overdraft of $7.9 millionand an increase in accounts payable of $4.4 million, significantly offset by anincrease in receivables of $10.7 million and an increase in inventories of$10.4 million.

During the six months ended June 30, 2006, the Companyused $25.5 million of cash in its operations, which was primarily due to a netloss of $9.2 million, increases in receivables and inventories of $10.7 millionand $13.6 million, respectively, and a decrease in accrued expenses of $1.4million, partially offset by a $4.4 million increase in accounts payable.During the six months ended June 30, 2005, the Company provided $2.5 million ofcash in its operations, which was primarily attributable to a $12.0 millionincrease in accounts payable and a $5.5 million increase in accrued expenses,which were substantially offset by an $8.7 million increase in inventories, anet loss of $6.9 million and an increase of receivables of $4.0 million. Forthe six months ended June 30, 2006, net cash used in investing activities was$2.6 million, which was primarily attributable to purchases of property, plantand equipment. During the six months ended June 30, 2005, net cash used ininvesting activities was $1.2 million, consisting primarily of $2.9 million ofpurchases of property, plant and equipment, partially offset by repayments onthe note receivable of $1.4 million. Net cash provided by financing activitiesfor the six months ended June 30, 2006 was $28.1 million, primarily due to netadvances under the line of credit of $20.2 million and an increase in the bookoverdraft of $7.9 million. Net cash used in financing activities for the six monthsended June 30, 2005 was $1.1 million, primarily due to a decrease in the bookoverdraft of $0.8 million and net payments on the line of credit of $0.5million.

AtJune 30, 2006, the Company had an asset-based revolving credit facility withUPS Capital Corporation (“UPSC”) and Wells Fargo Bank for $40 million, afterexercising two consecutive $5 million increases to the line of credit in Mayand June 2006. The credit facility is collateralized by all of the Company’sassets other than real estate. Borrowing availability is based 

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oneligible accounts receivable and inventory. The facility also includes arequirement to maintain a blocked account arrangement, whereby remittances fromthe Company’s customers reduce the debt outstanding.  On August 10, 2006, the Company entered intoan amendment of its credit facility in order to temporarily increase the creditline to $50 million through September 30, 2006. Borrowing availability willcontinue to be based on eligible accounts receivable and inventory. The Companyestimates that availability during the time when the credit line will betemporarily increased will range from $40 to $47 million.  The amendment provides that the $50 millioncredit facility is reduced incrementally to the original $40 million over afive-week period to be completed the last week in September.  The amendment also provides that allfinancial covenants are waived for the months of July, August and September of2006. In connection with the amendment, the Company provided its Perris,California real estate as collateral to secure the credit facility.

AtJune 30, 2006 and December 31, 2005, the Company had outstanding loans underthe line of credit of $32.3 million and $12.1 million, respectively. Initialamounts borrowed under the revolving credit facility bear interest at the primerate listed in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At June 30, 2006, the interest rate for the borrowingsunder the line of credit was 8.75%. The weighted average interest rate for theborrowings on the credit facility during the three months ended June 30, 2006and 2005 were 8.51% and 6.74%, respectively, and 8.26% and 6.47% for the sixmonths ended June 30, 2006 and 2005, respectively.

Management’s plan to achieve operational profitabilityincludes continuing or starting a variety of initiatives to improve the Company’searnings and working capital position, including: (i) introducing new productsand floor plans in 2006, (ii) adding new dealers to fill open market areas orreplace under-performing dealers, (iii) decreasing overall sales incentives bytailoring programs that provide the maximum value to the Company, (iv) reducingmaterial and related obsolescence costs, (v) improving manufacturingefficiencies, (vi) further reducing manufacturing and other overhead costs and(vii) decreasing the costs of warranty.

