SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________

Commission file number 0-25390

SMC CORPORATION
(Exact name of registrant as specified in its charter)

Oregon 93-0939076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

30725 Diamond Hill Road
Harrisburg, Oregon 97446
(Address of principal executive offices) (Zip Code)

Registrant's telephone number,
including area code: (503) 995-8214

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S- K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 18, 1997: $12,029,580. For purposes of this calculation,
officers and directors are considered affiliates.

Number of shares of Common Stock outstanding at March 18, 1997: 6,563,064.

Documents Incorporated by Reference

Part of Form 10-K into
Document which incorporated

Proxy Statement for 1997 Annual
Meeting of Shareholders Part III

TABLE OF CONTENTS

Item of Form 10-K Page

PART I................................................................. 1

Item 1 Business................................................ 1

Item 2 Properties.............................................. 14

Item 3 Legal Proceedings....................................... 14

Item 4 Submission of Matters to a Vote of Security Holders..... 14

Item 4(a) Executive Officers of the Registrant.................... 15

PART II................................................................ 17

Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters.................. 17

Item 6 Selected Financial Data................................. 18

Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations.............................................. 20

Item 8 Financial Statements and Supplementary Data............. 28

Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 28

PART III............................................................... 29

Item 10 Directors and Executive Officers of
the Registrant.......................................... 29

Item 11 Executive Compensation.................................. 29

Item 12 Security Ownership of Certain Beneficial
Owners and Management................................... 29

Item 13 Certain Relationships and Related
Transactions............................................ 29

PART IV................................................................ 30

Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................. 30

SIGNATURES............................................................. 33

PART I

ITEM 1. BUSINESS

Introduction

SMC Corporation (SMC or the Company) is one of the largest manufacturers of
high-line motor coaches in the United States. SMC was incorporated in Oregon in
1986 and production operations began in 1987. SMC is headquartered in
Harrisburg, Oregon and has seven operating subsidiaries. The Company's executive
offices are located at 30725 Diamond Hill Road, Harrisburg, Oregon, 97446, and
its telephone number is (541) 995-8214. The subsidiaries of the Company are
Safari Motor Coaches, Inc. (Safari), Magnum Manufacturing, Inc. (Magnum), Beaver
Motor Coaches, Inc. (Beaver), Electronic Design & Assembly, Inc. (ED&A),
Composite Technologies, Inc. (CTI), Harney County Operations, Inc. (HCO), and
SMC Midwest, Inc. (Midwest). Safari and Magnum are located in Harrisburg,
Oregon; Beaver and ED&A are located in Bend, Oregon; CTI and HCO are located in
Hines, Oregon; and Midwest is located in Minneapolis, Kansas.

General Background

Within the multi-billion dollar recreational vehicle industry, the majority
of SMC's products are positioned among the most expensive. SMC builds luxury
motor coaches - motorized, fully self-contained motorhomes with features such as
solid hardwood cabinetry, powerful diesel engines, and residential decor that
separate these coaches from the rest of the market. With retail prices ranging
from $70,000 to over $350,000, SMC's products occupy a high-end niche.

This select segment was targeted from Safari's founding and the Company
rapidly grew to become a leader in the luxury market. Mathew Perlot, SMC's
founder and Chief Executive Officer, considered this market particularly
attractive - anticipating the aging of the "baby boomers" and believing that
this maturing, affluent group would provide growing support for this particular
product. The initial product included coaches ranging from 30 to 34 feet and
retailed for about $100,000. Over the next several years Safari expanded its
product offerings to both higher and lower price points, to include coaches
ranging in length from 24 to 40 feet, and having retail prices ranging from
$70,000 to $230,000.

Magnum began production of chassis for Safari products in 1993 and has
since expanded operations to provide chassis for 5 model lines of Safari and
Beaver products. By manufacturing chassis specially designed for applications in
the recreational vehicle (RV) industry, the Company believes it has quality,
ride and cost advantages over competitors that do not build their own chassis.

SMC acquired the Beaver brand names and production facilities in 1994. At
that time the Beaver product ranged in retail price from $180,000 to $350,000.
The line has since been broadened to include a lower-priced coach, the Monterey.
This expansion of product offerings has enabled Beaver to expand distribution of
its products.

In 1996 the Company entered the Class C Recreational Vehicle market through
its acquisition of Honorbuilt Industries, Inc. in Minneapolis, Kansas. Class C
motor coaches are constructed on a chopped van chassis with the living quarters
being added by the manufacturer, including full bathrooms, separate bedrooms,
and full kitchens. With retail prices ranging from $44,000 to $50,000, SMC's El
Dorado brand Class C motor coaches occupy the middle range of the market. The
Company plans to continue its penetration into the upper range Class C market in
1997 through its operations at HCO and the introduction of a Safari brand Class
C motor coach.

Milestones in 1996

In 1996 the Company continued to expand in its core market -- high-line
motor coaches with retail prices typically over $100,000. Overall sales volume
increased by 35.5% from 1996, primarily due to sales of the Company's core
high-line products. Both the Beaver and Safari business units grew as a result
of an expanded dealer network developed during 1995 and 1996. The Company's
dealer network increased to 107 Class A dealer locations in 1996 from 86
locations in 1995. The Company's estimated market share of high-line retail
sales increased to 29.1% in 1996 from 24.5% in 1995.

The Company established a new subsidiary, EDA, in late 1995 to combine all
of its wiring, instrument sub-assembly, and electronic design and production at
a single site. This facilitated automated production and testing, which was not
possible when the work was performed at separate locations. Consolidating
functions at EDA has increased productivity, reduced warranty related problems,
and increased the use of state-of-the-art electronic design capabilities, which
should allow the Company to further differentiate its products from those of its
competitors. The start-up of EDA was completed during 1996 and the facility is
now fully operational.

CTI also became fully operational in 1996. The Company purchased CTI's
172,000 square foot facility in Hines, Oregon in January 1996, and CTI now
shares the facility with HCO. CTI was established to consolidate the Company's
fiberglass fabrication operations and to develop further plastic and composite
lamination capabilities. By the end of 1996, CTI was producing nearly all of the
fiberglass and laminated components used in the Company's motor coaches. The
Hines facility's start-up costs were significant in 1996, and the Company does
not expect to fully realize the facility's potential to improve efficiency and
product quality until 1997.

In June 1996 the Company entered the Class C recreational vehicle market
through its acquisition of the assets of Honorbuilt Industries, Inc. in
Minneapolis, Kansas. Honorbuilt designed and manufactured motor coaches under
the "El Dorado" brand name, which has existed for over 20 years. A new
subsidiary, SMC Midwest, Inc., was formed to operate the Honorbuilt facility.
The Company made capital improvements to the facility to meet the Company's
standards, and Midwest operated unprofitably for six months. In December 1996,
management concluded that the continued operating losses were unacceptable and
announced the planned exit and closure of the Midwest facility. Among the
unanticipated problems encountered at the facility was the Company's inability
to attract and retain a suitable labor force. This resulted in excessive labor
costs as well as higher material costs due to scrap and rework. In connection

with the planned closure and exit of the Midwest facility, the Company recorded
a pre-tax restructuring charge of $2.4 million in the fourth quarter of 1996.

The Company continued its expansion into the Class C recreational vehicle
market through operations at its HCO facility in Hines, Oregon. The Company
began development and prototype construction of a Safari brand Class C motor
coach at HCO late in 1996, but no sales were made during 1996. Existing chassis
and raw materials from the closed Midwest facility will be transferred to HCO.
The Company plans to proceed slowly with the development and manufacture of the
Safari and El Dorado Class C units at HCO to ensure acceptable quality and
productivity.

Industry Background

Recreational vehicles encompass a wide range of mobile housing options,
including folding camping trailers, van conversions, truck campers, fifth wheel
trailers, Class A, B and C motor coaches, and bus conversions. The retail prices
of these vehicles range from under $3,000 for the simplest folding camping
trailer to over $750,000 for the most expensive bus conversion. The Recreational
Vehicle Industry Association (RVIA) has reported that one in ten households in
the U.S. owns a recreational vehicle, resulting in a total ownership of
approximately nine million recreational vehicles.

Although retail sales of recreational vehicles and Class A motor coaches
have fluctuated over the last five years, retail sales of high-line motor
coaches have steadily increased during this period according to Statistical
Surveys, Inc. The following table shows (i) unit shipments to dealers of all
recreational vehicles, all motor coaches, and Class A motor coaches in the U.S.,
based on RVIA data, and (ii) unit retail sales of high-line motor coaches in the
U.S. and unit retail sales of Safari and Beaver coaches as a percentage of the
high-line market, based on data distributed by Statistical Surveys, Inc.

1992 1993 1994 1995 1996
(In thousands, except percentage data)

Unit shipments from manufacturers to dealers:
All recreational vehicles....................... 382.7 420.2 518.8* 475.2* 466.8*
All motor coaches............................... 47.0 51.4 58.1 52.8 55.3
Class A motor coaches........................... 27.3 31.9 37.3 33.0 36.5

Unit retail sales and market share data:
High-line motor coaches......................... 2.9 3.1 3.6 3.9 4.2
SMC percentage of high-line market:**........... 18.6% 19.4% 24.6% 24.5% 29.1%
===== ===== ===== ===== =====

<FN>
* RVIA modified its reporting to include van conversions in 1994. The impact
was to increase reported shipments by approximately 75,000 units.

** For all years includes sales for both Safari and Beaver motor coaches
(excluding Trek).
</FN>

SMC focuses primarily on the high-line segment of the Class A motor coach
market. Class A motor coaches incorporate kitchen, sleeping and bathroom
facilities built on a selfpowered chassis. The term "high-line motor coach" is
almost synonymous with "diesel pusher." For reasons of cooling and drive train
engineering almost all motor coaches are powered either by a gasoline engine
mounted in the front, or a diesel engine mounted in the rear. Diesel pushers are
more expensive, but can be built longer and are generally more powerful. Thus
most high-line coaches are diesel pushers, and nearly all high-line diesel
pushers retail for over $100,000.

All of SMC's products except the Trek and El Dorado models are high-line
coaches with retail prices over $100,000. Although the Trek shares many
high-line features of the Company's other models, its retail price ranges from
$70,000 to $90,000, and it is therefore excluded from market data compiled for
high-line products. The El Dorado is a Class C motor coach with retail prices
ranging from $44,000 to $50,000, which the Company began selling in 1996.

The high-line segment of the Class A RV market has seen consistent growth
since 1989, and in recent years this market has attracted many other companies.
Many "mainstream" RV builders, such as Fleetwood, Winnebago, and Coachmen have
developed offerings in this market. Meanwhile, some luxury builders, such as
Monaco Coach and Country Coach, have broadened their product lines. Some
companies are not surviving. Beaver Coaches was acquired by SMC in 1994 and
Holiday Rambler was purchased by Monaco Coach in early 1996. SMC Corporation
believes there will be further consolidation in this highly competitive
industry.

Several long-term trends favor the luxury segment of the RV industry. The
most significant indicator of future growth potential is the change in RV-owner
demographics. Households over fifty years old form the principal market for
luxury RVs. As the "baby-boom" generation ages, this demographic group is
expected to increase from approximately 50 million people today to 70 million by
the year 2005. The Company believes that on average this generation is expected
to retire earlier and have more discretionary income than preceding generations,
which is expected to provide a growing base for RV sales.

This trend is also reflected in the substantial increase in the number and
quality of facilities available for RV use and in companies serving the RV
market. The increased availability of accessories and facilities will continue
to make the RV lifestyle more attractive.

Three other factors also have a lesser impact on the RV industry:

Fuel Availability and Price Stability

Diesel fuel has been relatively abundant and inexpensive since the
beginning of the 1980's. The Company believes the needs of the transportation
industry for diesel fuel may contribute to continued availability and pricing
stability. With the exception of one Trek model, all of the Company's motor
coaches are powered by diesel engines. Consequently, an interruption in the
supply or a significant increase in the price of or tax on the sale of diesel
fuel on a regional or national basis could have a material adverse effect on the
Company's results of operations. Diesel fuel has from time to time been
difficult to obtain, and there is no assurance that the supply of diesel fuel
will continue uninterrupted, that rationing of diesel fuel will not be imposed
or that the price of or tax on diesel fuel will not significantly increase in
the future.

Low Interest Rates

Interest rate levels affect the cost of a motor coach for consumers who
finance their purchase and, more importantly, the cost of inventory maintenance
for motor coach dealers. Recent periods of relatively low interest rates have
facilitated dealer financing resulting in generally higher dealer stocking
levels.

Favorable Tax Treatment

U.S. tax laws generally allow individuals to deduct interest paid on loans
used to finance the purchase of either a first or second residence. The
definition of "residence" has been interpreted to include motor coaches of the
type manufactured by the Company. The Company

believes the tax deductibility of interest paid on loans used to purchase a
Class A motor coach increases the attractiveness of ownership. These laws,
however, have historically been amended frequently, and it is likely that
further amendments and additional tax laws will be applicable to financing the
purchase of motor coaches in the future. There is no assurance that favorable
tax treatment for financing the purchase of motor coaches will not be amended or
repealed.

Sales and Marketing

SMC has two distinctive brands that are marketed through separate dealer
networks. (Sales of Class C motor coaches to date have not been a significant
part of the Company's business.) The Beaver and Safari product are deliberately
kept differentiated to help increase total penetration of the high-line market.
The Beaver product is marketed as a "traditional" luxury RV. Its fiberglass wall
construction, air suspension, and "classic" RV styling places the Beaver models
near the mainstream of high-line coaches. The Safari product is avant-garde in
comparison. Its aluminum and stainless steel exterior are unique in this market,
and innovations such as the Velvet-Ride(TM) Suspension and power disk brakes
further separate the Safari from the rest of the luxury RV market. This
two-pronged attack on the luxury market has successfully expanded SMC's overall
penetration, with an estimated market share of 29%.

