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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
Commission file number: 0-17824
REXHALL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
|
California |
95-4135907 |
|
(State of Incorporation) |
(IRS Employer Identification No.) |
46147 7th Street West, Lancaster, California 93534
(Address of principal executive offices)
(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
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 November 5, 2004, there were 5,852,700 shares of common stock outstanding.
REXHALL INDUSTRIES, INC.
INDEX
| PART I - FINANCIAL INFORMATION |
|
| |
|
| Item 1. |
|
|
Financial Statements (Unaudited) |
|
|
|
|
Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 |
1 |
| |
|
|
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and September 30, 2003 |
2-3 |
| |
|
|
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and September 30, 2003 |
4 |
| |
|
|
Notes to Condensed Consolidated Financial Statements |
5-6 |
| |
|
| Item 2. |
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
6-12 |
| |
|
| Item 3. |
|
|
Quantitative and Qualitative Disclosure about Market Risk |
13 |
| |
|
| Item 4. |
|
|
Controls and Procedures |
13 |
| |
|
|
PART II - OTHER INFORMATION |
|
| |
|
| Item 2. Changes in Securities use of Proceeds and Issuer Purchases of Equity Securities |
|
| |
|
| Item 6. Exhibits and Reports on Form 8-K |
14 |
| |
|
|
Signatures |
15 |
| |
|
|
Officer Certifications |
16-17 |
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| |
|
September 30, 2004 |
|
December 31, 2003 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
772,000 |
|
$ |
1,883,000 |
|
|
Accounts Receivables, net |
|
|
322,000 |
|
|
1,332,000 |
|
|
Income Tax Receivable |
|
|
606,000 |
|
|
551,000 |
|
|
Inventories |
|
|
13,155,000 |
|
|
17,848,000 |
|
|
Deferred Income Taxes |
|
|
43,000 |
|
|
124,000 |
|
|
Other Current Assets |
|
|
138,000 |
|
|
265,000 |
|
|
TOTAL CURRENT ASSETS |
|
$ |
15,036,000 |
|
$ |
22,003,000 |
|
|
Property and Equipment at Cost Net
of Accumulated Depreciation |
|
|
4,168,000 |
|
|
4,613,000 |
|
|
Property Held for Sale |
|
|
201,000 |
|
|
1,189,000 |
|
|
Note Receivable from Officer |
|
|
181,000 |
|
|
159,000 |
|
|
Long-Term Note Receivable |
|
|
375,000 |
|
|
--------- |
|
|
Deposits |
|
|
5,000 |
|
|
35,000 |
|
|
TOTAL ASSETS |
|
$ |
19,996,000 |
|
$ |
27,999,000 |
|
|
LIABILITIES & STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts Payable |
|
$ |
1,697,000 |
|
$ |
1,836,000 |
|
|
Chassis Vendors Lines of Credit |
|
|
1,405,000 |
|
|
4,432,000 |
|
|
Notes Payable and Current Portion of Long-Term Debt |
|
|
54,000 |
|
|
54,000 |
|
|
Accrued Warranty |
|
|
332,000 |
|
|
980,000 |
|
|
Accrued Legal |
|
|
1,613,000 |
|
|
1,594,000 |
|
|
Accrued Dealer Incentives |
|
|
391,000 |
|
|
384,000 |
|
|
Other Accrued Liabilities |
|
|
1,328,000 |
|
|
1,102,000 |
|
|
Accrued Compensation and Benefits |
|
|
264,000 |
|
|
280,000 |
|
|
TOTAL CURRENT LIABILITIES |
|
|
7,084,000 |
|
|
10,662,000 |
|
| |
|
|
|
|
|
|
|
|
Long-Term Debt, less Current Portion |
|
|
893,000 |
|
|
942,000 |
|
|
TOTAL LIABILITIES |
|
|
7,977,000 |
|
|
11,604,000 |
|
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Preferred Stock - no par value, |
|
|
|
|
|
|
|
|
