# **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 September 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 x   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 x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

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

Yes o   Nox

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.
| Class                                    | ** ** | **Outstanding at  November 3, 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 -- September 30, 2006 and December 31, 2005                     |   |   |
|      |       |                                                                                              |   |   |
|      |       | Consolidated Statements of Operations -- Three and  Nine Months Ended September 30, 2006 and 2005 |   |   |
|      |       |                                                                                              |   |   |
|      |       | Consolidated Statements of Cash Flows -- Nine Months  Ended September 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  1A. |       | Risk  Factors                                                                                     |   |   |
|      |       |                                                                                              |   |   |
| Item  6.  |       | Exhibits                                                                                          |   |   |
|      |       |                                                                                              |   |   |
|      |       | Signature                                                                                         |   |   |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Consolidated Financial Statements**

**NATIONAL R.V.HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**
| ** **                                                                                        | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                            |       |                         |       |                        |       |
| Current assets:                                                                                   |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                        |       | $                            | 4          |                        | $          | 11 |   |
| Restricted cash                                                                                   |       | 720                          |       | 201                         |       |
| Receivables,  less allowance for doubtful accounts of $533 and $392, respectively                 |       | 21,801                       |       | 21,533                      |       |
| Inventories                                                                                       |       | 73,191                       |       | 61,940                      |       |
| Prepaid expenses                                                                                  |       | 2,732                        |       | 2,359                       |       |
| Deferred income  taxes                                                                            |       | 778                          |       | 1,281                       |       |
| Total current assets                                                                              |       | 99,226                       |       | 87,325                      |       |
| Property, plant  and equipment, net                                                               |       | 38,411                       |       | 38,457                      |       |
| Other assets                                                                                      |       | 1,344                        |       | 1,608                       |       |
| Total assets                                                                                      |       | $                            | 138,981    |                        | $          | 127,390 |   |
|                                                                                              |       |                         |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                        |       |                         |       |                        |       |
| Current liabilities*:*                                                                            |       |                         |       |                        |       |
| Book overdraft                                                                                    |       | $                            | 7,086      |                        | $          | 2,582 |   |
| Accounts payable                                                                                  |       | 34,394                       |       | 20,218                      |       |
| Accrued expenses                                                                                  |       | 23,396                       |       | 26,273                      |       |
| Current portion  of capital leases                                                                |       | 62                           |       | 57                          |       |
| Line of credit                                                                                    |       | 24,048                       |       | 12,059                      |       |
| Total current  liabilities                                                                        |       | 88,986                       |       | 61,189                      |       |
| Long-term  portion of capital leases                                                              |       | 136                          |       | 169                         |       |
| Deferred income  taxes                                                                            |       | 778                          |       | 1,281                       |       |
| Long-term  accrued expenses                                                                       |       | 4,986                        |       | 5,089                       |       |
| Total  liabilities                                                                                |       | 94,886                       |       | 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                                                                       |       | 38,256                       |       | 37,563                      |       |
| Retained  earnings                                                                                |       | 5,736                        |       | 21,996                      |       |
| Total  stockholders’ equity                                                                  |       | 44,095                       |       | 59,662                      |       |
| Total liabilities and  stockholders’ equity                                                  |       | $                            | 138,981    |                        | $          | 127,390 |   |

 

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

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**NATIONAL R.V.HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)(Unaudited)**
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                            |       | $                                                    | 91,999     |                                                | $          | 108,232 |   | $ | 315,107 |   | $ | 357,082 |   |
| Cost of goods  sold                  |       | 91,191                                               |       | 106,067                                             |       | 309,031 |   | 347,201 |   |
| Gross profit                         |       | 808                                                  |       | 2,165                                               |       | 6, 076 |   | 9,881 |   |
| Selling expenses                     |       | 3,234                                                |       | 4,335                                               |       | 9,861 |   | 11,289 |   |
| General and  administrative expenses |       | 3,774                                                |       | 3,346                                               |       | 10,618 |   | 10,489 |   |
| Operating loss                       |       | (6,200                                               | )          | (5,516                                              | )          | (14,403 | ) | (11,897 | ) |
| Interest expense                     |       | 801                                                  |       | 395                                                 |       | 1,835 |   | 983 |   |
| Other expense  (income)              |       | (10                                                  | )          | 19                                                  |       | (101 | ) | (72 | ) |
| Loss before income taxes             |       | (6,991                                               | )          | (5,930                                              | )          | (16,137 | ) | (12,808 | ) |
| Provision for  income taxes          |       | 86                                                   |       | —                                              |       | 123 |   | — |   |
| Net loss                             |       | $                                                    | (7,077     | )                                                   | $          | (5,930 | ) | $ | (16,260 | ) | $ | (12,808 | ) |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Loss per common  share:              |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                |       | $                                                    | (0.68      | )                                                   | $          | (0.57 | ) | $ | (1.57 | ) | $ | (1.24 | ) |
| Diluted                              |       | $                                                    | (0.68      | )                                                   | $          | (0.57 | ) | $ | (1.57 | ) | $ | (1.24 | ) |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  number of shares:  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                |       | 10,339                                               |       | 10,339                                              |       | 10,339 |   | 10,338 |   |
| Diluted                              |       | 10,339                                               |       | 10,339                                              |       | 10,339 |   | 10,338 |   |

 

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

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**NATIONAL R.V.HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
| ** **                                                                   | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
|                                                                         |       |                                                      |       |   |   |
| Cash flows from  operating activities:                                       |       |                                                      |       |   |   |
| Net loss                                                                     |       | $                                                         | (16,260    | ) | $ | (12,808 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                      |       |   |   |
| Bad debt expense                                                             |       | 147                                                       |       | 126 |   |
| Reserve and write down of inventories                                        |       | 6,403                                                     |       | 1,576 |   |
| Depreciation and amortization                                                |       | 3,112                                                     |       | 2,760 |   |
| Loss (gain) on asset disposal                                                |       | 28                                                        |       | (35 | ) |
| Stock-based compensation                                                     |       | 693                                                       |       | — |   |
| Changes in assets and liabilities:                                           |       |                                                      |       |   |   |
| Increase in receivables                                                      |       | (415                                                      | )          | (3,052 | ) |
| Increase in inventories                                                      |       | (17,654                                                   | )          | (4,100 | ) |
| (Increase) decrease in prepaid expenses                                      |       | (373                                                      | )          | 641 |   |
| Increase in accounts payable                                                 |       | 14,176                                                    |       | 1,271 |   |
| (Decrease) increase in accrued expenses                                      |       | (2,980                                                    | )          | 1,351 |   |
| Net cash used for operating activities                                       |       | (13,123                                                   | )          | (12,270 | ) |
|                                                                         |       |                                                      |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                      |       |   |   |
| (Increase) decrease in restricted cash                                       |       | (519                                                      | )          | 226 |   |
| Repayments on note receivable                                                |       | —                                                    |       | 1,970 |   |
| Purchase of property, plant and equipment                                    |       | (3,164                                                    | )          | (3,576 | ) |
| Proceeds from sale of assets                                                 |       | 128                                                       |       | 75 |   |
| Decrease in other assets                                                     |       | 206                                                       |       | 44 |   |
| Net cash used in investing activities                                        |       | (3,349                                                    | )          | (1,261 | ) |
|                                                                         |       |                                                      |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                      |       |   |   |
| Increase in book overdraft                                                   |       | 4,504                                                     |       | 4,207 |   |
| Principal payments on capital leases                                         |       | (28                                                       | )          | (24 | ) |
| Deferred financing costs                                                     |       | —                                                    |       | (236 | ) |
| Net borrowings under line of credit                                          |       | 11,989                                                    |       | 9,444 |   |
| Proceeds from issuance of common stock                                       |       | —                                                    |       | 140 |   |
| Net cash provided by financing activities                                    |       | 16,465                                                    |       | 13,531 |   |
| Net decrease in  cash and cash equivalents                                   |       | (7                                                        | )          | — |   |
| Cash and cash  equivalents, beginning of the year                            |       | 11                                                        |       | 11 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                                         | 4          |   | $ | 11 |   |
|                                                                         |       |                                                      |       |   |   |
| Supplementary  cash flow information:                                        |       |                                                      |       |   |   |
|                                                                         |       |                                                      |       |   |   |
| Reclassification of  inventory for operating lease                           |       | $                                                         | —     |   | $ | 394 |   |

 

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

5

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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. (“NRV”) and CountryCoach, Inc. (“CCI”).