In order to fund on-goingoperations through at least the next twelve months, the Company remainsdependent upon its ability to utilize outside financing through borrowings onits existing line of credit as well as any additional or replacement debtfinancings it may be able to complete until it achieves sustained operationalprofitability through a combination of increased sales, cost reductions andimproved product margins. After consideration of its available borrowing capacity,the Company believes it has sufficient financial resources to fund itsoperations through at least the next twelve months. However, the Company’sability to meet its obligations beyond the next twelve months is dependent onits ability to generate positive cash flows from operations and is dependent oncontinued borrowings under its existing line of credit. If management is unableto successfully implement the Company’s operational profitability plan or theCompany’s existing line of credit is insufficient to allow the Company to meetits obligations, the Company may need to implement alternative plans that couldinclude long-term financing collateralized by real estate or additional debtfinancing, equity financing, additional reductions in operating costs, deferralof capital expenditures, and further reductions in working capital.  In order to lessen the Company’s reliance onits existing line of credit to fund its day-to-day operations and to improveits working capital position, the Company is actively pursuing long-term debtfinancing opportunities.. There can be no assurance that any such long-termfinancing will be available on acceptable terms and conditions or that theCompany will be successful in obtaining such financing.

Most of the Company’smotorhome sales are made on terms requiring payment within 15 business days orless of the dealer’s receipt of the unit. Most dealers finance all, orsubstantially all, of the purchase price of their inventory under floor planarrangements with banks or finance companies under which the lender pays theCompany directly. Dealers typically are not required to commence loanrepayments to such lenders for a period of at least six months. The loan iscollateralized by a lien on the motorhome. Consistent with industry practice,the Company has entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require the Company to repurchase a unit ifthe dealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require the Company to repurchase RVs at the election of the lenderprovided certain conditions are met, such as repossession of the RV by thelender, the RV being new and unused and the time elapsed between invoice dateand demand for repurchase being no longer than a specified period which istypically 18 months or less. The Company’s maximum potential exposure underthese agreements approximated $167.0 million at June 30, 2006. The risk of lossunder the repurchase agreements is spread over a number of dealers and lendersand is reduced by the resale value of the RVs, which the Company would berequired to repurchase. Losses under these agreements have not been material inthe past and management does not believe that any future losses under suchagreements will have a material adverse effect on the Company’s consolidatedfinancial position, results of operations, or cash flows; consequently, noliability has been recognized in the consolidated financial statements.

In August 2004, theCompany entered into an agreement to acquire, for $3 million, approximately 73acres of land adjacent to its Country Coach, Inc. facility in JunctionCity, Oregon. The Company paid a deposit of $0.1 million. The closing of thepurchase is subject to customary closing conditions. The Company is in theprocess of obtaining long-term financing in order to finance the purchase andis expected to close before February 2007.

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**Recent Accounting Pronouncements**

In November 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.151, “Inventory Costs-an Amendment of ARB No. 43, Chapter 4” (“SFAS No.151”). SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4 (“ARB43”), to clarify that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized ascurrent-period charges. In addition, SFAS No. 151 requires that allocation offixed production overhead to the costs of conversion be based on the normalcapacity of the production facilities. This standard was effective forinventory costs incurred during fiscal years beginning after June 15, 2005.This standard was applied prospectively. While the adoption of this standarddid not have a material impact on the consolidated financial position, resultsof operations or cash flows of the Company, the requirements of SFAS No. 151could potentially have a significant future impact based on certain economicfactors and management’s judgments and estimates about what constitutesabnormal costs and normal capacity in which actual results could significantlydiffer from these estimates.

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets” (“SFAS No. 153”), which eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. SFAS No. 153 was effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.Adoption of SFAS No. 153 did not significantly affect the financialcondition, results of operations or cash flows of the Company.