The Company markets its products through independent dealers throughout the
United States and Canada. Few dealers carry both the Safari and Beaver brand
products. SMC has made dealer development a priority, because it believes that
an expanded dealer base results in greater retail sales exposure and ultimately
more retail sales volume. As of December 31, 1996, total Class A dealer
locations increased to 107, up 24% from 1995.

The Company grants exclusive distribution rights to a dealer within a
geographic region. Dealers are selected based on location, financial stability,
marketing expertise, sales history, integrity and repair and service capability.
The Company provides a variety of support services to its dealers, including
promptly supplied product literature, display materials and space rental
subsidies for trade shows and exhibitions and a dealer newsletter with updates
on product development and other product information. The Company offers
training and technical support to dealer salespeople, including a plant tour
video and a product handbook, and Company representatives visit dealers on a
regular basis for sales training and assistance.

The Company focuses its advertising on consumer publications which
emphasize the RV lifestyle. In 1995, the Company consolidated all of its media
production in-house because it was cost-effective to do so. In-house media
development has also added flexibility and responsiveness to the process, which
frequently involves "rush" jobs to take advantage of market opportunities.

A key part of the Company's affinity marketing effort is the sponsorship
and active promotion of Safari International and the Beaver Ambassador Club,
both of which are active owners clubs for owners of Safari and Beaver products,
respectively. Members of these groups socialize, discuss common experiences and
enjoy motor coaching activities together, thus helping to build customer loyalty
and enthusiasm. The Company publishes quarterly newsletters for members of the
owners' clubs, as well as a quarterly magazine, the "Rendezvous," which is
circulated to owners, prospective purchasers, suppliers, dealers and employees.
In addition, the

Company annually sponsors "homecoming" rallies at the Safari and Beaver
factories, open to all Safari and Beaver coach owners.

Dealers typically finance their inventory through revolving credit
facilities established with asset-based lending institutions, including
specialized finance companies and banks. It is industry practice for these
"floor plan" financiers to require motor coach manufacturers to repurchase motor
coaches previously sold to the dealer if the dealer defaults on its financing
agreements or if the lender otherwise has a reasonable basis to be concerned
about the ability of the dealer to meet its obligations to the lender. This
agreement typically applies for a period of 12 to 18 months from the date of the
dealer's purchase from the manufacturer. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

The Company takes several steps to reduce its exposure to coach repurchase
risk. A dealer is typically required to make periodic payments of principal,
referred to as "curtailment," to the flooring financing institution commencing
in the seventh month after purchase of the coach. A coach manufacturer may waive
these curtailment payments at the request of a dealer, but the Company generally
will not do so and, in any event, will do so only if the dealer owes to the
flooring institution no more than 90% of the wholesale price of the coach. The
Company also monitors the inventory levels and financial circumstances of its
dealers through reports generated by the flooring institutions and through
frequent contact by its sales personnel with the dealers. If a dealer is
experiencing undue difficulty in selling the Company's coaches, the Company will
often work with that dealer to voluntarily move the coaches to a dealer that can
sell additional inventory. The Company believes, however, that its most
fundamental protection against significant loss due to repurchase obligations is
the production and marketing of motor coaches that are sufficiently popular to
enable the Company quickly to resell, at satisfactory prices, any coaches it may
be required to repurchase. For 1995 and 1996 the Company made no repurchase
payments under flooring arrangements.

For 1996, sales of Safari coaches to Guaranty RV Center, one of the largest
motor coach dealers in the U.S. and located just a few miles from the Company's
headquarters, accounted for approximately 12% of net sales. Romania RV, also
located just a few miles from the Company's headquarters, accounted for
approximately 10% of 1996 net sales. After December 31, 1996, Romania RV
resigned as a dealer of the Company's products. When Romania RV resigned as a
dealer, the Company initiated a new dealer relationship with Destinations RV,
Inc. ("Destinations"). Destinations purchased all of the motor coaches that the
Company repurchased from Romania for the Company's repurchase price. See Note 16
of Notes to Consolidated Financial Statements. The Company does not believe the
change in dealer relationships from Romania RV to Destinations will have a
material adverse effect on the Company's future financial results.

Product Information

Beaver

The Beaver product line received a great deal of the management's attention
in 1995, and every model was subject to a major development project. In 1996 the
Company benefited from this attention in the form of increased product sales on
all three of its Beaver product lines. The Monterey was introduced in the summer
of 1995 to expand the Beaver line, and its unit sales increased 179% to 324
units in 1996.

Marquis

The Marquis is positioned at the top of the Beaver product line. With
retail prices of over $300,000, it is one of the most expensive and luxurious
motor coaches in production today. The Marquis has traditionally been the most
visible and best recognized of the Beaver models. The Marquis motor coach has
been further upgraded to its current ultra-luxury position in 1996. As part of
this strategy, production of the Marquis was slowed and a craftsman-intensive
team production program was developed to produce each vehicle. New cabinet
technologies were introduced, allowing the use of exotic veneers and richer
lacquers. The Marquis is now positioned as a limited production, prestige
product with an average production rate of approximately 1.5 units per week.

Patriot

In July 1995, SMC introduced the 1996 Patriot on the all-new Magnum
B-Series chassis. This new Magnum chassis replaced a chassis from an outside
chassis vendor used since the Patriot model was introduced in 1992. Sales in
1996 were 32% over 1995. The Patriot model has a retail price ranging from
$200,000 to $250,000.

Monterey

The Monterey is the first all-new product in the Beaver line since the
acquisition in 1994. Retailing from $135,000 to $160,000, the Monterey provides
Beaver with a product priced for broader appeal. The Monterey uses chassis and
floor plans that are similar to the Safari Sahara, but differs considerably from
the Safari product in styling options. In addition, an air-ride option has been
developed to provide the traditional RV owner an alternative which is typically
seen in high-line motor coaches.

Safari

Safari saw lower sales growth than Beaver in 1996. The product had a major
redesign completed in 1994, and redesign activities are typically performed
every three to four years.

Continental

The Continental is the flagship product from Safari. Its design and
technology features include disk brakes, B.F. Goodrich's Torsilastic suspension
system, and Magnum Intellidrive computerized monitoring display, all as standard
equipment. Sales of the Continental increased 5% in 1996 over 1995. Newly
updated exterior and interior styling of the Continental added dramatic flair to
the product. The Continental retails from $200,000 to $240,000.

Serengeti and Ivory

As the oldest of the Safari brand names, the Serengeti has been the core
Safari product since its introduction in 1988. The Serengeti retails from
$150,000 to $190,000, and its sibling, the Ivory model, occupies the higher end
of that price range. This product is the largest selling high-line coach model
in the industry.

Sahara

The Sahara model was introduced in 1993 and then repositioned in 1994 to
stand as a value-oriented luxury coach. The Sahara model retails from $130,000
to $150,000. Sahara unit sales increased 1% in 1996. The product provides many
of the features of the Serengeti and Ivory at a lower cost to the customer.

Trek

The Trek is constructed on a Chevrolet chassis. As the lowest priced SMC
motor coach, it also has the lowest profit margin and is intended to acquaint
new customers with SMC's products and attract them to the RV lifestyle. Trek
sales increased 43% in 1996 compared to 1995.

El Dorado

In 1996 SMC Corporation acquired certain assets of Honorbuilt, manufacturer
of the El Dorado brand Class C type motor coach. The Company believes expansion
of its product offerings into the Class C market provides opportunities to
increase its exposure to younger buyers and to develop affinity relationships
with customers who will eventually trade up to the Company's high-line products.

After the acquisition of the Honorbuilt assets, the Company concluded that
the Kansas facility could not be made to produce products at a satisfactory
profit and in December 1996 announced its intent to close the facility. The
Company intends to resume production of the El Dorado model at its Harney County
Operations facility in 1997.

Backlog

Motor coach dealers, particularly those with a relatively large sales
volume, from time to time indicate to motor coach manufacturers the number of
coaches they expect to purchase in the following months. While the Company
regularly receives such indications, the Company includes in its backlog only
purchase orders it has received that are sufficiently complete as to
specifications (color, floor plan, options, etc.) to permit the Company to
schedule production of the coach. Consequently, backlog generally represents
orders for coaches scheduled to be manufactured and shipped in the following 45
to 60 days. The Company's backlog at December 31, 1996 was $7.9 million,
compared to backlog of $14.6 million at December 31, 1995. Backlog can fluctuate
substantially as the result of the receipt of purchase orders in connection with
various major motor coach shows and rallies, which are not held at even
intervals throughout the year. Consequently, and because orders are generally
cancelable without penalty, the amount of backlog at any date is not necessarily
indicative of sales in future periods. To date, order cancellations have not
been material.

Customer Service

The Company believes one of the most important elements in the success of
its business is understanding its customers and their preferences and providing
excellent customer service. Customer service is important because many of the
Company's customers are repeat purchasers and because a high level of service is
expected by purchasers of high quality coaches. In addition, because motor coach
purchasers tend to communicate freely their views on the quality of various
coaches and business reputations of motor coach manufacturers, the quality of
post-sale customer service provided by a motor coach manufacturer is a key
factor in establishing a manufacturer's reputation among this group.

The Company offers a one-year or 12,000-mile warranty, whichever occurs
first, on all coaches. Customers have the option to purchase extended
warranties, written by others, from Company dealers. The Company's warranty
covers all manufacturing-related problems and parts and system failures,
regardless of whether the repair is made at a Company service facility or by one
of the Company's dealers or authorized service centers. In addition to the
Company's warranty, the chassis, drive train, engine and transmission are
covered by separate warranties offered by the manufacturers of those components,
or by the Company on the chassis manufactured by its Magnum Manufacturing
subsidiary. The Company's warranty on the Magnum chassis and drive train is for
three years or 36,000 miles, whichever occurs first. Appliances in the coaches
are covered by the warranties of manufacturers of those items.

The Company maintains toll-free telephone lines for customers to call with
repair or operating questions or problems. Although many questions can be
resolved by telephone, the Company often refers the customer to a local dealer
or repair facility for additional assistance. The Company also opened a new
24-bay service center in Harrisburg in November 1995 to better serve its
customers.

Manufacturing

The Company uses "lean production" techniques in its coach manufacturing
process. These techniques emphasize teamwork, include significant input from
worker teams and employ just-in-time inventory controls to improve product
quality and manufacturing efficiencies.

The Company believes its coach manufacturing operations are vertically
integrated to a substantial degree compared to most other high-line motor coach
builders. Components of the Company's motor coaches produced by the Company
include chassis constructed by Magnum Manufacturing, Inc., the shell or "house"
portion of the coach, fiberglass, countertops, hardwood cabinetry and portions
of the interior upholstery. The Company believes this in-house production of
certain components results in cost savings to the Company and greater control
over quality and inventory.

The construction of each motor coach begins with the preparation of the
chassis on which the superstructure of the "house" is built. The floors, walls
and roof of the motor coach "house" are built off-line. The coach's front and
rear caps are each single pieces molded from fiberglass resins that provide
favorable strength-to-weight ratios. The Company believes the lightweight
construction of its motor coaches combined with the diesel engines used in
nearly all models add significantly to the performance of its motor coaches.

The Company purchases raw materials, parts, subcomponents, electric systems
and appliances from approximately 1,000 suppliers. These items are either placed
directly into the coach or are incorporated into subassemblies by the Company.
All components, subassemblies and finished products are inspected for compliance
with the Company's specifications. The Company attempts to minimize its
inventory costs by ordering inventory only on an as-needed, or just-in-time,
basis. Some supplies, such as fiberglass, are ordered and delivered to the
Company's plant on a daily basis, while other items, particularly engines and
transmissions, are ordered as much as four months in advance of the expected use
date. While the Company generally commences construction on a coach only after
receipt of an order from a dealer, it must nonetheless order certain parts or
components, some of which represent a significant expenditure, in advance of
orders.

Certain of the components and subassemblies included in the Company's motor
coaches are obtained from a single or limited number of suppliers. Transmissions
of the type used in the Company's coaches and those of most of its competitors
are manufactured solely by Allison. Although the Company believes it would be
able to develop alternate sources for any of the components used in its
products, significant delays or interruptions in the delivery of certain
components from suppliers or difficulties or delays in shifting to new suppliers
could have a material adverse effect on the Company.

Upon completion of the manufacturing process, each coach undergoes a
thorough inspection and test drive, and problems discovered are corrected prior
to shipment.

Competition

The market for manufacture of mid- to high-line motor coaches is very
competitive, and the Company has significant competition in each of its product
lines. Other manufacturers of high-line coaches include Blue Bird Corporation,
Country Coach, Inc. (acquired in late 1996 by National RV Holdings, Inc.),
Fleetwood Enterprises, Inc., Foretravel Inc., Gulf Stream Coach, Inc., Hawkins
Motor Coach, Monaco Coach Corporation, and Holiday Rambler Corporation (acquired
in early 1996 by Monaco Coach Corporation). The Company competes with a number
of other manufacturers, some of which are much larger than the Company and have
greater financial and other resources than the Company. Certain of these larger
manufacturers have also identified value-oriented high-line motor coaches as an
attractive market and have recently developed coaches more directly competitive
with the Company's coaches.

The Company believes the principal competitive factors in the manufacture
and sale of high-line motor coaches are product quality and design, price,
customer service, performance and reliability. The Company believes it is
competitive with respect to each of these factors and believes its customer
service and the performance and reliability of its products compare favorably to
those of its competitors.

Product Design; Patents

The Company strives to be a design innovator in motor coach floor plans,
interior features, coach amenities and mechanical systems and believes it is
generally recognized in the industry as a design leader. Among the innovations
introduced by the Company are the first use of a side aisle floor plan, the
Electro-Majic bed, a rear-mounted cooling system, 110 volt residential-style
lighting and the successful use of Torsilastic suspension on a high-line motor
coach. The Company updates the fabrics, carpets, fixtures and floor plans of its
coaches each year and plans for a complete redesign of each model every three to
four years.