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 periods presented,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.

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***History of Recent Losses***

The Company experienced net losses for the threemonths ended September 30, 2006 and 2005 of $7.1 million and $5.9 million,respectively, and for the nine months ended September 30, 2006 and 2005 theCompany experienced net losses of  $16.3million and $12.8 million, respectively. The Company used $13.1 and $12.3million of cash for operating activities for the nine months ended September30, 2006 and 2005, respectively. The RV industry has been historically cyclicaland subject 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 nine months ended September30, 2006. These conditions combined with recent historical losses led theCompany to assess its short-term liquidity needs and plans to achieveprofitability.

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) improving manufacturing efficiencies, (v)further reducing manufacturing and other overhead costs and (vi) decreasing thecosts of warranty.

In order to fund on-going operations, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional orreplacement debt 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 and funding needs, the Company believes it willneed to raise additional funds in the near term in order to have sufficientfinancial resources to fund its operations for the next twelve months. As aresult, the Company is currently reviewing offers for long-term debt financingand several other strategic opportunities in order to lessen the Company’sreliance on its existing line of credit and to improve its working capitalposition.  There can be no assurance thatany such long-term financing or strategic opportunities can be completed withacceptable terms and conditions. If the Company is unable to obtain additionalfinancing, it will then attempt to preserve its available resources by variousmethods including deferring the creation or satisfaction of commitments,deferring the introduction of new products or otherwise scaling back itsoperations. If the Company were unable to raise such additional capital ordefer certain costs as described above, that inability would have a materialadverse effect on the Company’s financial position, results of operations andprospects.

**NOTE 2 — INVENTORIES**

Inventories consist of the following (in thousands):

|                   | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|------------------------------|------------|-----------------------------|------------|
| Inventories:      |       |                         |       |                        |       |
| Raw materials     |       | $                            | 21,461     |                        | $          | 19,289 |   |
| Chassis           |       | 6,377                        |       | 3,236                       |       |
| Work-in-process   |       | 30,922                       |       | 30,870                      |       |
| Finished goods    |       | 14,431                       |       | 8,545                       |       |
| Total inventories |       | $                            | 73,191     |                        | $          | 61,940 |   |

 

For the three months ended September 30, 2006 and 2005, the Companyrecorded a write-down of inventories to the lower of cost or market of $2.8million and $0.7 million, respectively. The increase primarily reflects the incremental costs incurred withintroducing two new products into production during the quarter.  For the nine months ended September 30, 2006and 2005, the Company recorded a write-down of inventories to the lower of costor market of $6.1 million and $0.9 million, respectively.  A total of $1.8 million of the $6.1 millionwrite-down was for units affected by the defective fiberglass as discussedbelow in Note 6.

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**NOTE 3 — ACCRUED EXPENSES**

Accrued expenses consist of the following (inthousands):

|                                                   | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                              |       |                         |       |                        |       |
| Current accrued  expenses:                        |       |                         |       |                        |       |
| Accrued compensation and related taxes            |       | $                            | 5,222      |                        | $          | 7,811 |   |
| Accrued sales incentives                          |       | 3,153                        |       | 4,129                       |       |
| Warranty reserve                                  |       | 11,667                       |       | 11,705                      |       |
| Workers’ compensation self-insurance reserve |       | 1,853                        |       | 2,209                       |       |
| Other accrued expenses                            |       | 1,501                        |       | 419                         |       |
| Total current  accrued expenses                   |       | $                            | 23,396     |                        | $          | 26,273 |   |
|                                              |       |                         |       |                        |       |
| Long-term  accrued expenses:                      |       |                         |       |                        |       |
| Warranty reserve                                  |       | $                            | 132        |                        | $          | 130 |   |
| Workers’ compensation self-insurance reserve |       | 4,242                        |       | 4,280                       |       |
| Deferred compensation                             |       | 612                          |       | 679                         |       |
| Total long-term accrued  expenses                 |       | $                            | 4,986      |                        | $          | 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.

The following table summarizes the activity related tothe warranty reserve for the nine months ended September 30, 2006 and 2005,respectively (in thousands):

|                                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Balance at  January 1,                                                                    |       | $                                                       | 11,835     |   | $ | 8,505 |   |
| Warranties issued during the period and changes in  liability for pre-existing warranties |       | 11,880                                                  |       | 13,228 |   |
| Settlements made during the period                                                        |       | (11,916                                                 | )          | (11,619 | ) |
| Balance at September  30,                                                                 |       | $                                                       | 11,799     |   | $ | 10,114 |   |

 

## **NOTE5 — CREDIT FACILITY**

AtSeptember 30, 2006, the Company had an asset-based revolving credit facilitywith UPS Capital Corporation (“UPSC”) and Wells Fargo Bank for $40 million,after exercising two consecutive $5 million increases to the line of credit inMay and June 2006. At September 30, 2006, the credit facility wascollateralized by all of the Company’s assets. Borrowing availability is based on eligible accounts receivable andinventory. The facility also includes a requirement to maintain a blockedaccount arrangement, whereby remittances from the Company’s customers reducethe debt outstanding. The credit facility contains, among other provisions,certain financial covenants, including funded debt to Earnings Before Interest,Taxes, Depreciation and Amortization (“EBITDA”) and a fixed charge coverageratio. If these financial covenants are not met, the Company’s availabilityunder the credit facility will be reduced. On August 10, 2006, the Companyentered into an amendment of its credit facility in order to temporarilyincrease the credit line to $50 million through September 30, 2006. Borrowingavailability continues to be based on eligible accounts receivable andinventory.   The amendment provided thatthe $50 million credit facility be reduced incrementally to the original $40million over a five-week period to be completed the last week inSeptember.  The amendment also providedthat all financial covenants were waived for the months of July, August andSeptember of 2006. In September, the Company exceeded its Minimum ExcessAvailability requirements and therefore was not in default of the financialcovenants.  In connection with theamendment, the Company provided its Perris, California real estate ascollateral to secure the credit facility.

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AtSeptember 30, 2006 and December 31, 2005, the Company had outstanding loansunder the line of credit of $24.0 million and $12.1 million, respectively.Initial amounts borrowed under the revolving credit facility bear interest atthe prime rate listed in the Wall Street Journal plus 0.50 percentage pointsand may be subsequently adjusted down based on a trailing twelve month fundeddebt to EBITDA calculation. At September 30, 2006, the interest rate for theborrowings under the line of credit was 8.75%. The weighted average interestrate for the borrowings on the credit facility during the three months endedSeptember 30, 2006 and 2005 were 8.75% and 6.57%, respectively. The weightedaverage interest rate for the borrowings on the credit facility during the ninemonths ended September 30, 2006 and 2005 were 8.44% and 6.56%, 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 that it estimated to affect approximately 50 motorhomes at the NRVsubsidiary. Since these initial estimates, the Company has found approximately22 additional defective units, of which two were found in the three monthperiod ending September 30, 2006. Management has made its best efforts toidentify all affected units as of October 17, 2006. However, there may still beadditional unidentified units that management cannot reasonably estimate;consequently, no reserve has been recorded for potential future losses on therepair and resale of unidentified defective units in the consolidated financialstatements for the three and nine months ended September 30, 2006.    On June 29, 2006, NRV filed a civil action inthe Riverside County, California Superior Court against the supplier of thedefective fiberglass.  The lawsuit seeks,among other remedies, compensatory damages for the repair costs and diminutionin value of the affected motorhomes, lost profits, loss of goodwill, and otherdamages incurred by NRV arising from the defective material.  There can be no assurance that the Companywill be successful in the lawsuit or that the Company will be able to recoverall or any of the costs incurred as a result of the defective material.

