1998 Rexhall Annual Report
Leading the way to the new millennium.
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Growth through experience.
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About Rexhall
Rexhall Industries is a manufacturer of Class "A" motorhomes entering our
13th year of operation. Manufacturing began in 1986 in a renovated, 18,000
square foot recreational vehicle plant in Pacoima, California. As orders
increased, the Company quickly outgrew its modest facilities and moved to an
80,000 square foot facility in Saugus, California. In June 1989 management
decided to take the Company public, with an initial offering of 1.15 million
shares of common stock trading on the NASDAQ Stock exchange. In 1991 Business
Week Magazine named Rexhall Industries the "Number One Best Small Growth
Company in America," out of 7,700 publicly traded companies. These early
milestones helped reinforce the philosophy of the Company and it wasn't
long before Rexhall was one of the top manufacturers of Class "A" motorhomes
nationally. In 1993 the Company bought and opened a second production plant
in Elkhart, Indiana. In 1994, Rexhall started building its new Corporate
headquarters in Lancaster, California. As part of the City of Lancaster's
redevelopment project, Rexhall was able to acquire 10 acres of land on which
to build a new manufacturing facility and Corporate Headquarters, now
encompassing 120,000 square feet of office and production space. The year
1998 has proven to be the best year in the history of the Company,
highlighted by centralized production, continued development of products
in demand and marketing strategies aimed at market expansion.
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Leading the way with commitment.
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Financial highlights.
1994 1995 1996 1997 1998
Sales 50,090,000 60,709,000 64,959,000 63,012,000 71,454,000
Gross Profit 6,906,000 8,728,000 8,792,000 7,091,000 12,140,000
Income Before Taxes 3,222,000 3,394,000 2,131,000 (2,912,000) 5,864,000
Net Income (Loss) 1,922,000 2,034,000 1,284,000 (1,835,000) 3,390,000
Working Capital 8,858,000 9,269,000 9,519,000 7,356,000 10,805,000
Total Assets 15,991,000 19,975,000 23,496,000 23,178,000 28,471,000
Shareholders Equity 10,376,000 12,225,000 13,581,000 11,480,000 14,992,000
Earnings per Share
- Basic 0.66 0.69 0.44 (0.64) 1.14
Weighted Average Shares
Outstanding (Basic) 2,893,000 2,934,000 2,948,000 2,882,000 2,968,000
*GRAPHS AVAILABLE ON HARD COPY
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Leading the way with leadership.
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Dear Fellow Shareholders:
Let me start by thanking the employees of Rexhall Industries, Inc. and the
dealerships across America for their determination and hard work in 1998.
Additionally, let me thank all of our retail customers who have demonstrated
tremendous confidence in our Company through the purchase of our motorhomes,
and certainly to you, our shareholders, whose optimism about our Company's
future has encouraged your investment. It is all of you that helped to
position Rexhall Industries, Inc. to be a significant part of the thriving
RV Industry and its bright future. The 1998-year was certainly not without
challenges, however, when met "head-on" with the strength of mind to resolve
them, we have proven that not only can we survive challenges, we can become
stronger as a result of them.
The positive results posted by our Company in 1998, has reaffirmed our
direction and re-energized confidence with respect to where we are headed
as a Company. Record performances in the areas of both production and sales
have proven our strategies to be sound and our focus to be clear. The
increase in sales can be partly attributed to the continued development of
new and exciting products, as well as the increased awareness that our
products have enjoyed. Centralizing our production at our Lancaster,
California facility has the emphasis firmly on efficient and quality
manufacturing. These efficiencies are reflected in the magnitude of the
improvement in gross profit in conjunction with the reduction of selling,
general, and administrative expenses.
Plans for aggressive marketing into the year 2000 and beyond started in 1998.
"Rexhall 2000", the new Corporate theme began with an association with
NASCAR driver Wally Dallenbach (#25 Bud Car) who will be featured in several
ads and promotional events during the year. This program signals the start of
a high profile marketing strategy aimed at gaining more brand awareness.
Recent studies have shown the RV buying public to be growing. The prime RV
buying age is between 55 and 64 years of age. Approximately 77 million
Americans (the Baby Boomers) are approaching this prime age and the
population of buyers will continue to grow.
Our record sales backlog at December 31st, 1998 deserves attention and is
just one of a growing number of positive indicators, adding to our optimism
for 1999 and beyond. Rexhall Industries, Inc. has never taken success for
granted. While opportunity sometimes presents itself, more often
opportunities are created. Though we have never been more confident with our
products and market positioning, we cannot let our optimism overshadow the
need to create opportunities. For it is with hard work, determination, and
a "never say die" attitude that Rexhall has found itself where it is today,
and it is that positive attitude that will lead us to the success these
opportunities offer.
The Board of Directors and I would like to thank you again for your
confidence in Rexhall Industries, Inc.
Sincerely,
William J. Rex
President and Chief Executive Officer
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Leading the way with innovation.
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Our Motorhomes
The Company's motorhomes are built with attention to quality. The materials
used by the Company in constructing its motorhomes are commonly found on more
expensive models and, in the opinion of management, generally are superior to
those found on motorhomes in the same price range as the Company's
motorhomes. The Company uses only steel, as opposed to wood or aluminum, in
framing its cage. The Company uses gel coated, high gloss, one-piece
fiberglass panel for the sidewalls, front cap, rear cap and roof, giving the
look of a more expensive motorhome and eliminating many of the seams
commonly found in most motorhomes. Additionally, fiberglass generally allows
easier repair of collision marks and scrapes as opposed to aluminum, the
other material commonly used in sidewall construction. For insulation, the
Company uses polyurethane foam and polystyrene.
The Company's motorhomes are also built with attention to aerodynamics. Each
motorhome has a streamlined bus-front cap that tapers to a width broader at
the junction with the sidewalls than at the leading edge of the nose. That
styling, coupled with rounded corners throughout the coach, permits a
smoother ride, particularly in high winds or when the motorhome is passed by
large trucks and trailers.
The Company currently offers six lines of Class A motorhomes. The product
lines are Aerbus, Rexair, RoseAir, Vision, Anthem and American Clipper.
The Company's Class A line offers many models and floor plans with multiple
decors. These various models come with the following chassis and engine
types:
- - Ford F-53 chassis with a V-10 electronically fuel injected engine
- - Chevrolet P-30 chassis with the 290 H.P. Vortec engine
- - Spartan Highlander chassis with a 300 H.P. engine
Models range in size from an overall length of approximately 23 feet to
approximately 39 feet with wheelbases ranging from 158 inches to 252 inches.
All models have an overall maximum width of eight and one half feet (102"
widebody) with a height (with air conditioner) of just over eleven feet.