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004),”Share-BasedPayment” (“SFAS No. 123(R)”), which replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” (“SFAS No. 123”) and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the consolidated financial statements basedon 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 to consolidatedfinancial statement recognition. The Company was required to adopt SFAS No.123(R) in the first calendar quarter of 2006, beginning January 1, 2006. UnderSFAS No. 123(R), the Company must determine the appropriate fair valuemodel to 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. 123(R), while the modifiedretrospective method would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated. Afterevaluating the requirements of SFAS No. 123(R), the Company determined toadopt SFAS No. 123(R) using the modified prospective method and use theBlack-Scholes model to value service stock option plans that are currently ineffect. The adoption of SFAS No. 123(R) and all of its interpretations had amaterial effect on the consolidated financial position, results of operationsand cash flows of the Company. Note 7 to the consolidated financial statementsdiscusses the effects of the implementation of SFAS No. 123(R) and its relatedinterpretations.

InMarch 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-BasedPayment” (“SAB No. 107”), which provides interpretive guidance related to theinteraction between SFAS No. 123(R) and certain SEC rules and regulations. Italso provides the SEC staff’s views regarding valuation of share-based paymentarrangements. In April 2005, the SEC amended the compliance dates for SFAS No.123(R), to allow companies to implement the standard at the beginning of theirnext fiscal year, instead of the next reporting period beginning after June 15,2005. The adoption of SFAS No. 123(R) and all of its interpretations had amaterial effect on the consolidated financial position, results of operationsand cash flows of the Company. Note 7 to the consolidated financial statementsdiscusses the effects of the implementation of SFAS No. 123(R) and its relatedinterpretations.

In March 2005, the FASB issued FASB Interpretation No.47, “Accounting for Conditional Asset Retirement Obligations”  (“FIN No.47”). FIN 47 provides guidance relating to the identification of and financialreporting for legal obligations to perform an asset retirement activity. TheInterpretation requires recognition of a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated. FIN No. 47 also defines when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation. The provision was effective no later than the end offiscal years ending after December 15, 2005. The adoption of FIN No. 47 did nothave a material impact on the consolidated financial position, results ofoperations or cash flows of the Company.

In June 2005, the Emerging Issues Task Force, or EITF,reached a consensus on Issue 05-6, “Determining the Amortization Period forLeasehold Improvements” (“EITF 05-6”), which requires that leaseholdimprovements acquired in a business combination or purchased subsequent to theinception of a lease be amortized over the lesser of the useful life of theassets or 

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a term that includes renewals that are reasonablyassured at the date of the business combination or purchase. EITF 05-6 waseffective for periods beginning after July 1, 2005. The provisions of thisconsensus did not have a material impact on the consolidated financialposition, results of operations or cash flows of the Company.

In June 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB No. 20 and SFASNo. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections. It establishes,unless impracticable, retrospective application as the required method forreporting a change in accounting principle in the absence of explicittransition requirements specific to the newly adopted accounting principles.SFAS No. 154 also provides guidance for determining whether retrospectiveapplication of a change in accounting principle is impracticable and forreporting a change when retrospective application is impracticable. Thecorrection of an error in previously issued consolidated financial statementsis not an accounting change. However, the reporting of a correction of an errorinvolves adjustments to previously issued consolidated financial statementssimilar to those generally applicable to reporting an accounting changeretrospectively. Therefore, the reporting of a correction of an error by restatingpreviously issued consolidated financial statements is also addressed by SFASNo. 154. SFAS No. 154 was required to be adopted in fiscal years beginningafter December 15, 2005. The adoption of this standard did not have amaterial impact on the consolidated financial position, results of operationsor cash flows of the Company.

InAugust 2005, the FASB issued FASB Staff Position (“FSP”) FSP FAS No. 123-1, “Classificationand Measurement of Freestanding Financial Instruments Originally Issued inExchange for Employee Services under FASB Statement No. 123(R).” In this FSP,the FASB decided to defer the requirements in SFAS No. 123(R), that make afreestanding financial instrument subject to the recognition and measurementrequirements of other accounting principles generally accepted in the UnitedStates of America when the rights conveyed by the instrument are no longerdependent on the holder being an employee. The guidance in this FSP should beapplied upon initial adoption of SFAS No. 123(R). The adoption of SFAS No.123(R) and all of its interpretations had a material effect on the consolidatedfinancial position, results of operations and cash flows of the Company. Note 7to the consolidated financial statements discusses the effects of the implementationof SFAS No. 123(R) and its related interpretations.