Recall:

****In June 2006, CCI determined that certain tires installed on some motorhomes between1995 and 2001 were defective. As a result, CCI is conducting a recall to replace these tires. The Company reducedthe original recall cost estimate by $0.4 million during the three month periodended September 30, 2006.   For the ninemonths ended September 30, 2006, the Company recognized a net cost of $0.7million.  The Company intends to seekrecovery of most of those costs from the 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

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demand for repurchasebeing no longer than a specified period which is typically 18 months or less.The Company’s maximum potential exposure under these agreements approximated$149.0 million at September 30, 2006. The risk of loss under the repurchase agreementsis spread over a number of dealers and lenders and is reduced by the resalevalue of the RVs, which the Company would be required to repurchase. Lossesunder these agreements have not been material in the past and management doesnot believe that any future losses under such agreements will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, or cash flows; consequently, no liability has been recognized inthe consolidated financial statements.

OtherCommitments:

InAugust 2004, the Company entered into an agreement to acquire, for $3million, approximately 73 acres of land adjacent to its CCI facility inJunction City, Oregon. The Company paid a deposit of $0.1 million. The closingof the purchase is subject to customary closing conditions and is expected tooccur before February 2007.

**NOTE 7 — STOCKBASED COMPENSATION**

#### **StockOption Plans**

As ofSeptember 30, 2006, the Company had three service-based fixed option plans (the“Plans”): the 1996 Stock Option Plan, the 1997 Stock Option Plan and the 1999Stock Option Plan. The Plans are further described 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 September 30, 2006 and 145,000 options grantedfor the nine months ended September 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 1997 Option Planprovides for the awarding of incentive stock options (as defined in Section 422of the IRS Code) and non-incentive stock options. Options granted pursuant tothe 1997 Option Plan will have such vesting schedules and expiration dates asthe Board (or a designated committee) shall establish for each participant inthe 1997 Option Plan, which terms shall be reflected in an option agreementexecuted in connection with the granting of the option. There were no optionsgranted under the 1997 Option Plan for the three and nine months endedSeptember 30, 2006.

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***1999Stock 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 1999 Option Plan for the three and ninemonths ended September 30, 2006.

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“Accounting for Stock-Based Compensation” (“SFAS No. 123”). Due to thedifference in the valuation methods between APB No. 25 and SFAS No. 123(R), theadoption of SFAS No. 123(R) had a significant impact on the Company’s financialposition, results of operations and cash flows. For the three and nine monthsended September 30, 2006, the Company recognized compensation expenses andadditional paid-in-capital of $0.1 million and $0.7 million related to thestock-based compensation 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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Assumptions used in the Black-Scholes model for stockoption grants during the nine months ended September 30, 2006 are as follows:

|                              | ** ** | **Nine Months Ended  September 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 nine months ended September 30, 2006 is based onthe awards ultimately expected to vest and therefore has been reduced forestimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated atthe 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 atSeptember 30, 2006. The estimated fair value, less the estimated forfeitures,is amortized to compensation expense using the straight-line attributionmethod. In the pro forma information required under SFAS No. 123 for theperiods prior to January 1, 2006, the Company accounted for pre-vestingforfeitures in the pro-forma disclosure as incurred.

A summary of option activity under the Plans for thethree and nine months ended September 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                             | )          | 6.80                                      |       |                                                            |       |
| Canceled                           |       | (6                              | )          | 9.36                                      |       |                                                            |       |
| Outstanding at  June 30, 2006      |       | 1,197                           |       | $                                         | 9.49       |                                                            | 4.1        |   |
| Granted                            |       | —                          |       | —                                    |       |                                                            |       |
| Exercised                          |       | —                          |       | —                                    |       |                                                            |       |
| Forfeited                          |       | (15                             | )          | 6.64                                      |       |                                                            |       |
| Canceled                           |       | (179                            | )          | 12.64                                     |       |                                                            |       |
| Outstanding at  September 30, 2006 |       | 1,003                           |       | $                                         | 8.97       |                                                            | 4.4        |   |
| Exercisable at  September 30, 2006 |       | 802                             |       | $                                         | 9.33       |                                                            | 3.3        |   |

 

Theweighted-average grant date fair value of options granted during the ninemonths ended September 30, 2006 was $2.79. Because the Plans established thatthe exercise price will not be less than 100 percent of the market value of theshares on the date of grant, there are no compensation costs related to theintrinsic value of share-based compensation.

Asummary of the status of the Company’s non-vested shares for the three and ninemonths ended September 30,

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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                                                   |       |
| Granted                           |       | —                          |       | —                                                 |       |
| Vested                            |       | —                          |       | —                                                 |       |
| Forfeited                         |       | (15                             | )          | 2.90                                                   |       |
| Non-vested at September  30, 2006 |       | 201                             |       | $                                                      | 3.04       |   |

 

As ofSeptember 30, 2006, there was $0.4 million of total unrecognized compensationcost related to non-vested share-based compensation arrangements granted underthe Plans that is expected to be recognized over a weighted-average period of1.1 years. The total fair value of shares vested during the three and ninemonths ended September 30, 2006 was $0.1 million and $0.7 million,respectively. Since the Company had net operating loss carryforwards (beforevaluation) as of September 30, 2006, no excess tax benefit for the taxdeductions related to stock-based compensation was recognized for the three andnine months ended September 30, 2006. Additionally, no incremental tax benefitswere recognized from stock options exercised for the three and nine monthsended September 30, 2006, which would have resulted in a reclassification toreduce net cash provided by operating activities with an offsetting increase innet cash provided by financing activities.

**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 nine months endedSeptember 30, 2005, the estimated value of the stock options were assumed to beamortized to expense over the stock options’ vesting periods. The pro-formaeffects of recognizing the compensation expense under the fair value method onnet loss and loss per common share for the three and nine months endedSeptember 30, 2005 were as follows (all amounts in thousands, except per shareamounts):

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| ** **                                                                                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                            | ** ** | **September 30, 2005** | ** ** |
|                                                                                                                                  |       |                             |       |                            |       |
| Net loss                                                                                                                              |       | $                                | (5,930     | )                               | $          | (12,808 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 186                              |       | 527                             |       |
| Pro forma net  loss                                                                                                                   |       | $                                | (6,116     | )                               | $          | (13,335 | ) |
|                                                                                                                                  |       |                             |       |                            |       |
| Basic loss per  share                                                                                                                 |       | $                                | (0.57      | )                               | $          | (1.24 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.02                             |       | 0.05                            |       |
| Basic loss per share  pro forma                                                                                                       |       | $                                | (0.59      | )                               | $          | (1.29 | ) |
|                                                                                                                                  |       |                             |       |                            |       |
| Diluted loss per  share                                                                                                               |       | $                                | (0.57      | )                               | $          | (1.24 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.02                             |       | 0.05                            |       |
| Diluted loss per share  pro forma                                                                                                     |       | $                                | (0.59      | )                               | $          | (1.29 | ) |

 

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.  For the three months ended September 30,2006, there were no stock options granted. A total of 145,000 stock options were granted during the nine monthperiod ending September 30, 2006. 

**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 negative evidencesuch as cumulative losses in recent years. The Company recorded non-cashcharges for the three months ended September 30, 2006 and 2005 of $2.9 millionand $2.5 million, respectively, and for the nine months ended September 30,2006 and 2005, the Company recorded non-cash charges of $6.3 million and $4.9million, respectively, to fully reserve against the net deferred tax assetsrealized during those periods. Allocating the valuation allowance on a pro ratabasis, in accordance with SFAS No. 109, resulted in current net deferred taxassets and long-term net deferred tax liabilities of $0.8 million at September30, 2006 and $1.3 million at December 31, 2005.