The Company began development of its Electro-Majic bed in 1988 and in 1992
obtained a patent for this electric powered bed system. Using a hidden electric
motor, the system uses small gear tracks attached to the living room walls to
lower a double-size bed from the ceiling down to a desired sleeping level. The
Electro-Majic bed is used in most Trek models. In two of the Company's
best-selling Trek floor plans, the Electro-Majic bed is the primary sleeping
space, which allows the entire coach to be used for living, kitchen and bathroom
areas. The Company believes there is no comparable motor coach floor plan on the
market.

The Company designed and patented an all new air ride suspension system in
1996 for use in its Beaver Patriot and Marquis models. The suspensions system is
designed to optimize the stability of the moving coach, while at the same time
maximizing ride comfort.

Government Regulation

Motor coach manufacturers, such as the Company, are subject to federal,
state, and local regulations governing the manufacture and sale of their
products, including the provisions of the Motor Vehicle Act. The Motor Vehicle
Act provides for, among other things, the recall for

modification, repair or replacement of vehicles that contain defects which are
potentially dangerous, or which fail to comply with applicable standards. The
Company's motor coaches also may be subject to recall by chassis manufacturers
in the event the chassis fail to comply with applicable standards. The Company
relies upon certifications from its engine suppliers and chassis manufacturers
that the Company's motor coaches comply with all applicable emission control
standards. Although motor coaches manufactured by the Company have been
voluntarily recalled for repair from time to time in the past, the Company has
not incurred significant expenses in connection with recalls. Because the
Company sells its products in Canada, it is also governed by similar laws and
regulations issued by the Canadian government. There is no assurance that future
recalls of the Company's products will not occur or that any such recalls will
not adversely affect the Company's operations or financial condition.

The Company is also subject to regulations promulgated by the Occupational
Safety and Health Administration ("OSHA") concerning workplace health and
safety. The Company's plants are periodically inspected by OSHA.

The business and operations of the Company are affected by federal, state,
and local environmental regulations relating to air and water pollution,
hazardous wastes, and noise. These regulations control the Company's use,
storage, and disposal of paints, solvents, stains, lacquers and other wastes.
The regulations also restrict the Company's air contaminant emissions and waste
water discharges and prohibit noise in excess of certain levels.

The Company holds a federal operating permit as required by Title V of the
federal Clean Air Act Amendments of 1990 (a "Title V Permit") for its Safari
motor coach manufacturing facility. The Beaver facility has applied for a Title
V permit, and is currently operating under a consent agreement between the
Company and the Oregon Department of Environmental Quality. The CTI facility
holds an air contaminant discharge permit ("ACDP"), issued by the Oregon
Department of Environmental Quality and has applied for a Title V permit. The
HCO facility holds an ACDP and will apply for a Title V permit in 1997. The
Company believes it will be issued the permits necessary to allow it to operate
these facilities. The ACDPs and the Title V permits, however, are issued for
operations at specified levels, and any increase in emissions beyond those
levels, including increases resulting from expanded operations or process
modifications, will require permit amendments.

To date, the Company has not been required to make significant expenditures
for environmental compliance. The promulgation of additional safety or
environmental regulations, or the need to acquire permit amendments, in the
future, however, could require the Company to incur additional expense which
could adversely impact the Company's results of operations. There is no
assurance that the Company will not be required to make significant expenditures
in the future with respect to such safety or environmental regulations.

The Company believes it is in material compliance with applicable laws
relating to the manufacture and operation of motor coaches and operations of its
manufacturing facilities. There is no assurance, however, that future
governmental regulations will not be more stringent, and that compliance with
those regulations will not require the Company to incur additional cost.

Employees

At December 31, 1996 the Company had 1,465 full-time employees. None of the
Company's employees is represented by a labor union, and the Company has never
experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations.

ITEM 2. PROPERTIES

The Company's corporate headquarters and Safari and Magnum manufacturing
facilities are located in Harrisburg, Oregon on property owned by the Company.
The corporate headquarters and Safari manufacturing facility consists of
buildings totaling 163,000 square feet on 16 acres, with 11,300 square feet of
office space and 151,700 square feet of manufacturing space. The Magnum
manufacturing facility consists of four buildings with a combined size of
approximately 93,000 square feet on 12 acres. The Company's Beaver manufacturing
facility is located in Bend, Oregon and consists of four buildings totaling
34,600 square feet on 3.5 acres that are owned by the Company, and an additional
90,100 square feet on 7.8 acres, that are leased on a long-term basis. In
January 1996, the Company purchased a 172,000 square foot building on 16 acres
in Hines, Oregon to meet future production requirements. The Company believes
its facilities are adequate to meet its needs for the foreseeable future. The
Company leases five buildings totaling 120,000 square feet on 16 acres at its
Midwest facilities in Minneapolis, Kansas.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved from time to time in litigation arising out of its
operations in the normal course of business, including claims under the "lemon
laws" of various states. The Company believes such legal proceedings, if
determined adversely to the Company, would not have a material impact on the
Company.

As a manufacturer and seller of motor coaches, the Company is subject to a
risk of loss resulting from claims that its products or components of its
products caused or contributed to damage or injury. The Company believes, at
current premium rates, that product liability insurance in amounts that would be
meaningful is not cost effective and it therefore maintains no insurance
covering product liability exposure. In the past, the Company has not incurred
material expenses for product liability; however, such liabilities, if incurred
in the future, could have a material adverse effect on the Company's operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the
executive officers of the Company as of March 18, 1997.

Name Age Position
---- --- --------

Mathew M. Perlot 60 President, Chief Executive Officer and
Chairman of the Board

Jay L. Howard 44 Executive Vice President - Manufacturing and
Chief Operating Officer

Paul M. Brown, Jr. 43 Senior Vice President - Finance and Chief
Financial Officer

L. Michael Cary 54 Vice President of SMC Corporation and
General Manager - Safari Motor Coaches, Inc.

Gordon R. Perlot 34 Vice President of SMC Corporation and
General Manager - Harney County Operations,
Inc.

Carroll E. White 50 Vice President of SMC Corporation and
General Manager - Beaver Motor Coaches, Inc.

Mathew M. Perlot co-founded the Company in November 1986 and has served as
President, Chief Executive Officer and Chairman of the Board since that time.
Mr. Perlot served as Director of Sales and Marketing for Monaco Coach
Corporation from 1982 to 1985 and for Beaver Coaches, Inc. from 1985 to 1987.
Mr. Perlot also served as President of RV Marketing, Inc. from 1980 to 1987. Mr.
Perlot is married to Connie M. Perlot, a director and Secretary- Treasurer of
the Company, and is the father of Gordon R. Perlot.

Paul M. Brown, Jr. joined the Company as Chief Financial Officer in October
1993. From November 1990 to September 1993, Mr. Brown served as Vice President -
Finance of Riedel International, Inc., an international construction and
dredging business. From October 1987 to October 1990, Mr. Brown was Director of
Finance for La Valley Industries, Inc., a manufacturer of equipment for the pulp
and paper industry. Mr. Brown is a CPA and holds a B.S. from Portland State
University.

L. Michael Cary joined the Company as Controller in August 1988. He became
Vice President - Operations and Chief Operating Officer in January of 1989 and
now serves as General Manager of Safari Motor Coaches, Inc. From 1976 to 1988,
Mr. Cary served as Controller of Nicolai Company, a door and wood products
manufacturing firm. Mr. Cary holds a B.A. degree in business administration from
the University of Portland and an M.S. degree in logistics management from the
Air Force Institute of Technology.

Jay L. Howard joined the Company as Corporate Vice President of
Manufacturing in December 1995. From 1979 to 1995 Mr. Howard served as Vice
President of Manufacturing for Dazey Corporation, an international manufacturer
of personal care and kitchen appliances. Mr. Howard is a Certified Manufacturing
Engineer by S.M.E. with additional certifications from A.P.I.C.S. and A.S.Q.C.

Gordon R. Perlot joined the Company as a production supervisor in October
1988 and became manager of mechanical operations in 1989. In 1992 Mr. Perlot
directed the design and development of the Magnum chassis and in 1993 became
plant manager of Magnum Manufacturing, Inc. In 1996, Mr. Perlot became General
Manager of the newly created subsidiary, Harney County Operations, Inc. Mr.
Perlot is the son of Mathew M. Perlot.

Carroll E. White joined the Company as Production Manager in March 1995. He
became General Manager of Beaver Motor Coaches, Inc. and Vice President of SMC
Corporation in March 1996. From 1977 until 1993 he was employed by Foretravel,
Inc., a luxury motor coach manufacturer. While employed by Foretravel, he served
as Plant Manager, National Sales Manager, and from 1985 until 1993, as Director
of Marketing and Sales. He also served as Vice President and was a member of
Foretravel's Board of Directors. Mr. White holds a B.S. degree in Agri-Business
from Stephen F. Austin State University.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS

The Company's Common Stock has been traded on the Nasdaq National Market
System since January 20, 1995 under the symbol SMCC. Information with respect to
the high and low sales prices for the Common Stock is set forth on page F-21.

At March 18, 1997 there were 70 shareholders of record of the Company's
Common Stock and 6,563,064 shares were outstanding. The Company believes the
number of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock is
held of record in broker "street names" for the benefit of individual investors.

Since incorporation and through December 31, 1994, the Company was treated
for state and federal income tax purposes as an S corporation. As a result, the
Company's earnings from inception through December 31, 1994 were taxed directly
to the Company shareholders rather than to the Company. The Company did not pay
any dividends in 1995 or 1996. The Company intends to retain future earnings for
use in its business and therefore does not anticipate paying cash dividends in
the foreseeable future. Certain of the Company's loan agreements require
approval by the lender to pay dividends and the agreement covering the
acquisition of Beaver prohibits the payment of dividends if the Company is in
default under the terms of the acquisition agreement.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended December 31, 1996 have been derived
from the audited financial statements of the Company. This data should be read
in conjunction with the financial statements, related notes and other financial
information included elsewhere in this report.

Year Ended December 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share and other operating data)

Statement of Income Data:
Sales(1).......................... $ 51,468 $ 60,583 $ 124,247 $ 148,189 $ 200,835
Cost of sales..................... 44,117 52,679 108,833 128,846 174,457
--------- --------- --------- ---------- ----------
Gross profit...................... 7,351 7,904 15,414 19,343 26,378
Selling, general and administrative
expenses....................... 4,132 4,591 8,429 11,702 17,601
Restructuring expense............. -- -- -- -- 2,392
--------- --------- --------- ---------- ----------
Income from operations............ 3,219 3,313 6,985 7,641 6,385
Other expense..................... 297 258 212 774 418
--------- --------- --------- ---------- ----------
Income before provision for
income taxes................... 2,922 3,055 6,773 6,867 5,967
Provision for income taxes(2)..... -- -- -- 1,926 2,384
--------- --------- --------- ---------- ----------
Net income........................ $ 2,922 $ 3,055 $ 6,773 $ 4,941 $ 3,583
========= ========= ========= ========== ==========
Net income per share.............. N/A $ .53 $ 1.18 $ .74 $ .54
========= ========= ========= ========== ==========
Weighted average shares outstanding N/A 5,763 5,763 6,647 6,661
========= ========= ========= ========== ==========

Pro Forma Statement of
Income Data:
Income before provision for
income taxes................... $ 2,922 $ 3,055 $ 6,773 $ 6,867 N/A
Pro forma provision for income
taxes (2)...................... 1,132 1,176 2,614 2,612 N/A
--------- --------- --------- ----------
Pro forma net income (2).......... $ 1,790 $ 1,879 $ 4,159 $ 4,255 N/A
========= ========= ========= ==========
Pro forma net income per
share (2)(3)................... $ .33 $ .72 $ .64 N/A
========= ========= ==========
Pro forma common shares (3)....... 5,763 5,763 6,647 N/A
========= ========= ==========

Other Operating Data:
Coaches sold...................... 638 747 1,199 1,405 1,859

December 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)

Balance Sheet Data:
Current assets.................... $ 7,588 $ 10,083 $ 20,093 $ 26,109 $ 39,740
Property and equipment............ 2,876 5,060 8,911 12,061 19,584
Total assets...................... 10,464 15,143 32,504 41,198 61,920
Current liabilities............... 6,897 9,671 25,222 18,254 34,225
Long-term debt.................... 383 1,194 4,169 4,676 6,626
Shareholders' equity.............. $ 3,184 $ 4,278 $ 2,263 $ 17,411 $ 20,994
- -----------------

<FN>

(1) Historical sales for the years ended December 31, 1993 and 1994 include
aggregate sales of $1.5 million (for the period from November 8, 1993
through December 31, 1993) and $16.3 million (for the period from January
1, 1994 through May 31, 1994), respectively, that represent sales by the
Company of Beaver products prior to the acquisition. These coaches and
trailers were purchased by the Company from Beaver at Beaver's standard
wholesale prices to dealers, less a 2.5% discount in consideration for the
agreement by the Company to satisfy warranty obligations for those
products. The Company's results of operations from June 1, 1994 include
operating results of the subsidiary that acquired the Beaver assets. See
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."

(2) The Company was an S corporation and accordingly was not subject to federal
and state income taxes prior to 1995. Pro forma net income reflects federal
and state income taxes as if the Company had been a C corporation, based on
the effective tax rates that would have been in effect during those
periods. Effective January 1, 1995 the Company elected C corporation tax
status. In accordance with SFAS No. 109, "Accounting For Income Taxes," the
Company recorded a transition adjustment to establish a deferred asset for
prepaid taxes, reducing the Company's reported tax provision by $686,000
for 1995. The 1995 pro forma provision for income taxes reflects the
provision for income taxes as if this transition adjustment were excluded.