In addition to size or chassis, Rexair, Aerbus, RoseAir, Vision, Anthem and
American Clipper models are differentiated by exterior graphics and some
floor plan and sleeping accommodation variations. Depending on the model,
each motorhome is equipped to sleep four to six adults comfortably. Standard
features and equipment on all Rexhall models include 75 or 80 gallon gas tank
(depending on chassis and model), halogen headlights, dash air conditioning,
double door flush mounted refrigerator/freezer, three burner range with
automatic pilot and optional conventional oven, radial tires, stabilizing air
bags, 30,000 B.T.U. furnace, day/night shades and extra large batteries
mounted on a slide-out tray for easy access and service. Additional standard
equipment includes a television, television antenna, AM/FM stereo radio with
cassette player, auxiliary power generators, convection microwave oven, roof
air conditioners, and video tape player. Optional equipment includes leak
detector for propane, back up camera, wsher and dryer, hydraulic leveling
jacks, electric and heated mirrors, 50 AMP service, ice maker and power entry
step for easier entry into the motorhome. Some models may vary in standard
equipment.
Suggested retail prices of Aerbus, Rexair, or RoseAir models with standard
equipment range from $75,000 to $148,000 (diesel models) and fully equipped
with available options from $82,000 to $175,000. Suggested retail prices for
the Vision and American Clipper models (entry level) with standard equipment
range from approximately $60,000 to $76,000 (add $5,000 with available
options). Anthem diesel models range from $99,000 to $105,000 with standard
equipment, and with available options from $105,000 to $114,000.
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Our Company Facilities
In December 1995, the Company completed construction and moved into a 87,000
square foot manufacturing facility in Lancaster, California which serves as
both a manufacturing facility and the Company's Executive Offices. The
facility was designed by management to insure efficiency and to specifically
position the company with the opportunity to meet increased production
demands based on orders that have continued to rise on a yearly basis. In
September 1996, expansion construction began at the Lancaster site. The new
addition, completed in the fourth quarter of 1997, provided an additional
19,320 square feet of production space. The Lancaster manufacturing plant
is debt free with no mortgages on the facility.
The Company owns a 97,000 square foot production facility on 12 acres in
Elkhart, Indiana. The Elkhart facility is debt free with no mortgages on
the property. As of December 30, 1997 the company decided to cease
production at the Elkhart facility. However, the company retained its
wholesale motorhome sales, warranty and service operations at the location
throughout 1998. As a result of this decision to restructure its operations,
the Company recorded a charge to operations of $1,042,000 in 1997. See
footnote 2 to the financial statements. As of January 1999, the Company has
contracted out the warranty and service operation to a Pennsylvania dealer.
The Company intends to sell the Indiana facilities.
In September 1995, the Company purchased a 4.5 acre site located in
Lancaster, California to serve as the Company's RV Service Center. The site
contains a 40,000 square foot facility and was purchased from the City of
Lancaster's Redevelopment Agency for $980,000. At December 31, 1998, the
Company was indebted to the City of Lancaster Redevelopment Agency an amount
of $797,000 with interest at 5.93% per annum due October 2015. The
promissory note is collateralized by the Lancaster land and building with a
net book value of approximately $911,000 at December 31, 1998. The Company
leased a portion of the facility to Lancaster RV from December 1997 to
present. Lancaster RV is a major retail dealer.
In September 1996, the Company purchased a 4,500 square foot facility located
one mile east of the Elkhart Plant. The facility has 1,500 sq. ft. of
office space and a 3,500 sq. ft. warehouse area. The facility is currently
leased to S & S RV as a retail RV Center.
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Market Information
The Company's Common Stock has traded in the over-the-counter market since
June 22, 1989 and sales and other information are reported in the NASDAQ
National Market System. The Company's NASDAQ symbol is "REXL". The
following table sets forth the range of high and low closing sale prices of
a share of the Company's Common Stock in the over-the-counter market for
each quarter since the first quarter of 1996 according to NASDAQ:
1996 High Low
First Quarter $ 7.00 $ 4.88
Second Quarter 8.13 6.25
Third Quarter 11.00 6.00
Fourth Quarter 10.00 6.50
1997 High Low
First Quarter $ 6.88 $ 5.50
Second Quarter 6.25 4.75
Third Quarter 6.00 5.25
Fourth Quarter 5.75 4.63
1998 High Low
First Quarter $ 5.19 $ 4.53
Second Quarter 7.63 4.44
Third Quarter 9.38 5.13
Fourth Quarter 9.00 4.75
Holders
At March 31, 1999, the Company had 67 shareholders of record.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table sets forth for each of the three years indicated the
percentage of revenues represented by certain items on the Company's
Statements of Operations:
Percentage of Net Sales
Year Ended December 31
1996 1997 1998
Net Revenues 100.0% 100.0% 100.0%
Costs of goods sold 86.5 88.7 83.0
Gross profit 13.5 11.3 17.0
Selling, general, and
administrative expenses 9.9 11.6 9.4
Restructuring charge --- 1.7 (.3)
Income(loss) from operations 3.6 (2.0) 7.9
Legal Settlement --- (2.5) ---
Other Income(expense), net (0.3) (0.1) 0.3
Income(loss) before income taxes (benefit) 3.3 (4.6) 8.2
Provision for income taxes (benefit) 1.3 (1.7) 3.5
Net income(loss) 2.0% (2.9%) 4.7%
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Management Discussion and Analysis
Overview
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein. As is generally the
case in the recreational vehicle industry, various factors can influence
sales. These factors include increases in interest rates, competition,
restrictions on the availability of financing for the purchase of
recreational vehicles as well as significant increases in the cost of
gasoline. The Company's business is also seasonal in that the majority of
sales occur in the second and third quarter.
Prior to 1998, the Company operated two manufacturing divisions, Lancaster,
California and Elkhart, Indiana. During 1997, the Company's Board of
Directors adopted a formal plan of restructuring whereby the Company
implemented a plan to cease production operations at its Elkhart, Indiana
manufacturing plant and potentially sell all or part of the real estate the
facility occupied. This decision was based upon the Company's evaluation of
costs and the product quality of the recreational vehicles being produced in
Elkhart. Concurrent with this decision, the Company completed an expansion
of its Lancaster facility to accommodate the expected rise in production.
The Company operated the service center in Elkhart, Indiana during 1998 but
in January sub-contracted its service and warranty in the eastern half of the
United States. The Company has decided to sell the Indiana facility.
Two key transactions adversely impacted the Company's results of operations
during 1997. In addition to the aforementioned restructuring charge for the
production closure of the Elkhart facility, the Company reached a settlement
of an existing class action lawsuit against the Company. Pursuant to the
settlement, the Company was required to pay $825,000, plus issue coupons to
all members of the class for a discount of $200 on future repairs or $1,250
towards the purchase of a new Rexhall vehicle. The Company reported the
impact from these transactions as charges in the accompanying statement of
operations aggregating $1,042,000 for the restructuring and $1,590,000 for
the lawsuit settlement during 1997.