**NOTE 9 — LOSS PERSHARE**

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 1,003,001 and 931,796 shares from the computation of diluted earnings per share at September 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. For the three and nine monthsended September 30, 2006 the Company recognized a current period charge of $0.4million of fixed production overhead below normal production levels.

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In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets” (“SFAS No. 153”), which eliminates theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. SFAS No. 153 was effective for nonmonetaryasset exchanges 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,“Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFASNo. 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the consolidatedfinancial statements based on their fair values beginning with the first annualperiod after June 15, 2005, with early adoption encouraged. The pro formadisclosures previously permitted under SFAS No. 123 no longer will be analternative to consolidated financial statement recognition. The Company wasrequired to adopt SFAS No. 123(R) in the first calendar quarter of 2006,beginning January 1, 2006. Under SFAS No. 123(R), the Company mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transitionmethod to be used at date of adoption. The transition methods include modifiedprospective and modified retrospective adoption options. Under the modifiedretrospective option, prior periods may be restated either as of the beginningof the year of adoption or for all periods presented. The modified prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS No. 123(R), while the modified retrospective method would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. After evaluating the requirements ofSFAS No. 123(R), the Company determined to adopt SFAS No. 123(R) using themodified prospective method and use the Black-Scholes model to value servicestock option plans that are currently in effect. 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.

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 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.

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In June 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections—a replacement of APB No. 20 andSFAS No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting 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 byrestating previously issued consolidated financial statements is also addressedby SFAS No. 154. SFAS No. 154 was required to be adopted in fiscal yearsbeginning after December 15, 2005. The adoption of this standard did nothave a material impact on the consolidated financial position, results ofoperations or cash flows of the Company.

InAugust 2005, the FASB issued FASB Staff Position (“FSP”) FSP FAS No. 123-1,“Classification and Measurement of Freestanding Financial InstrumentsOriginally Issued in Exchange 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 a freestanding financial instrument subject to therecognition and measurement requirements of other accounting principlesgenerally accepted in the United States of America when the rights conveyed bythe instrument are no longer dependent on the holder being an employee. Theguidance in this FSP should be applied upon initial adoption of SFAS No.123(R). 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.

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 the consolidatedfinancial statements discusses the effects of the implementation of 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 the implementationof SFAS No. 123(R) and its related interpretations.

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InFebruary 2006, the FASB issued FSP FAS No. 123(R)-4, “Classification of Optionsand Similar Instruments Issued As Employee Compensation That Allow for CashSettlement upon the Occurrence of a Contingent Event.” The guidance in this FSPamends certain paragraphs in SFAS No. 123(R),**and addresses situations when a company has option plans thatrequire the company to settle outstanding options in cash upon the occurrenceof certain contingent events. For example, some plans require a company to cashsettle an option upon a change in control of the company, or death ordisability of the holder. This FSP amends SFAS No. 123(R) to address suchsituations and concludes that a probability notion be applied. The guidance inthis FSP was effective with the adoption of SFAS No. 123(R). If a company hadalready adopted SFAS No. 123(R), the FASB required retrospective application ifa company applied the standard inconsistent with the conclusions in this FSP.The 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 EITF 06-2 for arrangements in whichthe individual continues to be a compensated employee and is not required toperform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of EITF 06-2 are met, the compensation costassociated with a sabbatical or other similar benefit arrangement should beaccrued 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.

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principals and expands disclosures about fair valuemeasurements.  The statement does notrequire new fair value measurements, but is applied to the extent that otheraccounting pronouncements require or permit fair value measurements.  The statement emphasizes that fair value is amarket-based measurement that should be determined based on the assumptionsthat market participants would use in pricing an asset or liability.  Companies that have assets and liabilitiesmeasured at fair value will be required to disclose information that enablesthe users of its financial statements to access the inputs used to developthose measurements.  The reporting entityis encouraged, but not required, to combine the fair value informationdisclosed under this statement with the fair value information disclosed underother accounting pronouncements.  SFASNo. 157 is effective for fiscal years beginning after November 15, 2007.  The Company is in the process of evaluatingthe provisions of the statement, but does not anticipate that the adoption ofSFAS No. 157 will have a material impact on the Company’s consolidatedfinancial statements.

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In September 2006, the FASB issued SFAS No. 158, Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans – an amendment ofFASB Statements No. 87, 88, 106 and 132(R), which requires an employer torecognize the over-funded or under-funded status of a defined benefitpostretirement plan (other than a multiemployer plan) as an asset or liabilityin its statement of financial position and to recognize changes in that fundedstatus in the year in which the changes occur through comprehensive income of abusiness entity or changes in unrestricted net assets of a not-for –profitorganization.  Statement No. 158 alsorequires an employer to measure the funded status of a plan as of the date ofits year-end statement of financial position, with limited exceptions.  This statement is effective for fiscal yearsending after December 15, 2006.  TheCompany does not currently provide defined benefit pension or otherpostretirement plans, therefore the Company has determined that the adoption ofthis statement will not have an impact on the Company’s consolidated financialstatements.

InSeptember 2006, the SEC released Staff Accounting Bulletin No. 108, “*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*”(SAB 108). SAB 108 provides guidance on how the effects of prior-yearuncorrected financial statement misstatements should be considered inquantifying a current year misstatement. SAB 108 requires registrants toquantify misstatements using both an income statement (rollover) and balancesheet (iron curtain) approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. If prior year errors that had been previouslyconsidered immaterial are now considered material based on either approach, norestatement is required as long as management properly applied its previousapproach and all relevant facts and circumstances were considered. If prioryears are not restated, the cumulative effect adjustment is recorded in openingretained earnings as of the beginning of the fiscal year of adoption. SAB 108is effective for fiscal years ending on or after November 15, 2006. TheCompany does not expect the adoption of SAB 108 to have an impact on ourfinancial condition or results of operations. 

**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 financialcondition and results of operations of National RV Holdings, Inc. This MD &A is provided as a supplement to, and should be read in conjunction with, theCompany’s consolidated 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-looking statements.” Generally, the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “project,” “will” and similar expressionsidentify forward-looking statements, which generally are not historical innature. All statements that address operating performance, events ordevelopments that the Company expects or anticipates will occur in thefuture—including statements relating to volume growth, share of sales andearnings per share growth, and statements expressing general optimism aboutfuture operating results—are forward-looking statements. As and when made,management believes that these forward-looking statements are reasonable.However, caution should be taken not to place undue reliance on any suchforward-looking statements because such statements speak only as of the datewhen made. The Company undertakes no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise. In addition, forward-looking statements are subject tocertain 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 one of the nation’s leading producers ofmotorized recreational vehicles, often referred to as RVs or motorhomes. Fromits Perris, California facility, NRV designs, manufactures, and markets Class Agas and diesel motorhomes under the *Dolphin*,*Islander*, *Sea Breeze*, *Pacifica*,*Surfside*,

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*Tradewinds*and *Tropical* brand names. From its Junction City, Oregonfacility, CCI designs, manufactures and markets high-end (Highline) Class Adiesel motorhomes under the brand names *Affinity*,*Allure*, *Inspire*, *Intrigue*,*Magna, Tribute*and busconversions under the *Country Coach Prevost*brand.

