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 June 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: 3,100,850 as of 8/10/00. REXHALL INDUSTRIES, INC. INDEX PART 1 - FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements (Unaudited): Condensed Balance Sheets at June 30, 2000 3 and December 31, 1999 Condensed Statements of Earnings for the three and six months ended June 30, 2000 and June 30, 1999 4-5 Condensed Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 6 Notes to Condensed Financial Statements as of June 30, 2000 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 12 PART II - OTHER INFORMATION Repurchase Agreements 12-13 Subsequent Events 13 Legal Proceedings 13 Reports on Form 8-K 13 Signatures 14 (Unaudited) June 30 December 31 PART I - FINANCIAL INFORMATION 2000 1999 Item 1. - Financial Statements REXHALL INDUSTRIES, INC. CONDENSED BALANCE SHEETS ASSETS CURRENT ASSETS Cash $ 5,414,000 $ 6,330,000 Accounts Receivable 4,501,000 6,972,000 Inventories 15,962,000 16,504,000 Deferred Income Taxes 832,000 1,133,000 Other Current Assets 652,000 341,000 Total Current Assets 27,361,000 31,280,000 Property and Equipment - Net 4,652,000 4,753,000 Property Held for Sale 122,000 131,000 Other Assets 54,000 20,000 TOTAL ASSETS $32,189,000 $36,184,000 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $ 6,780,000 $10,915,000 Warranty Allowance 800,000 1,000,000 Accrued Legal 500,000 737,000 Dealer Incentives 850,000 1,050,000 Other Accrued Liabilities 385,000 497,000 Accrued Compensation and Benefits 306,000 725,000 Current Portion of Long-Term Debt 31,000 31,000 Total Current Liabilities $ 9,652,000 $14,955,000 Deferred Income Tax Liabilities 152,000 198,000 Long Term Debt, Less Current Installments 722,000 737,000 TOTAL LIABILITIES 10,526,000 15,890,000 SHAREHOLDERS' EQUITY Preferred Stock - no par value; Authorized 1,000,000 shares; No shares outstanding at June 30, 2000 and December 31, 1999 --- --- Common Stock - no par value; Authorized 10,000,000 shares; issued and outstanding 3,111,000 shares June 30, 2000 and 3,161,000 at December 31, 1999 6,498,000 6,788,000 Loan receivable from exercise of options (64,000) (399,000) Retained Earnings 15,229,000 13,905,000 TOTAL SHAREHOLDERS' EQUITY 21,663,000 20,294,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $32,189,000 $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 June 30, 2000 June 30, 1999 Net Revenues $ 15,090,000 $ 20,937,000 Cost of Sales 13,058,000 17,271,000 Gross Profit 2,032,000 3,666,000 Selling, General, Administrative Expenses and Other Expenses 1,377,000 1,572,000 Earnings Before Income Taxes 655,000 2,094,000 Income Taxes 295,000 846,000 Net Earnings $ 360,000 $ 1,248,000 Basic and Diluted Earnings Per Share (1) $ 0.11 $ .39 Weighted Average Shares Outstanding - Basic and Diluted (1) 3,154,000 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 EARNINGS (UNAUDITED) Six Months Ended June 30, 2000 June 30, 1999 Net Revenues $ 35,754,000 $ 43,170,000 Cost of Sales 30,419,000 35,365,000 Gross Profit 5,335,000 7,805,000 Selling, General, Administrative Expenses and Other Expenses 3,025,000 3,616,000 Earnings Before Income Taxes 2,310,000 4,189,000 Income Taxes 986,000 1,682,000 Net Earnings $ 1,324,000 $ 2,507,000 Basic and Diluted Earnings Per Share (1) $ .42 $ .79 Weighted Average Shares Outstanding -Basic and Diluted (1) 3,154,000 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 FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 1,324,000 $ 2,507,000 Adjustments to reconcile net earnings to net cash provided by (used in) Operating Activities: Depreciation and Amortization 246,000 138,000 Net change in deferred tax assets and liabilities 255,000 (232,000) (INCREASE) DECREASE IN Accounts Receivable 2,471,000 (1,382,000) Inventories 542,000 (4,154,000) Other Assets (295,000) (55,000) INCREASE (DECREASE) IN: Accounts Payable (4,135,000) 2,802,000 Other Accrued and Current Liabilities (562,000) 381,000 Dealer Incentives (200,000) 165,000 Net cash (used in) provided by operating activities $ (354,000) $ 170,000 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used in investing activities Additions to property and equipment (186,000) (395,000) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (15,000) (13,000) Repayment of short-term debt (71,000) --- Repurchase of common stock (290,000) --- Net cash used in financing activities (376,000) (13,000) NET DECREASE IN CASH $ (916,000) $ (238,000) BEGINNING CASH BALANCE 6,330,000 5,017,000 ENDING CASH BALANCE $ 5,414,000 $ 4,779,000 PART I - FINANCIAL INFORMATION Item 1. REXHALL INDUSTRIES, INC. Notes to the Condensed Financial Statements June 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 second quarter of 2000, the Company repurchased 50,000 common shares on the open market at an average cost of $5.80 per share. Subsequent to June 30, 2000, the Company repurchased an additional 10,000 shares on the open market at an average cost of $5.00 per share. 