authorized, 1,000,000 shares; none issued |
|
|
0 |
|
|
0 |
|
|
Common Stock - no par value, |
|
|
|
|
|
|
|
|
authorized, 10,000,000 shares; |
|
|
|
|
|
|
|
|
issued and outstanding |
|
|
|
|
|
|
|
|
5,852,700 at September 30, 2004 |
|
|
|
|
|
|
|
|
and 5,872,700 at December 31, 2003 |
|
|
5,552,000 |
|
|
5,580,000 |
|
|
Retained Earnings |
|
|
6,467,000 |
|
|
10,815,000 |
|
|
TOTAL STOCKHOLDERS' EQUITY |
|
|
12,019,000 |
|
|
16,395,000 |
|
| |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
|
$ |
19,996,000 |
|
$ |
27,999,000 |
|
See accompanying notes to condensed consolidated financial statements
REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| |
|
Three Months Ended |
|
|
|
|
September 30, 2004 |
|
September 30, 2003 |
|
| |
|
|
|
|
|
|
Net Revenues |
|
|
3,110,000 |
|
|
10,823,000 |
|
| |
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
(5,516,000 |
) |
|
9,559,000 |
|
| |
|
|
|
|
|
|
|
|
Gross Profit/(Loss) |
|
|
(2,406,000 |
) |
|
1,264,000 |
|
| |
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Selling, General and Administrative |
|
|
915,000 |
|
|
1,100,000 |
|
| |
|
|
|
|
|
|
|
|
Research and Development |
|
|
2000 |
|
|
729,000 |
|
| |
|
|
917,000 |
|
|
1,829,000 |
|
|
Loss from Operations |
|
|
(3,323,000 |
) |
|
(565,000 |
) |
| |
|
|
|
|
|
|
|
|
Other Income |
|
|
271,000 |
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
Income/(Loss) before Income Taxes |
|
|
(3,052,000 |
) |
|
(565,000 |
) |
| |
|
|
|
|
|
|
|
|
Income Tax (Expense)/Benefit |
|
|
0 |
|
|
361,000 |
|
|
Net Income/(Loss) |
|
|
(3,052,000 |
) |
|
(204,000 |
) |
|
Basic and Diluted Income/(Loss) per Share |
|
|
(.52 |
) |
|
(.03 |
) |
|
Weighted Average Shares Outstanding -
Basic and Diluted |
|
|
5,866,613 |
|
|
5,872,700 |
|
See accompanying notes to condensed consolidated financial statements
REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| |
|
Nine Months Ended |
|
| |
|
September 30, 2004 |
|
September 30, 2003 |
|
| |
|
|
|
|
|
|
Net Revenues |
|
$ |
12,920,000 |
|
$ |
33,411,000 |
|
| |
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
14,400,000 |
|
|
29,286,000 |
|
| |
|
|
|
|
|
|
|
|
Gross Profit/(Loss) |
|
$ |
(1,480,000 |
) |
$ |
4,125,000 |
|
| |
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Selling, General and Administrative |
|
|
3,137,000 |
|
|
4,517,000 |
|
| |
|
|
|
|
|
|
|
|
Research and Development |
|
|
4000 |
|
|
729,000 |
|
| |
|
|
3,141,000 |
|
|
5,246,000 |
|
| |
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(4,621,000 |
) |
|
(1,121,000 |
) |
| |
|
|
|
|
|
|
|
|
Other Income |
|
|
271,000 |
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
Income/(Loss) before Income Taxes |
|
|
(4,350,000 |
) |
|
(1,121,000 |
) |
| |
|
|
|
|
|
|
|
|
Income Tax (Expense)/Benefit |
|
|
2,000 |
|
|
579,000 |
|
| |
|
|
|
|
|
|
|
|
Net Income/(Loss) |
|
$ |
(4,348,000 |
) |
$ |
(542,000 |
) |
| |
|
|
|
|
|
|
|
|
Basic and Diluted Income/(Loss) - per Share |
|
$ |
(0.74 |
) |
$ |
(0.09 |
) |
|
Weighted Average Shares Outstanding -
Basic and Diluted |
|
|
5,870,649 |
|
|
5,872,700 |
|
See accompanying notes to condensed consolidated financial statements
REXHALL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| |
|
Nine Months Ended |
|
| |
|
September 30, 2004 |
|
September 30, 2003 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income/(loss) |
