26
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-22268
NATIONAL R.V. HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0371079
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3411 N. Perris Blvd., Perris, California 92571
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (951) 943-6007
Indicate by check 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 whether the registrant is an accelerated filer.
YES __ NO X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 28, 2004
Common stock, par value 10,245,440
$.01 per share
NATIONAL R.V. HOLDINGS, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003.................... 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2004 and 2003..... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003............... 5
Notes to Consolidated Financial Statements.................. 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 12 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 22
Item 4. Controls and Procedures..................................... 23 - 24
PART II - OTHER INFORMATION
Item 5. Other Information........................................... 25
Item 6. Exhibits.................................................... 25
Signature................................................... 26
2
NATIONAL R.V. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2004 2003
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................. $ 11 $ 2,059
Restricted cash............................ 250 250
Receivables, less allowance for doubtful
accounts ($103 and $132, respectively).... 27,941 20,978
Inventories................................ 68,818 51,659
Deferred income taxes...................... 5,885 7,955
Notes receivable........................... 2,737 -
Prepaid expenses........................... 3,270 1,658
Assets held for sale......................... 1,669 -
--------- ---------
Total current assets................... 110,581 84,559
Property, plant and equipment, net.............. 37,312 40,833
Long-term deferred income taxes................. 3,805 3,805
Other........................................... 1,242 1,252
--------- ---------
$ 152,940 $ 130,449
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................. $ 2,150 $ -
Book overdraft............................. 7,228 -
Current portion of long-term debt.......... 1 19
Accounts payable........................... 22,310 14,101
Accrued expenses........................... 21,537 20,770
--------- ---------
Total current liabilities.............. 53,226 34,890
Long-term accrued expenses...................... 7,716 7,569
--------- ---------
Total liabilities............................... 60,942 42,459
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000
shares authorized, 4,000 issued and
outstanding.................................. - -
Common stock - $.01 par value; 25,000,000
shares authorized, 10,242,940 and
10,190,230 issued and outstanding,
respectively............................... 102 102
Additional paid-in capital...................... 36,960 36,463
Retained earnings............................... 54,936 51,425
--------- ---------
Total stockholders' equity................. 91,998 87,990
--------- ---------
$ 152,940 $ 130,449
========= =========
See Notes to Consolidated Financial Statements.
3
NATIONAL R.V. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net sales............................. $ 117,457 $ 84,640 $ 340,977 $ 220,979
Cost of goods sold.................... 108,672 80,756 314,403 219,749
--------- --------- --------- ---------
Gross profit...................... 8,785 3,884 26,574 1,230
Selling expenses...................... 3,512 2,845 9,898 8,285
General and administrative expenses... 3,063 1,543 8,643 5,407
Other expense......................... 374 - 374 -
--------- --------- --------- ---------
Operating income (loss)........... 1,836 (504) 7,659 (12,462)
Interest expense...................... 52 85 130 309
Other income.......................... (25) (2) (72) (6)
--------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes.... 1,809 (587) 7,601 (12,765)
Provision (benefit) for income taxes.. 758 (217) 2,985 (4,723)
--------- --------- --------- ---------
Income (loss) from continuing
operations........................ 1,051 (370) 4,616 (8,042)
--------- --------- --------- ---------
Loss from discontinued operations..... 1,532 503 2,155 1,228
Gain from sale of discontinued
operations............................ (336) - (336) -
Benefit for income taxes.............. (501) (186) (714) (454)
--------- --------- --------- ---------
Net loss from discontinued operations. (695) (317) (1,105) (774)
--------- --------- --------- ---------
Net income (loss)..................... $ 356 (687) 3,511 (8,816)
========= ========= ========= =========
Basic earnings (loss) per common share:
Continuing operations............. $ 0.10 $ (0.04)$ 0.45 $ (0.82)
Discontinued operations........... $ (0.07)$ (0.03)$ (0.11) $ (0.08)
Total............................. $ 0.03 $ (0.07)$ 0.34 $ (0.90)
Diluted earnings (loss) per common share:
Continuing operations............. $ 0.10 $ (0.04)$ 0.45 $ (0.82)
Discontinued operations........... $ (0.07)$ (0.03)$ (0.11) $ (0.08)
Total............................. $ 0.03 $ (0.07)$ 0.34 $ (0.90)
Weighted average number of shares:
Basic............................. 10,222 9,835 10,203 9,833
Diluted........................... 10,426 9,835 10,392 9,833
See Notes to Consolidated Financial Statements.