InOctober 2005, the FASB issued FSP FAS No. 123(R)-2, “Practical Accommodation tothe Application of Grant Date As Defined in FASB Statement No. 123(R)*.”* In this FSP, the FASB is providingcompanies with a “practical accommodation” when determining the grant date ofan award that is subject to the accounting provisions in SFAS No. 123(R)*.* Specifically, assuming a company meetsall of the other criteria in the definition of grant date in SFAS No. 123(R), amutual understanding (between the company and the recipient) of the key termsand conditions of an award is presumed to exist at the date the award isapproved (in accordance with the company’s normal corporate governance policy)if (1) the award is a unilateral grant meaning that the recipient does not havethe ability to negotiate the key terms and conditions of the award, and (2) thekey terms and conditions of the award are expected to be communicated to therecipient within a relatively short period of time (as defined in the FSP)after the grant was approved. The guidance in this FSP shall be applied uponinitial adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R) and all ofits interpretations had a material effect on the consolidated financialposition, results of operations and cash flows of the Company. Note 7 to theconsolidated financial statements discusses the effects of the implementationof SFAS No. 123(R) and its related interpretations.

InNovember 2005, the FASB issued FSP FAS No. 123(R)-3, “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” ThisFSP provides a practical exception when a company transitions to the accountingrequirements in SFAS No. 123(R). SFAS No. 123(R) requires a company tocalculate the pool of excess tax benefits available to absorb tax deficienciesrecognized subsequent to adopting SFAS No. 123(R) (termed the “APIC Pool”),assuming the company had been following the recognition provisions prescribedby SFAS No. 123. The FASB learned that several companies do not have thenecessary historical information to calculate the APIC pool as envisioned bySFAS No. 123(R) and accordingly, the FASB decided to allow a practicalexception as documented in this FSP. The guidance in this FSP was effectiveafter the date the FSP was posted to the FASB website. The adoption of SFAS No.123(R) and all of its interpretations had a material effect on the consolidatedfinancial position, results of operations and cash flows of the Company. Note 7to the consolidated financial statements discusses the effects of theimplementation of SFAS No. 123(R) and its related interpretations.

In February 2006, the FASB issued FSP FAS No. 123(R)-4, “Classificationof Options and Similar Instruments Issued As Employee Compensation That Allowfor Cash Settlement upon the Occurrence of a Contingent Event.” The guidance inthis FSP amends certain paragraphs in SFAS No. 123(R),**and addresses situations when a companyhas option plans that require the company to settle outstanding options in cashupon the occurrence of certain contingent events. For example, some plansrequire a company to cash settle an option upon a change in control of thecompany, or death or disability of the holder. This FSP amends SFAS No. 123(R)to address such situations and concludes that a probability notion be applied.The guidance in this FSP was effective with the adoption of SFAS No. 123(R). Ifa company had already adopted SFAS No. 123(R), the FASB required retrospectiveapplication if a company applied the standard inconsistent with the conclusionsin this FSP. The 

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guidance in this FSP was applied upon initial adoption of SFAS No. 123(R).The adoption of SFAS No. 123(R) and all of its interpretations had a materialeffect on the consolidated financial position, results of operations and cashflows of the Company. Note 7 to the consolidated financial statements discussesthe effects of the implementation of SFAS No. 123(R) and its relatedinterpretations.

