10-Q 1 0001.txt 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 Quarter Ended September 30, 2000 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) (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 _____. Applicable only to Corporate Issuers State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,069,000 as of 11/9/00. REXHALL INDUSTRIES, INC. INDEX PART 1 - FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements (Unaudited): Condensed Balance Sheets at September 30, 2000 and December 31, 1999 3 Condensed Statements of Earnings for the three and nine months ended September 30,2000 and September 30, 1999 4-5 Condensed Statements of Cash Flows for the nine months ended September 30, 2000 and September 30, 1999 6 Notes to Condensed Financial Statements as of September 30, 2000 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Item 3. Quantitative and Qualitative Disclosure about Market Risks 11 PART II - OTHER INFORMATION Repurchase Agreements 12 Property Acquisition 12 Legal Proceedings 13 Reports on Form 8-K 13 Signatures 14 (Unaudited) September 30 December 31 PART I - FINANCIAL INFORMATION 2000 1999 Item 1. - Financial Statements REXHALL INDUSTRIES, INC. CONDENSED BALANCE SHEETS ASSETS CURRENT ASSETS Cash $ 4,267,000 $ 6,330,000 Accounts Receivable 4,129,000 6,972,000 Inventories 17,853,000 16,504,000 Other Current Assets 239,000 341,000 Deferred Income Taxes 842,000 1,133,000 Total Current Assets 27,330,000 31,280,000 Property and Equipment - Net 5,588,000 4,753,000 Property Held for Sale 116,000 131,000 Other Assets 7,000 20,000 TOTAL ASSETS $ 33,041,000 $ 36,184,000 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $ 7,383,000 $ 10,915,000 Warranty Allowance 800,000 1,000,000 Accrued Legal 450,000 737,000 Dealer Incentives 900,000 1,050,000 Other Accrued Liabilities 416,000 497,000 Accrued Compensation and Benefits 305,000 725,000 Current Portion of Long-Term Debt 32,000 31,000 Total Current Liabilities $ 10,286,000 $ 14,955,000 Deferred Income Tax Liabilities 71,000 198,000 Long-Term Debt, Less Current Installment 714,000 737,000 TOTAL LIABILITIES 11,071,000 15,890,000 SHAREHOLDERS' EQUITY Preferred Stock - no par value; Authorized 1,000,000 shares; No shares outstanding at September 30, 2000 and December 31, 1999 --- --- Common Stock - no par value; Authorized 10,000,000 shares; issued and outstanding 3,071,000 shares at September 30, 2000 and 3,161,000 shares at December 31, 1999 6,304,000 6,788,000 Loan receivable from exercise of options (61,000) (399,000) Retained Earnings 15,727,000 13,905,000 TOTAL SHAREHOLDERS' EQUITY 21,970,000 20,294,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,041,000 $ 36,184,000 See accompanying notes to condensed financial statements PART I - FINANCIAL INFORMATION Item 1. - Condensed Financial Statements REXHALL INDUSTRIES, INC. CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended September 30, 2000 September 30, 1999 Net Revenues $ 12,646,000 $ 20,590,000 Cost of Sales 10,047,000 16,574,000 Gross Profit 2,599,000 4,016,000 Selling, General, Administrative Expenses and Other Expenses 1,716,000 1,956,000 Earnings Before Income Taxes 883,000 2,060,000 Income Taxes 385,000 809,000 Net Earnings $ 498,000 $ 1,251,000 Basic and Diluted Earnings Per Share (1) $ 0.16 $ 0.40 Weighted Average Shares Outstanding - Basic and Diluted (1) 3,096,000 3,160,000 (1) Retroactively adjusted to give effect to 5% stock dividend of 150,488 in 1999. See accompanying notes to condensed financial statements PART I - FINANCIAL INFORMATION Item 1. - Financial Statements REXHALL INDUSTRIES, INC. CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) Nine Months Ended September 30, 2000 September 30, 1999 Net Revenues $ 48, 400,000 $ 63,760,000 Cost of Sales 40,466,000 51,939,000 Gross Profit 7,934,000 11,821,000 Selling, General, Administrative Expenses and Other Expenses 4,741,000 5,572,000 Earnings Before Income Taxes 3,193,000 6,249,000 Income Taxes 1,371,000 2,491,000 Net Earnings $ 1,822,000 $ 3,758,000 Basic and Diluted Earnings Per Share (1) $ 0.58 $ 1.19 Weighted Average Shares Outstanding - Basic and Diluted (1) 3,144,000 3,160,000 (1) Retroactively adjusted to give effect to 5% stock dividend of 150,488 shares in 1999. See accompanying notes to condensed financial statements PART I - FINANCIAL INFORMATION Item 1. - Financial Statements REXHALL INDUSTRIES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 1,822,000 $ 3,758,000 Adjustments to reconcile net earnings to net cash provided by (used in) Operating Activities: Depreciation and Amortization 372,000 234,000 Loss on sale of fixed assets --- 