4
NATIONAL R.V. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss)..................................... $ 3,511 $ (8,816)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation................................... 2,881 2,959
Loss on asset disposal......................... 6 3
Changes in assets and liabilities,
net of discontinued operations:
Increase in trade receivables, net............. (6,963) (11,575)
(Increase) decrease in inventories............. (19,991) 11,326
Decrease in income taxes receivable............ - 7,015
(Increase) decrease in prepaid expenses........ (1,612) 628
Increase in accounts payable................... 8,209 6,256
Increase (decrease) in accrued expenses........ 914 (826)
Decrease (increase) in deferred income taxes... 2,070 (4,876)
-------- ---------
Net cash (used in) provided by operating
activities................................... (10,975) 2,094
-------- ---------
Cash flows from investing activities:
Decrease (increase) in other assets................... 10 (177)
Proceeds from sale of assets..................... 1,932 3
Proceeds from sale of discontinued operation..... 500 -
Purchases of property, plant and equipment....... (3,372) (1,196)
-------- ---------
Net cash used in investing activities.......... (930) (1,370)
-------- ---------
Cash flows from financing activities:
Net advances under (payments on) line of credit....... 2,150 (1,727)
Increase in book overdraft....................... 7,228 499
Principal payments on long-term debt............. (18) (17)
Proceeds from issuance of common stock........... 497 518
-------- ---------
Net cash provided by (used in) financing
activities................................... 9,857 (727)
-------- ---------
Net decrease in cash.................................. (2,048) (3)
Cash, beginning of period............................. 2,059 14
-------- ---------
Cash, end of period................................... $ 11 $ 11
========= =========
See Notes to Consolidated Financial Statements.
5
NATIONAL R.V. HOLDINGS, INC.
PART I, ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - GENERAL
In the opinion of National R.V. Holdings, Inc. (collectively, with its
subsidiaries National R.V., Inc. (NRV) and Country Coach, Inc. (CCI) referred to
herein as the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position,
results of operations and cash flows for all periods presented. Results for the
interim periods are not necessarily indicative of the results for an entire
year. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's latest annual
report on Form 10-K. Certain reclassifications, none of which affected net
income or loss or retained earnings, have been made to prior period amounts to
conform to current period presentation.
NOTE 2 - HISTORY OF RECENT LOSSES
The Company experienced a net profit in the first nine months of 2004 of
$3.5 million compared to a net loss of $8.8 million during the same period last
year. However, the Company had net losses totaling $8.3 million and $21.4
million for the years ended December 31, 2003 and 2002, respectively. Resumed
losses could reduce the Company's liquidity and cause the Company to reduce its
expenditures on capital improvements, machinery and equipment, and research and
development. This could have a negative effect on the Company's ability to
maintain production schedules, manufacture products of high quality, and develop
and manufacture new products that will achieve market acceptance. This could, in
turn, have a negative impact on the Company's sales and earnings. The Company's
losses in 2003 and 2002 were mainly caused by (i) excess manufacturing capacity
and related fixed costs caused by continued low production levels, (ii)
continued significant discounting to wholesale distributors in 2002 and the
first half of 2003, (iii) the recognition of the complete impairment of the
Company's goodwill in 2002, (iv) high warranty costs in 2002 and (v) a workers'
compensation reserve increase in 2002 and continued high workers' compensation
costs in 2003. In spite of improvement in items (i), (ii), (iv) and (v) above
resulting in profitable first, second, and third quarters in 2004 and a
profitable fourth quarter in 2003, there are no assurances that the conditions
that have resulted in the Company's losses in 2003 and 2002 will not resume in
future periods.
As of September 30, 2004, the Company had a deferred tax asset of $9.7
million, which includes the tax benefit of operating loss carryforwards of $5.0
million. Realization is dependent on generating sufficient taxable income prior
to expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
6
NOTE 3 - STOCK BASED COMPENSATION
The Company has stock option plans that enable it to offer equity
participation to employees, officers, and directors as well as certain
non-employees. Stock options may be granted as incentive or nonqualified
options.
The Company has four fixed option plans that reserve shares of common stock
for issuance to executives, key employees, consultants, and directors. The
Company has also issued fixed options outside of such plans pursuant to
individual stock option agreements. Options granted to non-employee directors
generally vest immediately upon grant and generally expire five to ten years
from the date of grant. Options granted to employees, including employee
directors, generally vest in three equal annual installments and expire five to
ten years from the date of grant. The price of the options granted pursuant to
these plans will not be less than 100 percent of the market value of the shares
on the date of grant. There were no options granted during the third quarter of
2004, 24,000 options were granted during the second quarter of 2004 and 236,500
options granted in the first quarter of 2004, and there were no options granted
during 2003.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148), which amends SFAS Statement 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS 148, the Company continues to
measure compensation cost in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations, but provides pro forma disclosures of net income and earnings
per share as if the fair-value method had been applied. The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
Company had applied the fair value recognition provisions to stock-based
employee compensation:
All amounts in thousands except per share amounts
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) - as reported......... $ 356 $ (687) $ 3,511 $ (8,816)
Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects..... 138 64 431 253
-------- -------- --------- ---------
Pro forma net income (loss)............. $ 218 $ (751) $ 3,080 $ (9,069)
======== ======== ========= =========
Basic earnings (loss) per share
as reported............................ $ 0.03 $ (0.07) $ 0.34 $ (0.90)
Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects..... 0.01 0.01 0.04 0.02
-------- -------- --------- ---------
Basic earnings (loss) per share
pro forma.............................. $ 0.02 $ (0.08) $ 0.30 $ (0.92)
======== ======== ========= =========
Diluted earnings (loss) per share
as reported............................ $ 0.03 $ (0.07) $ 0.34 $ (0.90)
Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects..... 0.01 0.01 0.04 0.02
-------- -------- --------- ---------
Diluted earnings (loss) per share
pro forma.............................. $ 0.02 $ (0.08) $ 0.30 $ (0.92)
======== ======== ========= =========
7
The weighted-average fair value of the stock options has been estimated on
the date of grant using the Black-Scholes option-pricing model. The
weighted-average fair value of stock options and the assumptions used to
calculate weighted-average fair value are listed below for new grants during the
nine months ended September 30, 2004. There were no new stock option grants
during the nine months ended September 30, 2003.