In June 2006, the Emerging Issue Task Force EITF reached a consensus onissue EITF 06-2 “Accounting for Sabbatical Leave and Other Similar BenefitsPursuant to FASB Statement No. 43” (“EITF 06-2”). Accordingly, an employee’sright to a compensated absence under a sabbatical or other similar benefitarrangement (a) that requires the completion of a minimum service period and(b) in which the benefit does not increase with additional years of serviceaccumulates pursuant to paragraph 6(b) of Statement 43 for arrangements inwhich the individual continues to be a compensated employee and is not requiredto perform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of Statement 43 are met, the compensationcost associated with a sabbatical or other similar benefit arrangement shouldbe accrued over the requisite service period. The provisions of this consensus should be applied in financial reportsfor fiscal years beginning after the date the consensus is ratified by theBoard. Entities should recognize the effects of applying the consensus as achange in accounting principle through retrospective application to all priorperiods unless it is impracticable to do so. The Company had been accountingfor benefits similar to sabbatical leave in accordance with the provisions ofthis consensus. Consequently, the adoption of the provisions of this consensuswill not have a material impact on the consolidated financial position, resultsof operations and cash flows of the Company.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes.” This Interpretation clarifies the accountingfor uncertainty in income taxes recognized in Companies’ financial statementsin accordance with SFAS No. 109, “Accounting for Income Taxes.” ThisInterpretation prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in a tax return. This Interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. TheCompany does not expect FASB Interpretation No. 48 to have a material impact onthe consolidated financial position, results of operation or cash flows of theCompany.

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**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

Market risk represents the risk of loss that mayimpact the Company’s financial position, results of operations or cash flowsdue to adverse changes in market prices, including interest rate risk and otherrelevant market rate or price risks. The Company does not have any significantrisks related to derivative financial instruments or foreign currency translation.However, the Company is exposed to interest rate changes related primarily tocash borrowings on the Company’s credit facility. The weighted average interestrate for the borrowings on the credit facility during the three months endedJune 30 2006 and 2005 were 8.51% and 6.74%, respectively, and 8.26% and 6.47%for the six months ended June 30, 2006 and 2005, respectively. For every 0.25%increase in interest rates, the Company would expect a quarterly increase ininterest expense of $625 for each $1.0 million borrowed.

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**Item 4. Controls and Procedures**

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

Inconnection with the preparation of this Quarterly Report on Form 10-Q, as ofJune 30, 2006, 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 lightof the material weakness referenced below which the Company first identified inconnection with the assessment required by Section 404 of the Sarbanes-OxleyAct of 2002 and disclosed in its Form 10-K for the year ended December 31, 2005and which continued to exist as of the end of the period covered by thisreport, the Company’s CEO and CFO concluded that, as of the end of the periodcovered by this report, the disclosure controls and procedures were noteffective at a reasonable assurance level as of June 30, 2006.

Amaterial weakness is a control deficiency, or a combination of controldeficiencies that results in more than a remote likelihood that a materialmisstatement of the annual or interim consolidated financial statements willnot be prevented or detected. The Company identified the following materialweakness in the Company’s internal control over financial reporting:

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

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

During the 2006 fiscal year, management has taken anumber of steps that it believes will impact the material weakness in internalcontrol over financial reporting described above. Management has assessed thesupervision, training and corporate oversight within its accounting function.The Company has undertaken remedial actions that include strengthened controlsfor the accounting close process, additional divisional staffing and theimplementation of procedures to improve the supervision of the divisionalaccounting staffs. Remedial actions also include additional procedures atcorporate to strengthen ongoing reviews of divisional accounting activitiesthrough the utilization of its corporate and internal audit staffs.

TheCompany believes that it will be able to improve its internal controlprocedures and remedy the material weakness and additional control deficienciesidentified as part of its 2005 year-end assessment process. Notwithstanding theCompany’s remediation efforts, because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

#### **Changes in Internal Control over FinancialReporting**

Except as disclosed above, there have been no changesin the Company’s internal control over financial reporting during the mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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**PART II -OTHER INFORMATION**

**Item 1.  Legal Proceedings**

 

In 2006, Kemlitemanufactured and sold to NRV fiberglass sidewall material.  This material contained a latent defect thatNRV discovered during the manufacturing process but not before approximately 70motorhomes identified to date containing the defective material weresignificantly damaged.  The defect causedmonetary damages to NRV in the form of repair costs and diminution in value ofthe affected motorhomes, lost profits, loss of goodwill, and otherdamages.  On June 29, 2006, NRV filed acivil action in the Riverside County, California Superior Court, Case No.RIC-452462, against Crane Co. and Crane Composites, Inc. aka Kemlite Company,Inc.  The suit, which has now beenremoved to federal court by the defendants, asserts causes of action for breachof contract, breach of warranty, misrepresentation, Section 17200 violations,and other related actions.  NRV seekscompensatory damages, punitive damages and attorney’s fees.  No trial date is set at this early stage inthe litigation. 