(3) Shares used in pro forma computations of income per share include the
estimated number of shares required to be sold by the Company in its
initial public offering to make final S corporation distributions to the
Company's shareholders.
</FN>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

SMC Corporation designs, manufactures, and markets predominantly Class A
motor coaches. The Company's Safari and Beaver motor coaches include six
high-line models, with suggested retail prices ranging from $125,000 to over
$350,000, and one model with suggested retail prices of $70,000 to $90,000. In
1996 the Company entered the Class C market with the El Dorado motor coach,
which has a suggested retail price ranging from $44,000 to $50,000

The Company shipped its first motor coach in July 1987. The Company's 1987
sales totaled $3.7 million, and the Company has experienced sales increases in
each succeeding year. Sales through 1990 were solely of the Company's Safari
model, a high-line motor coach priced as a more affordable alternative to custom
coaches. In late 1990 the Company introduced the Trek model, which was designed
to attract buyers in the mid-line price range of the market but shares many
high-line features with the Company's other models. To expand its presence in
the higher end of the motor coach market, the Company introduced the Continental
model in March 1992. These models take advantage of the cost and quality
benefits derived from production-line manufacturing techniques, while satisfying
the expectations of sophisticated motor coach purchasers. In June 1993 Magnum
Manufacturing, Inc. commenced operations to build chassis for Safari motor
coaches. The manufacture of its own chassis, uncommon in the high-line motor
coach industry, reduces the Company's production costs, improves quality control
and allows the Company to respond directly and effectively to customer service
issues on both the chassis and the coach body. In 1995 Magnum commenced
manufacturing of chassis for Beaver's Patriot and Monterey products.

Effective June 1, 1994 the Company acquired substantially all of the
operating assets of Beaver, a manufacturer of luxury Class A motor coaches,
through a bankruptcy proceeding following several years of Beaver operating
losses. From November 8, 1993 through May 31, 1994, the Company provided
executive management services to Beaver pursuant to an arrangement approved by
the Bankruptcy Court. Beginning in November 1993 the Company's results of
operations reflect its sale to Beaver dealers of coaches and trailers purchased
from Beaver at its wholesale prices, less a 2.5% discount in consideration for
the agreement by the Company to satisfy warranty obligations with respect to
those products. Because the discount was equal to the warranty accrual with
respect to such sales, the Company realized no gross profit on its sales of
Beaver products prior to the acquisition. These sales represented $1.5 million
and $16.3 million of the Company's sales for 1993 and 1994, respectively. The
Company's results of operations from June 1, 1994 include operating results of
the subsidiary that acquired the Beaver assets.

The acquisition of Beaver enabled the Company to expand its product
offerings with Beaver's Patriot and Marquis lines, which have significantly
different characteristics from Safari products. Positioned as a more
"traditional" product, Beaver's Patriot and Marquis offer air suspension and
brake systems, have more conservative floor plans and decor and have a
reputation for extremely high quality craftsmanship. In 1995 Beaver introduced
the Monterey, a

lower priced motor coach with a retail price ranging from $135,000 to $160,000.
This new product also launched a major dealer expansion effort for Beaver
products which expanded Beaver's dealer base from 14 sites in 1994 to 44 sites
in 1996.

Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
Industries, Inc., a manufacturer of the Class C motor coach model El Dorado in
Minneapolis, Kansas. The Company operated the facility for six months at an
operating loss. In December 1996, the Company's management decided to
discontinue production at the Kansas facility to reduce unacceptable operating
losses.

Accounting for the Acquisition of Assets of Beaver Coaches, Inc.

Effective June 1, 1994 the Company acquired substantially all of the
operating assets of Beaver and assumed certain of its liabilities in accordance
with a Plan of Reorganization of Beaver under the U.S. Bankruptcy Code. The
Company paid cash of $3.9 million, forgave $3.1 million of accounts receivable
from Beaver and incurred acquisition related costs of $400,000. In addition, the
Company agreed to pay a royalty equal to the greater of $1.6 million or 1% of
gross sales of Beaver products for three years. Goodwill of $2.6 million was
recorded in connection with the acquisition and is being amortized over 15 years
on a straight-line basis. See Note 9 of Notes to Consolidated Financial
Statements.

Accounting for the Acquisition of Assets of Honorbuilt Industries, Inc.

Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
for cash. Honorbuilt was primarily engaged in the design, manufacture,
distribution and sale of Class C motor coaches (under the name brand of El
Dorado) from its facility in Minneapolis, Kansas. The Company formed a new
subsidiary, Midwest, to operate the facility.

The acquisition was accounted for by the purchase method. Accordingly, the
purchase price of $1.4 million was allocated to the assets acquired based on
their estimated values as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of assets acquired totaled
$561,000, which was recorded as goodwill and was initially amortized on the
straight-line basis over 15 years. See Note 10 of Notes to Consolidated
Financial Statements

Results of Operations

The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales, and the
percentage change in such data from the comparable prior period.

Percentage change in
Year ended December 31, dollar amounts from
------------------------------------ --------------------
1994 1995
1994 1995 1996 to 1995 to 1996
---- ---- ---- ------- -------

Sales...................... 100.0% 100.0% 100.0% 19.3% 35.5%
Cost of sales.............. 87.6 87.0 86.9 18.4 35.4
-------- -------- -------
Gross profit............... 12.4 13.0 13.1 25.5 36.4
Selling, general and
administrative expenses... 6.8 7.9 8.7 38.8 50.4
Restructuring expense...... -- -- 1.2 N/A N/A
-------- -------- -------
Income from operations..... 5.6 5.1 3.2 9.4 (16.4)
Interest expense........... 0.3 0.6 0.3 119.3 (24.7)
Other (income) and
expense................... (0.1) (0.1) (0.1) (37.3) 96.3
-------- -------- -------

Pretax income.............. 5.4 4.6 3.0 1.4 (13.1)
Provision for income taxes. -- 1.3 1.2 N/A 23.8
-------- -------- -------
Net income................. 5.4 3.3 1.8 (27.1) (27.5)
======== ======== =======

Pretax income.............. 5.4 4.6 N/A 1.4 N/A
Pro forma provision for
Income taxes............. 2.1 1.8 N/A 0.0 N/A
-------- --------
Pro forma net income....... 3.3% 2.8% N/A 2.3% N/A
======== ========

1996 Compared to 1995

Sales increased by $52.6 million (35.5%) to $200.8 million for 1996 from
$148.2 million for 1995. The increase was attributable primarily to a
significant increase in sales of Beaver coaches, which increased by $36.9
million (92.2%) compared to 1995, sales of Safari coaches, which increased by
$9.1 million (8.4%) compared to 1995, and sales of El Dorado coaches produced by
the Company's newly-acquired Midwest facility, which totaled $3.7 million.
Increases in parts and service sales of approximately $2.9 million made up the
rest of the increase in sales from 1995.

Beaver unit coach sales increased by 271 units (91.6%) to 567 units in 1996
from 296 units in 1995. Safari unit coach sales increased by 96 units (8.7%) to
1,205 units in 1996 from 1,109 in 1995. The Company continues to monitor the
performance of each of its model lines.

Gross profit increased $7.0 million (36.4%) and increased slightly as a
percentage of sales to 13.1% from 13.0% in 1995. A number of offsetting factors
led to relatively stable overall gross margin performance. The significant
increase in Beaver coach sales improved gross margin percentage. Beaver
products, which sell at higher average prices than the Safari models,

became a larger portion of the Company's overall sales mix in 1996. The
Company's products generally achieve greater gross margin on higher-priced
coaches, and the significant increase in Beaver sales contributed to a greater
overall margin performance. Conversely, operating results of the Company's
start-up of Midwest, which produces and sells the El Dorado Class C coaches,
reduced gross margin by $1.0 million (0.5%). Midwest's inability to achieve
profitable performance led to the Company's decision to terminate operations at
the Minneapolis, Kansas-based facility. Higher warranty costs in 1996 compared
to 1995 also had a negative effect on gross margin.

Selling, general, and administrative expenses increased by $5.9 million
(50.4%) to $17.6 million in 1996 from $11.7 million in 1995. Selling, general,
and administrative costs were 8.7% and 7.9% of sales for 1996 and 1995,
respectively. Selling, general, and administrative costs, in percentage terms,
increased more than sales in 1996 due to higher legal and accounting costs
associated with the Company's transition to public company status, increases in
staffing required to handle increased sales volume, the commencement of
operations at the Company's newly formed subsidiaries (EDA, CTI, Midwest, and
HCO), and the Company's customer service center. Additionally, travel costs were
significantly higher in 1996 because employees headquartered in Oregon were
dispatched to assist with the start-up of the Midwest facility, and also needed
to travel between the newly established subsidiaries in Oregon.

The Company recorded a pre-tax restructuring expense of $2.4 million in the
fourth quarter of 1996 ($1.4 million after tax) related to the planned exit and
closure of the operations at Midwest in an effort to reduce excessive costs and
eliminate the operating losses associated with Midwest. The major components of
the 1996 restructuring charge included the write down of goodwill and
organizational costs recorded at the time of the acquisition (approximately
$700,000), the reserve for impairment of certain property, plant, and equipment
(approximately $930,000), and other incremental costs of closing the facility
(approximately $800,000).

The combined effect of relatively unchanged gross margin, increased
selling, general, and administrative expenses, and the Midwest restructuring
charge was to decrease operating income by $1.2 million (16.4%) to $6.4 million
from $7.6 million in 1995. Operating income was 3.2% of sales in 1996 compared
to 5.2% of sales in 1995. If the restructuring charge and operating loss of
Midwest during 1996 were eliminated, operating income would have been 5.2% of
sales in 1996, the same as in 1995.

Interest expense decreased 24.7% to $685,000 in 1996 from $910,000 in 1995.
The decrease was due to lower borrowings on the Company's revolving line of
credit. Positive cash flows created by profits from operations and reductions in
inventory levels during the first half of the year were used to reduce revolving
indebtedness. The strong sales growth at Beaver and Safari accounted for these
operating profits and inventory reductions. Operating losses at Midwest resulted
in increased borrowings late in 1996, but this did not completely offset the
impact of positive cash flows during the first half of the year.

The Company's effective tax rate for 1996 was 40.0%, resulting in an income
tax provision of $2.4 million, compared to an effective rate of 28.0% and an
income tax provision of $1.9 million for 1995. The increase in the effective tax
rate from 1996 to 1995 is due to the

Company's termination of its S corporation tax status and commencement of its
tax-paying C corporation status effective January 1, 1995. Upon conversion to C
corporation status, the Company recorded a transition deferred tax asset of
$686,000. This reduced the income tax provision recorded during 1995. If the
Company had been a C corporation before 1995, its effective tax rate in 1995
would have been 38.0%, which would have resulted in an income tax provision of
$2.6 million and would have been comparable to the effective rate of 40.0% for
1996.

On a pro forma basis, after adjusting for the 1995 deferred tax asset
described above, net income after tax decreased $670,000 (15.8%) to 1996's
actual net income of $3.6 million from 1995's pro forma net income of $4.3
million. The decrease was primarily due to the poor operating performance of
Midwest. Midwest's operating losses and restructuring charge combined to create
an after-tax loss of $2.4 million in 1996. This loss was offset in part by
income generated by the increase in sales volume at Beaver and Safari. Excluding
the results of the Midwest, net income after taxes would have been $6.0 million,
or $1.7 million (40.2%) above 1995's pro forma net income of $4.3 million.

1995 Compared to 1994

Sales increased by $23.9 million (19.3%) to $148.2 million for 1995 from
$124.2 million for 1994. The increase was the result of increases in sales of
Safari coaches of approximately $24.9 million (30.0%), offset by a decrease in
the sale of Beaver coaches of approximately $1.8 million (4.3%). Increases in
parts and service sales of approximately $800,000 made up the rest of the
increase in sales from 1994.

Safari unit coach sales increased by 178 (19.1%) to 1,109 for 1995 from 931
in 1994. Safari increased its production of coaches by adding a third production
line early in 1995 to expand production of the Sahara model. Sales revenue
increased at a higher rate than unit volume due to a shift in customer demand to
higher priced products. Sales were made to Safari's well established dealer base
throughout the United States, as well as to new dealerships added in 1995.

Beaver unit coach sales increased by 28 (10.5%) to 296 for 1995 from 268 in
1994. Beaver's Monterey model was introduced in June 1995 and was priced
significantly lower than other Beaver models in order to expand the brand's
offerings to the market. In the process of introducing the new Monterey model,
Beaver increased its dealer distribution network by 21 dealers, some of which
carry the higher priced Patriot and Marquis. Patriot model sales declined
sharply in early 1995, in anticipation of a major redesign of the product for
the 1996 model year. Although Patriot sales recovered after the new model
introduction in July, sales volume for the full year was lower than in 1994.

Gross profit margin increased $3.9 million (25.5%) and increased as a
percentage of sales to 13.0% from 12.4% in 1994. The improvement in gross margin
percentage is affected by Beaver coach sales recorded in 1994 prior to SMC's
acquisition of Beaver on June 1, 1994. Prior to the acquisition, SMC managed the
operations of Beaver, and under the terms of the management agreement, sales of
Beaver coaches were passed through SMC without any profit

margin. If the sales of product in 1994 prior to the acquisition were
eliminated, the gross profit margin for 1994 would have been 14.3%. Adjusted
gross margin declined by 1.3% primarily as the result of two factors. $800,000
or .6% impact on gross profit was caused by heavier than normal model year end
discounting in the second quarter of 1995. The Company increased discounts due
to strong competition from other manufacturers, and market anticipation of
significant changes to both Safari and Beaver model lines prior to the new model
year in July 1995. Changes in model design related to the engine systems
installed on both Safari and Beaver models exceeded original cost estimates by
approximately $900,000 or .6% reduction in gross profit. The transition to the
new engine system is complete, and all of the new product development and
implementation costs were reflected in the year ended December 31, 1995.