|
$ |
(4,348,000 |
) |
$ |
(542,000 |
) |
|
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
247,000 |
|
|
288,000 |
|
|
Gain on sale of property, plant and equipment |
|
|
(271,000 |
) |
|
----- |
|
|
Provision for deferred income taxes |
|
|
81,000 |
|
|
323,000 |
|
|
(Increase)/Decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,010,000 |
|
|
(1,678,000 |
) |
|
Inventories |
|
|
4,693,000 |
|
|
699,000 |
|
|
Income tax receivable |
|
|
(55,000 |
) |
|
(176,000 |
) |
|
Increase/(Decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(139,000 |
) |
|
648,000 |
|
|
Warranty allowance |
|
|
(648,000 |
) |
|
(97,000 |
) |
|
Accrued legal |
|
|
19,000 |
|
|
(496,000 |
) |
|
Dealer incentives |
|
|
7,000 |
|
|
(104,000 |
) |
|
Other assets and liabilities |
|
|
382,000 |
|
|
(1,933,000 |
) |
|
Net cash provided by/(used in) operating activities |
|
|
978,000 |
|
|
(3,068,000 |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(45,000 |
) |
|
(1,065,000 |
) |
|
Proceeds from sale of property and equipment |
|
|
1,060,000 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities |
|
|
1,015,000 |
|
|
(1,065,000 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayments on long-term debt |
|
|
(49,000 |
) |
|
(40,000 |
) |
|
Repayments on short-term notes |
|
|
-- |
|
|
-- |
|
|
Proceeds/(repayment) on chassis vendor line of credit |
|
|
(3,027,000 |
) |
|
(1,473,000 |
) |
|
Proceeds from redevelopment agency |
|
|
|
|
|
300,000 |
|
|
Proceeds received for purchase of equipment |
|
|
|
|
|
98,000 |
|
|
Repurchase and retirement of stock |
|
|
(28,000 |
) |
|
(326,000 |
) |
| |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,104,000 |
) |
|
(1,441,000 |
) |
|
NET CASH FLOWS FROM DISCONTINUED OPERATIONS |
|
|
|
|
|
199,000 |
|
|
NET INCREASE/(DECREASE) IN CASH |
|
|
(1,111,000 |
) |
|
(5,375,000 |
) |
|
BEGINNING CASH BALANCE |
|
|
1,883,000 |
|
|
5,757,000 |
|
|
ENDING CASH BALANCE |
|
$ |
772,000 |
|
$ |
382,000 |
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Interest paid during the period |
|
$ |
131,000 |
|
$ |
96,000 |
|
| |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
Notes payable for insurance policies |
|
|
74,000 |
|
|
475,000 |
|
| |
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
REXHALL INDUSTRIES, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2004
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.
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.
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.
|
|
|
September 30, 2004 |
|
December 31, 2003 |
|
|
Chassis |
|
$ |
4,535,000 |
|
$ |
8,306,000 |
|
|
Raw Materials |
|
|
2,354,000 |
|
|
2,787,000 |
|
|
Work-in-Progress |
|
|
3,494,000 |
|
|
2,033,000 |
|
|
Finished Goods |
|
|
4,980,000 |
|
|
4,871,000 |
|
|
Reserve |
|
|
(2,208,000 |
) |
|
(149,000 |
) |
|
Total |
|
$ |
13,155,000 |
|
$ |
17,848,000 |
|
On August 3, 2004, the Company sold its Arizona property for $1,060,000 cash and a $375,000 second trust deed on the property, resulting in a gain of approximately $271,000. The trust deed bears interest at 6.5% and requires monthly principal and interest payments of approximately $2,800 commencing January 1, 2005 through January 1, 2012, at which time the unpaid balance is due and payable.