3. Detail of Inventory June 30, 2000 December 31, 1999 Raw Material $ 7,571,000 $11,341,000 Work in Process 1,499,000 2,485,000 Finished Motorhomes 6,892,000 2,678,000 TOTAL $15,962,000 $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 is not expected to have a material impact upon the financial statements. PART I - FINANCIAL INFORMATION Item 2. -Management 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 "Forward-Looking Statements" and should be read subject to the assumptions contained in the "Forward-Looking Statements". Results of Operations Comparison of the Three Months ended June 30, 2000 and for the Three Months ended June 30, 1999 Revenues - 2000 Compared with 1999 Net Revenues for the second quarter ended June 30, 2000 were $15,090,000 compared to $20,937,000 for the same period prior year. This represents a 27.9% decrease from the comparable quarter in 1999. Net units sold for the second quarter 2000 were 205 compared to 309 in the second quarter 1999. The decrease in sales during the quarter is attributable to a general downturn in the motorhome market associated with the increase in fuel and interest costs. In addition to the adverse economic conditions, dealer inventory build-up and price competition, there was a $900,000 decrease in sales to the Arizona market compared to the second quarter of 1999 due to the bankruptcy of one of the Company's significant customers. In addition, 19 units at a cost of $1,310,000 were repurchased under the floorplan repurchase agreements related the Arizona dealership which declared bankruptcy in the first quarter of 2000. Based upon current market conditions as reflected in the Company's back-log, no significant change in the current downtrend is anticipated during the next two quarters independent of improved economic conditions affecting the industry. This is a forward-looking statement, and should be considered subject to the comments in the "Forward-Looking Statements". Cost of Sales - 2000 compared with 1999 Cost of Sales for the second quarter 2000 were $13,058,000 compared to $17,271,000 for the second quarter of 1999, reflecting a decline in sales. Direct material costs per unit remained comparable to prior periods. Due to reduced production schedules, previous labor efficiencies eroded and fixed costs coverage adversely affected the cost ratio during the period. Gross Profit decreased to 15% for the second quarter of 2000 compared to 18% for the same period of 1999. Management has made cost cuts in this area including production layoffs and will continue to adjust staffing levels to the current production schedules. Gross Profit was also adversely effected by the repurchase of units from the bankrupt Arizona dealer. Due to the price competition within the industry, there can be no assurances of significant improvement in Gross Profit. Selling, General Administrative and Other Expenses-2000 compared with 1999 Selling, General Administrative and Other Expenses declined to $1,377,000 from $1,572,000 for the quarter ended June 30, 2000. When comparing selling, general, administrative and other expenses as a percentage of sales, the quarter ended June 30, 2000 is 9.1% versus 7.5% for the same quarter in the prior year. This 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 $295,000 for the quarter ended June 30, 2000 as compared to $846,000 in the second 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 evaluation by management. Results of Operations For the Six Months ended June 30, 2000 and for the Six Months ended June 30 1999 Revenues - 2000 Compared with 1999 Net Revenues for the six months ended June 30, 2000, totaled $35,754,000 compared to $43,170,000 for the same period in 1999. This represents a 17.2% decrease from the prior year. Net units sold for the six months ended June 30, 2000 were 494 compared to 636 for the same period in the prior year. The 142 decrease in units sold for the six months ended June 30, 2000 is a 22% decrease in shipments compared to the same period in 1999. The decrease in revenues is primarily attributable to the bankruptcy of one of the Company's significant customers located in Arizona and poor economic conditions effecting the industry. Of the $13,400,000 in sales to the Arizona dealer during 1999, $9,729,000 came in the first and second quarters of 1999. During the first six months of 2000, sales to the Arizona dealer were $1,750,000, representing a decrease of $7,979,000 from the first half of 1999. During the quarter 19 Arizona units at a cost of $1,310,000 were repurchased and returned to inventory. In addition to the adverse affect of the Arizona dealers bankruptcy, general economic conditions impacting the Company's segment of the Class A motorhome market added to the decline in sales during the second quarter. No immediate improvement is anticipated. This is a forward-looking statement, and should be considered subject to the comments in the "Forward-Looking