For the three months ended September 30, 2006, theCompany incurred a net loss of $7.1 million or $0.68 per share as compared to anet loss of $5.9 million or $0.57 per share for the three months endedSeptember 30, 2005. For the nine months ended September 30, 2006, the Companyincurred a net loss of $16.3 million or $1.57 per share as compared to a netloss of $12.8 million or $1.24 per share for the nine months ended September30, 2005. Despite its losses, the Company increased market share by 12.5% asreported by Statistical Surveys, Inc. for the eight months ended August 31,2006 (the most recent period available) as compared to the same period in 2005.The Class A motorhome industry experienced a 17.7% decline in wholesaleshipments as reported by the Recreation Vehicle Industry Association (“RVIA”)for the nine months ended September 30, 2006 as compared to the same period in2005. Net sales for the three and nine months ended September 30, 2006 declined15% and 12% respectively, despite the even larger overall industrydecline.  As a result, the Company’sprofitability was negatively affected. During the three and nine months endedSeptember 30, 2006, the Company incurred significant writedowns of inventorylevels due to declining production volumes at the Company’s NRV subsidiary andproduction inefficiencies associated with the introduction of two new productlines by the CCI subsidiary.

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123(R),”Share-Based Payment”,and all related financial statement guidance and interpretations using themodified prospective application transition method. The modified prospectivemethod applies the expense recognition requirements of SFAS No. 123(R) to newawards and to awards outstanding at the effective date and subsequentlymodified or canceled and does not restate prior periods for comparativepurposes. Previously, the Company had accounted for employee stock-basedcompensation using the intrinsic value method as proscribed under AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB No. 25”) and related interpretations and the fair value methodfor 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 nine months endedSeptember 30, 2006, the Company recognized compensation expenses and additionalpaid-in-capital of $0.1 million and $0.7 million, respectively, related to thestock-based compensation arrangements. Because the Company’s stock option plansestablished that the exercise price will not be less than 100 percent of themarket value of the shares on the date of grant, no compensation costs relatedto the intrinsic value of stock options were recognized in periods prior to January1, 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 atSeptember 30, 2006. The estimated fair value, less the estimated forfeituresare amortized to compensation expense using the straight-line attributionmethod. In the pro forma information required under SFAS No. 123 for theperiods prior to January 1, 2006, the Company accounted for pre-vestingforfeitures in the pro-forma disclosure required by SFAS No. 123 as incurred.

At September 30, 2006, there was $0.4 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 1.1 years. The total fair value of shares vestedduring the three and nine months ended September 30, 2006 was $0.1 million and$0.7 million, respectively. Since the Company had net operating losscarryforwards (before valuation) as of September 30, 2006, no excess taxbenefit for the tax deductions related to stock-based compensation wasrecognized for the three and nine months ended September 30, 2006.Additionally, no incremental tax benefits were recognized from stock optionsexercised for the three and nine months ended September 30, 2006 that wouldhave resulted in a reclassification to reduce net cash provided by operatingactivities with an offsetting increase in net cash provided by financingactivities.

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**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 introduced its newPacifica diesel motorhome early in the third quarter of 2006, and CCI introducedits new Tribute line in the third quarter of 2006.  CCI will also introduce the Rhapsody line inthe fourth quarter of the year.

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 nine months ended September 30, 2006.

**Stock-BasedCompensation**

EffectiveJanuary 1, 2006, the Company adopted Statement of SFAS No. 123(R), and allrelated financial statement guidance and interpretations using the modifiedprospective application transition method. Under the provisions of SFAS No.123(R), the fair value of the stock options are estimated using the BlackScholes option pricing model. The assumptions used in the Black-Scholes optionpricing model requires managements to make estimates about the term in whichthe option holder will exercise, the risk free interest rate, volatility of thestock, future dividend yield and pre-vesting forfeiture rates. These estimatesare based on historical experience and on various other judgments thatmanagement believes to be reasonable under the circumstances. Actual resultscould significantly differ from these estimates, and the results of operationscould be materially impacted.

**InventoryPricing**

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 151. SFAS No. 151 amends ARB No.43, Chapter 4, to clarify that abnormal amount of idle facility expense,freight, handling costs, and wasted materials (spoilage) should be recognizedas current-period charges. In addition, SFAS No. 151 requires that allocationof fixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. Compliance with SFAS No. 151 requiressignificant judgments and estimates as to what constitutes abnormal amounts ofidle facility,

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freight,handling costs, and wasted materials (spoilage) as well as the threshold of“normal capacity” of a production facility. The requirements of SFAS No. 151could potentially have a future impact on the Company’s financial position,results of operations and cash flow of the Company 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.  For thethree and nine months ended September 30, 2006, the Company recognized acurrent period charge of $0.4 million of allocated fixed production overheadbelow normal production levels.     

**Results of Operations**

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

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

**Net sales**
| ** **                 | ** ** | **Three Months Ended   September 30,  Percent Change** | ** ** | **Nine Months Ended   September 30,  Percent Change** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                                        | ** ** | ** **                                                                     | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                            |       |                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Net sales                  |       | $                                                                               | 91,999     |                                                                           | (15.0      | )% | $ | 108,232 |   | $ | 315,107 |   | (11.8 | )% | $ | 357,082 |   |
| 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 that are sold to a networkof dealers throughout the United States and Canada. Net sales are comprised ofsales of motorhomes, parts and services. Net sales are reduced by sales returnsand allowances and cash-based sales incentive programs.

Thefollowing table presents the number of diesel and gas Class A motorhomeswholesale sold for the three and nine months ended September 30, 2006 and thethree and nine months ended September 30, 2005:
| ** ** | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Diesel     |       | 288                                                  |       | 302                                                 |       | (4.6 | )% | 952 |   | 1,087 |   | (12.4 | )% |
| Gas        |       | 220                                                  |       | 303                                                 |       | (27.4 | )% | 911 |   | 1,073 |   | (15.1 | )% |
| Total      |       | 508                                                  |       | 605                                                 |       | (16.0 | )% | 1,863 |   | 2,160 |   | (13.8 | )% |

 

Net sales for the three months ended September 30,2006 decreased $16.2 million or 15% from the same period in 2005. The decreasewas caused by a general decline in industry shipments of18%. Shipments of diesel units declined 5% while shipments of gas unitsdeclined 27% for a combined unit shipment decline of 16% for the Company. Theaverage sales price for the quarter increased 1% to $181,000 for the currentquarter from $179,000 for the same quarter last year.

Sales incentives for the three months ended September30, 2006 increased by approximately $0.8 million, going from 2.8% to 4.3%of net sales from the same period in 2005. Included in the sales incentiveswere $1.1 million in rebates related to the sale of units affected by thedefective fiberglass material from a third party supplier. Excluding theincentives for the units affected by the defective fiberglass material, salesincentives would have decreased by $0.3 million.

Net sales for the nine months ended September 30, 2006decreased $42.0 million or 12% from the same period in 2005. The decrease wascaused by a general decline in industry shipments of18%. Shipments of diesel units declined 12% while shipments of gas unitsdeclined 15% for a combined unit shipment decline of 14% for the Company. Theaverage sales price for the nine months ended September 30, 2006 increased 2%to $169,000 from $165,000 for the same period last year.

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Sales incentives for thenine months ended September 30, 2006, decreased by $1.4 million or 11% from thesame period in 2005.   Included in thesales incentives were $2.0 million in rebates related to the units affected bythe defective fiberglass material from a third party supplier.  Excluding the incentives for the unitsaffected by the defective fiberglass material, sales incentives for the Company would have decreased $3.4million or 27% from the nine month period ended September 30, 2005.  In 2005, the Company offered significant cashrebates to move surplus goods from its manufacturing facility as a result ofthe slowing market demands.  In 2006, theCompany has focused its incentives to more structured cash rebates to thedealers based on retailing brands and replenishing the dealers’ lots withsimilar brand models.