The remaining property held for sale is the property in Acton, California. Originally purchased for $401,000 in December 2000 by the Company and Mr. William J. Rex, the Company’s 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. The Company paid $151,000 on behalf of Mr. Rex in exchange for a $151,000 note receivable at approximately 5% interest, secured by the executive’s interest in the property. At September 30, 2004, the unpaid balance of the note and accrued interest is $181,000
Item 2. - Management’s 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, it’s 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 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.
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 September 30, 2004 to the three months ended September 30, 2003.
Revenues
Net revenues for the quarter ended September 30, 2004 were $3,110,000 as compared to $10,823,000 for the same quarter in 2003. This represents a 71.3% decrease from the prior year. Net units sold for the quarter ended September 30, 2003 were 130 compared to 26 for the quarter ended September 30, 2004, an 80.0% decrease. Wholesale shipments of the Company’s gas motorhomes were down 79.4%, while diesel shipments were down 82.6% when compared to last year’s third quarter.
The Company has continued to experience extremely low sales in the third quarter and attributes the major cause to the Company’s inability to sign up new dealers and provide flooring financial arrangements, as its larger competitors are able to, in order to attract new dealerships, along with current dealers not replacing inventory. Due to the difficulty in signing new dealers the Company is implementing a plan to have a Factory Direct For You program to get sales in areas where we have no dealers and help current dealers sell more units if they choose to sign on with the new
program, which will allow retail consumers to purchase the Company’s current inventory by placing an order with the Company directly or through one of the Company’s dealers. The Company will seek to use and recruit dealerships as factory direct outlets and plans to direct consumers to the factory direct dealer in their area. However, this distribution method is new to the Company and unproven and there can be no assurance that the Company’s sales will increase or even continue at the low level achieved in the third quarter ended September 30, 2004. In fact, if the Company’s factory direct program is not successful or if dealerships feel threatened by it or do not take advantage of or otherwise accept it, the Company’s sales could decline further.
Gross Profit/(Loss)
The Company incurred a gross loss of $2,406,000 during the third quarter of 2004, as compared to a gross profit of $1,264,000 for the same three-month period in 2003. This represents a decline of $3,670,000 or 290.3%. The 2004 gross loss represented 77.4% of sales as compared to a gross profit of 11.7% for 2003. This decline in gross margins is principally attributable to the increase of $2,015,000 in the inventory reserve for 2004, in addition to increased labor and overhead absorption for each unit built. The inventory reserve is based on a decline in forecasted sales.
Selling, General and Administrative Expenses
SG&A expenses decreased by %185,000 or 16.8% in the third quarter of 2004 from $1,100,000 in the third quarter of 2003 primarily because of a decrease in warranty and legal costs.
Research and Development Costs
The Company has not engaged in significant R&D projects since the completion of the T-Rex in 2003.
Income Taxes
Income tax benefit was $0 for the quarter ended September 30, 2004 as compared to a benefit of $361,000 in the same quarter 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.
Comparison of the nine months ended September 30, 2004 to the nine months ended September 30, 2003.
Revenues
Net revenues for the first nine months ended September 30, 2004 were $12,920,000 as compared to $33,411,000 for the first nine months of 2003. This represents a 61.3% decrease from the prior year. Net units sold for the nine months ended September 30, 2004 were 135 compared to 390 for the nine months ended September 30, 2003, a 65.4% decrease. Wholesale shipments of the Company’s gas motorhomes were down 64.2%, while diesel shipments were down 71.0%.
