SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

REXHALL INDUSTRIES, INC.

46147 7th Street West, Lancaster, California 93534
(Address of principal executive offices) (Zip Code)

(661) 726-0565
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x.

As of May 11, 2004, there were 5,872,700 shares of common stock outstanding.

REXHALL INDUSTRIES, INC.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. — Condensed Consolidated Financial Statements

REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes to condensed consolidated financial statements

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REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to condensed consolidated financial statements

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REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to condensed consolidated financial statements

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REXHALL INDUSTRIES, INC.

Notes to the Condensed Consolidated Financial Statements

March 31, 2004

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, they include all adjustments, consisting of normal accruals, necessary to present fairly the information set forth herein in accordance with accounting principles generally accepted in the United States of America for interim reporting.

For further information refer to the Financial Statements and footnotes included in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.

The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

2. Use of Estimates

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Earnings Per Share

Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Basic and diluted earnings per share are the same for all periods presented as the Company has no potentially dilutive securities outstanding.

4. Inventory

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5. Property & Equipment

At March 31, 2004, the Company’s customer service Center in Mesa, Arizona was listed as held for sale. The facility is approximately 10,000 square feet on four acres of land, with a net book value of $1,189,000 as of March 31, 2004.

Additionally, at March 31, 2004, the Company’s property in Acton, California was listed as held for sale with a net book value of $201,000. Originally purchased for $401,000 in December 2000 by the Company and Mr. William J. Rex, the Company’s President and Chief Executive Officer, the property is approximately 1.7 acres with a partially constructed building on its premises. The Company and Mr. Rex each contributed 50% of the purchase price and agreed to share equally in the final construction of the building on the property. The Company paid $151,000 on behalf of Mr. Rex in exchange for a $151,000 note receivable. The note is secured by the executive’s interest in the property.

Item 2. — Management Discussion and Analysis of Financial Condition and Results of Operations.

As used in this Report, “we,” “us,” “our,” “Rexhall” or the “Company” refer to Rexhall Industries, Inc. and, where applicable, its consolidated subsidiary.

All statements in this discussion and analysis which relate to future sales, costs, capital expenditures or earnings are “Forward-Looking Statements” and should be read subject to the assumptions contained in the section “Forward-Looking Statements”.

Critical Accounting Policies

In the ordinary course of business, management has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require the most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Valuation of Inventory

The Company values inventories at the lower of cost or market with cost determined using the first-in, first-out (FIFO) method. Adjustments to the value of inventory are recorded based upon damage, deterioration, obsolescence and changes in market value. In determining market value, management has considered its current replacement cost ensuring it does not exceed net realizable value (i.e., estimated selling price in the ordinary course of business less estimated costs of completion and disposal). Management has evaluated the current level of inventories considering the order backlog and other factors in assessing estimated selling prices and made adjustments to cost of goods sold for estimated decrease in the net realizable value of inventory. Actual results may differ significantly from these estimates under different assumptions or conditions.

Legal Accrual

The Company’s current estimated range of liability related to some of the pending litigation is accrued based on claims for which it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, management will assess the potential liability related to the pending litigation and revise the estimates. Such revisions in the estimates of the potential liability could materially impact the results of operation and financial position.

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Warranty Costs

The Company provides an estimate for accrued warranty costs at the time a product is sold. This estimate is based on historical average per-unit repair costs and current dealer inventories, as well as other reasonable assumptions as have been deemed appropriate by management. However, actual costs may vary from estimates, requiring adjustments to warranty reserves. These reserves are reviewed by management on a quarterly basis and adjusted accordingly. 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.

There have been no material changes in our critical accounting policies from the filing of our Annual Report filed on Form 10-K for the year ended December 31, 2003

Results of Operations

Comparison of the three months ended March 31, 2004 to the three months ended March 31, 2003.

Revenues — 2004 compared to 2003

Net revenues for the quarter ended March 31, 2004 were $4,779,000 as compared to $12,946,000 for the same quarter in 2003. This represents a 63% decrease from the prior year. Net units sold for the quarter ended March 31, 2004 were 51 compared to 152 for the quarter ended March 31, 2003, a 66% decrease. Wholesale shipments of the Company’s gas motorhomes were down 57%, while diesel shipments were down 69% when compared to last year’s first quarter.