Selling, general and administrative expenses increased by $3.3 million
(38.8%) to $11.7 million in 1995 from $8.4 million in 1994. As a percentage of
sales, selling, general and administrative costs were 7.9%, and 6.8% of sales
for 1995 and 1994, respectively. The percentage increase in costs is largely the
result of the pass-through sales of Beaver in 1994 previously noted. After
eliminating the effect of the pass-through sales, adjusted selling, general, and
administrative expenses increased .1% to 7.9% of sales in 1995, compared to 7.8%
in 1994.

Operating income rose 9.4% to $7.6 million in 1995 from $7.0 million in
1994, primarily due to increased sales volume. Proportionately, the percentage
increase in operating income was not as large as the percentage increase in
sales revenue because of the factors affecting gross margin described above.

Interest expense increased 119% to $910,000 in 1995 from $415,000 in 1994
due to increased borrowings related to the Beaver acquisition which were made on
or subsequent to June 1, 1994 and were fully outstanding during 1995 while only
outstanding for part of 1994. Increased sales volume also required more use of
working capital lines of credit in 1995.

Other income was $136,000 for 1995, compared to $217,000 in 1994. The
difference was due primarily to $121,000 in fee revenue recorded in 1994
pursuant to management fees earned while the Company managed the operations of
Beaver prior to the June 1, 1994 acquisition.

The Company terminated its S corporation tax status effective January 1,
1995 and became a tax-paying C corporation as of that date. The Company's
effective tax rate in 1995 was 28.0%, resulting in an income tax provision of
$1.9 million. If the Company had been an ongoing C corporation, its pro forma
effective tax rate in 1995 would have been 38.0%, and the income tax provision
would have been $2.6 million. For 1994, if the Company had been a C corporation,
its effective tax rate would have been 38.6%, and the income tax provision would
have been $2.6 million. The conversion from S corporation to C corporation tax
status on January 1, 1995 resulted in the recording of a transition deferred tax
asset of $686,000, in accordance with SFAS No. 109, "Accounting for Income
Taxes."

On a pro forma basis, after adjusting for the 1995 transition deferred tax
asset previously noted, net income was $4.3 million, an increase of $100,000
(2.3%) over 1994's pro forma results. 1995 pro forma earnings per share
decreased to $.64 per share on 6.6 million shares

outstanding, compared to 1994 pro forma earnings per share of $.72 on 5.8
million shares outstanding.

Income Taxes

Prior to January 1, 1995, the Company was an S corporation not subject to
federal and state income taxes. In anticipation of its initial public offering,
the Company terminated its S corporation status and the Company paid taxes as a
C corporation in 1995. Pro forma net income reflects federal and state income
taxes as if the Company had been a C corporation, based on the rates that would
have been in effect during the periods reported.

Inflation

The Company does not believe inflation has had a material impact on its
results of operations for the periods presented.

Factors Affecting Future Operating Results

The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Short-term fluctuations in operating
results may be caused by a variety of factors, including the relatively high
unit cost of the Company's motor coaches, the timing of orders from dealers,
dealer cancellations of orders, the repurchase of coaches from dealers, new
product introductions, production delays and the timing of trade shows and
rallies. Because the Company's gross profit is generally greater with respect to
its more expensive coaches, changes in the product mix of coaches sold can
affect the Company's operating results. Over longer periods, the cyclical nature
of the recreational vehicle industry, changes in interest rates and changes in
the level of discretionary consumer spending may also adversely affect the
Company's results of operations. The impact of these and other factors on the
Company's sales and operating results in any future period cannot be predicted
with certainty, and the results for any prior period may not be indicative of
results for any future period.

The Company believes that the high-line motor coach market is much less
volatile than the RV industry as a whole, and believes buyers purchasing
high-line products are making lifestyle decisions largely independent of factors
such as the state of the economy or interest rates. High-line coach sales have
increased every year since 1989, while the sale of all Class A motor coaches
have seen both increases and decreases during this period.

Liquidity and Capital Resources

During 1996 SMC generated $4.6 million in cashflows from operations, while
its net working capital decreased from $7.9 million at December 31, 1995 to $5.5
million at December 31, 1996 (including cash and cash equivalents of $316,000).

The Company made capital expenditures of $11.1 million during 1996.
Approximately $3.8 million of the expenditures related to the purchase of an
aircraft. The Company's previous aircraft was sold. Additionally, approximately
$1.0 million was invested to automate and

computerize the cabinet shop at the Safari location, and approximately $1.0 was
invested to upgrade production operation at the Beaver facility. The Company
invested $3.4 million to start up the Company's HCO and CTI facilities in Hines,
Oregon, including purchases of building and equipment. The Company acquired the
assets of Honorbuilt for $1.4 million and made subsequent capital expenditures
at the Midwest facility of approximately $1.2 million. The remaining
expenditures were made on various capital projects to maintain the Company's
growth and production needs. The Company anticipates that its aggregate capital
expenditures for 1997 will approximate $3.0 million.

The Company has lines of credit of $10.0 million, with $4.2 million
available at December 31, 1996, plus an additional $5.1 million equipment
financing line of credit, of which $3.1 million is available at December 31,
1996. Amounts outstanding under these lines of credit bear interest at annual
rates ranging from prime to prime plus 1/4% (8.25% to 8.50% at December 31,
1996) and are secured by all assets not specifically identified in other
financing obligations. The terms of the revolving credit and equipment financing
agreements require compliance with certain financial covenants and other
covenants which provide that the Company receive consent from the lender to
declare or pay dividends in cash, stock or other property. The covenants also
include restrictions relating to (1) mergers, consolidations and sale of assets,
(2) guarantees by the Company of debts or obligations of other persons or
entities, and (3) acquisition of the Company's own stock. The Plan of
Reorganization pursuant to which the Company completed the acquisition of Beaver
also prohibits the Company from paying dividends if Beaver defaults on payment
obligations under the Plan. The Company was not in compliance with all covenants
and agreements at December 31, 1996, but had received waivers for the conditions
of noncompliance, which expire March 31, 1997. The Company does not believe any
of these covenants will have a material impact on the Company's ability to meet
its cash obligations. See Notes 4 and 5 of Notes to Consolidated Financial
Statements.

Most dealer purchases of motor coaches from the Company are financed under
flooring financing arrangements between the dealer and a bank or finance
company. Under these flooring arrangements, the financing institution lends the
dealer all or substantially all of the wholesale purchase price of a motor coach
and retains a security interest in the coach purchased. These financing
arrangements provide that, for a period of time after a coach is financed
(generally 12 to 18 months), if the dealer defaults on its payment or other
obligations to the lender, the Company is obligated to repurchase the dealer's
inventory for the amount then due from the dealer plus, in certain
circumstances, costs incurred by the lender in connection with repossession of
the inventory. The repurchase price may be more than the resale value of the
coach. The Company's contingent liability under its repurchase obligations
varies from time to time. As of December 31, 1996, the Company estimates its
total contingent liability under repurchase obligations was approximately $82.2
million. To date, losses incurred by the Company pursuant to repurchase
obligations have not been material. The Company cannot predict with certainty
its future losses, if any, pursuant to repurchase obligations, and these amounts
may vary materially from the expenditures historically made by the Company.
Furthermore, even in circumstances where losses in connection with repurchase
obligations are not material, a repurchase obligation can represent a
significant cash requirement for the Company. See "Business -- Sales and
Marketing" and Note 11 of Notes to Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this item are
included on pages F-1 to F-22 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1997
annual meeting of shareholders (the "1997 Proxy Statement") to be filed not
later than 120 days after the end of the fiscal year covered by this Report and
is incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this Report.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1997 Proxy Statement and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
1997 Proxy Statement and is incorporated herein by reference.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

(a)(1)Financial Statements Page in this Report
-------------------

Report of Independent Accountants F-1

Consolidated Balance Sheet at December 31, 1995
and 1996 F-2

Consolidated Statement of Income for the Years
Ended December 31, 1994, 1995 and 1996 F-3

Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 1994,
1995 and 1996 F-4

Consolidated Statement of Cash Flows for the Years
Ended December 31, 1994, 1995 and 1996 F-5

Notes to Consolidated Financial Statements F-6

(a)(2)Financial Statement Schedules - None

(a)(3)Exhibits

2.1 Order Confirming Second Modified Plan of
Reorganization of Beaver Coaches, Inc. (April
4, 1994) as amended (the "Plan"), filed May 20,
1994, and Plan; incorporated by reference to
Exhibit 2.1 to the Registrant's Registration
Statement on Form S-1, Registration No.
33-85780 (the "1995 S-1")

3.1 Restated Articles of Incorporation;
incorporated by reference to Exhibit 3.1 to the
1995 S-1

3.2 Restated Bylaws; incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1994

4.1 See Articles II and V of Exhibit 3.1 and
Articles I and VI of Exhibit 3.2

*10.1 1994 Stock Incentive Plan, as amended;
incorporated by reference to Exhibit 10.1 to
the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994

10.2 Stock Purchase Agreement dated March 28, 1988
among Curtis Lawler and Sandra Lawler, Mathew
M. Perlot and the Registrant; incorporated by
reference to Exhibit 10.2 to the 1995 S-1

10.3 Stock Purchase Agreement dated November 30,
1990 among L. Michael Cary, Mathew M. Perlot
and the Registrant; incorporated by reference
to Exhibit 10.3 to the 1995 S-1

10.4 Revised form of Representatives' Warrant
Agreement, including form of warrant;
incorporated by reference to Exhibit 10.5 to
the 1995 S-1

10.5 Manufacturer Agreement dated June 24, 1987
between General Electric Credit Corporation and
the Registrant; incorporated by reference to
Exhibit 10.7 to the 1995 S-1

+10.6 Manufacturer's Financing Agreement dated April
30, 1991 between John Deere Company and the
Registrant, and addenda thereto; incorporated
by reference to Exhibit 10.8 to the 1995 S-1

10.7 Repurchase Agreement dated November 30, 1993
between the Registrant and General Motors
Acceptance Corporation; incorporated by
reference to Exhibit 10.9 to the 1995 S-1

+10.8 Floorplan Agreement dated April 14, 1994
between ITT Commercial Finance Corp. and the
Registrant, and amendment and amendment letters
thereto; incorporated by reference to Exhibit
10.10 to the 1995 S-1

10.9 Lease Assignment and Assumption Agreement dated
June 1994 between Beaver Coaches, Inc. and
Beaver Motor Coaches, L.L.C., with Lease dated
May 15, 1989 by and between Frank Storch and
James Hogue, dba S&H Associates, and Beaver
Coaches, Inc., and amendments thereto;
incorporated by reference to Exhibit 10.11 to
the 1995 S-1

21.1 Subsidiaries of the Registrant

27.1 Financial Data Schedule

- ----------------

* This exhibit constitutes a management contract or compensatory plan or
arrangement.

+ Confidential treatment has been granted by the Commission for certain
portions of this agreement.

(b) Reports on Form 8-K.

No report on Form 8-K was filed by the Company in the last quarter of
1996

Report of Independent Accountants

To the Board of Directors and Shareholders of
SMC Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
SMC Corporation and its subsidiaries at December 31, 1996, and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Portland, Oregon
February 5, 1997

F-1

SMC Corporation
Consolidated Balance Sheet
(in thousands)
- ---------------------------------------------------------------------------------------------------

December 31,
1995 1996
----------- -----------

Assets
Current assets:
Cash and cash equivalents $ 69 $ 316
Accounts receivable, net (Note 4) 8,565 12,859
Inventories (Notes 2 and 4) 16,311 23,633
Prepaid expenses and other 412 574
Deferred tax asset (Note 6) 752 2,358
----------- -----------

Total current assets 26,109 39,740

Property, plant and equipment, net (Notes 3, 4, and 5) 12,061 19,584
Intangible assets, net (Notes 1, 9 and 10) 2,328 2,154
Deferred tax asset (Note 6) - 343
Other assets 700 99
----------- -----------
Total assets $ 41,198 $ 61,920
=========== ===========

Liabilities and Shareholders' Equity
Current liabilities:
Notes payable (Note 4) $ 1,671 $ 5,798
Current portion of long-term debt (Note 5) 1,401 1,752
Accounts payable 11,053 17,251
Income taxes payable (Note 6) - 1,365
Royalties payable (Note 9) 542 652
Product warranty liabilities 1,165 2,808
Current portion of capital lease obligation (Note 8) - 16
Accrued liabilities 2,422 4,095
Accrued restructuring costs (Note 10) - 488
----------- -----------

Total current liabilities 18,254 34,225

Long-term debt, net of current portion (Note 5) 4,676 6,626
Capital lease obligation, less current portion (Note 8) - 75
Noncurrent royalties (Note 9) 480 -
Deferred income taxes (Note 6) 377 -
----------- -----------

Total liabilities 23,787 40,926
----------- -----------

Commitments and contingencies (Notes 8, 9 and 10)
Shareholders' equity:
Preferred stock, 5,000 shares authorized, none issued or outstanding - -
Common stock, 30,000 shares authorized, 6,563 shares
issued and outstanding (Notes 12 and 13) 10,914 10,914
Additional paid-in capital (Note 13) 1,556 1,556
Retained earnings (Note 13) 4,941 8,524
----------- -----------

Total shareholders' equity 17,411 20,994
----------- -----------

Total liabilities and shareholders' equity $ 41,198 $ 61,920
=========== ===========

The accompanying notes are an integral part of this financial statement.