**Gross profit margin**
| ** **          | ** ** | **Three Months Ended  September 30,  Percent Change** | ** ** | **Nine Months Ended  September 30,  Percent Change** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                                  | ** ** | ** **                                                               | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                |       |                                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Gross profit        |       | $                                                                         | 808        |                                                                     | (62.7      | )% | $ | 2,165 |   | $ | 6,076 |   | (38.5 | )% | $ | 9,881 |   |
| Gross profit margin |       | 0.9                                                                       | %          | (55.0                                                                    | )%         | 2.0 | % | 1.9 | % | (32.1 | )% | 2.8 | % |
|                     |            |                                                                           |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Grossprofit represents net sales less cost of goods sold. Cost of goods sold includematerials, labor and overhead (including research, development and engineeringcosts) associated with the production of Class A motorhomes, the cost of partssold, costs of providing service, warranty expense and delivery costs.

For the three months ending September 30, 2006, theCompany realized gross profit of $.8 million, a decrease of $1.4 million fromthe three months ending September 30, 2005. Gross profit margin was negatively impacted by a $1.5 million increasein the workers compensation reserve for a significant injury and a revised actuarialestimate on the overall reserve.  Inaddition, the Company recorded a write-down of inventories to the lower of costor market of $2.8 million primarily reflecting the incremental costs incurredwith introducing new products and redesigns into production during thequarter.  As a result of decreasinglevels of production at NRV a charge of $0.4 million was recognized for fixedoverhead costs below normal capacity as required by SFAS 151 “InventoryCosts-an Amendment of ARB No. 43, Chapter 4”.  Offsetting these increases was a reduction of$0.4 million to the reserve accrual for the recall of defective tires used inthe manufacture of certain motorhomes between 1995 and 2001, other costreductions and improved operating efficiencies over the three months endingSeptember 30, 2005.           

For the nine months ending September 30, 2006, theCompany realized gross profit of $6.1 million, a decrease of $3.8 million fromthe nine months ending September 30, 2005. The Company recorded a write-down of inventories to the lower of cost ormarket of $6.1 million as the result of three primary factors.  The first factor related to the costsassociated with the defective fiberglass supplied to the Company by a thirdparty supplier, which the Company first identified in April 2006.  The costs incurred related to this defectivematerial include, among other items, production rework costs, discounts relatedto the sale of affected units, plant shutdowns and other costs.  The second factor was the incremental costsassociated with the introduction of new products and redesigns intoproduction.  The third factor was lowerproduction rates realized at NRV resulting in lower fixed cost absorption.  Gross profit was also negatively affected by a$1.5 million increase in the workers compensation reserve for asignificant injury and a revised actuarial estimate on the overall reserve anda $0.7 increase in the reserve for the recall for defective tires used inthe manufacture of certain motorhomes between 1995 and 2001.  Gross profit for the nine months endedSeptember 30, 2006 was positively impacted by reductions in sales incentives.

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**Selling expenses**
| ** **                 | ** ** | **Three Months Ended   September 30,  Percent Change** | ** ** | **Nine Months Ended  September 30,  Percent Change** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                                        | ** ** | ** **                                                               | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                            |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Selling expenses           |       | $                                                                               | 3,234      |                                                                     | (25.4      | )% | $ | 4,335 |   | $ | 9,861 |   | (12.6 | )% | $ | 11,289 |   |
| as a percent of net  sales |       | 3.5                                                                             | %          |                                                                     |       | 4.0 | % | 3.1 | % |   |   | 3.2 | % |
|                            |            |                                                                                 |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 September 30, 2006, sellingexpenses decreased 25% from the comparable prior year period.  This decrease was due to a reduction in bothsales and marketing expenses and was offset by a small increase in the cost ofshows and rallies.  The decrease inselling expenses for the nine months ended September 30, 2006 compared to thenine months ended September 30, 2005 was due to decreased sales commissionsresulting from a decrease in sales and a reduction in advertising costs and waspartially offset by increased show expenses.

**General and administrative expenses**
| ** **                           | ** ** | **Three Months Ended  September 30,  Percent Change** | ** ** | **Nine Months Ended  September 30,  Percent Change** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                                  | ** ** | ** **                                                               | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                                 |       |                                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| General and  administrative expenses |       | $                                                                         | 3,774      |                                                                     | 12.8       | % | $ | 3,346 |   | $ | 10,618 |   | 1.2 | % | $ | 10,489 |   |
| as a percent of net  sales           |       | 4.1                                                                       | %          |                                                                     |       | 3.1 | % | 3.4 | % |   |   | 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.

The increase of $0.4 million in general andadministrative costs for the three months ended September 30, 2006 was theresult of increased professional fees and loan fees.  The increase in general and administrativecosts for the nine months ended September 30, 2006 was due to increasedprofessional fees, share based compensation and loan fees offset by certaincost reductions resulting from the Company’s cost containment iniatives. 

**Interest expense**
| ** **                 | ** ** | **Three Months Ended  September 30,  Percent Change** | ** ** | **Nine Months Ended  September 30,  Percent Change** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                                  | ** ** | ** **                                                               | ** ** | **2005** | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
|                       |       |                                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Interest expense           |       | $                                                                         | 801        |                                                                     | 102.8      | % | $ | 395 |   | $ | 1,835 |   | 86.7 | % | $ | 983 |   |
| as a percent of net  sales |       | 0.9                                                                       | %          |                                                                     |       | 0.4 | % | 0.6 | % |   |   | 0.3 | % |
|                            |            |                                                                           |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

The increase in interest expense in both the three andnine month period ended September 30, 2006 is a result of increased borrowingon the line of credit as well as rising interest rates directly related to theincreases in the prime interest rate by the Federal Reserve.

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**Liquidity, CapitalResources and Financial Condition**

TheCompany incurred net losses of $7.1 million and $5.9 million for the threemonths ended September 30, 2006 and September 30, 2005, respectively, and $16.3million and $12.8 million for the nine months ended September 30, 2006 and2005, respectively. The Company used $13.1 and $12.3 million of cash foroperating activities for the nine months ended September 30, 2006 and 2005,respectively.  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.

During the nine months ended September 30, 2006, the Company financedits operations primarily through its existing working capital and line ofcredit with UPSC and Wells Fargo Bank. At September 30, 2006, the Company had$4,000 in cash and cash equivalents. This amount excludes restricted cash totaling $0.7 million required tosecure a letter of credit in connection with one of the Company’s insurancepolicies, to provide security for the Company’s credit cards and to provide adeposit in lieu of bond for a warranty case. The $0.5 million increase in restricted cash from December 31,2005, wasprimarily attributable to the $0.3 million deposit in lieu of bond.  The Company had net working capital of $10.2million and $26.1 million at September 30, 2006 and December 31, 2005,respectively. The decrease in working capital at September 30, 2006 compared toDecember 31, 2005 was primarily due to an increase in accounts payable of $14.2million, an increase in the line of credit of $12.0 million, and an increase inthe book overdraft of $4.5 million, offset by an increase in net inventories of$11.3 million.

 

During the nine months ended September 30, 2006, theCompany used $13.1 million of cash in its operations, which was primarily dueto a net loss of $16.3 million, increases in net inventories of $11.3 million,partially offset by a $14.2 million increase in accounts payable.  During the nine months ended September 30,2005, the Company used $12.0 million of cash in its operations.  This was primarily attributable to a net lossof $12.8 million, increases in accounts receivable and net inventory of $3.1million and $2.1 million, partially offset by $2.8 million of depreciationexpense and increases in accrued liabilities and accounts payable of $1.4million and $1.3 million, respectively. For the nine months ended September 30, 2006, net cash used in investingactivities was $3.3 million, which was primarily attributable to purchases ofproperty, plant and equipment. During the nine months ended September 30, 2005,net cash used in investing activities was $1.5 million, consisting primarily of$3.6 million of purchases of property, plant and equipment, partially offset byrepayments on the note receivable of $2.0 million. Net cash provided byfinancing activities for the nine months ended September 30, 2006 was $16.5million, primarily due to net borrowings under the line of credit of $12.0 million and an increase in the bookoverdraft of $4.5 million. Net cash provided by financing activities for thenine months ended September 30, 2005 was $13.5 million, primarily due to net borrowingsunder  the line of credit of $9.4 millionand an increase in the book overdraft of $4.2 million.