5,000 Net change in deferred tax assets and liabilities 164,000 (64,000) (INCREASE) DECREASE IN: Accounts Receivable 2,843,000 (2,681,000) Inventories (1,349,000) (5,972,000) Other Assets 115,000 (327,000) INCREASE (DECREASE) IN: Accounts Payable (3,531,000) 3,386,000 Other Accrued and Current Liabilities (580,000) (261,000) Dealer Incentives (150,000) 122,000 Net cash used in operating activities (294,000) (1,800,000) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,192,000) (581,000) Proceeds from the sale of fixed assets --- 59,000 Net cash used in investing activities (1,192,000) (522,000) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (22,000) (21,000) Repayment of short-term debt (71,000) --- Repurchase of common stock (484,000) --- Net cash used in financing activities (577,000) (21,000) NET DECREASE IN CASH (2,063,000) (2,343,000) BEGINNING CASH BALANCE 6,330,000 5,017,000 ENDING CASH BALANCE $ 4,267,000 $ 2,674,000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR Interest $ 147,000 $ 84,000 Income Taxes 2,900,000 2,900,000 SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES: Repayment of loans receivable through cancelation of bonus liability $ 337,000 --- PART I - FINANCIAL INFORMATION Item 1. REXHALL INDUSTRIES, INC. Notes to the Condensed Financial Statements September 30, 2000 1. Basis of Presentation: The accompanying unaudited condensed Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes 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 generally accepted accounting principles 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 year ended December 31, 1999. The Results of Operations for any interim period are not necessarily indicative of the results to be expected for the full year. 2. Summary of Significant Accounting Polices: Income Taxes Income tax expense is based upon the estimated effective tax rate for the entire fiscal year. The effective tax rate is subject to ongoing evaluation by management. Earnings Per Share Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted- average number of shares outstanding, inclusive of the dilutive impact of common stock options. During the nine months ended September 30, 2000, the Company repurchased 90,000 common shares on the open market at an average cost of $5.38 per share. 3. Detail of Inventory September 30, 2000 December 31, 1999 Raw Material $ 6,728,000 $ 11,341,000 Work in Process 1,783,000 2,485,000 Finished Motorhomes 9,342,000 2,678,000 TOTAL $ 17,853,000 $ 16,504,000 4. New Accounting Pronouncement: On March 31, 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensations - an interpretation of APB Opinion No.25 (FIN44). This Interpretation provides guidance for issues that have arisen in applying APB Opinion No.25, Accounting for Stock Issued to Employees. FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The new Interpretation did not have a material impact upon the financial statements. PART I - FINANCIAL INFORMATION Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations. All statements in this discussion and analysis which relate to future sales, costs, capital expenditures or earnings are "Forwarding Looking Statements" and should be read subject to the assumptions contained in the "Forward Looking Statements". Results of Operations For the Three Months ended September 30, 2000 and for the Three Months ended September 30, 1999 Revenues - 2000 compared with 1999 Net Revenues were $12,646,000 for the third quarter ended September 30, 2000 compared to $20,590,000 for the same quarter in the prior year. The third quarter sales in 2000 represented a 38.6% decrease from the comparable quarter of 1999. Net units sold for the third quarter 2000 were 171 as compared to 307 for the same period of 1999. The decrease in sales is attributable to the decrease in net units sold resulting from the general downturn in the motorhome market associated with the increase in fuel and interest costs. In addition, during the third quarter of 2000, 30 units at a cost of $1,748,000 were repurchased under the floorplan repurchase agreements relatede to the Arizona dealership which declared bankruptcy in the first quarter of 2000. Since such units were not required to be repurchased under the repurchase agreements, the company was able to negotiate favorable repurchase terms. Third quarter 1999 sales to the Arizona dealer that declared bankruptcy were not significant. Cost of Sales - 2000 compared with 1999 Cost of Sales for the third quarter of 2000 were $10,047,000 compared to $16,574,000 for the third quarter of 1999 reflecting the decline in sales. The Company has made efforts