Result of Operations
Comparison of the Year Ended December 31, 1998 to
Year Ended December 31, 1997
Net revenues for the year ended December 31, 1998, were $71.4 million,
compared to $63.0 million for 1997, an increase of $8.4 million or 13.3%.
The number of units shipped in 1998 increased 40 to 1,122 in 1998 from 1,082
in 1997, an increase of 3.7%. This increase in units shipped was lower than
the overall increase in sales as a result of a change in the sale mix.
Double-slide units introduced in the fourth quarter of 1997 increased to 28%
of sales in 1998. Conversely fewer lower margin single slide and non-slide
units were sold in 1998. The average net selling price increased
approximately 9% during the period.
Gross profit for the year ended December 31, 1998 increased to $12.1 million
from $7.1 million for 1997, an increase of $5.0 million or 70%. The gross
margin for 1998 was 17.0% as compared to 11.3% for 1997. The increase in
gross profit is due to increased operating efficiencies and improved quality
at the California plant primarily serving our major market in the Western
United States and higher margins associated with the increased sales of units
equipped with higher priced options.
Selling, general and administrative expenses (SG&A) for the year ended
December 31, 1998 were $6.7 million, compared to $7.3 million for 1997, a
decrease of $.6 million or 7%. The decrease in SG&A is due principally to
decreases in warranty expense as compared to 1997. The decrease in selling,
general and administrative expenses as a percentage of sale from 11.5% in
1997 to 9.4% in 1998 results from the increased sales level and efficiencies
gained by operating one plant at the Corporate Headquarters.
The Company's effective income tax rate was 43.5% for the year ended December
31, 1998 as compared with 37.0% for 1997. Basic and diluted net income per
share was $1.14 and $1.13 respectively, for the year ended December 31, 1998,
as compared to basic and diluted net loss per share of ($.64) sales and
($.64), respectively, in 1997. Exclusive of the impacts of the restructuring
and legal settlement non-recurring items during 1997 and 1998, net loss
would have been ($0.2) million for the year ended December 31, 1997 less as
compared to net income of $3.2 million for 1998. Basic and diluted loss per
share excluding the impact of the aforementioned non-recurring items during
1997 and 1998 would have been $0.06 for the year ended December 31, 1997 as
compared to $1.08 and $1.07 respectively, for 1998. The increase in basic
and diluted net income per share was due to increased sales margins and
decreased SG&A costs such as warranty.
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Comparison of the Year Ended December 31, 1997 to
Year Ended December 31, 1996
Net revenues for the year ended December 31, 1997, were $63.0 million,
compared to $65.0 million for 1996, a decrease of $2.0 million or 3.0%. The
decrease in net revenues was principally due to reduced production and sales
from its Elkhart facility. During 1997, revenues from the Elkhart facility
were $10.7 million, compared to $19.4 million in 1996, a decrease of $8.7
million or 45%. This decrease was offset by increased net revenues at its
facility of $6.8 million to $52.3 million in 1997 from $45.5 million in 1996,
an increase of 14.9%. The number of units shipped in 1997 decreased 88 to
1,082 in 1997 from 1,170 in 1996, a decrease of 7.5%. This decrease was
somewhat higher than the overall decrease in sales as a result of the
Company's effort to expand its offering of optional equipment items and other
product improvements.
Gross profit for the year ended December 31, 1997 decreased to $7.1 million
from $8.8 million for 1996, a decrease of $1.7 million or 19.3%. The gross
margin for 1997 was 11.3% as compared to 13.5% for 1996. The decrease in
gross profit was due principally to increased chassis costs, production
problems encountered in the production of vehicles at the Elkhart facility
leading to the Company's decision to ultimately close production at the
facility, and lastly, increased competition in the recreational vehicle
industry. Also contributing to the reduction in gross profit was the
overall 3.0% decrease in revenues.
Selling, general and administrative expenses (SG&A) for the year ended
December 31, 1997 were $7.3 million, compared to $6.4 million for 1996, an
increase of $0.9 million or 13.4%. The increase of SG&A was due principally
to an increase in sales incentive payments, legal expenses and warranty
expense as compared to 1996. The percentage of SG&A to revenues was 11.6%
for 1997 as compared to 9.9% for 1996. The increase is due, in part, to
fixed costs of the Elkhart facility being spread over a smaller population
of sales during 1997 as compared to 1996.
During 1997, the Company's Board of Directors approved a restructuring of the
Company's operations. The restructuring plan provided for changes in
operational and production strategies. In implementing these plans, the
Company decided to cease manufacturing operations at its Elkhart, Indiana
plant. The closure of this facility was done in conjunction with the recently
completed expansion of its Lancaster, California facility to accommodate the
anticipated increased production. The Company believes that the national
market can be adequately served from the California facility and that any
slight increase in freight charges will be more than offset by the reduced
manufacturing costs. As a result of this strategic change, the Company wrote
down or wrote off entirely, certain of its property and equipment and
inventories located at the Elkhart facility aggregating $937,000. In
addition, the Company recorded additional charges for severance costs and
other expected costs associated with the facility closure aggregating
$105,000. The total charge of $1,042,000 is recorded as a Restructuring
charge in the accompanying statements of operations.
During 1997, the Company reached a tentative settlement, subject to court
approval, of its class action lawsuit. Under the settlement agreement, the
Company will pay $825,000 in cash, and issue one coupon per vehicle owned by
the members of the class for $1,250 towards the purchase of a new Rexhall
vehicle or $200 towards service, parts and labor. Coupons would be
redeemable at the Company's two service centers and at three dealerships
which are suitably dispersed around the country. The Company has accrued for
the estimated costs of the redemption of these coupons and the cash payment,
aggregating $1,590,000 and has recorded this as Lawsuit settlement in the
accompanying statements of operations.
The net loss before income tax benefit for the year ended December 31, 1997
was $2.9 million, as compared with net income before tax of $2.1 million for
1996, principally due to the aforementioned non-recurring charges. Without
these non-recurring charges, loss before taxes would have been $0.3 million
for the year ended December 31, 1997 as compared to net income of $2.1
million for 1996. The decrease in this adjusted difference is due
principally to production inefficiencies in the Elkhart facility resulting in
reduced gross margins, increased legal, warranty and other administrative
costs in the Elkhart facility, and increased dealer rebates and sales
incentive payments.
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The Company's effective income tax rate was 37.0% (benefit) for the year
ended December 31, 1997 as compared with 39.7% for 1996. The income tax
benefit in 1997 results from the anticipated refund of prior year income
taxes from the carryback of the 1997 taxable net loss. Basic and diluted net
loss per share was $0.64 for the year ended December 31, 1997, as compared to
basic and diluted income per share of $0.44 and $0.43, respectively, in 1996.