September 30, 2004
------------------
Dividend yield 0.0%
Expected volatility 279.1%
Risk-free interest rate 3.45%
Expected lives 4 years
NOTE 4 - SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of the following (in thousands):
September 30, December 31,
2004 2003
---- ----
Finished goods.................... $ 7,957 $ 8,957
Work-in-process................... 32,256 22,142
Raw materials..................... 18,348 13,902
Chassis........................... 10,257 6,658
--------- ---------
Total inventories................. $ 68,818 $ 51,659
========= =========
Accrued expenses consist of the following (in thousands):
September 30, December 31,
2004 2003
---- ----
Current accrued expenses:
Workers' compensation self-insurance reserve. $ 2,975 $ 3,561
Warranty reserve............................. 8,621 8,312
Payroll and other accrued expenses........... 9,941 8,897
--------- ---------
Total current accrued expenses............... $ 21,537 $ 20,770
========= =========
Long-term accrued expenses:
Workers' compensation self-insurance reserve. $ 6,702 $ 6,499
Warranty reserve............................. 219 348
Deferred compensation........................ 795 722
--------- ---------
Total long-term accrued expenses............. $ 7,716 $ 7,569
========= =========
8
NOTE 5 - CREDIT FACILITY
The Company has an asset-based revolving credit facility of $15 million
with UPS Capital Corporation (UPSC). This credit facility expires August 2005.
The Company has reserved $0.3 million from the line-of-credit for one month's
rent on the CCI facility. The remaining $14.7 million is available for general
corporate working capital needs and capital expenditures. Amounts borrowed under
the revolving credit facility bear interest at the prime rate listed in the Wall
Street Journal plus 0.75 percentage points, which was 5.50% at September 30,
2004. The credit facility contains, among other provisions, certain financial
covenants, including net worth requirements. At September 30, 2004, the Company
had outstanding loans under the line-of-credit totaling $2.2 million and the
Company was not in default with any covenants of its loan agreement with UPSC.
NOTE 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
options were exercised or converted into common stock. Shares attributable to
the exercise of outstanding options that are anti-dilutive are excluded from the
calculation of diluted loss per share.
All amounts in thousands except per share amounts.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss)....................... $ 356 $ (687) $ 3,511 $ (8,816)
======= ======== ======= ========
Basic weighted average common shares
outstanding............................ 10,222 9,835 10,203 9,833
Effect of dilutive stock options........ 204 - 189 -
------- -------- ------- --------
Diluted weighted average common shares
outstanding............................ 10,426 9,835 10,392 9,833
======= ======== ======= ========
Basic earnings (loss) per share......... $ 0.03 $ (0.07) $ 0.34 $ (0.90)
======= ======== ======= ========
Diluted earnings (loss) per share....... $ 0.03 $ (0.07) $ 0.34 $ (0.90)
======= ======== ======= ========
Excluded from the computation of diluted earnings per share are outstanding
common stock options with an exercise price greater than the average market
price of the common shares as of September 30, 2004 and September 30, 2003. For
the quarters ended September 30, 2004 and 2003, excluded from the computation of
diluted earnings per share were stock options to purchase 12,000 shares and
1,304,000 shares, respectively. Also for the nine months ended September 30,
2004 and 2003, excluded from the computation of diluted earnings per share were
stock options to purchase 12,000 shares and 1,304,000 shares, respectively.
9
NOTE 7 - DISCONTINUED OPERATIONS
On September 24, 2004, the Company sold its travel trailer business assets
to Weekend Warrior, a privately owned, California-based ramp-trailer
manufacturer. The sale was designed to allow the Company to further concentrate
its efforts and resources on its growing motorhome business. The total selling
price of the business was $3.2 million. The sale included inventory totaling
$2.8 million and equipment totaling $0.1 million. Weekend Warrior paid $0.5
million at closing with the balance to be paid in ten equal monthly payments. In
addition, a payment of 1% of monthly sales for other assets and trademarks will
be made on a monthly basis over a twelve-month period ending September 30, 2005
with a minimum due of $300,000. The Company also entered into a sublease
agreement, which allows Weekend Warrior to lease a portion of the Company's
facilities for up to twelve months. Net sales from discontinued operations for
the three and nine months ended September 30, 2004 were $1.4 million and $14.7
million, respectively. For the three and nine months ended September 30, 2004
the Company recorded a net loss from discontinued operations of $0.7 million and
$1.1 million, respectively. This net loss included a pre-tax gain on the sale of
the discontinued operations of $0.3 million.