to control variable costs during this period. Gross Profit as a percentage of sales was 20.5% for the quarter ended September 30, 2000 as compared to 19.5% for the same period in the prior year. The improvement in margin is primarily attributable to inefficiencies experienced with the introduction of the millennium edition motorhome during the third quarter of 1999 which were not experienced during the third quarter of 2000. The Company will continue to tryand improve the Gross Profit, however, there can be no assurance due to the unknown nature of competitors within the industry. Selling, General, Administrative and Other Expenses-2000 compared with 1999 Selling, General, Administrative and Other Expenses decreased by approximately $240,000 between the third quarter ended September 30, 2000 and 1999, respectively. This decline is primarily due to a reduction in bonuses and dealer incentives, partially offset by increased advertising costs. When comparing selling,general, and administrative and other expenses as a percentage of sales, the quarter ended September 30,2000 is 13.5% versus 9.5% for the same quarter in the prior year. The decline is primarily the result of fixed costs being spread over a lower base of sales. Income Taxes - 2000 compared with 1999 Income tax expense was $385,000 for the quarter ended September 30, 2000 as compared to $809,000 in the third quarter of 1999. Income taxes are provided based upon the estimated effective tax rate for the entire fiscal year applied to pre-tax income for the period. The effective tax rate is subject to ongoing review and evaluation by management. Results of Operations For the Nine Months ended September 30, 2000 and for the Nine Months ended September 30, 1999 Net Revenues - 2000 compared with 1999 For the nine months ended September 30, 2000, net revenues were $48,400,000 compared to $63,760,000 for the same period in the prior year. This $15,360,000 shortfall represents a 24.1% decrease from the prior year. Net units sold for these periods were 664 and 952, respectively. On a percentage basis, net units sold decreased by 30.0%. The substantial decrease in revenues is primarily attributed to the bankruptcy of one of the Company's significant customers located in Arizona and poor economic conditions effecting the industry. Sales to this dealer through the nine month period in 1999 were $9,800,000. Sales to the Arizona dealer in 2000 were less than $2,000,000. In addition, the Company repurchased 49 units from the Arizona dealer at a cost of $3,060,000. Costs of Sales - 1999 compared with 1998 Cost of Sales for 2000 were $40,466,000 compared to $51,939,000 for 1999, reflecting the decline in sales. Gross Profit was 16.4% for the nine months ended September 30, 2000 compared to 18.5% for the same period in the prior year. The erosion in margin is due to the decline in sales and production at a time when net revenues were impacted by the repurchase of 49 Arizona dealer units. The Company's efforts to improve sales in Arizona, improve production efficiencies and aggressively institute price changes in the product line, should have a positive impact on product margins. The Company continues to explore avenues to improve gross profit, however, there can be no assurance that gross profit will improve due to the unknown nature of competitors within the industry. Selling, General Administrative and Other Expenses - 2000 compared to 1999 Selling, General Administrative and Other Expenses were $4,741,000 and $5,572,000 for the nine months ended September 30, 2000 and 1999, respectively. The percentage of sales for the nine months ended September 30, 2000 is 9.8% compared to 8.7% for the same period in 1999. The decrease in actual costs is attributable to a decrease in administrative bonuses, warranty costs, and sales allowances offset by an increase in advertising costs. The increase in costs as a percentage of sales in primarily the result of fixed costs being spread over a lower base of sales. Income taxes - 2000 compared with 1999 Income taxes for the nine months ended September 30, 2000 were $1,371,000 as compared to $2,491,000 for the same period in the prior year. Income taxes are provided based upon the estimated effective 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 internally on generated funds, trade credit and debt to finance its operations and expansion. As of September 30, 2000 the company had working capital of $17,043,000 compared to $16,325,000 at December 31, 1999. The $718,000 increase in working capital is primarily due to a $1,349,000 increase in inventories, a $3,531,000 decrease in accounts