Exclusive of the impacts of the aforementioned non-recurring items, net loss
would have been $0.2 million for the year ended December 31, 1997, as
compared to net income of $1.3 million for 1996. Basic and diluted loss per
share excluding the impact of the aforementioned non-recurring items would
have been $0.06 for the year ended December 31, 1997 as compared to $0.44 and
$0.43 respectively, for 1996. The decrease in both of these relationships is
due principally to production inefficiencies in the Elkhart facility
resulting in reduced gross margins, increase legal, warranty and other
administrative costs in the Elkhart facility, and increased dealer rebates
and sales incentive payments.
Year 2000:
The Year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Computer
programs that are date dependent are found in the software that operate many
IT systems as well as in the computer based devices which control many types
of electronic equipment. Computer programs that are not Year 2000 compliant
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to a disruption in the
operation of the related IT systems or electronic equipment.
The Company has established and is implementing a program to address the Year
2000 issue. The Year 2000 program included the implementation of previously
planned systems as well as specific Year 2000 programs. All programs are on
track for completion before the year 2000 with various applications being
upgraded or replaced as needed. The failure to correct a material Year 2000
problem may result in an interruption in, or a failure of, certain normal
business operations or activities. Such failures could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. Additionally, the Year 2000 program has not deferred any other
company projects that will have a material impact on its results of
operation, liquidity or financial condition.
Information Technology Systems:
The Company began undertaking changes to bring non-compliant systems and
accompanying methodology to Year 2000 compliant standards. In furtherance
of the Year 2000 program, the Company acquired a new Year 2000 compliant
client server enterprise system and hired a full time IS professional to
oversee the implementation of the program.
The IT systems have been inventoried and the necessary Year 2000 upgrades,
replacements and retrofits identified. These projects are presently in
various stages of analysis, development and implementation. The Year 2000
program is currently scheduled to be completed by the fourth quarter of
1999.
Non-Information Technology Systems:
Non-IT Systems may contain date sensitive embedded technology requiring the
Year 2000 upgrades. Examples of this technology include security equipment
such as access and alarm systems, as well as facilities equipment such as
heating and air conditioning units.
The Company is a product manufacturer; therefore, the "embedded chip" issue
relates to production line components as well as to the equipment used by the
Company. Production line components and facilities and equipment are being
inventoried and assessments are in progress.
The Company is also addressing the readiness of its critical suppliers and
customers. The Company has inventoried its critical suppliers, and is
sending letters to suppliers, and where appropriate, contacting certain
suppliers requesting Year 2000 certification. The Company is also contacting
certain key customers where potential Year 2000 problems may exist. In
certain areas where the Company relies on products supplied by manufacturers
for the systems provided to its customers, the Company is seeking standard
Year 2000 warranties that, to the extent assignable, may be transferred to
customers.
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Costs:
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's results of
operations, liquidity and financial condition. The estimated total cost of
the Year 2000 effort is expected to be under $100,000. This estimate does
not include the cost of the Company's previously planned business critical
systems upgrades, which have not been accelerated due to the Year 2000
problem.
Risks and Contingency Planning:
The Company has identified and assessed the areas that may be at risk related
to the Year 2000 problem. The failure to correct a material Year 2000
problem may result in an interruption in, or a failure of, certain normal
business operations or activities. Such failures could materially and
adversely affect the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers, the Company is unable to determine at
this time whether the consequences of the Year 2000 failures will have a
material impact on the Company's results of operations, liquidity or
financial condition. The Company has initiated contingency planning for
possible Year 2000 issues, including such factors as supply chain and banking
operations. Where needed, the Company will establish contingency plans based
on the Company's actual testing experience and assessment of outside risks.
The Company anticipates final contingency plans to be in place by June 1999.
The Year 2000 program is expected to significantly reduce the Company's level
of uncertainty about the Year 2000 problem. The Company believes that
through its Year 2000 program, the possibility of significant interruptions
of normal business operations should be reduced.
Readers are cautioned that forward looking statements contained in the Year
2000 Update should be read in conjunction with the Company's disclosures
under the heading "Forward Looking Statements".
Liquidity and Capital Resources:
The Company has relied primarily on internally generated funds, trade credit
and debt to finance its operations and expansions. As of December 31, 1998,
the Company had working capital of $10,805,000, compared to $7,356,000 at
December 31, 1997 The $3,449,000 increase in working capital primarily
resulted from a $3,335,000 increase in inventories and a $4,206,000 increase
in cash, partially offset by a $1,846,000 increase in accounts payable and a
$1,311,000 decrease in current deferred tax assets. The increase in cash and
inventory relates to 1998 income and increase in back orders at December
1998, as compared with the same period in 1997.
As of December 31, 1998 the Company has a $3,500,000 line of credit with Bank
of America which can be used for working capital purposes. Under this line
of credit, $365,000 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
workmen's compensation insurance in California. Since the Company purchased
workmen's compensation insurance covering their employees at their Elkhart
plant, a similar letter is not required for this facility. At December 31,
1998, 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 December 31, 1998.
The Company has a $1,866,000 line of credit with General Motors Acceptance
Corporation, a chassis vendor. Borrowings under the line bear interest at an
annual rate of prime plus 1% (8.75% at December 31, 1998). All borrowings
are secured by the Company's assets. The outstanding balances included in
accounts payable at December 31, 1997 and 1998 were $453,000 and $644,000
respectively.
The Company has a line of credit with another chassis vendor, Ford Motor
Credit Company ("FMCC"), with a $2,600,000 limit. Borrowings under the line
bear interest at an annual rate of prime plus 1% (8.75% at December 31,
1998). All borrowings are secured by the Company's assets. The outstanding
balances included in accounts payable at December 31, 1997 and 1998 were
$2,162,000 and $2,986,000 respectively. FMCC has subsequently increased
the line of credit to $4,000,000 as of March 13, 1999, in order to
accommodate increased production demands.
Capital expenditures during 1998 were $482,000. Management anticipates a
comparable level of capital expenditures in 1999. Cash flows from financing
activities consisted primarily of proceeds of $199,000 from the exercise of
employee stock options, offset by repurchases of common stock on the open
market of $63,000.
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The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1999, including payments related to the legal settlement
and expansion plans at the California facility, primarily with cash flows
from operations, supplemented, if necessary, by borrowings under its
revolving credit agreement.
As mentioned previously during 1997, the Company restructured its operations
and ceased production in its Elkhart, Indiana facility. As a result, the
Company recorded certain charges for write-off of certain property and
equipment and inventory in the Elkhart facility. The Company owns the
real estate for the Elkhart facility. As of December, the Company has
decided to sell the property. The Company has evaluated the recoverability
of this real estate and has concluded that the appraised value of the real
estate exceeds the related book value and that the cost of the real estate is
recoverable. Accordingly, no impairment write-down has been recorded as of
December 31, 1998.
Forward Looking Statements
Our report contains 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 materials costs, and pricing and other pressures from
substantially larger competitors, labor disruptions, and adverse weather.
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. Finally, dealer
relations for the entire recreational vehicle industry may be changed by
dealers joining together in financial or operating arrangements just now
being formed, which may be similar to developments in the automotive or
manufactured housing industries. Management intends to remain aware of these
factors and react to them, but cannot predict their timing or significance.
