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PAGE
NUMBER |
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Item 1. |
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| Financial Statements (Unaudited): |
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Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 |
1 |
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Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and June 30, 2003 |
2 |
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003 |
4 |
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Notes to Condensed Consolidated Financial Statements |
5-8 |
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| Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
6-11 |
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| Item 3. |
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Quantitative and Qualitative Disclosure about Market Risks |
11 |
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| Item 4. |
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Controls and Procedures |
12 |
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| PART II – OTHER INFORMATION |
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13 |
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Signatures |
14 |
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15-16 |
Item 1. – Condensed Consolidated Financial Statements
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June 30, 2004 |
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December 31, 2003 |
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$ |
332,000 |
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$ |
1,883,000 |
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1,139,000 |
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1,332,000 |
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606,000 |
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551,000 |
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16,076,000 |
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17,848,000 |
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159,000 |
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124,000 |
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177,000 |
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265,000 |
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$ |
18,489,000 |
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$ |
22,003,000 |
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4,274,000 |
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4,613,000 |
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1,390,000 |
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1,189,000 |
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194,000 |
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194,000 |
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$ |
24,347,000 |
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$ |
27,999,000 |
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$ |
1,899,000 |
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$ |
1,836,000 |
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2,185,000 |
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4,432,000 |
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54,000 |
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54,000 |
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475,000 |
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980,000 |
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1,732,000 |
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1,594,000 |
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397,000 |
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384,000 |
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1,317,000 |
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1,102,000 |
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276,000 |
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280,000 |
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TOTAL CURRENT LIABILITIES |
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8,335,000 |
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10,662,000 |
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909,000 |
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942,000 |
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9,244,000 |
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11,604,000 |
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Common Stock - no par value, Authorized, 10,000,000 shares; issued and utstanding 5,872,700 at June 30, 2004 and 5,872,700 December 31, 2003 |
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5,580,000 |
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5,580,000 |
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9,523,000 |
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10,815,000 |
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15,103,000 |
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16,395,000 |
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$ |
24,347,000 |
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$ |
27,999,000 |
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Three Months Ended |
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June 30, 2004 |
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June 30, 2003 |
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$ |
5,031,000 |
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$ |
9,642,000 |
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4,593,000 |
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8,383,000 |
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$ |
438,000 |
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$ |
1,259,000 |
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1,301,000 |
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1,725,000 |
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(863,000 |
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(466,000 |
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-0- |
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184,000 |
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$ |
(863,000 |
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$ |
(282,000 |
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$ |
(0.15 |
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$ |
(0.05 |
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5,872,700 |
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5,872,700 |
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REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Six Months Ended |
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June 30, 2004 |
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June 30, 2003 |
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Net Revenues |
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$ |
9,810,000 |
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$ |
22,588,000 |
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Cost of Sales |
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8,880,000 |
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19,727,000 |
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Gross Profit |
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$ |
930,000 |
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$ |
2,861,000 |
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Operating Expenses: |
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Selling, General, Administrative Expenses
and Other Expenses |
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2,224,000 |
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3,416,000 |
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Income/(Loss) before Income Taxes |
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(1,294,000 |
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(555,000 |
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Income Tax (Expense)/Benefit |
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2,000 |
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217,000 |
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Net Income/(Loss) |
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$ |
(1,292,000 |
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$ |
(338,000 |
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Basic and Diluted Income/(Loss) - Per Share |
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$ |
(.22 |
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$ |
(.06 |
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Weighted Average Shares Outstanding |
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Basic and Diluted |
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5,872,700 |
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5,872,700 |
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REXHALL INDUSTRIES, INC.