The Company has continued to experience extremely low sales in the third quarter and attributes the major cause to the Company’s inability to sign up new dealers and provide flooring financial arrangements, as its larger competitors are able to, in order to attract new dealerships, along with current dealers not replacing inventory. Due to the difficulty in signing new dealers the Company is implementing a plan to have a Factory Direct For You program to get sales in areas where we have no dealers and help current dealers sell more units if they choose to sign on with the new
program, which will allow retail consumers to purchase the Company’s current inventory by placing an order with the Company directly or through one of the Company’s dealers. The Company will seek to use and recruit dealerships as factory direct outlets and plans to direct consumers to the factory direct dealer in their area. However, this distribution method is new to the Company and unproven and there can be no assurance that the Company’s sales will increase or even continue at the low level achieved in the third quarter ended September 30, 2004. In fact, if the Company’s factory direct program is not successful or if dealerships feel threatened by it or do not take advantage of or otherwise accept it, the Company’s sales could decline further.
Gross Profit/(Loss)
The Company incurred a gross loss of $1,480,000 in 2004, as compared to a gross profit of $4,125,000 for the same nine-month period in 2003. This represents a decline of $5,605,000 or 135.9%. The 2004 gross loss represented 11.5% of sales as compared to a gross profit of 12.3% for 2003. This decline in gross margins is principally attributable to the increase of $2,015,000 in the inventory reserve for 2004, in addition to increased labor and overhead absorption for each unit built. The inventory reserve is based on a decline in forecasted sales.
Selling, General and, Administrative Expenses
SG&A expenses decreased by $1,380,000 or 30.6% in 2004 from $4,517,000 in 2003 primarily because of a decrease of $963,000 in warranty costs and $269,000 in administrative salaries.
Research and Development Costs
The Company has not engaged in significant R&D projects since the completion of the T-Rex in 2003.
Income Taxes
Income tax benefit was $2000 for the nine months ended September 30, 2004 as compared to a benefit of $579,000 in the first nine months 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 September 30, 2004, the Company’s working capital declined to $7,952,000, from $11,341,000 at December 31, 2003. Excluding the value of its inventories, the Company’s other current assets of $1,881,000 at September 30, 2004, are insufficient to satisfy its current liabilities of $7,084,000. The Company has been seeking financing for future operations but due to its recurring losses and uncertain future prospects, it may be difficult to obtain financing on acceptable terms or at all and the Company may have to consider other alternatives such as further reducing its level of operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
Capital expenditures during the first nine months of 2004 were $45,000. The Company has no commitments for, and does not expect to, make material capital expenditures for the remainder of 2004.
Since September 30, 2003, Rexhall had self insured for Workers’ Compensation Insurance through the California Self Insurer’s Security Fund and its Alternative Security Program (ASP). Under the ASP, the fund annually arranges 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 was $711,000 at September 30, 2004, which is included in other liabilities on the Company’s balance sheet. On September 20, 2004 the Company was notified that the California Self Insurer’s Security fund and its Alternative Security Program (ASP) would no longer cover the Company under the ASP security deposits since the Company did not meet the
minimum credit rating requirements to participate in the alternative security deposit program. The Company has been in the process of applying for a bond, should the Company not be able to post a bond it would have to either provide an adequate Letter of Credit or reapply for Workers’ Compensation Insurance.
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% (5.75% at September 30, 2004). All borrowings are secured by the Ford merchandise. The outstanding balance at September 30, 2004 was $1,131,000. 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% (5.75% at September 30, 2004). The chassis purchased from Workhorse secure borrowings under this line of credit. The outstanding balance under this line of credit was $274,000 at September 30, 2004.