<PAGE>
Independent Auditor's Report
The Board of Directors
Rexhall Industries, Inc.
We have audited the accompanying balance sheets of Rexhall Industries, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rexhall Industries, Inc.
as of December 31, 1998 and 1997, and the result of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Los Angeles, California
March 12, 1999
Auditor's Report
Rexhall Industries, Inc.:
We have audited the statements of operations, shareholders' equity, and cash
flows of Rexhall Industries, Inc. for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Rexhall Industries, Inc. operations
and its cash flows for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
April 11, 1997
<PAGE>
Rexhall Industries, Inc.
Balance Sheets
December 31, 1997 and 1998
ASSETS 1997 1998
CURRENT ASSETS
Cash $ 811,000 $5,017,000
Accounts receivables, less allowance
for doubtful accounts $106,000 in 1997,
and $150,000 in 1998 5,378,000 4,631,000
Inventories 9,439,000 12,774,000
Income tax receivable 337,000 ---
Deferred income taxes (note 7) 2,197,000 956,000
Other current assets 59,000 33,000
Total Current Assets 18,221,000 23,411,000
Property and equipment at cost net of
accumulated depreciation (note 3 and 6) 4,957,000 4,519,000
Property held for sale (note 13) --- 541,000
Total Assets $23,178,000 $28,471,000
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (note 4) $6,111,000 $7,958,000
Restructuring reserve (note 2) 605,000 ---
Warranty allowance 937,000 966,000
Accrued Legal Settlement (note 9) 1,590,000 765,000
Accrued Legal 348,000 829,000
Dealer Incentives 608,000 830,000
Other accrued liabilities 467,000 557,000
Accured Compensation and Benefits 172,000 672,000
Current portion of long-term debt (note 6) 27,000 29,000
TOTAL CURRENT LIABILITIES 10,865,000 12,606,000
Deferred income taxes (note 7) 36,000 106,000
Long-Term debt (note 6) 797,000 767,000
TOTAL LIABILITIES 11,698,000 13,479,000
SHAREHOLDERS' EQUITY
Preferred Stock - no par value
Authorized, 1,000,000 shares;
No shares outstanding at December 31, 1997
and December 31, 1998 --- ---
Common stock-no par value,
Authorized, 10,000,000 shares,
issued and outstanding;
2,714,000 at December 31, 1997 and
3,010,000 at December 31, 1998 (Note 11) 6,267,000 6,788,000
Loan receivable from exercise of options (Note 5) (399,000)
Retained earnings 5,213,000 8,603,000
Total Shareholder Equity 11,480,000 14,992,000
Commitments and Contingencies (note 8)
Total Liabilities and shareholder equity $23,178,000 $28,471,000
See accompanying notes to financial statements
<PAGE>
Rexhall Industries, Inc.
Statements of Operations
For the years ended December 31, 1996, 1997 and 1998
1996 1997 1998
Net Revenues $64,959,000 $63,012,000 $71,454,000
Cost of Sales 56,167,000 55,921,000 59,314,000
Gross Profit 8,792,000 7,091,000 12,140,000
Operating Expenses
Selling, General and Administrative
Expenses 6,426,000 7,286,000 6,749,000
Restructuring Charge --- 1,042,000 (282,000)
Income (Loss) from Operations 2,366,000 (1,237,000) 5,673,000
Other Income (Expense)
Interest Income 29,000 3,000 157,000
Interest Expense (171,000) (134,000) (101,000)
Legal Settlement --- (1,590,000) ---
Other Income (Expense) (93,000) 46,000 135,000
Income (Loss) Before Income Taxes 2,131,000 (2,912,000) 5,864,000
Income Tax Expense (Benefit) 847,000 (1,077,000) 2,474,000
Net Income (Loss) $1,284,000 ($1,835,000) $3,390,000
Basic Net Income (Loss) Per Share .44 (.64) 1.14
Diluted Net Income (Loss) Per Share .43 (.64) 1.13
Weighted Average Shares Outstanding
- - Basic 2,948,000 2,882,000 2,968,000
Weighted Average Shares Outstanding
- - Diluted 2,998,000 2,882,000 2,990,000
See accompanying notes to financial statements
Rexhall Industries, Inc.
Statements of Shareholders' Equity
For the years ended December 31, 1996, 1997 and 1998
COMMON COMMON
STOCK STOCK LOAN RETAINED
SHARES AMOUNT RECEIVABLE EARNINGS TOTAL
BALANCE,
January 1, 1996 $2,626,000 $6,461,000 --- $5,764,000 $12,225,000
Exercise of Stock
Options 10,000 33,000 --- --- 33,000
Repurchase and
Retirement of Stock (6,000) (46,000) --- --- (46,000)
Options issued to consultant
(Note 10) --- 85,000 --- --- 85,000
Net income --- --- --- 1,284,000 1,284,000
BALANCE,
December 31, 1996 2,630,000 6,533,000 --- 7,048,000 13,581,000
Repurchase and
Retirement of Stock (47,000) (266,000) --- --- (266,000)
5% Stock Dividend 131,000 --- --- --- ---
Net Loss --- --- --- (1,835,000)(1,835,000)
BALANCE,
December 31, 1997 2,714,000 6,267,000 --- 5,213,000 11,480,000
Repurchase and
Retirement of Stock (7,000) (63,000) --- --- (63,000)
Exercise of
Stock options 161,000 584,000 --- --- 584,000
5% Stock Dividend 142,000 --- --- --- ---
Loans receivable from
excercise of tock options --- --- (399,000) --- (399,000)
Net Income --- --- --- 3,390,000 3,390,000
Balance,
December 31, 1998 3,010,000 $6,788,000 ($399,000)$8,603,000 $14,992,000
See accompanying notes to financial statements
<PAGE>
Rexhall Industries, Inc.
Statements of Cash Flows
December 31, 1996, 1997 and 1998
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1997 1998
Net Income(loss) $1,284,000 ($1,835,000) $3,390,000
Adjustments to reconcile net
ncome (loss) to net cash
provided by Operating Activities:
Depreciation and amortization 348,000 216,000 344,000
Restructuring charges - non-cash effect --- 437,000 ---
Provision for deferred income taxes (155,000) (1,726,000) 1,311,000
Options issued to consultant 85,000 --- ---
(Increase) decrease in:
Accounts receivable 1,855,000 (2,170,000) 747,000
Inventories (5,142,000) 4,056,000 (3,335,000)
Income tax receivable (271,000) (66,000) 337,000
Increase(decrease) in:
Accounts payable 1,844,000 (1,480,000) 1,846,000
Restructuring Reserve --- 605,000 (605,000)
Warranty allowance 44,000 582,000 29,000
Accrued legal settlement --- 1,590,000 (825,000)
Accrued legal --- --- 481,000
Dealer incentives 271,000 269,000 221,000
Other assets and liabilities 315,000 312,000 639,000
Net cash provided by operating activities 207,000 790,000 4,580,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,426,000) (427,000) (482,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (24,000) (28,000) (28,000)
Proceeds from exercise of stock options 33,000 --- 199,000
Repurchase and retirement of stock (46,000) (266,000) (63,000)
Net cash provided by (used in)
financing activities (37,000) (294,000) 108,000
NET (DECREASE) INCREASE IN CASH (1,256,000) 69,000 4,206,000
BEGINNING CASH BALANCE 1,998,000 742,000 811,000
ENDING CASH BALANCE $742,000 $811,000 $5,017,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid during the year $918,000 $696,000 $1,090,000
Interest paid during the year $273,000 $259,000 $101,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Loans to related parties for
stock option exercise --- --- $399,000
See accompanying notes to financial statements
<PAGE>
Rexhall Industries, Inc.