On or about August 21,2002, Allen and Eva Mak purchased a used 2003 Country Coach Prevost busconversion from Bob and Terri Lee in a private party transaction. At the timeof the transaction, Mr. Lee was a director of the Company and an officer ofCountry Coach. The Maks subsequently filed civil actions against the Lees andCountry Coach. The case against the Lees was filed on December 3, 2004, in LaneCounty Circuit Court as Case No. l6-04-22755. The case against Country Coachwas filed on July 7, 2005, in U.S. District Court, for the District of Oregon,as Case No. 6:05-CU-6203-HO. The case against Country Coach was for breach ofwarranty under Magnusom Moss Consumer Warranty Act. In 2006, Country Coachsettled this lawsuit on terms it deemed appropriate. The settlement amount wasnot material to CCI or the Company and it included a release of any claims byCountry Coach against the Lees.

**Item 1A.  Risk Factors**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inthe Annual Report on Form 10-K for the year ended December 31, 2005, whichcould materially affect the Company’s business, financial condition or futureresults. The risks described in the Company’s Annual Report on Form 10-K arenot the only risks facing the Company. Additional risks and uncertainties notcurrently known to the Company or that the Company currently deems to beimmaterial also may materially adversely affect the Company’s business,financial condition and/or operating results. Other than with respect to therisk factors below, there have been no material changes from the risk factorsdisclosed in the “Risk Factors” section of the Company’s Annual Report on Form10-K for the year ended December 31.

**For someof our components, we depend on a small group of suppliers, and the loss orbusiness interruption of any of these suppliers could affect our ability toobtain components at competitive prices, which would decrease our margins.Further, any defects in the third-party components or raw materials weincorporate into our motorhomes could negatively affect our sales and financialresults.**

Mostrecreation vehicle and bus components are readily available from a variety ofsources. However, a few components are produced by only a small group ofquality suppliers that have the capacity to supply large quantities on anational basis. Our NRV subsidiary purchases gasoline-powered chassis from FordMotor Company and Workhorse Custom Chassis and rear engine diesel-poweredchassis from Freightliner Custom Chassis Corporation and Spartan MotorCorporation. Our CCI subsidiary manufactures its own chassis, the DynoMax,which is used as the base upon which all CCI motorhomes are built, except forthe Country Coach Prevost bus conversions, which utilize a Prevost bus shell.We generally maintain a one to two month production supply of a chassis ininventory. Historically, in the event of an industry-wide restriction ofsupply, chassis manufacturers have allocated chassis among our competitors andus based on the volume of chassis previously purchased. If Ford Motor Company,Workhorse Custom Chassis, Freightliner Custom Chassis Corporation or SpartanMotor Corporation were to discontinue the manufacturing of motor home chassis,or if as a group all of our chassis suppliers significantly reduced theavailability of chassis to the industry, our business could be adverselyeffected. Similarly, shortages, production delays or work stoppages by the employeesof these chassis manufacturers or other chassis suppliers could have a materialadverse effect on us. Finally, as is standard in the industry, arrangementswith chassis suppliers are terminable at any time by either the chassissupplier or us. If we cannot obtain an adequate chassis supply, this couldresult in a material adverse affect on our financial condition and results ofoperations.