AtSeptember 30, 2006, the Company had an asset-based revolving credit facilitywith UPS Capital Corporation (“UPSC”) and Wells Fargo Bank for $40 million,after exercising two consecutive $5 million increases to the line of credit inMay and June 2006. The credit facility is collateralized by all of theCompany’s assets. Borrowing availability is based on eligible accountsreceivable and inventory. The facility also includes a requirement to maintaina blocked account arrangement, whereby remittances from the Company’s customersreduce the debt outstanding.  On August10, 2006, the Company entered into an amendment of its credit facility in orderto temporarily increase the credit line to $50 million through September 30,2006. Borrowing availability continued to be based on eligible accountsreceivable and inventory.   The amendmentprovided that the $50 million credit facility be reduced incrementally to theoriginal $40 million over a five-week period to be completed the last week inSeptember.  The amendment also providedthat all financial covenants were waived for the months of July, August andSeptember of 2006. In September, the Company exceeded its Minimum ExcessAvailability requirements and therefore was not in default of the financialcovenants.  In connection with theamendment, the Company provided its Perris, California real estate ascollateral to secure the credit facility.

AtSeptember 30, 2006 and December 31, 2005, the Company had outstanding loansunder the line of credit of $24.0 million and $12.1 million, respectively.Initial amounts borrowed under the revolving credit facility bear interest atthe prime rate listed in the Wall Street Journal plus 0.50 percentage pointsand may be subsequently adjusted down based on a trailing twelve month fundeddebt to EBITDA calculation. At September 30, 2006, the interest rate for theborrowings under the line of credit was 8.75%. The weighted average interestrate for the

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borrowingson the credit facility during the three months ended September 30, 2006 and2005 were 8.75% and 6.57%, respectively, and 8.44% and 6.56% for the ninemonths ended September 30, 2006 and 2005, respectively.

Management’s plan to achieve operational profitabilityincludes continuing or starting a variety of initiatives to improve theCompany’s earnings and working capital position, including: (i) introducing newproducts and floor plans in 2006, (ii) adding new dealers to fill open marketareas or replace under-performing dealers, (iii) decreasing overall salesincentives by tailoring programs that provide the maximum value to the Company,(iv) reducing material and related obsolescence costs, (v) improvingmanufacturing efficiencies, (vi) further reducing manufacturing and otheroverhead costs and (vii) decreasing the costs of warranty.

In order to fund on-going operations, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional or replacementdebt financings it may be able to complete until it achieves sustainedoperational profitability through a combination of increased sales, costreductions and improved product margins. After consideration of its availableborrowing capacity and funding needs, the Company believes it will need toraise additional funds in the near term in order to have sufficient financialresources to fund its operations for the next twelve months. As a result, theCompany is currently reviewing offers for long-term debt financing and severalother strategic opportunities in order to lessen the Company’s reliance on itsexisting line of credit and to improve its working capital position.  There can be no assurance that any suchlong-term financing or strategic opportunities can be completed with acceptableterms and conditions. If the Company is unable to obtain additional financing,it will then attempt to preserve its available resources by various methodsincluding deferring the creation or satisfaction of commitments, deferring theintroduction of new products or otherwise scaling back its operations. If theCompany were unable to raise such additional capital or defer certain costs asdescribed above, that inability would have a material adverse effect on the Company’sfinancial position, results of operations and prospects.

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 $149.0 million at September 30, 2006. The risk ofloss under the repurchase agreements is spread over a number of dealers andlenders and is reduced by the resale value of the RVs, which the Company wouldbe required to repurchase. Losses under these agreements have not been materialin the 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.

**Recent Accounting Pronouncements**

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 151, “InventoryCosts-an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No.151 amends Accounting Research Bulletin No. 43, Chapter 4 (“ARB 43”), toclarify 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 productionoverhead to the costs of conversion be based on the normal capacity of theproduction facilities. This standard was effective for inventory costs incurredduring fiscal years beginning after September 15, 2005. This standard wasapplied prospectively. For the three and nine months ended September 30, 2006the Company recognized a current period charge of $0.4 million of fixedproduction overhead below normal production levels.     

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InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”(“SFAS No. 153”), which eliminates the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance.SFAS No. 153 was effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. Adoption of SFAS No.153 did not significantly affect the financial condition, results of operationsor 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,“Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFASNo. 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the consolidatedfinancial statements based on their fair values beginning with the first annualperiod after June 15, 2005, with early adoption encouraged. The pro formadisclosures previously permitted under SFAS No. 123 no longer will be analternative to consolidated financial statement recognition. The Company wasrequired to adopt SFAS No. 123(R) in the first calendar quarter of 2006,beginning January 1, 2006. Under SFAS No. 123(R), the Company mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transition methodto be used at date of adoption. The transition methods include modifiedprospective and modified retrospective adoption options. Under the modifiedretrospective option, prior periods may be restated either as of the beginningof the year of adoption or for all periods presented. The modified prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS No. 123(R), while the modified retrospective method would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. After evaluating the requirements ofSFAS No. 123(R), the Company determined to adopt SFAS No. 123(R) using themodified prospective method and use the Black-Scholes model to value servicestock option plans that are currently in effect. 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.

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 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.

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In June 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections—a replacement of APB No. 20 andSFAS No. 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 statements similarto those generally applicable to reporting an accounting changeretrospectively. Therefore, the reporting of a correction of an error byrestating previously issued consolidated financial statements is also addressedby SFAS No. 154. SFAS No. 154 was required to be adopted in fiscal yearsbeginning after December 15, 2005. The adoption of this standard did nothave a material impact on the consolidated financial position, results ofoperations or cash flows of the Company.

InAugust 2005, the FASB issued FASB Staff Position (“FSP”) FSP FAS No. 123-1,“Classification and Measurement of Freestanding Financial InstrumentsOriginally Issued in Exchange 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 a freestanding financial instrument subject to therecognition and measurement requirements of other accounting principlesgenerally accepted in the United States of America when the rights conveyed bythe instrument are no longer dependent on the holder being an employee. Theguidance in this FSP should be applied upon initial adoption of SFAS No.123(R). 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.

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

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concludes that a probability notion be applied. The guidance in thisFSP was effective with the adoption of SFAS No. 123(R). If a company hadalready adopted SFAS No. 123(R), the FASB required retrospective application ifa company applied the standard inconsistent with the conclusions in this FSP.The 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 EITF 06-2 for arrangements in whichthe individual continues to be a compensated employee and is not required toperform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of EITF 06-2 are met, the compensation costassociated with a sabbatical or other similar benefit arrangement should beaccrued 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 tax positiontaken or expected to be taken in a tax return. This Interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The Company does notexpect FASB Interpretation No. 48 to have a material impact on the consolidatedfinancial position, results of operation or cash flows of the Company.

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principals and expands disclosures about fair valuemeasurements.  The statement does notrequire new fair value measurements, but is applied to the extent that otheraccounting pronouncements require or permit fair value measurements.  The statement emphasizes that fair value is amarket-based measurement that should be determined based on the assumptionsthat market participants would use in pricing an asset or liability.  Companies that have assets and liabilitiesmeasured at fair value will be required to disclose information that enablesthe users of its financial statements to access the inputs used to developthose measurements.  The reporting entityis encouraged, but not required, to combine the fair value informationdisclosed under this statement with the fair value information disclosed underother accounting pronouncements.  SFASNo. 157 is effective for fiscal years beginning after November 15, 2007.  The Company is in the process of evaluatingthe provisions of the statement, but does not anticipate that the adoption ofSFAS No. 157 will have a material impact on the Company’s consolidatedfinancial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans – an amendment ofFASB Statements No. 87, 88, 106 and 132(R), which requires an employer torecognize the over-funded or under-funded status of a defined benefitpostretirement plan (other than a multiemployer plan) as an asset or liabilityin its statement of financial position and to recognize changes in that fundedstatus in the year in which the changes occur through comprehensive income of abusiness entity or changes in unrestricted net assets of a not-for –profitorganization.  Statement No. 158 alsorequires an employer to measure the funded status of a plan as of the date ofits year-end statement of financial position, with limited exceptions.  This statement is effective for fiscal yearsending after December 15, 2006.  TheCompany does not currently provide defined benefit pension or otherpostretirement plans, therefore the Company has determined that the adoption ofthis statement will not have an impact on the Company’s consolidated financialstatements.