Notes To Financial Statements
1.
General and Summary of
Significant Accounting Policies.
Business Activities - Rexhall Industries, Inc. (the "Company") designs,
manufactures and sells Class A motorhomes. Class A motorhomes are
self-contained and self-powered recreational vehicles used primarily in
conjunction with leisure travel and outdoor activities.
Concentration of Credit Risk - Sales are usually made to dealers over a wide
geographic area on either a C.O.D. basis or on terms requiring payment within
ten days or less of the dealer's receipt of the unit. Most dealers have
floor plan financing arrangements with banks or other financing institutions
under which the lender advances all, or substantially all, of the purchase
price of the motorhome. The loan is collateralized by a lien on the
purchased motorhome. As is customary in the industry, the Company has
entered into repurchase agreements with these lenders. In general, the
repurchase agreements provide that in the event of default by the dealer on
its agreement to the lending institution, the Company will repurchase the
motorhome so financed.
The Company has recorded an allowance for doubtful accounts to cover the
difference between recorded revenues and collections from customers. The
allowance and provision for bad debts are adjusted periodically based upon
the Company's evaluation of historical collection experiences, industry
trends and other relevant factors.
Inventories - Inventories are stated at the lower of cost or market value,
determined using the first-in, first- out basis, or market. Costs include
material, labor and applicable manufacturing overhead. Inventories consist
of the following at December 31, 1997 and 1998:
1997 1998
Raw materials $4,659,000 $7,593,000
Work-in-Progress 2,124,000 1,522,000
Finished Goods 2,656,000 3,659,000
Total $9,439,000 $12,774,000
Property and Equipment - Property is recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
based on the straight-line method over the estimated useful lives of the
assets, which range from 2 to 31.5 years.
Property held for sale is stated at the lower of cost or estimated net
realizable value and includes certain property and equipment no longer used
in the Company's operation.
Revenue Recognition - The Company derives revenue primarily from the sale of
motorhomes to dealers across the United States. Revenue is recognized when
title of the motorhome transfers to the dealer. This generally occurs upon
shipment. Revenues are also generated from the service of motorhomes and
from shipment or installation of parts and accessories.
Warranty Reserve Policy - The Company provides retail purchasers of its
motorhomes with a limited warranty against defects in materials and
workmanship for 12 months or 12,000 miles measured from date of purchase, or
upon the transfer of the vehicle by the original owner, whichever occurs
first. The Company's warranty excludes certain specified components,
including chassis, engines and power train, which are warranted separately by
the suppliers. The Company estimates warranty reserves required by applying
historical experience with regard to probabilities of failure and cost to
product sales covered by warranty terms. Warranty expense was $959,000,
$1,753,000 and $1,041,000 for the years ended December 31, 1996, 1997, and
1998, respectively.
<PAGE>
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Income (Loss) per Share - Basic net income (loss) per share is based upon the
weighted average number of the actual shares outstanding during the period.
Options to purchase common stock are included in the calculation of income
(loss) per share provided their impact is not anti-dilutive.
Use of Estimates -The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions relating to the reported amounts of assets and
liabilities and disclosure of contingent 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 these
estimates.
Accounting for Stock Options - In October, 1995, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensations"
("SFAS No. 123"), was issued. This statement encourages, but does not
require, a fair value based method of accounting for employee stock options.
The Company will continue to measure compensation costs under Accounting
Principles Board Opinion No. 25, Accounting for Stock issued to Employees
and complied with the pro froma disclosure requirements of SFAS No. 123 in
its annual financial statements.
Recent Accounting Pronouncements - In June 1997, The Financial Accounting
Standards Board ("FASB) issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS" 130"). SFAS 130 established
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements,. SFAS 130 does not require a
specific financial statement format but requires an enterprise to display an
amount representing total comprehensive income for the period covered by the
financial statement. Comprehensive income include items such as net income,
changes in value of available for sale securities and foreign currency
translation gains and losses. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Management has determined that the
disclosure requirements from these statements does not impact the financial
statements of the Company as there is no difference between net income and
comprehensive income for the years presented.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 established standards for public business enterprises
to report information about operating segments in annual financial statements
and requires those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. SFAS 131 need not be applied to interim financial statements in
the initial year of application is to be reported in financial statements for
interim periods in the second year of application. The Company operates in
only one business segment, the manufacture and distribution of recreational
vehicles. Accordingly, SFAS 131 does not have an impact on the Company's
financial reporting.
<PAGE>
In February 1998, FASB issued Statement of Financial Accounting Standard
No. 132, Employers' Disclosures about Pensions and other Post Retirement
Benefits. SFAS 132 established additional standards for the disclosure of
pensions and post retirement benefits but does not change the method of
accounting for such plans. SFAS 132 is effective for fiscal years beginning
after December 15, 1997. Management has determined that the disclosure
requirements from these statements does not impact the financial statements
of the Company.
In June 1999, FASB issued Statement of Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has determined that the disclosure requirements from this
statement will not impact the financial statements of the Company.
Fair Values of Financial Instruments - The following methods and assumptions
were used to estimate the fair value of each class of financial instruments
for which it is practicable to estimate that value:
Cash and cash equivalents, trade and other receivables, trade accounts
payable and accrued expenses: The carrying amounts approximate the fair
values of these instruments due to their short-term nature.
Reclassifications - Certain reclassifications have been made to the 1996 and
1997 financial statements to conform to the 1998 presentation.
2.
Restructuring
During 1997, the Company's Board of Directors approved a restructuring of
the Company's operations. The restructuring plan provided for changes in
the operations, and production strategies. In implementing these plans, the
Company decided to cease manufacturing operations at Elkhart, Indiana plant.
The Company recorded charges aggregating $1,042,000 as a result of this
restructuring plan in the fourth quarter of 1997.
The ceasing of manufacturing operations at the Elkhart facility was made in
conjunction with the recently completed expansion of the California facility
to accommodate the projected increase in production at the California plant.