Inaddition to the chassis, we incorporate a variety of components and rawmaterials from third parties into our recreational vehicles. Any defects inthese components or raw materials could cause us to incur significant expensein repairing, replacing or finding alternatives to the components or rawmaterials, could negatively impact the sales of affected motorhomes and couldcause a material adverse impact on our financial results and financialcondition. In this regard, in April 2006, we identified an issue relating to asupply of defective fiberglass affecting an unknown number of units produced,and approximately 70 have been identified to date. We are not certain of thenumber of other units that may have been affected by 

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thisdefect and additional units beyond those identified may also contain thedefective material and require repair, resulting in additional costs to us. Thecosts associated with dealing with the defective product issue have had amaterial impact on consolidated financial condition, results of operations andcash flows for the quarter ended June 30, 2006. We expect to continue to incurcosts related to the repair and resale of affected units in future periods andexpect to continue to incur additional costs if we discover additional unitsthat may have been affected.   While wehave filed a lawsuit against the supplier of the defective fiberglass in orderto recover the costs of repair, lost profits and other damages suffered by us,there can be no assurance that we will be successful in this lawsuit or that wewill be able to recover all of the costs incurred as a result of the defectivematerial.

**While webelieve we will have sufficient funds for our operations for at least the nexttwelve months, it is possible that we will need additional capital during orafter that time.  We may need additional capitalin the future, and it may not be available on acceptable terms, or at all, andif we do not receive any necessary additional capital, it could harm ourfinancial condition and future prospects.**

 

After considerationof our available borrowing capacity, we believe we have sufficient financialresources to fund our operations through at least the next twelve months.However, our  ability to meet ourobligations beyond the next twelve months is dependent on our ability togenerate positive cash flows from operations and is dependent on continuedborrowings under our existing line of credit. If we are unable to successfully implement our operational profitabilityplan or our existing line of credit is insufficient to allow us to meet ourobligations, we may need to implement alternative plans that could includelong-term financing collateralized by real estate or additional debt financing,equity financing, additional reductions in operating costs, deferral of capitalexpenditures, and further reductions in working capital.  In order to lessen our reliance on ourexisting line of credit to fund day-to-day operations and to improve ourworking capital position, we are actively pursuing long-term debt financing opportunities.We cannot assure you that any such long-term financing will be available onacceptable terms and conditions or that we will be successful in obtaining suchfinancing.  To the extent we raise additional capital byissuing equity securities, our shareholders may experience substantialdilution. If we are unable to obtain additional capital that may be required tofund our operations, we may then attempt to preserve our available resources byvarious methods including deferring the creation or satisfaction ofcommitments, reducing expenditures on our research and developmentprograms or otherwisescaling back our operations.  If we wereunable to raise such additional capital or defer certain costs as describedabove, that inability would have an adverse effect on our financial position,results of operations and prospects.

 

**Item 5.  Other Information**

On August 10, 2006, theCompany, together with its wholly-owned subsidiaries NRV and CCI (together withthe Company, the “Borrowers”), UPS Capital Corporation (“UPS”), as agent forthe lenders specified therein (the “Lenders”), and such Lenders executed anamendment (the “Amendment”) to the Credit Agreement dated August 12, 2005between the Borrowers and the Lenders. The Amendment temporarily increases the credit line to $50 millionthrough September 30, 2006. Borrowing availability will continue to be based oneligible accounts receivable and inventory. The Company estimates thatavailability during the time when the credit line will be temporarily increasedwill range from $40 to $47 million.  TheAmendment provides that the $50 million credit facility is reducedincrementally to the original $40 million over a five-week period to becompleted the last week in September. The Amendment also provides that all financial covenants are waived forthe months of July, August and September of 2006.  . In connection with the amendment, theCompany provided its Perris, California real estate as collateral to secure thecredit facility.

**Item 6.  Exhibits**

Exhibits

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

** **

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                       | **NATIONAL  R.V. HOLDINGS, INC.**                                     |
|-----------------------|-----------------------------------------------------------------------|
|                  | (Registrant)                                                          |
|                  |                                                                  |
| Date: August 8,  2006 | By                                                                    | /s/ Thomas J. Martini |
|                  | Thomas J. Martini                                                     |
|                  | Chief Financial Officer  (Principal Accounting and Financial Officer) |

 

 

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