The Company’s sales continued to be below prior year levels and have declined significantly while the industry, in general, has experienced increased sales. Management believes the decline is a result of two major factors. Availability of external flooring sources has diminished for many of the Company’s dealers, and as a result, its dealer network has similarly diminished. In contrast, many of the Company’s larger competitors provide flooring for its dealers-making it easier for dealers to do business with the larger manufacturer. Management also believes its premature announcement of the new T-Rex floorplans has caused sales of its standard-line products to suffer, while its dealers opt to “wait and see” how the T-Rex will be received by the public, and to reserve its limited flooring for the T-Rex.

Gross Profit — 2004 compared to 2003

Gross profit decreased to $491,000 from $1,602,000 for the same quarter in 2003, which is a decrease of $1,111,000 or 69%. Gross margin was 10% as compared to 12% last year. The decrease in gross margin was primarily due to a decrease in production and increases in per-unit direct labor and manufacturing expense related to rework done on T-Rex slide units.

Selling, General, Administrative and Other Expenses — 2004 compared to 2003

Selling, General, Administrative and Other Expenses decreased by approximately $772,000 from the first quarter of 2003 to the first quarter of 2004. The decrease in SG&A expenses is largely related to a $480,000 reduction in warranty costs, a $238,000 reduction in administrative salaries and bonus, and a $63,000 reduction in advertising expense. Selling, general, administrative and other expenses increased to 19% as a percentage of sales when compared to 13% for the quarter ended March 31, 2003 primarily as a result of the decline in sales.

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Income Taxes — 2004 compared to 2003

Income tax expense was $2,000 for the quarter ended March 31, 2004 as compared to a benefit of $32,000 in the same quarter of 2002. Income taxes are provided based upon the estimated effective tax rate for the entire fiscal year applied to the pre-tax income for the period. The effective tax rate is subject to ongoing evaluation by management.

Financial Condition, Capital Resources and Liquidity

The Company has relied primarily on internally generated funds, trade credit and debt to finance its operations and expansions. As of March 31, 2004, the Company had working capital of $10,964,000, compared to $11,341,000 at December 31, 2003. The $377,000 decrease in working capital is primarily due to a $1,477,000 decrease in cash, a $255,000 decrease in accounts receivable, and a $576,000 increase in accounts payable, partially offset by a $283,000 increase in inventory, a $1,141,000 decrease in the chassis vendor line of credit, a $361,000 decrease in warranty accrual, and a $186,000 decrease in the legal accrual.

Capital expenditures during the first three months of 2004 were $15,000. The Company has made no commitments for, and does not expect to make material capital expenditures for the remaining three quarters of 2004-depending upon market conditions.

As of September 30, 2003, the Company had eliminated its entire $2,500,000 Line of Credit with a bank, which included an Irrevocable Standby Letter of Credit for the Company to meet the requirements for self-insurance established by the Department of Industrial Relations which regulates Worker’s Compensation Insurance in California. Because Rexhall had never drawn from this line of credit, and due to the costs and liability associated with maintaining a line of revolving credit, Rexhall eliminated its line during the second and third quarters. The requirements for self-insurance are now being met through the California Self Insurer’s Security Fund and its Alternative Security Program (ASP). Under the ASP, the fund will arrange for a composite security deposit for participating self-insurers rather than rely on such members to arrange for their security deposits on an individual basis. The Company’s covered deposit under this plan is $711,427.

The Company has a line of credit with a chassis vendor, Ford Motor Credit Company (“FMCC”), with a $3,500,000 limit. Borrowings under the line bear interest at an annual rate of prime plus 1% (5.00% at March 31, 2004). All borrowings are secured by the Ford merchandise. The outstanding balance at March 31, 2004 was $2,421,000.

Additionally, the Company has a financing agreement with GE Capital for the purchase of chassis from Workhorse Custom Chassis. The limit on this line of credit is $1,600,000. Borrowings under this line of credit bear interest at the rate of prime plus 1% (5.00% at March 31, 2004). The chassis purchased from Workhorse secure borrowings under this line of credit. The outstanding balance under this line of credit was $870,000 at March 31, 2004.