F-2

SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------

Year ended December 31,
1994 1995 1996
----------- ----------- -----------

Sales $ 124,247 $ 148,189 $ 200,835

Cost of sales 108,833 128,846 174,457
----------- ----------- -----------

Gross profit 15,414 19,343 26,378

Selling, general and administrative expenses 8,429 11,702 17,601
Restructuring expense (Note 10) - - 2,392
----------- ----------- -----------

Income from operations 6,985 7,641 6,385

Interest expense 415 910 685
Other income (217) (136) (267)
----------- ----------- -----------

Income before minority interest 6,787 6,867 5,967

Minority interest in earnings of consolidated subsidiary 14 - -
----------- ----------- -----------

Income before provision for taxes 6,773 6,867 5,967

Provision for income taxes (Note 6) - 1,926 2,384
----------- ----------- -----------

Net income $ 6,773 $ 4,941 3,583
=========== =========== ===========

Net income per share $ 1.18 $ .74 $ .54
=========== =========== ===========

Weighted average number of shares 5,763 6,647 6,661
=========== =========== ===========

Unaudited pro forma data (Notes 1 and 6):
Income before provision for income taxes $ 6,773 $ 6,867 N/A
Pro forma provision for income taxes 2,614 2,612 N/A
----------- ----------- -----------

Pro forma net income $ 4,159 $ 4,255 N/A
=========== =========== ===========

Pro forma net income per share $ .72 $ .64 N/A
=========== =========== ===========

Weighted average number of shares 5,763 6,647 N/A
=========== =========== ===========

The accompanying notes are an integral part of this financial statement.

F-3

SMC Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
- --------------------------------------------------------------------------------------------------------

Notes
Common stock receivable Additional
-------------------- from paid-in Retained
Shares Amount shareholder capital earnings Total
-------- -------- --------- --------- -------- --------

Balance, December 31, 1993 5,000 $ 707 $ (77) $ - $ 3,648 $ 4,278

Distributions to shareholders - - - - (8,865) (8,865)

Payments received on notes
receivable from shareholder - - 77 - - 77

Net income - - - - 6,773 6,773
-------- -------- --------- --------- -------- --------

Balance, December 31, 1994 5,000 707 - - 1,556 2,263

Common stock issued in public
offering 1,553 12,032 - - - 12,032

Common stock issued upon
exercise of options 10 82 - - - 82

Equity issuance costs related to
public offering - (1,907) - - - (1,907)

Reclassification of retained
earnings to additional paid-in
capital (Note 13) - - - 1,556 (1,556) -

Net income - - - - 4,941 4,941
-------- -------- --------- --------- -------- --------

Balance, December 31, 1995 6,563 10,914 - 1,556 4,941 17,411

Net income - - - - 3,583 3,583
-------- -------- --------- --------- -------- --------

Balance, December 31, 1996 6,563 $ 10,914 $ - $ 1,556 $ 8,524 $ 20,994
======== ======== ========= ========= ======== ========

The accompanying notes are an integral part of this financial statement.

F-4

SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------------------------

Year ended December 31,
1994 1995 1996
----------- ----------- -----------

Cash flows from operating activities:
Net income $ 6,773 $ 4,941 $ 3,583
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Noncash restructuring charges - - 2,392
Depreciation and amortization 719 1,202 1,838
Deferred taxes - (375) (2,326)
Other 14 -
Gain on asset dispositions - - (183)
Changes in certain assets and liabilities
(excluding impact of acquisition of a
business and noncash restructuring charges):
Accounts receivable (1,630) (1,918) (4,294)
Inventories (2,509) (3,305) (7,270)
Prepaid expenses and other 39 (152) (162)
Other assets - (331) 547
Accounts payable 5,057 (1,137) 6,198
Income taxes payable - - 1,365
Accrued liabilities and other obligations 503 217 2,946
----------- ----------- -----------

Net cash provided by (used in) operating activities 8,966 (858) 4,634
----------- ----------- -----------

Cash flows from investing activities:
Acquisition of a business, net of cash acquired
(Notes 9 and 10) (7,428) - (1,420)
Capital expenditures (2,782) (4,171) (11,059)
Proceeds from disposal of equipment 225 - 1,669
----------- ----------- -----------

Net cash used in investing activities (9,985) (4,171) (10,810)
----------- ----------- -----------

Cash flows from financing activities:
Net borrowings on notes payable 1,660 (1,003) 4,127
Proceeds from long-term debt 4,790 2,250 4,330
Repayments of long-term debt (1,186) (2,025) (2,029)
Principal payments on capital lease obligation - - (5)
Payments of notes payable to shareholders (Note 13) - (5,133) -
Distributions to shareholders (3,732) - -
Sale of minority interest 20 - -
Payments received on notes receivable
from shareholders 77 - -
Proceeds from issuance of common stock - 12,114 -
Public offering costs incurred (622) (1,285) -
----------- ----------- -----------

Net cash provided by financing activities 1,007 4,918 6,423
----------- ----------- -----------

Net (decrease) increase in cash and cash equivalents (12) (111) 247
Cash and cash equivalents, beginning of period 192 180 69
----------- ----------- -----------

Cash and cash equivalents, end of period $ 180 $ 69 $ 316
=========== =========== ===========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized of $91,000 and
$94,000 in 1995 and 1996, respectively $ 410 $ 906 $ 626
Income taxes $ - $ 2,524 $ 3,011

The accompanying notes are an integral part of this financial statement.

F-5

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies

Nature of business
SMC Corporation (the "Company"), an Oregon corporation, and its wholly
owned subsidiaries design, manufacture, and market Class A and Class C
motor coaches sold primarily to dealers which are independent of the
Company and its subsidiaries throughout the United States and Canada.

Basis of consolidation
The accompanying consolidated financial statements include the accounts of
SMC Corporation and the following seven wholly owned subsidiaries which
operate under the control of SMC Corporation: Safari Motor Coaches, Inc.
("Safari"), Beaver Motor Coaches, Inc. ("Beaver"), Magnum Manufacturing,
Inc. ("Magnum"), Electronic Design and Assembly, Inc. ("ED&A"), Composite
Technologies, Inc. ("CTI"), SMC Midwest, Inc. ("Midwest"), and Harney
County Operations, Inc. ("HCO"). Safari and Beaver purchase motor coach
chassis and other components used in the manufacture of finished motor
coaches from the other subsidiaries, excluding Midwest and HCO which are
new subsidiaries formed in 1996 engaged in the manufacture of Class C motor
coaches. All significant intercompany transactions have been eliminated for
purposes of presentation of the consolidated financial statements of SMC
Corporation.

Reporting periods
The Company reports its annual results of operations on the basis of
52-week periods ending December 31 and its quarterly results of operations
on the basis of 13-week periods ending on the Saturday nearest the calendar
month end. For presentation purposes, the Company has indicated its
quarters as ending March 31, June 30, and September 30.

Cash and cash equivalents
Cash consists of demand deposits with financial institutions. The Company
considers all highly liquid short-term investments with original maturities
of three months or less to be cash equivalents for purposes of the
consolidated balance sheet and consolidated statement of cash flows.
Noncash transactions have been excluded from the consolidated statement of
cash flows (see Note 9).

Accounts receivable
Accounts receivable are net of an allowance for doubtful accounts of
$28,000 and $98,000 at December 31, 1995 and 1996, respectively.

Inventories
Inventories are stated at the lower of cost or market, with cost determined
by the first-in, first-out method for raw materials, work-in-progress and
finished goods and by the specific cost method for chassis. Cost includes
the purchase price of raw materials, direct labor and an allocation of
overhead costs. Raw materials inventory consists of component parts and
motor coach chassis. Chassis manufacturers provide terms calling for
payment generally upon completion of the motor coach.

F-6

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies
(Continued)

Property, plant and equipment
Property, plant and equipment are stated at cost. Additions, renewals and
betterments are capitalized. Expenditures for maintenance, repairs, and
minor renewals and betterments are charged to expense. Gains or losses
realized from sales or retirements are reflected in earnings and totaled
$183,000 during the year ended December 31, 1996 and were not significant
for the two years ended December 31, 1995. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of 15 years for land improvements, 20 to 30 years for buildings and
improvements, and 5 to 12 years for machinery and equipment.

Intangible assets
Costs in excess of the fair value of the assets of Beaver acquired in 1994
and the assets of Midwest acquired in 1996 consist primarily of product
trade names, which are being amortized using the straight-line method over
15 years (see Notes 9 and 10). Amortization expense for the years ended
December 31, 1994, 1995 and 1996 was $93,000, $181,000 and $189,000,
respectively. At the end of each quarter, the Company reviews the
recoverability of its intangible assets based on estimated undiscounted
future cash flows from operating activities compared with the carrying
value of the intangible assets. If the aggregate future cash flows are less
than the carrying value, a write-down would be required, measured by the
difference between the discounted future cash flows and the carrying value
of the intangible assets.

Financial instruments
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and
liabilities compared to the current market rates of interest for
instruments of a similar nature and degree of risk. Cash and cash
equivalents, and notes payable to banks approximate fair value as reported
in the consolidated balance sheet. The fair value of long-term debt is
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the Company's long-term debt at December 31, 1995 and
1996 approximates the carrying value. The Company records all other
financial instruments, including accounts receivable and accounts payable,
at cost, which approximates market value.

Common stock split and change in authorized shares
Effective October 24, 1994, the Company amended its articles of
incorporation to effect a 5,000- for-one split of its Common Stock, to
increase the authorized number of shares of Common Stock to 30,000,000 and
to authorize the issuance of up to 5,000,000 shares of Preferred Stock, the
terms of which may be fixed by the Company's Board of Directors without
further shareholder approval. This recapitalization of the Company has been
given retroactive effect in the accompanying financial statements.

Revenue recognition and accounts receivable
The Company recognizes revenue from the sale of motor coaches when title
and risk of ownership are transferred to the dealer, which generally is
upon shipment or dealer pick-up. Motor coaches are shipped to dealers only
upon verification of dealer financing from the finance company providing
the motor coach financing. Finance companies remit funds directly to the
Company upon receipt of the manufacturer's certificate of origin, generally
within 10 days after shipment. A dealer may be invoiced for and receive
title to motor coaches prior to taking physical possession when the dealer
has made a fixed, written commitment to purchase, the motor coaches have
been completed and are available for pick-up or delivery, and the dealer
has requested the Company to hold the motor coaches until the dealer
determines the most

F-7

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies
(Continued)

Revenue recognition and accounts receivable (Continued)
economical means of taking physical possession. Upon such a request, the
Company has no further obligation except to segregate the motor coaches,
invoice them under normal billing and credit terms and hold them for a
short period of time as is customary in the industry, generally less than
two weeks, until pick-up or delivery. Motor coaches are built to dealer
specification and no right of return or exchange privileges are granted.
Accordingly, no provision for sales allowances or returns is recorded.

Sales and the percentage of total sales made to dealers representing more
than 10% of consolidated sales in any of the following periods were as
follows (dollar amounts in thousands):

Year ended December 31,
1994 1995 1996
------------- ------------- --------------

Dealer 1 $22,665 18% $ 23,131 16% $ 23,314 12%
Dealer 2 (See Note 16) $23,138 19% $ 17,732 12% $ 20,777 10%

Certain risks, uncertainties and concentration of credit risk
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

The Company has a concentration of credit risk in the recreational vehicle
industry, and specifically related to amounts outstanding at any point in
time in accounts receivable and/or under repurchase agreements (see Note
11) with any specific dealership to which it has sold motor coaches. The
Company requires no collateral from its dealers upon sale of a motor coach,
and most dealer financing arrangements provide for repurchase agreements
which require the Company to repurchase previously sold motor coaches in
the event of the dealer's default on its financing arrangement.

Product warranty
The Company provides a one-year warranty against defects in material and
workmanship to dealers and purchasers of motor coaches and a similar
three-year warranty for chassis manufactured by the Company. Certain
components used in the manufacture of the Company's motor coaches carry
warranties of other manufacturers. Estimated warranty costs are reserved at
the time of sale of the warranted products.

Income taxes
Effective January 1, 1995, the Company adopted the liability method of
accounting for income taxes, as set forth in Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS No.
109). Under the liability method, deferred taxes are determined based upon
the difference between the financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax expense represents the
change in the deferred tax asset/liability balance. A valuation allowance
is established for deferred taxes if their realization is not likely.

F-8

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

1. Nature of Business and Summary of Significant Accounting Policies
(Continued)

Income taxes (Continued)
Prior to January 1, 1995, the Company had elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those
provisions and analogous provisions of certain state laws, the Company did
not pay federal or state corporate taxes on taxable income. Instead, the
shareholders were liable for federal and state income taxes for their
respective shares of the Company's taxable income. Accordingly, no accrual
or provision for income taxes was made in the Company's financial
statements for the year ended December 31, 1994. For comparative purposes,
a pro forma provision for income taxes (unaudited) that would have been
recorded if the Company had been operating as a C corporation for all
periods presented is provided. A pro forma tax provision is also presented
for the year ended December 31, 1995 due to the impact of the recognition
of a cumulative net deferred tax asset of $686,000 associated with the
change from S corporation status to C corporation status as of January 1,
1995 (Note 6).

Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.

Net income per share
For the year ended December 31, 1996, net income per share is computed
using the actual weighted average number of shares outstanding during the
year. For the year ended December 31, 1995, net income per share is
computed using the weighted average number of shares of common stock
actually outstanding after the Company's initial public offering, which
took place on January 20, 1995, and the number of shares used in the
calculation for 1994 (5,763,000) for the period of time in 1995 prior to
the initial public offering. In addition, the dilutive effect of
outstanding stock options and warrants (see Notes 12 and 13) is considered
in the computation for both 1996 and 1995. Fully diluted EPS is not
presented as its effect was less than 3% of primary earnings per share.

For the year ended December 31, 1994, net income per share is computed
using the weighted average number of shares of common stock outstanding
during the period adjusted to include the estimated number of shares,
763,000, required to be sold by the Company in its initial public offering
(see Note 13) in order to make its final S corporation distributions to the
Company's pre-public offering shareholders for the year ended December 31,
1994 in the amount of $5.1 million.