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Six Months Ended |
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June 30, 2004 |
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June 30, 2003 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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$ |
(1,292,000 |
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$ |
(338,000 |
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183,000 |
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178,000 |
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Provision for deferred income taxes |
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(35,000 |
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70,000 |
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193,000 |
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(403,000 |
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1,772,000 |
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(2,551,000 |
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(55,000 |
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(176,000 |
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63,000 |
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1,157,000 |
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(505,000 |
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(64,000 |
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138,000 |
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(268,000 |
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13,000 |
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(69,000 |
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299,000 |
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(312,000 |
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774,000 |
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(2,776,000 |
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(45,000 |
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(1,058,000 |
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(45,000 |
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(1,058,000 |
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(33,000 |
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(40,000 |
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Proceeds/(repayment) on chassis vendor line of credit |
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(2,247,000 |
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(1,696,000 |
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-- |
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300,000 |
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Proceeds received from sale of equipment |
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-- |
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98,000 |
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-- |
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(326,000 |
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(2,280,000 |
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(1,664,000 |
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NET INCREASE/(DECREASE) IN CASH |
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(1,551,000 |
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(5,498,000 |
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NET CASH FLOWS FROM DISCONTINUED OPERATIONS |
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-- |
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199,000 |
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1,883,000 |
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5,757,000 |
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$ |
332,000 |
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$ |
458,000 |
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$ |
104,000 |
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74,000 |
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Supplemental disclosure of non-cash financing activities:
Notes payable for insurance policies |
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$ |
170,000 |
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$ |
475,000 |
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See accompanying notes to condensed consolidated financial statements
1. Basis of Presentation
2. Use of Estimates
3. Earnings Per Share
4. Inventory
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June 30, 2004 |
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December 31, 2003 |
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$ |
5,670,000 |
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$ |
8,306,000 |
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2,682,000 |
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2,638,000 |
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3,463,000 |
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2,033,000 |
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4,261,000 |
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4,871,000 |
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$ |
16,076,000 |
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$ |
17,848,000 |
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5. Property & Equipment
At June 30, 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 June 30, 2004. On August 3, 2004, the Company sold the Arizona property for net proceeds of $1,435,000, receiving $1,060,000 in cash and a promissory note in the amount of $375,000 secured by a second trust deed on the property. The note bears an interest rate of 6.5% per annum and requires monthly payments of principal and interest in the amount of $2,795.20 to commence January 1, 2005 and continue through January 1, 2012, at which time the unpaid principal balance (assuming no prepayments of principal) of $309,000 and accrued and unpaid interest is due and payable.
At June 30, 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”.
Legal Accrual
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.
The Company continues to struggle with low sales due to the diminishing dealer network which management believes has resulted from competition from Rexhall’s largest competitors who were able to provide more favorable flooring financial arrangements for their dealer networks. Along with this factor, many of Rexhall’s dealers had exclusive territory agreements that have allowed them to maintain extremely low inventory levels of motorhomes and therefore order fewer units from the Company. Since most of these exclusivity agreements have expired, Rexhall may now start an aggressive campaign to initiate new dealerships primarily concentrating in the 11 western states. This concentration will offer the Company the opportunity to make a strong effort seeking to earn back a portion of the market, which it has lost over the last few years.
Comparison of the six months ended June 30, 2004 to the six months ended June 30, 2003.
The Company continues to struggle with low sales due to the diminishing dealer network, which management believes has resulted from competition from Rexhall’s largest competitors who were able to provide more favorable flooring financial arrangements for their dealer networks. Along with this factor, many of Rexhall’s dealers had exclusive territory agreements that have allowed them to maintain extremely low inventory levels of motorhomes and therefore order fewer units from the Company. Since most of these exclusivity agreements have expired, Rexhall may now start an aggressive campaign to initiate new dealerships primarily concentrating in the 11 western states. This concentration will offer the Company the opportunity to make a strong effort seeking to earn back a portion of the market, which it has lost over the last few years.
Gross profit decreased to $930,000 from $2,861,000 for the same six months in 2003, which is a decrease of $1,931,000 or 68%. Gross margin was 10% as compared to 13% last year. The decrease was primarily due to a decrease in production and an increase in per unit direct labor.
Income tax benefit was $2,000 for the six months ended June 30, 2004 as compared to a tax benefit of $217,000 in the first half of 2003. 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 June 30, 2004, the Company had working capital of $10,154,000, compared to $11,341,000 at December 31, 2003. The $1,187,000 decrease in working capital is primarily due to a $1,551,000 decrease in cash, a $193,000 decrease in accounts receivable, and a $1,772,000 decrease in inventory, and a $2,247,000 decrease in the chassis vendor line of credit. The Company’s available cash, which was only $332,000 at June 30, 2004, has increased by $1,060,000 from its receipt of cash proceeds from the sale of the real property underlying its former customer Service Center in Mesa, Arizona on August 3, 2004.
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 June 30, 2004). All borrowings are secured by the Ford merchandise. The outstanding balance at June 30, 2004 was $1,699,000.
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 six months ended June 30, 2004 and 2003, the Company repurchased approximately $1,978,000 and $1,412,000 respectively, (wholesale value) of motorhomes under these agreements. At June 30, 2004 and 2003, approximately $16,878,000 and $23,500,000, respectively, of dealer inventory was covered by repurchase agreements. Dealers do not have the contractual right to return motorhomes under any 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.
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 $1,292,000 in the six months ended June 30, 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 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 $16.8 million at June 30, 2004. During the six months ended June 30, 2004, the Company repurchased approximately $1,978,000 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 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.
Changes in Internal Controls
Item 6.Exhibits and Reports On Form 8-K
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.