As a result of this repositioning, the Company determined that certain of
fixed assets and inventories located at the Elkhart plant should be written
down, resulting in a charge of approximately $937,000. Additionally, the
Company recorded severance and other related costs relating to the closure of
the Elkhart plant for approximately $105,000, which was included as a
restructuring charge in the accompanying statements of operations for the
year-ended December 31, 1997. As of December 31, 1998, the Company had no
remaining reserve relating to this restructuring.
Restructuring reserve at 12/31/97 $605,000
Payments and asset write-downs
through December 31, 1998 605,000
Future cash outlay and charges $0
The Company owns the real estate for the Elkhart facility. The Company has
evaluated the recoverability of this real estate and has concluded that the
appraised value of the real estate exceeds the related book value and that
the cost of the real estate is recoverable. Accordingly, no impairment
write-down has been recorded as of December 31, 1998.
3.
Property and Equipment
Property and equipment consist of the following at December 31, 1997 and
1998:
Useful Lives
(In years) 1997 1998
Building and Land 5,315 4,543,000 4,094,000
Furniture, fixtures and equipment 2,7 1,227,000 1,332,000
Autos and trucks 5,7 155,000 309,000
5,925,000 5,735,000
Less accumulated depreciation
and amortization (968,000) (1,216,000)
Property and equipment, net $4,957,000 $4,519,000
<PAGE>
4.
Lines of Credit
The Company has available a $3,500,000 revolving line of credit with a bank
expiring on June 1, 1999. Under this line of credit, $365,000 has been set
aside as an irrevocable standby letter of credit. The reference rate is the
rate of interest publicly announced from time to time by the bank in San
Francisco. At December 31, 1998, no amounts were outstanding under this
line and $365,000 of standby letters of credit have been issued. All
borrowings are collateralized by the Company's assets.
The Company has a $1,866,000 line of credit with General Motors Acceptance
Corporation, a chassis vendor. Borrowings under the line bear interest at an
annual rate of prime plus 1% (8.75% at December 31, 1998). All borrowings
are secured by the Company's assets. The outstanding balances included in
accounts payable at December 31, 1997 and 1998 were $453,000 and $644,000
respectively.
The Company has a line of credit with another chassis vendor, Ford Motor
Credit Company ("FMCC"), with a $2,600,000 limit. Borrowings under the line
bear interest at an annual rate of prime plus 1% (8.75% at December 31,
1998). All borrowings are secured by the Company's assets. The outstanding
balances included in accounts payable at December 31, 1997 and 1998 were
$2,162,000 and $2,986,000 respectively. FMCC has subsequently increased the
line of credit to $4,000,000 as of March 13, 1999, in order to accommodate
increased production demands.
5.
Loans to Related Parties
From time to time the Company makes loans to certain officers and key
employees related to the exercise of stock options. During 1998, the Company
advanced $385,000 to key employees under the Company's Incentive and
Non-Statutory Stock Option Plan (The Plan). These loans are full recourse
loans secured by the shares of common stock issued upon such exercise. The
notes bear interest at a rate as defined by Regulation 1.1274-4 of Internal
Revenue Code of 1986, as amended, subject to annual adjustments as approved
by the Company's Compensation Committee (4.47% at December 31, 1998). Loans
extended for the exercise of incentive stock options are netted against
equity. The maturity date of the notes are March 20, 2003 and April 19,
2003 and are secured by a pledge of the shares purchased with proceeds of the
notes under the Company's Plan. The number of options exercised under the
Plan was 123,000 shares during the year ended December 31, 1998.
6.
Long-Term Debt
Long-term debt at December 31, 1997
and 1998 consists of the following: 1997 1998
Promissory note payable to the City of Lancaster
Redevelopment Agency, 240 monthly payment
of $6,285 including principal and interest
at 5.93% per annum, note matures on October 2015.
The note is collateralized by land and building with a
net book value of approximately $911,000 at
December 31, 1998. $824,000 $796,000
Less: Current Portion 27,000 29,000
Long-Term debt $797,000 $767,000
Future annual minimum principal payments due on long-term debt (including
current portion) as of December 31, 1998 are as follows:
Year Ending December 31,
1999 $ 29,000
2000 31,000
2001 32,000
2002 34,000
2003 37,000
Thereafter 633,000
$796,000
<PAGE>
7.
Income Taxes
The components of income tax expense (benefit) are as follows:
Years Ended December 31, 1996 1997 1998
Current:
Federal $780,000 $526,000 $1,018,000
State 222,000 123,000 145,000
1,002,000 649,000 1,163,000
Deferred:
Federal (124,000) (1,347,000) 950,000
State (31,000) (379,000) 361,000
(155,000) (1,726,000) 1,311,000
$847,000 ($1,077,000) $2,474,000
<PAGE>
The components of deferred tax assets (liabilities) at December 31, 1997 and
1998 are as follows:
1997 1997 1998 1998
FEDERAL STATE FEDERAL STATE
Current:
Allowance for bad debts $33,000 $9,000 $51,000 $9,000
Inventory reserves 124,000 34,000 --- ---
Warranty accrual 292,000 81,000 190,000 32,000
Dealer incentives 179,000 49,000 87,000 14,000
Uniform capitalization 120,000 33,000 21,000 4,000
Reserve for self insurance 135,000 37,000 87,000 14,000
Legal reserves 603,000 167,000 205,000 34,000
Accrued restructuring liability 188,000 52,000 --- ---
Other accrued liabilities 15,000 4,000 39,000 6,000
State tax 42,000 --- 163,000 ---
1,731,000 466,000 843,000 113,000
Non Current:
Depreciation 29,000 7,000 (91,000)(15,000)
Net deferred tax assets $1,702,000 $459,000 $752,000 $98,000
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income (loss) taxes
(benefit) due to the following:
Years Ended December 31, 1996 1997 1998
Income (loss) before income tax $2,131,000 ($2,912,000) $5,864,000
Statutory federal tax rate (benefit) 35% 34% 34%
Expected tax expense (benefit) 746,000 (990,000) 1,994,000
State taxes net of federal effect 148,000 (169,000) 334,000
Permanent differences 20,000 6,000 6,000
IRS audit resolution, primarily
State Tax deduction --- 101,000 ---
Write off of income tax receivable --- --- 140,000
Other adjustments (67,000) ( 5,000) ---
Provision for income taxes (benefit) $847,000 ($1,077,000) $2,474,000
8.
Commitments and Contingencies
Repurchase Agreements - Motorhomes purchased under financing agreements by
dealers are subject to repurchase by the Company at dealer cost plus unpaid
interest in the event of default by the dealer. To date repurchases have not
resulted in significant losses. During 1997 and 1998 the Company repurchased
approximately $3,145,000 and $832,000 respectively, of motorhomes under these
agreements. At December 31, 1997 and 1998, approximately $22,130,000 and
$25,530,000 respectively, of dealer inventory is covered by repurchase
agreements. Dealers do not have the contractual right to return motorhomes.