NOTE 8 - ASSETS HELD FOR SALE
On October 5, 2004, the Company closed on the sale of land located in
Florida. At September 30, 2004, the Company recorded this property as an asset
held for sale and recorded an impairment loss of $0.3 million related to the
sale of this property which has been recorded in other operating expenses in the
accompanying consolidated statement of operations.
NOTE 9 - COMMITMENTS AND GUARANTEES
As is customary in the industry, the Company generally agrees with its
dealers' lenders to repurchase any unsold RVs in certain circumstances. Although
the Company's maximum potential exposure under these agreements approximated
$111 million at September 30, 2004, as with accounts receivable, the risk of
loss was spread over numerous dealers and lenders and was further reduced by the
resale value of the RVs, which the Company would be required to repurchase.
Losses under these agreements have not been material in the past and management
does not believe that any future losses under such agreements will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
The Company's warranty reserve is established based on its best estimate of
the amounts necessary to settle future and existing claims on products sold as
of the balance sheet date. The Company records an estimate for future
warranty-related costs based on recent actual warranty claims. Also, as part of
the warranty reserve the Company's recall reserve is established, as necessary,
based on management's estimate of the cost per unit to remedy the problem and
the estimated number of units that will ultimately be brought in for the repair.
10
Nine Months Ended September 30, 2004 (in thousands)
Beginning Ending
Balance Additions Deductions Balance
-------- --------- --------- --------
Warranty reserve....... $ 8,660 $ 10,033 $ 9,853 $ 8,840
======== ========= ========= ========
11
NATIONAL R.V. HOLDINGS, INC.
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Disclosure Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results may differ materially from that
projected or suggested herein due to certain risks and uncertainties including,
without limitation, potential fluctuations in the Company's operating results;
resumption of losses; seasonality and economic conditions; dependence on certain
dealers and concentration of dealers in certain regions; dependence on chassis
suppliers; potential liabilities under repurchase agreements; competition;
government regulation; warranty claims; and product liability. Certain risks and
uncertainties that could cause actual results to differ materially from that
projected or suggested are set forth in the Company's filings with the
Securities and Exchange Commission (the "SEC") and the Company's public
announcements, copies of which are available from the SEC or from the Company
upon request. The Company undertakes no obligation to revise or update publicly
any forward looking statements for any reason.
Overview
For the third quarter of 2004, the Company's net income from continuing
operations increased to $1.1 million compared to a loss of $0.4 million for the
same quarter last year. The third quarter's earnings per diluted share from
continuing operations were $0.10 compared to a loss per diluted share from
continuing operations of $0.04 for the third quarter of 2003. Net income from
continuing operations for the nine months ended September 30, 2004 was $4.6
million or $0.45 per diluted share compared to a loss from continuing operations
in the same period of 2003 of $8.0 million or $0.82 per diluted share. Net
sales, from continuing operations, for the third quarter of 2004 increased to
$117.5 million from $84.6 million for the third quarter of 2003, an increase of
39%.
During the third quarter, the Company sold its Travel Trailer business,
which it recorded as a discontinued operation. The sale was designed to allow
the Company to further concentrate its efforts and resources on its growing
motorhome business. For the three and nine months ended September 30, 2004 the
Company recorded a net loss from discontinued operations of $0.7 million and
$1.1 million, respectively. The net loss on discontinued operations for the
three and nine months ended September 30, 2004 included a pre-tax gain on the
sale of the Travel Trailer business of $0.3 million.
Net income for the third quarter of 2004 was $0.4 million, or $0.03 per
diluted share, as compared to a net loss of $0.7 million, or $0.07 per diluted
share in the third quarter of 2003. The Company's improved results were driven
by stronger demand for its products as well as progress made by the Company in
its gross margins compared to those in the comparable periods of 2003. The
Company's results for the first three quarters of 2004 have also benefited from
a healthy economy and strong industry demand.
12
Operating Performance
Continual effort to improve the safety of the workforce and decrease its
workers' compensation costs resulted in an approximate $1.0 million reduction in
workers' compensation costs for the third quarter of 2004 compared to the third
quarter of 2003. Continued reductions are part of the strategy throughout 2004,
though workers' compensation costs continue to be a challenge in California. The
Company has undertaken significant safety programs to address these costs and
the Company is being more proactive in the handling of its claims. In addition
to these measures, which are helping, the Company believes that its workers'
compensation costs should be further reduced by recent state reforms, although
no assurance can be provided.
Other factors leading to the improvement in gross profit margin percentage
from last year's third quarter include higher sales, production levels and price
increases, partially offset by various items including production inefficiencies
and increased discounting. Both National RV and Country Coach have increased
production during the nine months ended September 30, 2004.