payable, a decrease in accrued liabilities of $730,000 offset by a $2,843,000 decrease in accounts receivable. The cash position decreased by $2,063,000 primarily due to funding the partial repurchase of Arizona units of $1,240,000 and the acquisition of the property in Mesa, Arizona, along with the repurchase of 90,000 shares of common stock for $484,000. Payments through September 30, 2000 related to the Arizona property totaled $993,000. As of September 30, 2000 the Company has a $3,500,000 line of credit with a bank which can be used for working capital purposes. The line expires on July 1, 2001. Under this line of credit, $343,000 has been set aside as 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. At September 30, 2000, no amounts were outstanding under the line of credit agreement. The line of credit contains various covenants. The Company was in compliance with such covenants as of September 30, 2000. The Company has a line of credit with a chassis vendor, Ford Motor Credit Company ("FMCC"), with a $8,000,000 limit. Borrowings under the line bear interest at an annual rate of prime plus 1% (10.5% at September 30, 2000). All borrowings are secured by the Company's assets. The outstanding balance included in accounts payable at September 30, 2000 was $3,500,000. Capital expenditures during the first nine months of 2000 were $1,192,000. Management anticipates capital expenditures for the remainder of the 2000 to be $250,000 for refurbishment and expansion of certain production facilities, production equipment and the completion of the Arizona facility. The Company anticipates that it will be able to satisfy its ongoing cash requirements through 2000, including payments related to the repurchase of the Arizona dealer units and expansion plans at the California and Arizona facilities, primarily with cash flows from operations, supplemented, if necessary, by borrowings under its revolving credit agreement. New Accounting Pronouncement: On March 31, 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44,Accounting for Certain Transactions involving Stock Compensations - an interpretation of APB Opinion No.25 (FIN44). This Interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12,2000. The new Interpretation did not have a material impact upon the financial statements. Seasonality The Company's business is subject to seasonal and quarterly fluctuations. Historically, the Company has realized a higher portion of its sales in the second quarter and third quarter, consistent with the summer vacation season. This is consistent with industry trends, although in this quarter other factors have acted to counter the normal seasonal trend towards increased sales. Forward-Looking Statements Our reports contain forward-looking statements, usually expressed as our expectations or our intentions. These are based on assumptions and on facts known to us today, and we do not intend to update statements in this report. Rexhall's business is both seasonal and cyclical, and the timing of the business cycle cannot be predicted. Its business is also subject to increases in material costs, and pricing and other pressures from substantially larger competitors, labor disruptions and adverse weather. Rexhall depends on independent dealers for its sales and the loss of significant dealers may have an adverse impact on sales and profits. The recreational vehicle industry has in the past enjoyed favorable recreational vehicle industry sales when we have low interest rates, low unemployment, and ready availability of motor fuel. More recently,the sharp increase in fuel prices has resulted in an unprecedented and corresponding decline in sales. A subsequent decline in fuel prices may not reverse the downward trend during this fiscal year. Item 3. Quantitative and Qualitative Disclosure About Market Risk In the ordinary course of its business, the Company is exposed to certain market risks, primarily changes in interest rates. After an assessment of these risks to the Company's operations, the Company believes that its primary market risk exposures (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. The Company's line of credit permits a combination of fixed and variable rates at the Company's option, which Management believes reduces the risk of interest rate fluctuation. Part II - Other Information Repurchase Agreements - Motorhomes purchased under financing agreements by dealers are subject to repurchase by the Company, in some cases, at dealer cost plus unpaid interest in the event of default by the dealer. To date repurchases have not resulted in significant losses. Tfhe