<PAGE>
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 alleges 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. The Company believes that it has meritorious defenses against the
Elworthy and Marshall claim and intends to vigorously defend itself against
the claim. 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 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 result
of operations, except as described in footnote 9, legal settlement.
9.
Legal Settlement
Legal Settlement - The class action lawsuit Masterjohn et al vs. Rexhall, et
al, Case No. 752188 filed in the Superior Court of Orange County, California
has been settled on October 2, 1998. Under the agreement Rexhall paid
$825,000 in cash, and issued one coupon per vehicle owned by members of the
class of $1,250 towards purchase of a new Rexhall vehicle or $200 toward
service, parts and labor. Coupons are redeemable at Rexhall's Lancaster,
California Service Center, as well as other designated dealerships
geographically dispersed. The total number of vehicles owned by class
members is estimated at approximately 5,000. The Company recorded a charge
of $1,590,000 in 1997 relating to this settlement. The December 31, 1998
accrual balance of $765,000 is for the remaining legal settlement costs
associated with the coupons still outstanding.
<PAGE>
10.
Stocking Incentive Plan
The Company has granted stock options under its Incentive and Nonstatutory
Stock Option Plan (the "Plan"), which provides for the granting of (I)
incentive stock options to key employees, pursuant to Section 422A of the
Internal Revenue Code of 1986, and (ii) nonstatutory stock options to key
employees, directors and consultants to the Company designated by the Board
as eligible under the Plan. Under the Plan, options for up to 225,000 shares
may be granted. Options granted and outstanding under the Plan expire in
five years and become exercisable and vest in annual increments from two to
three years. The maximum term of each option may not exceed 10 years. The
following table summarizes the change in outstanding employee incentive stock
options:
Range of Weighted
Number of OptionsPrices Average
Options per Share Exercise Price
Outstanding options at
December 31, 1995 164,000
Options exercised (10,000) $3.25 $3.25
Options canceled (20,000) 3.25 3.25
Outstanding options at
December 31, 1996 134,000 2.75 - 3.25 3.14
Options exercised --- --- ---
Options canceled --- --- ---
Outstanding options at
December 31, 1997 134,000 2.75 - 3.25 3.14
Options exercised (123,000) 2.75 - 3.25 3.13
Options canceled --- --- ---
Outstanding options at
December 31, 1998 11,000 3.25 3.25
The following table summarizes information about stock options outstanding
at December 31, 1998:
Number Weighted Weighted Shares
Outstanding Ave. Remaining Average Exercisable Weighted
Exercise at December Contractual Exercise at December Average
Price 31, 1997 Life Price 31, 1998 Exercise Price
$3.25 11,000 1.2 $3.25 11,000 $3.25
All stock options under the Plan are granted at the fair market value of the
Company's common stock at the grant date. No options were granted to
employees during 1996 and 1997 or 1998. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost for the Plan has been recognized
in 1996, 1997 or 1998.
<PAGE>
No non-statutory stock options were granted under the stock plan during 1997
or 1998. During 1996, the Company granted 38,000 non-statutory options at an
exercise price of $5.25 per share to a consultant for services received
during that year. The fair value of approximately $85,000, or $2.23 per
share, related to these options was determine using the Black-Scholes option
pricing model utilizing the following weighted average assumptions:
December
31, 1995
Dividend yield 0%
Anticipated volatility 49.47%
Risk-free interest rate 6.58%
Expected lives 4 years
The fair value was recorded as compensation expense in 1996 in the
accompanying statements of operations. These options were exercised during
1998 for $199,500.
11.
Common Stock
In May 1998, the Company announced a 5% stock dividend of 142,000 shares
issued on May 27, 1998 to shareholders of record as of June 19, 1998.
The impact of this stock dividend has retroactively been recorded for all
periods presented.
12.
Significant Customers
The Company had two major customers, RV World Productions a.k.a. RV
Supercenter and Richardson's RV (five Arizona locations and three Southern
California locations, respectively), who accounted for 14% and 11%
respectively of the Company's sales during 1998. The Company had one major
customer, RV World Productions a.k.a. Rainbow RV, who accounted for 11% of
the Company's sales during 1997. In 1996, Village RV accounted for 15.4% of
the Company's sales.
13.
Properties Held for Sale
Properties held for sale consist of 12 acres of land in Elkhart, Indiana. A
97,000 square foot building resides on the property which housed the
Company's East Coast production facility. In fiscal 1997, the Company's
Board of Directors adopted a formal plan of restructuring whereby the Company
implemented a plan to cease production operations at this location. During
1998, the Company continued to operate a wholesale motorhome sales, warranty,
and service operations at this location. At December 31, 1998, the Company's
Board of Directors has approved a plan to sell the Elkhart property and
facility in its entirety. The Elkhart land and facility are debt free with
no mortgages on the property. The Company has evaluated the recoverability
of this real estate and related buildings and has concluded that the
appraised value of the assets exceeds the related book value. Accordingly,
no adjustment to the carrying value of the property has been recorded.
14.
Income (loss) Per Share
The following is a reconciliation of the basic and diluted income (loss) per
share computation for the year 1996, 1997 and 1998 (in thousands):
Year ended December 31, 1996 1997 1998
Net income (loss) used for basic and
diluted income per share $1,284 ($1,835) $3,390
Share of Common Stock and
Common Stock equivalents:
Weighted average shares used in
basic computation 2,948 2,882 2,968
Weighted stock options 50 --- 22
Weighted average shares used in
diluted computation 2,998 2,882 2,990
Income per share:
Basic $ 0.44 ($ 0.64) $1.14
Diluted $ 0.43 ($ 0.64) $1.13
<PAGE>
Corporate Information
Directors:
William J. Rex
Chairman, President and Chief Executive Officer
Don Hannay, Sr.
Vice President, Sales Director
Frank A. Visco
Owner, Frank A. Visco & Associates
Al J. Theis
Consultant
Director
Robert A. Lopez
President, Nickerson Lumber Plywood
Director
Officers:
William J. Rex
President
Donald Hannay, Sr.
Vice President, Sales
Thomas M. Zirnite
Chief Financial Officer
Cheryl L. Rex
Corporate Secretary
<PAGE>
Corporate Information
Registrar and Transfer Agent:
US Stock Transfer Corp.
Glendale, CA
Legal Counsel:
Freshman, Marantz, Orlanski, Cooper & Klein
Beverly Hills, CA
Baker & Daniel
Elkhart, IN
Auditors:
KPMG, LLP
Woodland Hills, CA
Form 10K:
A copy of the Company's Form 10K, filed with Security and Exchange Commission
is available without charge upon writing to:
Shareholders Relations:
Rexhall Industries, Inc.
46147 7th Street West
Lancaster, CA 93534
Executive Offices:
Rexhall Industries, Inc.
46147 7th Street West
Lancaster, CA 93534
(661)726-0565
Website: http://www.rexhall.com
E-mail: [email protected]