As new and revitalized products have come on-line, the Company has seen a
rise in wholesale deliveries and an improvement in Class A retail market share,
from 5.9% for the first eight months of 2003 to 6.7% for the first eight months
of 2004. Both the industry and the Company have experienced a shift to the more
profitable diesel versus gas product lines. Stronger product offerings and the
resulting increase in demand have reduced the need to discount many of the
Company's products through the first nine months of 2004 though there can be no
assurance that future demand and competitive conditions will not cause the
Company to increase discounts in future periods.
Looking Forward
Many of the same objectives the Company addressed last year remain in place
for the current year. Aggressive product development, cost containment, and
increased customer satisfaction are three of those objectives.
The 2004 third quarter saw the release of the remaining 2005 model year
offerings. National R.V. expects to introduce the Tradewinds and Islander
diesel-powered products at the industry's annual tradeshow in early December
2004.
Cost containment remains a high priority, specifically in the manufacturing
cost areas, warranty, and workers' compensation. The Company continues to focus
on improving the quality of its motorhomes resulting in decreased warranty
costs. Also, the Company has instituted a number of safety programs, which have
already resulted in measurably reduced workers' compensation costs. The Company
expects further progress in containing its costs as it continues to implement
lean manufacturing concepts.
The Company is continually striving to increase its customer support by
improving club support, telephone support for owners and dealers, and parts
fulfillment. The Company utilizes various techniques such as surveys and focus
groups to ensure that it is improving in the area of customer satisfaction.
A renewed focus on dealer acquisition and enhanced training programs for
the Company's workforce, service centers, dealers, and consumers are also key
initiatives. The Company has already undertaken efforts in the areas of safety;
with new distance learning capabilities, the Company is looking forward to
broadcasting its service training programs directly to dealers and service
providers, driving the movement for increased customer satisfaction in areas of
technical maintenance. In addition, factory-training programs are providing the
Company's customers a basis for self-diagnostics and a better understanding of
the equipment they are operating.
13
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses for each period.
The following represents a summary of the Company's critical accounting
policies, defined as those policies that the Company believes are: i) the most
important to the portrayal of the Company's financial condition and results of
operations, and ii) that require the Company's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain.
Valuation of Long-Lived Assets. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. If indicators of
impairment were present, the Company would evaluate the carrying value of
property and equipment, in relation to estimates of future undiscounted cash
flows of the underlying business, which are based on judgment and assumptions.
Warranty Reserve. The Company's warranty reserve is established based on
its best estimate of the amounts necessary to settle future and existing claims
on products sold as of the balance sheet date. The Company records an estimate
for future warranty-related costs based on recent actual warranty claims. Also,
the Company's recall reserve is established, as necessary, based on management's
estimate of the cost per unit to remedy the problem and the estimated number of
units that will ultimately be brought in for the repair. While the Company's
warranty costs have historically been within its expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same warranty costs that it has in the past. A significant increase in
dealer shop rates, the cost of parts or the frequency of claims could have a
material adverse impact on the Company's operating results for the period or
periods in which such claims or additional costs materialize.
Revenue Recognition. The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements,
or SAB 104. SAB 104 requires that four basic criteria must be met before revenue
can be recognized: i) persuasive evidence of an arrangement exists, ii) delivery
has occurred and title and the risks and rewards of ownership have been
transferred to the customer, iii) the price is fixed and determinable, and iv)
collectibility is reasonably assured. Assuming that all of the above criteria
were satisfied, sales are recorded by the Company when the unit is accepted by
the dealer.
14
Legal Proceedings. The Company is currently involved in certain legal
proceedings and has accrued its estimate of the probable costs for the
resolution of these claims. This estimate has been developed in consultation
with counsel handling the Company's defense in these matters and is based upon
an analysis of potential results, assuming a combination of litigation and
settlement strategies.
Deferred Tax Asset. As of September 30, 2004, the Company had a deferred
tax asset of $9.7 million, which includes the tax benefit of operating loss
carryforwards of $5.0 million. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
Valuation of Inventory. Inventory is valued at the lower of cost (estimated
using the first-in, first-out method) or market. The Company periodically
evaluates the carrying value of inventories and maintains an allowance for
excess and obsolescence to adjust the carrying value as necessary to the lower
of cost or market or to amounts on hand to meet expected demand in the near
term. Unfavorable changes in estimates of obsolete inventory would result in an
increase in the allowance and a decrease in gross profit.
Workers' Compensation Reserve. The Company's workers' compensation reserve
is established based on its best estimate of the amounts necessary to settle
future and existing employee workers' compensation claims as of the balance
sheet date. The Company records an estimate for future workers' compensation
related costs based on historical workers' compensation claims paid. Even though
the Company's workers' compensation costs have been growing during the past
several years these costs have declined in 2004 and, the Company cannot provide
assurance that these costs will continue at these levels, increase or decrease,
in the near term. A significant change in California workers' compensation
legislation, the cost of claims or the frequency of claims could have a material
adverse impact on the Company's operating results for the period or periods in
which such claims or additional costs materialize.