In light of the Company’s elevated inventory levels at the start of 2004, management expects cash requirements for the year to be significantly lower as the Company uses up its material and raw chassis inventory and sells through its finished goods inventory. Accordingly, the Company anticipates that it will be able to satisfy its ongoing cash requirements through 2004 primarily with cash flows from operations and chassis purchase lines of credit. Additional cash may be generated through the Company’s sale of its Mesa, Arizona and Acton, California facilities, provided the Company is able to sell the properties in the near future.

Repurchase Agreements — Motorhomes purchased by dealers, under financing agreements with third party lenders are subject to repurchase by the Company under the terms of the financing, at dealer cost and might include unpaid interest and other costs in the event of default by the dealer. During the three months ended March 31, 2004 and 2003, the Company repurchased approximately $818,000 and $528,000 respectively, (wholesale value) of motorhomes under these agreements. At March 31, 2004 and 2003, approximately $12,310,000 and $26,950,000, respectively, of dealer inventory was covered by repurchase agreements. Dealers do not have the contractual right to return motorhomes under any

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Rexhall Dealer Agreement. The repurchase agreements require the dealers to default or file for bankruptcy. There are also a number of state statutes that under certain conditions require the repurchasing of motorhomes whenever a dealership is terminated.

New Accounting Pronouncements

None.

Certain Risk Factors That Could Affect Future Results

You should carefully consider and evaluate all of the information in this Form 10-Q, including the risk factors listed below. The risks described below are not the only ones facing our company. Additional risk not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Form 10-Q. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-Q.

Potential Fluctuations in Operating Results. The Company’s net sales, gross margin and operating results may fluctuate significantly from period to period due to factors such as the mix of products sold, the level of discounting employed on the Company’s products, the ability to utilize or expand manufacturing resources efficiently, material shortages, the introduction and consumer acceptance of new models offered by the Company, competition, warranty expense, the addition or loss of dealers, the timing of trade shows and rallies, and factors affecting the recreational vehicle industry as a whole, such as cyclicality and seasonality. In addition, the Company’s overall gross margin will be impacted by shifts in the Company’s product. Due to the relatively high selling prices of many of the Company’s motorhome models, a relatively small variation in the number of recreational vehicles sold in any quarter can have a significant effect on sales and operating results for that quarter.

Continuation of Losses. The Company has had net losses totaling $2.4 million, $935,000 and $2.0 million for 2003, 2002 and 2001, respectively, net losses of $430,000 in the three months ended March 31, 2004. Continued losses could reduce the Company’s liquidity. 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. If the Company continues to suffer losses, the Company could be unable to implement its business and financial strategies or meet its obligations when due.

Cyclicality, Seasonality and Economic Conditions. The recreational vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic conditions, which affect disposable income for leisure-time activities. Concerns about the availability and price of gasoline, decreases in consumer confidence, increases in interest rates and reductions in available financing have had, and may in the future have, an adverse impact on recreational vehicle sales. Seasonal factors, over which the Company has no control, also have an effect on the demand for the Company’s products. Demand in the recreational vehicle industry declines over the winter season, while sales are generally highest during the spring and summer months.

Dependence on Certain Dealers. For the year ended December 31, 2003, two dealers accounted for 14%, and 11%, respectively, of the Company’s net sales. The loss by the Company of one or more of these dealers could have a material adverse effect on the Company’s financial condition and results of operations.

Dependence on Chassis Suppliers. One of the principal components used in the manufacture of motorhomes is the chassis, which includes the engine, drive train and other operating components. The

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Company obtains the chassis required for its motorhomes from Ford Motor Company, Workhouse Custom Chassis and, to a lesser extent, Spartan Motors. As is standard in the industry, arrangements with such suppliers permit them to terminate their relationship with the Company at any time. Lead times for the delivery of chassis frequently exceed six weeks and the recreational vehicle industry as a whole has from time to time experienced temporary shortages of chassis. If any of the Company’s suppliers were to discontinue the manufacture of chassis utilized by the Company in the manufacture of its Class A motorhomes, materially reduce their availability to the recreational vehicle industry in general or limit or terminate their availability to the Company in particular, the business and financial condition of the Company could be materially and adversely affected.