recent repurchases from the Arizona dealers are expected to be resold without sustaining significant losses. During 1999, 1998 and 1997 and the nine months ended September 30, 2000, the Company repurchased approximately $1,973,000 $832,000, $3,145,000 and $3,138,000 respectively, of motorhomes under these agreements. At September 30, 2000 and December 31, 1999, approximately $22,000,000 and $34,233,000, respectively, of dealer inventory is covered by repurchase agreements. Dealers do not have the contractual right to return motorhomes under any Rexhall Dealer Agreement. There are states which require the repurchasing of motorhomes pursuant to their individual state laws. In March 2000, the Company was notified that one of its significant customers had filed for reorganization bankruptcy. Through the date of this report, the Company has committed to repurchase forty-nine units at a cost of $3,060,000. In addition to the eight units repurchased in the second quarter, forty-one units were accrued for during the nine months ended September 30, 2000. To date $1,828,000 of the repurchase amount has been paid. No additional units have been identified for repurchase from this dealer under the financial institutions repurchase agreements. Management believes it will be able to satisfy its ongoing cash requirements through cash on hand and existing credit facilities. Management believes that the impact to the Company's financial position as a result of the bankruptcy has been absorbed as of the third quarter of 2000. Prospective operations are not expected to be adversely affected in the long term and may become beneficial to the Company as additional dealers generate a presence in the Arizona market. The short-term impact has resulted in a decrease in the Company's sales and gross profit in 2000. This dealer represented approximately 16% of sales in 1999 and the Company was expecting at least that for the first half of 2000. The Company continues to carry excess inventory at their plant because of the dealer's untimely filing of bankruptcy in the first quarter. Flooring sources retained ownership of thirty-two units which were subject to interest charges totaling $45,000 for July through September. Twenty units remained subject to interest at September 30, 2000. Property Acquisition - On July 17, 2000, the Company purchased property and a partially constructed commercial building and all related "improvements" in Arizona. The purchase price for the property, $794,000. The Company will also fund the completion of the commercial building and related improvements, not to exceed $450,000. These payments shall be paid in a series of progress payments to be determined by mutual written agreement of Buyer and Seller. The Company paid $200,000 in September 2000 and $50,000 in October 2000 with completion expected in November 2000. The property is located in Mesa, Arizona and is the future site for motorhome sales and service for the remaining inventory of the bankrupt Arizona dealership and future shipments as to be determined. Item 1- Legal Proceedings Litigation - The Company was sued by Bruce Elworthy and Anne B. Marshall (Elworthy and Marshall) in June 1995 in the Superior Court of the County of Los Angeles. The complaint alleged that a leveling system on a motorhome purchased from Rexhall was defective and caused damages to Elworthy and Marshall of $1,000,000 for medical expenses, loss of earnings, and pain and suffering. Rexhall prevailed in its defense with zero dollars being awarded to the Plaintiffs. The verdict is currently under appeal by the Plaintiffs. Although the Company believes the final disposition of this matter will not have a material adverse effect on the Company's financial position or result of operations, if Elworthy and Marshall were to prevail on its liability claims, a judgment on appeal in a material amount could be awarded against the Company. The Company is a party to various claims, complaints and other legal actions that have arisen in the ordinary course of business. The Company believes that the outcome of such pending legal proceedings, in the aggregate will not have a material adverse effect on the Company's financial condition or results of operations. Item 2. - Reports on Form 8-K a) Reports on Form 8-K: Filed May 1, 2000; Repurchase of Stock. REXHALL INDUSTRIES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized. REXHALL INDUSTRIES, INC. by (Registrant) Date: November 14, 2000 /s/William J. Rex William J. Rex Chairman, President and Chief Executive Officer Date: November 14, 2000 /s/Richard K. Krueger Richard K. Krueger Controller