Liquidity and Capital Resources
The Company's primary sources of liquidity are internally generated cash
from operations and available borrowings under its credit facility. At September
30, 2004, the Company had working capital of $57.4 million compared to $49.7
million at December 31, 2003. This increase of $7.7 million was primarily due to
a $17.2 million increase in inventory and a $7.0 million increase in accounts
receivable, partially offset by an $8.2 million increase in accounts payable and
a $7.2 million book overdraft increase. Both the increase in accounts payable
and the increase in inventory are primarily due to the Company's purchasing and
production increases to meet the market demand for its products. During the
first nine months of 2004, the Company used cash in its operations of $11.0
million, compared to $2.1 million of cash provided by its operations during the
first nine months of 2003.
15
Net cash used in investing activities was $0.9 million for the nine months
ended September 30, 2004. This is primarily comprised of $3.4 million in
purchases of property, plant, and equipment, partially offset by proceeds of
$1.9 million from the sale of real property, and by proceeds of $0.5 million
received as partial payment from the sale of the travel trailer business.
Net cash provided by financing activities was $9.9 million for the nine
months ended September 30, 2004, which was primarily explained by an increase in
book overdraft of $7.2 million and advances under the line of credit of $2.2
million.
The Company's consolidated financial statements have been presented on the
basis that it will continue as a going-concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has suffered net losses of $8.3 million, $21.4 million
and $11.5 million for the years ended December 31, 2003, 2002 and 2001,
respectively. For the year ended December 31, 2003, the Company provided cash
from operating activities totaling $7.2 million and used cash in operating
activities of $4.4 million and $12.6 million for the years ended December 31,
2002 and 2001, respectively.
The Company has funded its financial needs primarily through operations and
its existing line of credit. At September 30, 2004, the Company had cash and
cash equivalents of $11,000 (excluding restricted cash totaling $0.3 million
dollars required to secure a letter-of-credit in connection with one of the
Company's insurance policies), working capital of $57.4 million, and $12.5
million available under the credit facility. The Company remains dependent upon
its ability to obtain outside financing either through the issuance of
additional shares of its common stock or through borrowings until it achieves
sustained profitability through a combination of increased sales and improved
product margins. The Company has an asset-based revolving credit facility of $15
million with UPS Capital Corporation (UPSC). This credit facility expires August
2005. The Company has reserved $0.3 million from the line-of-credit for one
month's rent on the CCI facility. The remaining $14.7 million is available for
general corporate working capital needs and capital expenditures. Amounts
borrowed under the revolving credit facility bear interest at the prime rate
listed in the Wall Street Journal plus 0.75 percentage points. The credit
facility contains, among other provisions, certain financial covenants,
including net worth requirements. At September 30, 2004, the Company had
outstanding advances under the line-of-credit totaling $2.2 million and the
Company was not in default with any covenants of its loan agreement with UPSC.
In August 2004, the Company entered into an agreement to acquire for $3
million approximately 73 acres of land adjacent to its Country Coach, Inc.
facility in Junction City, Oregon. The closing of the purchase is subject to
customary closing conditions and is expected to occur in early 2005. The Company
believes the combination of internally generated funds and unused borrowing
availability will be sufficient to meet this obligation.
Management is focused on continuing to improve liquidity through certain
initiatives throughout 2004 including: i) a reduction of manufacturing costs
resulting from the continued implementation of lean manufacturing concepts, ii)
further reduction of warranty costs, and iii) a reduction of workers'
compensation costs.
16
The Company believes the combination of internally generated funds, working
capital, and unused borrowing availability will be sufficient to meet the
Company's planned capital and operational requirements for at least the next 12
months. Should the Company require further capital resources during the next 12
months, it would most likely address such requirements through a combination of
sales of equity securities, sales of excess properties, and/or additional debt
financings. If circumstances changed, and additional capital was needed, no
assurance can be given that the Company would be able to obtain such additional
capital resources.
If unexpected events occur requiring the Company to obtain additional
capital and it is unable to do so, it then might attempt to preserve its
available resources by deferring the creation or satisfaction of various
commitments, deferring the introduction of various products or entry into
various markets, or otherwise scaling back its operations. If the Company were
unable to raise such additional capital or defer certain costs as described
above, such inability would have an adverse effect on the financial position,
results of operations, cash flows and prospects of the Company.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales represented by certain items reflected in the Company's Consolidated
Statements of Operations:
Percentage of Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................... 92.5 95.4 92.2 99.4
Gross profit...................... 7.5 4.6 7.8 0.6
Selling expenses...................... 3.0 3.4 2.9 3.8
General and administrative expenses... 2.6 1.8 2.6 2.4
Other expense......................... 0.3 0.0 0.1 0.0
----- ----- ----- -----
Operating income (loss)........... 1.6 (0.6) 2.2 (5.6)
Interest expense...................... 0.0 0.1 0.0 0.1
Other income.......................... (0.0) (0.0) (0.0) (0.0)
----- ----- ----- -----
Income (loss) from continuing
operations before income taxes..... 1.6 (0.7) 2.2 (5.7)
Provision (benefit) for income taxes.. 0.7 (0.3) 0.9 (2.1)
Income (loss) from continuing
operations............................ 0.9% (0.4)% 1.3% (3.6)%
----- ----- ----- -----
Loss from discontinued operations..... 1.3 0.6 0.6 0.6
Gain from sale of discontinued
operations............................ (0.3) (0.0) (0.1) (0.0)
Benefit for income taxes.............. (0.4) (0.2) (0.2) (0.2)
----- ----- ----- -----
Net loss from discontinued operations. (0.6) (0.4) (0.3) (0.4)
----- ----- ----- -----
Net income (loss)................... 0.3% (0.8)% 1.0% (4.0)%
===== ===== ===== =====
17
Comparison of Continuing Operations for the Three and Nine Months Ended
September 30, 2004 to the Three and Nine Months Ended September 30, 2003:
(Amounts in tables are in thousands, except percentages)
Net sales
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Net sales.................... $117,457 38.8% $84,640 $340,977 54.3% $220,979
as a percent of net sales.... 100.0% 100.0% 100.0% 100.0%
Net sales of $117.5 million for the quarter ended September 30, 2004
represent an increase of $32.8 million or 38.8% from the same quarter last year.