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In September 2006, the SEC released Staff Accounting BulletinNo. 108, “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (SAB 108). SAB 108 provides guidance on howthe effects of prior-year uncorrected financial statement misstatements shouldbe considered in quantifying a current year misstatement. SAB 108 requiresregistrants to quantify misstatements using both an income statement (rollover)and balance sheet (iron curtain) approach and evaluate whether either approachresults in a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. If prior year errors that had beenpreviously considered immaterial are now considered material based on eitherapproach, no restatement is required as long as management properly applied itsprevious approach and all relevant facts and circumstances were considered. Ifprior years are not restated, the cumulative effect adjustment is recorded inopening retained earnings as of the beginning of the fiscal year of adoption.SAB 108 is effective for fiscal years ending on or after November 15,2006. The Company does not expect the adoption of SAB 108 to have an impact onour financial condition or results of operations. 

**Item 3.  Quantitative and Qualitative Disclosuresabout 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 currencytranslation. However, the Company is exposed to interest rate changes relatedprimarily to cash borrowings on the Company’s credit facility. The weightedaverage interest rate for the borrowings on the credit facility during thethree months ended September 30, 2006 and 2005, were 8.75% and 6.57%,respectively, and 8.44% and 6.56% for the nine months ended September 30, 2006and 2005, respectively. For every 0.25% increase in interest rates, the Companywould expect a quarterly increase in interest expense of $625 for each $1.0million borrowed.

**Item4.  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 ofSeptember 30, 2006, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the CEO and CFO, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act).In light of the material weakness referenced below which the Company firstidentified in connection with the assessment required by Section 404 of theSarbanes-Oxley Act of 2002 and disclosed in its Form 10-K for the year endedDecember 31, 2005 and which continued to exist as of the end of the periodcovered by this report, the Company’s CEO and CFO concluded that, as of the endof the period covered by this report, the disclosure controls and procedureswere not effective at a reasonable assurance level.

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,

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accrued liabilities, accumulated depreciation andamortization, and the related income statement accounts, primarily cost of goodssold, selling, general and administrative expenses. Additionally, this controldeficiency could result in misstatements in the aforementioned accounts thatwould result in a material misstatement to the annual or interim consolidatedfinancial statements that would not be prevented 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.

The Companybelieves that it will be able to improve its internal control procedures andremedy the material weakness and additional control deficiencies identified aspart of its 2005 year-end assessment process. Notwithstanding the Company’sremediation efforts, because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

#### **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.

**PART II- OTHER INFORMATION**

**Item 1A.  Risk Factors**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report onForm 10-K for the year ended December 31, 2005, which could materially affectthe Company’s business, financial condition or future results. The risksdescribed in the Company’s Annual Report on Form 10-K are not the only risksfacing the Company. Additional risks and uncertainties not currently known tothe Company or that the Company currently deems to be immaterial also maymaterially adversely affect the Company’s business, financial condition and/oroperating results. Other than with respect to the risk factors below, therehave been no material changes from the risk factors disclosed in the “RiskFactors” section of the Company’s Annual Report on Form 10-K for the year endedDecember 31 and the Company’s Forms 10-Q for the quarters ended March 31, 2006 andJune 30, 2006. 

**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 we incorporate intoour motorhomes could negatively affect our sales and financial results.**

Most recreationvehicle and bus components are readily available from a variety of sources.However, a few components are produced by only a small group of qualitysuppliers that have the capacity to supply large quantities on a nationalbasis. Our NRV subsidiary purchases gasoline-powered chassis from Ford MotorCompany and Workhorse Custom Chassis and rear engine diesel-powered chassisfrom Freightliner Custom Chassis Corporation. Our CCI subsidiary manufacturesits own chassis, the DynoMax, which is used as the base upon which all CCImotorhomes are built, except for the Country Coach Prevost bus conversions,which utilize a Prevost bus shell. We generally maintain a one to two monthproduction supply of a chassis in inventory. Historically, in the event of anindustry-wide restriction of supply, chassis manufacturers have allocatedchassis among our competitors and us based on the volume of chassis previouslypurchased. If Ford Motor Company, Workhorse Custom Chassis or FreightlinerCustom Chassis Corporation were to discontinue the manufacturing of motor homechassis, or if as a group all of our chassis suppliers significantly reducedthe availability of chassis to the industry, our business could be adverselyeffected. Similarly, shortages, production delays or work stoppages by theemployees of these chassis manufacturers or other chassis suppliers could havea material adverse effect on us. Finally, as is standard in the

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industry,arrangements with chassis suppliers are terminable at any time by either thechassis supplier or us. If we cannot obtain an adequate chassis supply, thiscould result in a material adverse affect on our financial condition andresults of operations.

In addition to the chassis, we incorporate a variety of components andraw materials 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 72 have been identified as of the end of our 2006 third quarter.  We are not certain of the number of otherunits that may have been affected by this defect and additional units beyondthose identified may also contain the defective material and require repair,resulting in additional costs to us. The costs associated with dealing with thedefective product issue have had a material impact on consolidated financialcondition, results of operations and cash flows for the quarter ended September30, 2006. We expect to continue to incur costs related to the repair and resaleof affected units in future periods and expect to continue to incur additionalcosts if we discover additional units that may have been affected.   While we have filed a lawsuit against thesupplier of the defective fiberglass in order to recover the costs of repair,lost profits and other damages suffered by us, there can be no assurance thatwe will be successful in this lawsuit or that we will be able to recover any orall of the costs incurred as a result of the defective material.

 

**We believe wewill need additional capital in the near term, and it may not be available onacceptable terms, or at all, and if we do not receive any necessary capital, itcould have a material adverse effect on our financial condition and futureprospects.**

 

In order to fund on-going operations, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its existing line of credit as well as any additional orreplacement debt financings it may be able to complete until it achieves sustainedoperational profitability through a combination of increased sales, costreductions and improved product margins. After consideration of its availableborrowing capacity and funding needs, the Company believes it will need toraise additional funds in the near term in order to have sufficient financialresources to fund its operations for the next twelve months. As a result, theCompany is currently reviewing offers for long-term debt financing and severalother strategic opportunities in order to lessen the Company’s reliance on itsexisting line of credit and to improve its working capital position.  There can be no assurance that any suchlong-term financing or strategic opportunities can be completed with acceptableterms and conditions. If the Company is unable to obtain additional financing,it will then attempt to preserve its available resources by various methodsincluding deferring the creation or satisfaction of commitments, deferring theintroduction of new products or otherwise scaling back its operations. If theCompany were unable to raise such additional capital or defer certain costs asdescribed above, that inability would have a material adverse effect on theCompany’s financial position, results of operations and prospects.

**Item 6.  Exhibits**

Exhibits
| 10.1 |   | Loan Modification Agreement No. 2, dated August 10,  2006, between the Company, NRV, CCI and UPS Capital Corporation and Wells  Fargo Bank, as lenders. |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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: November 10,  2006 |       | By                                                                    |   | /s/ Thomas J. Martini |
|                     |       | Thomas J. Martini                                                     |
|                     |       | Chief Financial Officer  (Principal Accounting and Financial Officer) |

 

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