On August 26, 2004 the Company received notice from the Nasdaq Stock Market that the Company had not maintained a minimum market value of publicly held shares of $5,000,000 as required for continued inclusion by Nasdaq Marketplace Rule 4450(a)(2). The Company has been given 90 days, or until November 24, 2004 to comply with the Rule. Because of its inability to comply with these requirements by the deadline imposed by Nasdaq as well as other factors, the Company has determined to file a Form 15 with the Securities and Exchange Commission to deregister its common stock and suspend its reporting obligations under the Securities Exchange Act of 1934. The Company expects the deregistration to become effective in 90 days. As a result of the filing of the Form 15, the Company’s obligation to file with the SEC
certain reports and forms in the future, including Forms 10-K, 10-Q and 8-K will immediately cease. In addition, the Company’s common stock will no longer be listed on the Nasdaq Stock Market. Among the other factors considered in the decision to deregister were: the substantial increase in costs and expenses that the Company would have to incur in 2005 and thereafter associated with being a public company in light of the Sarbanes-Oxley Act of 2002, particularly complying with Section 404 of that act; the ongoing costs and expenses, both direct and indirect, associated with the preparation and filing of the Company’s periodic reports with the SEC; the perceived need to use available resources in the Company’s business rather than to comply with regulatory requirements associated with being a public company; the recent drop in the market price of Rexhall’s common stock to below the minimum $1.00 per share bid price also required by Nasdaq to maintain a listing on the Nasdaq Stock
Market; the fact that the Company’s stock is very thinly traded; the nature and extent of the trading in the Company’s common stock; and the lack of analyst coverage and minimal liquidity for the Company’s common stock. In addition to the significant time and cost savings resulting from deregistration, this action is intended to allow the Company’s management to focus its attention and resources on Rexhall’s core business of building Class A motorhomes.
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 nine months ended September 30, 2004 and 2003, the Company repurchased approximately $2,140,000 and $1,630,000 respectively, (wholesale value) of motorhomes under these agreements. At September 30, 2004 and 2003, approximately $7,615,000 and $20,900,000, 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.
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, the success (or lack of success) of the Company’s direct marketing program 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 incurred net losses of $2.4, $935,000 and $2 million for 2003, 2002 and 2001, respectively, and net losses of $4.3 million for the nine months ended September 30, 2004. Continued losses could further reduce the Company’s liquidity. This could have a negative effect on the Company’s ability to maintain production schedules and develop and manufacture new products that will achieve market acceptance. This could in turn, have a further 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 meet its obligations when
due. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
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 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 approximately $7.6 million at September 30, 2004. During the nine months ended September 30, 2004, the Company repurchased approximately $2,140,000 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 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 J. 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 could 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 remaining 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.
PART II - OTHER INFORMATION
Item 2 Changes in Securities and use of Proceeds
| (e) ISSUER PURCHASES OF EQUITY SECURITIES |
|
|
|
| |
|
|
|
|
| |
(a) |
(b) |
(c) |
(d) |
|
Period |
Total Number of
Shares (or Units)
Purchased |
Average Price
Paid per Share
(or Unit) |
Total
Number of
Shares (or Units)
Purchased as
part of Publicly
Announced
Plans or
Programs |
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased
Under the Plans
or Programs |
|
July 1 Through July 31, 2004 |
-- |
-- |
-- |
163,500 |
|
August 1 Through August 31, 2004 |
-- |
-- |
-- |
163,500 |
|
September 1 Through September 30, 2004 |
20,000 |
1.38 |
20,000 |
143,500 |
Note: During April 2000 the Company announced a plan to repurchase up to 250,000 shares of its Common Stock. In June 2002 this was increase to 500,000 shares to reflect a 2:1 stock split effected at that time.
Item 6. Exhibits and Reports On Form 8-K
|
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 Rul3 13a-14(a) of the Exchange Act. |
|
32.1 |
Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. |
One report on Form 8-K was filed during the period covered by this Report.
| · |
An 8-K dated August 26, 2004 was filed on August 30, 2003 reporting matters under Item 2. |
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.
Rexhall Industries, Incorporated
(Registrant)
By /s/ William J. Rex
William J. Rex
President and CEO
Chairman of the Board
Date: November 22, 2004
By /s/ Dianna Miller
Dianna Miller
Chief Financial Officer
Date: November 22, 2004