Third quarter wholesale unit shipments of diesel motorhomes were 330, up 11%
from 297 units during the same period last year. Quarterly shipments of gas
motorhomes were 494, up 54% from 321 units during the same period last year.
Net sales of $341.0 million for the nine months ended September 30, 2004
represent an increase of $120.0 million or 54.3% from the same period last year.
Wholesale unit shipments of diesel motorhomes were 1,066, up 42% from 752 units
during the same period last year. Wholesale unit shipments of gas motorhomes
were 1,362, up 44% from 946 units during the same period last year.
Revenues in the quarter for National RV were $61.8 million, up 47% from
$42.0 million for the third quarter of last year. Revenues in the quarter for
Country Coach were $55.7 million, up 31% from $42.6 million for the third
quarter of last year. Revenues during the first nine months for National RV were
$181.4 million, up 41% from $128.6 million during the first nine months of 2003.
Revenues during the first nine months for Country Coach were $159.6 million, up
73% from $92.4 million during the first nine months of 2003. The increase in net
sales is mainly attributable to strong sales of National RV's Tropi-Cal which
was introduced in the first quarter of 2003 and of Country Coach's Inspire which
was introduced in the second quarter of 2003, as well as an overall increase in
the demand for the Company's other products. The Company also benefited from a
healthy economy and strong industry demand.
Gross profit margin
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Gross profit margin......... 7.5% 63.0% 4.6% 7.8% 100.0% 0.6%
The gross profit margin for the third quarter of 2004 was 7.5% compared to
a 4.6% gross margin for the same period last year. For the first nine months of
2004, the gross profit margin was 7.8% compared to a 0.6% gross profit margin
for the same period last year. The primary factors that led to the improved
gross margins were higher production levels, product price increases, and
reduced workers' compensation costs, with the third quarter gross profit margin
also being partially offset by various items including production inefficiencies
and increased discounting.
18
Selling expenses
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Selling expenses............. $3,512 23.4% $2,845 $9,898 19.5% $8,285
as a percent of net sales.... 3.0% 3.4% 2.9% 3.8%
Selling expenses increased $0.7 million or 23.4% for the three months ended
September 30, 2004 over the same period last year. Selling expenses for the nine
months ended September 30, 2004 increased $1.6 million or 19.5% over the same
period last year. Sales costs increased mainly due to increased sales
commissions resulting from higher sales. However, as a percentage of net sales,
selling expenses decreased due to higher sales over which to spread the fixed
selling expenses.
General and administrative expenses
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
General and administrative
expenses..................... $3,063 98.5% $1,543 $8,643 59.8% $5,407
as a percent of net sales..... 2.6% 1.8% 2.6% 2.4%
General and administrative expenses totaling $3.1 million for the quarter
ended September 30, 2004 were up $1.5 million, or 98.5%, compared to the same
period last year. For the first nine months of 2004, general and administrative
expenses were $8.6 million, representing an increase of $3.2 million, or 59.8%,
compared to the same period last year. The increase in general and
administrative expenses is due to increased expenses related to compliance with
the Sarbanes-Oxley Act, increased personnel expenses, a new employee incentive
program, and increased training (principally safety) expenses.
19
Other expense
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Other expense............... $374 100.0% - $374 100.0% -
as a percent of net sales... 0.3% 0.0% 0.1% 0.0%
Other expense for the three months and nine months ended September 30, 2004
was primarily the impairment charge on the real property in Florida.
Interest expense
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Interest expense............ $52 (38.8)% $85 $130 (57.9)% $309
as a percent of net sales... 0.0% 0.1% 0.0% 0.1%
Interest expense for the three months ended September 30, 2004 and 2003 was
$0.05 million and $0.09 million, respectively. For the first nine months of
2004, interest expense was $0.1 million compared to $0.3 million for the same
period last year. The reduction in interest expense is attributable to lower
borrowing on the line of credit when comparing the third quarter of 2004 to the
same period last year. As a percentage of net sales, interest expense for these
periods was immaterial.