Pro forma net income per share (unaudited)
An unaudited pro forma net income per share is presented in order to show
what earnings per share would have been had the Company elected to be
treated as a C corporation for all periods presented. Pro forma net income
per share is computed using the same number of shares as used in the
calculation of the actual net income per share.

F-9

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

2. Inventories

Inventories by major classification are as follows (in thousands):

December 31,
1995 1996
----------- -----------
Raw materials $ 8,961 $ 11,560
Work-in-progress 5,097 7,285
Finished goods 2,253 4,788
----------- -----------

Total $ 16,311 23,633
=========== ===========

3. Property, Plant and Equipment

The components of property, plant and equipment are as follows (in
thousands):

December 31,
1995 1996
----------- -----------

Land and improvements $ 1,046 $ 1,143
Buildings and improvements 7,051 8,663
Machinery and equipment 5,699 9,563
Construction in progress 720 3,711
----------- -----------
14,516 23,080

Less accumulated depreciation (2,455) (3,496)
----------- -----------
Property, plant and equipment, net $ 12,061 $ 19,584
=========== ===========

4. Notes Payable

Safari has a $6.0 million revolving line of credit and Beaver has a $4.0
million revolving line of credit (collectively, the "lines of credit") with
the same bank. The available borrowings under the lines of credit are
limited to 80% of eligible accounts receivable plus 50% of inventory, on an
individual company basis. At December 31, 1996, $3.5 million was
outstanding on Safari's line of credit with interest at the bank's prime
rate (8.25%), and $2.5 million was available to be borrowed. At December
31, 1996, $2.3 million was outstanding on the Beaver line of credit with
interest at the bank's prime rate (8.25%), and $1.7 million was available
to be borrowed. Outstanding borrowings under the lines of credit are due on
demand. The lines of credit are secured by accounts receivable, inventory
(excluding chassis inventory purchased from third parties), and equipment
at Safari and Beaver.

F-10

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

4. Notes Payable (Continued)

Further, the lines of credit are cross-collateralized between the
companies. The terms of the respective credit agreements require compliance
with certain financial covenants, including working capital requirements.

Safari, Beaver and CTI have entered into three similar credit agreements
which enable borrowings of up to $5.1 million for equipment purchases, as
needed. $2.0 million has been borrowed under these credit agreements at
December 31, 1996, and these amounts have been converted to term debt and
are included in the amounts shown in Note 5. A remaining available balance
of $3.1 million is outstanding at December 31, 1996 to finance future
equipment requirements.

As of December 31, 1996, the Company was in noncompliance with certain of
its financial covenants associated with its line of credit facilities and
other bank loans with its primary lending institution. Waivers of the
conditions of noncompliance were granted by the lending institution
covering the period through March 31, 1997.

F-11

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

5. Long-Term Debt
Long-term debt consists of the following:

December 31,
1995 1996
----------- -----------
(in thousands)

Bank loan secured by equipment with monthly payments of $35,000 plus
interest at LIBOR plus 1.5%, or 6.88% at
December 31, 1996, with the balance due October 12, 2003 $ - $ 2,885
Bank loan secured by a first trust deed on the Magnum
manufacturing facility, with monthly payments of $9,000 plus
interest at 8.22%, with the balance due November 30, 2005 1,641 1,540
Bank equipment loans secured by capital acquisitions
financed, with monthly payments of $24,000 plus interest
at the bank's prime rate plus .25%, or 8.5% at
December 31, 1996, with the balance due October 12, 2001 - 1,386
Bank loan secured by a first trust deed on the Safari manu-
facturing facility, with monthly payments of $31,000 plus interest at
the bank's prime rate plus .75%, or 9.0% at
December 31, 1996, with the balance due October 18, 1999 1,411 1,043
Bank loan secured by equipment, with monthly payments of
$18,000 plus interest at the bank's prime rate plus .75%,
repaid December 11, 1996 788 -
Bank loan secured by a first trust deed on the Beaver manu-
facturing facility, with monthly payments of $13,000 plus interest at
the bank's prime rate plus .75%, or 9.0% at
December 31, 1996, with the balance due October 18, 1999 588 438
Bank equipment loan secured by capital acquisitions financed,
with monthly payments of $10,000 plus interest at the bank's prime rate
plus 1%, or 9.25% at December 31, 1996, with the
balance due June 1, 1999 420 300
Bank equipment loan secured by capital acquisitions financed,
with monthly payments of $8,000 including interest at the bank's
prime rate plus .25%, or 8.5% at December 31, 1996, with the
balance due June 22, 2000 367 296
Bank equipment loan secured by capital acquisitions financed, with
monthly payments of $8,000 plus interest at the bank's prime rate plus
1%, or 9.25% at December 31, 1996, with the
balance due June 1, 1999 350 250
Notes payable to a financing company, with monthly payments
of $21,000 including interest at 9%, due May 1, 1997 328 92
Bank equipment loan secured by capital acquisitions financed,
with monthly payments of $4,000 including interest at the bank's
prime rate plus .25%, or 8.5% at December 31, 1996, with the
balance due June 22, 2000 184 148
----------- -----------

6,077 8,378
Less portion due within one year (1,401) (1,752)
----------- -----------

Long-term debt less current portion $ 4,676 $ 6,626
=========== ===========

F-12

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

5. Long-Term Debt (Continued)

In connection with the acquisition of the operating assets of BCI (see Note
9), the Company assumed certain notes payable to a financing company, which
notes BCI had assumed as guarantor upon default of the original borrower.

The aggregate maturities of long-term debt for the next five years and
thereafter as of December 31, 1996 are $1,752,000, $1,675,000, $1,503,000,
$869,000, $799,000 and $1,780,000, respectively.

Certain of the borrowings are subject to restrictive covenants, including
working capital requirements, with which the Company is not in compliance
at December 31, 1996. As explained in Note 4, the Company has received a
waiver for the conditions of noncompliance from its primary lending
institution covering the period through March 31, 1997. Other terms of the
borrowings require the lending bank's written consent prior to the issuance
of any dividends.

6. Provision for Income Taxes

In connection with the Company's completion of the offering of its common
stock (see Note 13), its S corporation status was terminated effective
January 1, 1995. Accordingly, the consolidated income statement includes a
pro forma adjustment for income taxes which would have been recorded if the
Company had been a C corporation, based on tax rates in effect during all
periods presented, as calculated under SFAS No. 109.

The unaudited pro forma provisions for income taxes are as follows (in
thousands):

Year ended December 31,
1994 1995
---------- -----------

Current:
Federal $ 2,420 $ 1,905
State 504 396
---------- -----------

2,924 2,301
---------- -----------

Deferred:
Federal (276) 280
State (34) 31
---------- -----------

(310) 311
---------- -----------

$ 2,614 $ 2,612
========== ===========

A pro forma provision is presented only for 1994 and 1995 because 1996 was
not affected by the Company's transition from S corporation to C
corporation status.

F-13

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

6. Provision for Income Taxes (Continued)

The audited actual provision for income taxes for the years ended December
31, 1995 and 1996 are as follows (in thousands):

Year ended December 31,
1995 1996
----------- -----------

Current:
Federal $ 1,905 $ 3,897
State 396 813
----------- -----------
2,301 4,710
----------- -----------
Deferred:
Federal 280 (1,925)
State 31 (401)
----------- -----------
311 (2,326)
----------- -----------

Provision before cumulative deferred tax asset 2,612 2,384
Cumulative deferred tax asset (686) --
----------- -----------

$ 1,926 $ 2,384
=========== ===========

The provision for income taxes for the year ended December 31, 1995 is
offset by recognition of a cumulative net deferred tax asset of $686,000
associated with the termination of the Company's S corporation status on
January 1, 1995 in accordance with SFAS 109.

Deferred tax assets (liabilities) are comprised of the following components
(in thousands):

December 31,
1995 1996
----------- -----------

Current:
Vacation reserve $ 143 $ 250
Accrued workers' compensation claim liabilities 151 76
Warranty reserves 447 1,077
Restructuring reserve (Note 10) -- 187
Inventory reserves -- 26
Other liabilities -- 598
Other reserves (Note 10) -- 106
Allowance for doubtful accounts 11 38
----------- -----------

$ 752 $ 2,358
=========== ===========
Noncurrent:
Tax depreciation in excess of book depreciation $ (377) $ (282)
Other reserves (Note 10) -- 625
----------- -----------

$ (377) $ 343
=========== ===========

F-14

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

6. Provision for Income Taxes (Continued)

The effective tax rate would differ from the U.S. statutory federal tax
rate due to the following:

Pro forma unaudited Actual year ended
year ended December 31, December 31,
1994 1995 1995 1996
----------- ----------- ----------- -----------

Statutory federal tax rate 34.0% 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.4 4.4 4.4 4.4
Nondeductible expenses -- -- -- 1.6
Other, net .2 (.4) (.4) --
Effect of change in tax status -- -- (10.0) --
----------- ----------- ----------- -----------

38.6% 38.0% 28.0% 40.0%
=========== =========== =========== ===========

7. Related Parties

During 1991, the Company opened a retail sales lot in Southern California.
Effective December 1, 1992, the motor coach inventory of the retail sales
lot was sold to Motor Home Safari, Inc. ("Motor Home"), a corporation owned
by two shareholders of the Company. Effective March 1, 1995, Motor Home was
sold to an unrelated third party. The Company's principal shareholder
provides financing to Motor Home for its purchase of motor coach inventory
from Safari.

Sales to Motor Home for the years ended December 31, 1994, 1995 and 1996
were $4.1 million, $8.5 million, and $7.8 million, respectively. Sales are
made at the manufacturer's suggested list price offered to third parties.
The Company had accounts receivable due from Motor Home of $752,000 and
$350,000 at December 31, 1995 and 1996, respectively, related to the sale
of motor coaches.

8. Leases

The Company is obligated under a capital lease for computer software that
expires in September of 2001. At December 31, 1996, the gross amount of
equipment and related accumulated amortization recorded under capital
leases was $95,000 and $5,000, respectively.

The Company also has noncancelable operating leases, primarily for
facilities space, telecommunications, transportation equipment, and
computer software and hardware, which expire over the next five years and
thereafter. Rental expense under operating leases was, $148,000, $270,000,
and $511,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.

F-15

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

8. Leases (Continued)

Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1996 are:

Year ending December 31: Capital Lease Operating Leases
------------------------ ------------- ----------------

1997 $ 23,000 $ 672,000
1998 23,000 642,000
1999 23,000 612,000
2000 23,000 586,000
2001 18,000 405,000
Thereafter -- 3,415,000
------------- -----------

Total minimum lease payments 110,000 $ 6,332,000

Less amount representing interest
(at 8.52%) 19,000
-------------
Minimum Lease payments,
excluding interest 91,000

Current installments of obligation
under capital lease 16,000
-------------

Obligation under capital lease
excluding current installments $ 75,000
=============

9. Acquisition of the Assets of Beaver Coaches, Inc.

Effective June 1, 1994, the Company acquired all of the operating assets of
Beaver Coaches, Inc. ("BCI"), and now operates the former BCI as Beaver
Motor Coaches, Inc. ("Beaver"). BCI was primarily engaged in the design,
manufacture, distribution, sales and service of Class A high-line motor
coaches and trailers.

BCI had filed for protection under Chapter 11 of the United States
Bankruptcy Code on November 3, 1993 and had been operating as a
debtor-in-possession since that time under the supervision of the
Bankruptcy Court. On June 1, 1994, the Company acquired substantially all
of the operating assets of BCI and assumed certain liabilities, together
with unexpired warranty claims on products sold prior to the acquisition,
pursuant to an Asset Purchase Agreement ("Agreement"). Under the terms of
the Agreement, the aggregate purchase price consisted of cash consideration
of $3.9 million, forgiveness of accounts receivable from BCI in the amount
of $3.1 million, and contingent consideration based on future sales of the
products manufactured and sold by BMC. The Company incurred acquisition
related costs of $400,000 in relation to the purchase of BCI. The
contingent consideration is equal to the greater of $1.6 million or
semi-annual payments of 1% of the gross sales of products manufactured and
sold by Beaver for a period of three years beginning June 1, 1994. A total
of $973,000 has been paid under this Agreement through December 31, 1996,
and the Company's remaining minimum liability for contingent consideration
is included in the consolidated balance sheet as royalties payable in the
amount of $652,000 as of December 31, 1996. Pursuant to the terms of the
Agreement, the Company may not pay dividends in the event of default in the
performance of any of the payment obligations of the Company or its
subsidiaries under the Agreement.

F-16

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

9. Acquisition of the Assets of Beaver Coaches, Inc. (Continued)

The Company's acquisition of the BCI assets was accounted for using the
purchase method; accordingly, the acquired assets and assumed liabilities
have been recorded at their estimated fair value at the date of
acquisition. The approximate $2.6 million excess of purchase price over the
estimated fair value of the net assets acquired is being amortized on the
straight-line basis over 15 years. The results of operations of Beaver have
been included in the consolidated statement of income since the date of the
acquisition. The following table presents unaudited pro forma results of
operations as if the acquisition had occurred on January 1, 1993, and the
Company had elected to be taxed as a C corporation as of that same date.
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the
acquisition been made at the beginning of 1993 or the results which may
occur in the future.

Pro Forma Information
(in thousands, except per share amounts)

Year ended
December 31, 1994
-----------------

Net Sales............................................... $ 122,930
Net Income.............................................. $ 4,281
Earnings per common share............................... $ .69

10. Acquisition of the Assets of Honorbuilt Industries, Inc.

Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
Industries, Inc. ("Honorbuilt") for cash. Honorbuilt was primarily engaged
in the design, manufacture, distribution and sale of Class C motor coaches
(under the name brand of El Dorado) from its facility in Minneapolis,
Kansas. The Company formed a new subsidiary, SMC Midwest, Inc., to operate
the facility.