Repurchase Arrangements. As is typical in the recreational vehicle industry, the Company enters into repurchase agreements with the financing institutions used by its dealers to finance their purchases of the Company’s Class A motorhomes. These agreements require the Company to repurchase the dealer’s inventory in the event that the dealer does not repay its lender. Obligations under these agreements vary from period to period, but totaled approximately $16.6 million as of December 31, 2003 and $12.3 million at March 31, 2004. During the three months ended March 31, 2004, the Company repurchased approximately $818,000 in the wholesale value of motorhomes. If the Company became obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results, and financial condition could be adversely affected.

Competition. The Company competes with numerous manufacturers, many of which have multiple product lines of recreational vehicles, which are larger and have substantially greater financial and other resources than the Company. In addition, sales of used recreational vehicles provide competition to recreational vehicle manufacturers.

Government Regulation. The Company is subject to numerous federal, state and local regulations governing the manufacture and sale of its motorhomes. It is also subject to federal and numerous state consumer protection and unfair trade practice laws and regulations relating to the sale, transportation and marketing of motor vehicles, including so-called “Lemon Laws”. Federal and state laws and regulations also impose upon vehicle operators various restrictions on the weight, length and width of motor vehicles, including buses and motor homes, that may be operated in certain jurisdictions or on certain roadways. Certain jurisdictions also prohibit the sale of vehicles exceeding length restrictions. Finally, federal and state authorities also have various environmental control standards relating to air, water, noise pollution and hazardous waste generation and disposal that affect the Company’s business and operations. Failure to comply with any of the foregoing laws or regulations could have an adverse impact on the Company’s business.

Warranty Claims. The Company is subject to warranty claims in the ordinary course of its business. Although the Company maintains reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A large number of warranty claims exceeding the Company’s current warranty expense levels could have a material adverse effect on the Company’s results of operations and financial condition.

Product Liability. The Company maintains product liability insurance with coverage in amounts which management believes is reasonable. To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable. Given the nature of the Company’s business, product liability in excess of the Company’s insurance coverage, if incurred, could have a material adverse financial effect on the Company.

Risks Relating to Patents. The Company has been awarded two patents from the United States Patent and Trademark Office covering the ornamental design for its T-Rex Double & Wide motorhomes. The Company’s patents on the design of the new motorhomes may not provide it with meaningful protection against duplication. Policing unauthorized use of the Company’s designs could result in the expenditure of significant financial and managerial resources and the success of these efforts cannot be predicted with certainty. Litigation may be necessary in the future to enforce the Company’s patent and other

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intellectual property rights. This litigation could be costly and its outcome cannot be predicted with certainty. The Company’s inability to adequately protect against unauthorized use of its patent and other intellectual property rights would significantly impair their value and could adversely damage its competitive position.

Dependence on, and Control of, William Rex. The Company’s success depends to a substantial degree on the continued participation in its business by William Rex, a founder, the Chief Executive Officer and principal shareholder of the Company. While the Company has an employment agreement with Mr. Rex, the loss of his services through death, disability or other cause would have a material adverse effect on the business of the Company. A family trust of which Mr. Rex and his wife serve as trustees owns 53.3% of the Company’s outstanding shares. Accordingly, Mr. Rex controls a sufficient percentage of the outstanding stock of the Company to control its affairs and policies.

Issuance of Preferred Stock. The Company is authorized to issue up to 1,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Company’s board of directors without further action by shareholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of the Company’s common stock, and therefore, reduce the value of the Company’s common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict the Company’s ability to merge with, or sell the Company’s assets to, a third party and thereby preserve control by the present management.

Item 3. — Quantitative and Qualitative Disclosure About Market Risk

In the ordinary course of its business, the Company is exposed to certain market risks, including changes in interest rates. After an assessment of these risks to the Company’s operations, the Company believes that its primary market risk exposures relating to interest rates (within the meaning of Regulation S-K Item 305) are not material and are not expected to have any material adverse effect on the Company’s financial condition, results of operations or cash flows for the next fiscal year.

Item 4. — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by the report on Form 10-Q, our Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 6. Exhibits and Reports On Form 8-K

(a)

Exhibits

	31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.
	31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act.
	32.1		Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

	(b)		Reports on Form 8-K
			One report on Form 8-K was filed during the period covered by this Report.

•

An 8-K dated March 4, 2004 was filed on March 12, 2004 reporting matters under Item 4.

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SIGNATURES

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.

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