Other income
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Other income................ $(25) 100.0% $(2) $(72) 100.0% $(6)
as a percent of net sales... (0.0)% (0.0)% (0.0)% (0.0)%
The components of other income during the three months and nine months
ended September 30, 2004 are immaterial. The other income during the same period
in 2003 was immaterial.
Provision (benefit) for income taxes
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Provision (benefit) for
income taxes.............. $758 N/A $(217) $2,985 N/A $(4,723)
as a percent of net sales.. 0.7% (0.3)% 0.9% (2.1)%
The effective tax rate for the three and nine months ending September 30,
2004 was 41.9% and 39.3% respectively, compared to 37.0% for the same periods
last year. The increase in the effective tax rate for the three and nine months
ending September 30, 2004 was the result of a higher Federal tax rate, related
to projected increases in annual pre-tax profit, and increased state tax rates
and obligations.
20
Net loss from discontinued operations
Three Months Ended Nine Months Ended
September 30, September 30,
Percent Change Percent Change
2004 2003 2004 2003
---- ---- ---- ----
Net loss from discontinued
operations.................... $(695) N/A $(317) $(1,105) N/A $(774)
as a percent of net sales..... (0.6)% (0.4)% (0.3)% (0.4)%
On September 24, 2004, the Company sold its Travel Trailer business assets
to Weekend Warrior, a privately owned, California-based ramp-trailer
manufacturer. The net loss from discontinued operations for the three months
ended September 30, 2004 was $0.7 million compared to a net loss of $0.3 million
for the same period last year. The net loss for the nine months ended September
30, 2004 was $1.1 million compared to a net loss of $0.8 million for the same
period last year. The net loss on discontinued operations for the three and nine
month ended September 30, 2004 included a pre-tax gain on the sale of $0.3
million.
21
NATIONAL R.V. HOLDINGS, INC.
PART I, ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no significant financial instruments. The Company has not
entered into any derivative financial instruments. The Company does not have any
significant foreign currency exposure because it does not transact business in
foreign currencies. However, the Company is exposed to market risk as a result
of interest rate changes (Interest Rate Risk). Interest rate risk relates
primarily to cash investments in money market funds. Cash balances invested in
these funds are insignificant and consequently, interest rate risk is minimal.
22
NATIONAL R.V. HOLDINGS, INC.
PART I, ITEM 4 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Exchange Act Rule 13a-15(e) and 15d-15(e). In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the quarter covered by this Report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no changes in the Company's internal controls over
financial reporting during the fiscal quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will
be required, beginning with its fiscal year ending December 31, 2004, to include
in its annual report management's assessment of the effectiveness of the
Company's internal controls over financial reporting and the Company's audited
financial statements as of the end of its prior fiscal year. Furthermore, the
Company's independent registered public accountants, PricewaterhouseCoopers LLP,
will be required to express an opinion on management's assessment and an opinion
on the effectiveness of the Company's internal controls over financial reporting
based on its audit. The Company has not yet completed the documentation of its
internal controls nor its assessment of the effectiveness of internal controls
over financial reporting for purposes of the Sarbanes-Oxley Act of 2002. As a
result, PricewaterhouseCoopers LLP has advised the Company that it has serious
concerns that the Company may not be in a position to complete its work on a
timely basis. The Company continues to diligently and vigorously review its
internal controls over financial reporting in order to ensure compliance with
the Section 404 requirements, however, due to the number of controls to be
examined, the complexity of the project, as well as the subjectivity involved in
determining effectiveness of controls, the Company cannot be certain that it
will complete its Section 404 compliance work on a timely basis or, if it does,
that all of the Company's internal controls will be considered effective. In
addition, the guidelines for the evaluation and attestation of internal controls
systems have only recently been formalized, and the evaluation and attestation
processes are new and untested. Therefore, the Company can give no assurances
that its systems will satisfy the new regulatory requirements.
23
If the Company fails to timely complete its Section 404 compliance work,
including this assessment, or if the Company's independent public accounting
firm cannot timely attest to the Company's assessment, the Company could be
subject to regulatory sanctions and a loss of public confidence in its internal
controls. Also, any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm the Company's
operating results or commercial relationships or cause the Company to fail to
timely meet its regulatory reporting obligations. Any of these failures could
have a negative effect on the trading price of the Company's stock.
24
NATIONAL R.V. HOLDINGS, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 24, 2004 the Company modified its Loan Agreement with UPS
Capital Corporation to amend one of the financial covenants.
ITEM 6. EXHIBITS
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
10.1 Loan Modification Agreement No. 2 dated as of September 24, 2004
between UPS Capital Corporation and the Company.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL R.V. HOLDINGS, INC.
----------------------------
(Registrant)
Date: November 12, 2004 By /s/ JOSEPH W. HANSEN, Esq.
-----------------------------
Joseph W. Hansen
Chief Financial Officer
(Principal Accounting and
Financial Officer)
26