The acquisition was accounted for by the purchase method. Accordingly, the
purchase price of $1.4 million was allocated to the assets acquired based
on their estimated values as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of assets acquired totaled
$561,000, which was recorded as goodwill and was initially amortized on the
straight-line basis over 15 years.

The estimated fair value of assets acquired is summarized as follows:

Inventory $ 327,000
Equipment 432,000
Goodwill 561,000
Other Assets 100,000
-----------
Total Purchase Price $ 1,420,000
-----------

On December 26, 1996, the Company announced the planned exit and closure of
the operations at the Minneapolis, Kansas facility in an effort to reduce
excessive costs that were not anticipated when the Company acquired the
assets of Honorbuilt. The closure has been treated as a restructuring for
financial reporting purposes, and a total charge of $2.4 million has been
made for the year ended December 31, 1996 related to the Midwest
restructuring. Restructuring activities primarily involve the separation of
the workforce, the closing of the facility, and the termination of existing
leases. Costs for restructuring activities are limited to incremental costs
that directly result from the restructuring activities and that provide no
future benefit to the Company.

F-17

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

10. Acquisition of the Assets of Honorbuilt Industries, Inc. (Continued)

A reserve of $488,000 to cover expected future costs of the restructuring
is recorded as of December 31, 1996. Additionally, the remaining
unamortized goodwill, deferred acquisition costs, and certain property,
plant, and equipment have been charged to restructuring expense during the
year ended December 31, 1996. Recording of the reserves for book purposes
but not for tax purposes has created a related deferred tax asset (Note 6)
that will be realized when the exit plan has been completed.

Commencing June 14, 1996, results of operations of Honorbuilt are included
in the Consolidated Statement of Income for the year ended December 31,
1996. The following unaudited pro forma summary presents information as if
the acquisition of Honorbuilt had occurred at the beginning of 1995. The
pro forma information is provided for informational purposes only. It is
based on historical information and includes adjustments for interest
expense that would have been incurred to finance the purchase, depreciation
adjustments related to asset valuations, and amortization of intangibles.
The pro forma information is not indicative of future results of operations
of the combined companies.

Pro Forma Information
(in thousands, except per share amounts)

Year ended December 31,
1995 1996
----------- -----------

Net Sales......................................... $ 164,005 $ 207,763
Net Income........................................ $ 2,931 $ 2,975
Earnings per common share......................... $ .44 $ .45

11. Commitments and Contingencies

As is customary in the recreational vehicle industry, the Company is
contingently liable under the terms of repurchase agreements with finance
companies which provide secured inventory financing for dealers of the
Company's products. These agreements require the Company to repurchase its
products from the finance company in the event of a dealer's default. The
contingent liability under these agreements approximates the sales price of
the motor coaches, less principal payments made by the dealer. The Company
expects to resell any products repurchased to reduce any liabilities
incurred. Historically, the Company has not experienced significant losses
under these repurchase agreements.

The risk of loss is spread over various dealers and finance companies.
Total secured inventory financing obligations of the Company's dealers, for
which the Company was contingently liable, were approximately $54.1 million
and $82.2 million at December 31, 1995 and December 31, 1996, respectively.

From time to time, the Company is involved in various customer complaints
which arise in the ordinary course of business. The Company does not
believe that losses, if any, incurred under outstanding repurchase
agreements or customer complaint settlements will have a significant impact
on the Company's financial position or results of operations.

In connection with the acquisition of BCI (Note 9), the Company sold a
division of BCI, Collins Trailer, to a third party. The Company guaranteed
certain lease and other commitments assumed by the buyer. As of December
31, 1996, the Company has guaranteed payments under two lease agreements
through December 31, 1997 in the aggregate amount of $288,000. In addition,
the Company has guaranteed the payment of certain notes in the aggregate
amount of $675,000 at December 31, 1996.

F-18

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

12. Employee Benefit Plans

Stock Incentive Plan
Effective October 20, 1994, the Company adopted a stock incentive plan for
key employees and directors of the Company. The plan covers 1.1 million
shares of common stock which have been reserved for by the Company. The
stock options generally become exercisable ratably over a period of three
years from the date of grant at prices equal to the fair market value at
the date of grant. The maximum option term is 10 years. The following table
summarizes option transactions under the plan:

1994 1995 1996
-------- -------- --------

Shares subject to option:
Balance at January 1 - 745,000 781,000
Options granted 745,000 76,000 117,000
Options exercised - (10,564) -
Options terminated - (29,436) (15,000)
-------- -------- --------
Balance at December 31 745,000 781,000 883,000
-------- -------- --------
Weighted average option
price in dollars:
At January 1 $ - $ 7.75 $ 7.82
Options granted 7.75 8.47 9.29
Options exercised - 7.75 -
Options terminated - 7.75 7.75
At December 31 7.75 7.82 7.97

Shares available for
grant at December 31: 355,000 308,436 206,436

The Company applies ABP Opinion 25 and related Interpretations in
accounting for the stock incentive plan. Accordingly, no compensation cost
has been recognized in the accompanying consolidated financial statements.
Had compensation cost for the stock incentive plan been determined based on
the fair value at the grant dates for awards under the plan consistent with
the method of FASB Statement 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:

Pro Forma Information
(in thousands, except per share amounts)

Year ended December 31,
1995 1996
--------- ---------

Net Income As reported $ 4,941 $ 3,583
Pro Forma $ 4,838 $ 3,306

Primary earnings per share As reported $ .74 $ .54
Pro Forma $ .73 $ .50

F-19

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

12. Employee Benefit Plans (Continued)

Stock Incentive Plan (Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected dividend yield:
0.0%, expected volatility: 68.17%, risk-free interest rate: 6.5%, expected
life: 10 years. Results may not be representative of future years because
options are generally granted on an annual basis and vest over time.

Retirement and Savings Plan
Effective July 1, 1995, the Company and its subsidiaries established a
joint 401(k) and Profit Sharing Plan which allows eligible employees to
contribute up to 15% of their compensation annually. The plan allows for a
Company matching percentage based upon the discretion of management, and
$1,000 and $4,000 were contributed by the Company and its subsidiaries to
the plan during the years ended December 31, 1995 and 1996, respectively.
There were no amounts contributed by the Company or its subsidiaries to the
profit sharing element of the plan in 1996.

13. Recapitalization and Initial Public Offering

Effective October 24, 1994, the Company amended its articles of
incorporation to effect a 5,000-for- one split of its common stock, to
increase the authorized number of shares of common stock to 30,000,000 and
to authorize the issuance of up to 5,000,000 shares of preferred stock, the
terms of which may be fixed by the Company's board of directors without
further shareholder approval. This recapitalization of the Company has been
applied retroactively in the accompanying financial statements.

On January 20, 1995, the Company sold 1,552,500 shares of common stock of
SMC Corporation at an offering price of $7.75 per share pursuant to an
Initial Public Offering (the Offering). The proceeds of the Offering, (net
of underwriting discounts and commissions and offering expenses) of $10.1
million, were used to repay borrowings in the amount of approximately $3
million, $2.6 million of which were outstanding at December 31, 1994, and
to repay $5.1 million due under promissory notes issued to shareholders.
The remaining proceeds were used for working capital needs.

In conjunction with the Company's initial public offering, a total of
125,000 warrants were issued to the Underwriters of the Offering. Such
warrants entitle the holder to purchase an equal amount of shares of common
stock of the Company anytime after January 20, 1996 until their expiration
on January 20, 2000 at a price of $9.30 per share. No stock has been
purchased related to the warrants as of the date of this report.

As discussed in Note 6, the Company terminated its S corporation status
effective January 1, 1995 in conjunction with the Offering and,
accordingly, the remaining undistributed S corporation retained earnings at
December 31, 1994 of $1.6 million were reclassified as additional paid-in
capital.

F-20

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

14. Quarterly Financial Information (Unaudited)

First Second Third Fourth
quarter quarter quarter quarter
---------- ---------- ---------- ----------
(In thousands, except per share amounts)

Year ended December 31, 1995:
Revenue $ 34,045 $ 33,885 $ 38,906 $ 41,353
Gross profit 5,157 4,119 4,626 5,441
Net income 2,037 796 916 1,192
Net income per share .31 .12 .14 .18
Pro forma net income 1,351 - - -
Pro forma net income per share .21 - - -
Year ended December 31, 1996:
Revenue 43,102 48,731 56,016 52,986
Gross profit 5,973 6,941 8,112 5,352
Net income (loss) 1,296 1,613 1,814 (1,140)
Net income (loss) per share .20 .24 .27 (.17)

15. Market Information (Unaudited)

The Company's common stock is traded on the Nasdaq National Market System
under the symbol SMCC. The following table sets forth the high and low sale
prices of the stock for each quarter since the Company's January 20, 1995
initial public offering:

1995 1996
High Low High Low
-------- -------- -------- --------

January 20 through March 31 (1995) $ 11.00 $ 8.75 $ - $ -
First Quarter (1996) - - 8.25 6.75
Second quarter 12.50 9.25 10.00 7.375
Third quarter 11.25 8.50 11.25 8.50
Fourth quarter 10.25 6.875 11.25 6.50

F-21

SMC Corporation

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

16. Subsequent Events

In March 1997 Romania RV Center ("Romania") resigned as a dealer for the
Company's products. Sales to Romania represented 19%, 12%, and 10% of total
sales during the years ended December 31, 1994, 1995, and 1996,
respectively. The Company repurchased the motor coaches remaining in
Romania's inventory at the time of termination for their original sales
value of $4.2 million ($3.9 million of coaches sold to Romania before
December 31, 1996 and $261,000 of coaches sold to Romania after December
31, 1996). Concurrent with its termination of the Romania dealer
relationship, the Company initiated a new dealer relationship with
Destinations RV, Inc. ("Destinations"). Destinations purchased all of the
motor coaches that had been repurchased by the Company from Romania for the
Company's repurchase price of $4.2 million. Therefore, no gain or loss was
recorded on the transaction.

Destinations is owned by principals related to an officer of the Company.
The Company's sales of motor coaches to Destinations are at prices
consistent with sales to unrelated third parties.

F-22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 28, 1997 SMC CORPORATION

By: PAUL M. BROWN, JR.
----------------------------------------
Paul M. Brown, Jr.
Senior Vice President -- Finance
and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on March 28, 1997.

Signature Title

MATHEW M. PERLOT President, Chief Executive
- ----------------------------------- Officer and Chairman of the Board
Mathew M. Perlot (Principal Executive Officer)

PAUL M. BROWN, JR. Senior Vice President -- Finance and
- ----------------------------------- Chief Financial Officer (Principal
Paul M. Brown, Jr. Financial and Accounting Officer)

- ----------------------------------- Director
Curtis W. Lawler

Director
- -----------------------------------
Connie M. Perlot

JAMES L. TRAUGHBER Director
- -----------------------------------
James L. Traughber

MILTON L. RAY Director
- -----------------------------------
Milton L. Ray

L. MICHAEL CARY Director
- -----------------------------------
L. Michael Cary

LAWRENCE S. BLACK Director
- -----------------------------------
Lawrence S. Black

EXHIBIT INDEX

Exhibit
No. Description
- ------- -----------

2.1 Order Confirming Second Modified Plan of Reorganization
of Beaver Coaches, Inc. (April 4, 1994) as amended (the
"Plan"), filed May 20, 1994, and Plan; incorporated by
reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-1, Registration No.
33- 85780 (the "1995 S-1")

3.1 Restated Articles of Incorporation; incorporated by
reference to Exhibit 3.1 to the 1995 S-1

3.2 Restated Bylaws; incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994

4.1 See Articles II and V of Exhibit 3.1 and Articles I and
VI of Exhibit 3.2

*10.1 1994 Stock Incentive Plan, as amended; incorporated by
reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994

10.2 Stock Purchase Agreement dated March 28, 1988 among
Curtis Lawler and Sandra Lawler, Mathew M. Perlot and
the Registrant; incorporated by reference to Exhibit
10.2 to the 1995 S-1

10.3 Stock Purchase Agreement dated November 30, 1990 among
L. Michael Cary, Mathew M. Perlot and the Registrant;
incorporated by reference to Exhibit 10.3 to the 1995
S-1

10.4 Revised form of Representatives' Warrant Agreement,
including form of warrant; incorporated by reference to
Exhibit 10.5 to the 1995 S-1

10.5 Manufacturer Agreement dated June 24, 1987 between
General Electric Credit Corporation and

the Registrant; incorporated by reference to Exhibit 10.7
to the 1995 S-1

+10.6 Manufacturer's Financing Agreement dated April 30, 1991
between John Deere Company and the Registrant, and
addenda thereto; incorporated by reference to Exhibit
10.8 to the 1995 S-1

10.7 Repurchase Agreement dated November 30, 1993 between
the Registrant and General Motors Acceptance
Corporation; incorporated by reference to Exhibit 10.9
to the 1995 S-1

+10.8 Floorplan Agreement dated April 14, 1994 between ITT
Commercial Finance Corp. and the Registrant, and
amendment and amendment letters thereto; incorporated
by reference to Exhibit 10.10 to the 1995 S-1

10.9 Lease Assignment and Assumption Agreement dated June
1994 between Beaver Coaches, Inc. and Beaver Motor
Coaches, L.L.C., with Lease dated May 15, 1989 by and
between Frank Storch and James Hogue, dba S&H
Associates, and Beaver Coaches, Inc., and amendments
thereto; incorporated by reference to Exhibit 10.11 to
the 1995 S-1

21.1 Subsidiaries of the Registrant

27.1 Financial Data Schedule

- ----------------

* This exhibit constitutes a management contract or compensatory plan or
arrangement.

+ Confidential treatment has been granted by the Commission for certain
portions of this agreement.