Statements". Costs of Sales - 2000 compared with 1999 Cost of Sales as a percentage of sales for the six months ended June 30, 2000 were $30,419,000 compared to $35,365,000 for the same period in 1999, primarily due to the decline in sales. There have been no significant changes in unit costs for material or labor. Gross Profit declined to 15% for the six months ended June 30, 2000 as compared to 18.1% 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 nineteen Arizona dealer units. Even with cost cutting that has been implemented, there are no assurances that the loss in margin can be regained in the near term given the current intense competition within the industry. Selling, General Administrative and Other Expenses - 2000 compared to 1999 Selling, General Administrative and Other Expenses decreased by $591,000 for the six months ended June 30, 2000 when compared to the same period in 1999. The percentage of sales for the six months ended June 30, 2000 was 8.5% compared to 8.4% for the same period in the prior year. Administrative bonuses and dealer incentives, along with a decrease in warranty expense were the major portions of the dollar decrease for the six months ended June 30, 2000. As a percentage of sales, expenses have not decreased in relation to revenues. Income Taxes - 2000 compared with 1999 Income tax expense was $986,000 for the six months ended June 30, 2000 as compared to $1,682,000 in the comparable period of 1999. Income taxes are provided based upon the estimated effective tax rate for the entire fiscal year applied to the pre-tax income for the period. The effective tax rate is subject to ongoing evaluation by management. Financial Condition, Capital Resources and Liquidity The Company has relied primarily on internally generated funds, trade credit and debt to finance its operations and expansions. As of June 30, 2000, the Company had working capital of $17,709,000 compared to $16,325,000 at December 31, 1999. The $1,384,000 increase in working capital is primarily due to a $4,135,000 decrease in accounts payable partially offset by a $542,000 decrease in inventories and a $2,471,000 decrease in accounts receivable. As of June 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 June 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 June 30, 2000. The Company has a line of credit with a chassis vendor, Ford Motor Credit Company ("FMCC"), with a $4,000,000 limit. Borrowings under the line bear interest at an annual rate of prime plus 1% (10.75% at June 30, 2000). All borrowings are secured by the Company's assets. The outstanding balance included in accounts payable at June 30, 2000 was $4,180,000. The over-advance is temporary. The Company has adequate resources to pay down this amount to the borrowing limit. Capital expenditures during the first six months of 2000 were $186,000. Management anticipates capital expenditures for the remainder of the 2000 to be $2,000,000 for purchase and completion of the Arizona property and refurbishment of certain production facilities and production equipment. Cash flows from financing activities for the first six months ended June 30, 2000 consists principally of stock repurchases of $290,000. The Company will buy back stock in the open market from time to time when the market price is deemed to be appropriate by management. Future repurchases of common stock for the remainder of 2000 is not expected to be significant. The Company anticipates that it will be able to satisfy its ongoing cash requirements through 2000, including payments related to the legal settlement and expansion plans at the California and Arizona facility, 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 re-pricing 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 is not expected to 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, including changes in interest rates. After an assessment of these risks to the Company's operations, except for the impact of the Arizona dealer's bankruptcy, 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. This disclosure should be read together with the comments in the "Forward-Looking Statements". 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, although no assurance can be given that the recent repurchases from the Arizona dealer will be resold without sustaining such losses. During 1999, 1998 and 1997 and the six months ended June 30, 2000, the Company repurchased approximately $1,973,000, $832,000, $3,145,000 and $2,700,000 respectively, of motorhomes under these agreements. At June 30, 2000 and December 31, 1999, approximately $27,000,000 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. The motorhomes guaranteed under the repurchase agreements with the dealer's flooring agents are estimated at $3,000,000 for approximately 52 units in the dealers inventory at June 30, 2000. Management believes that the impact to the Company's financial position and prospective operations should not be adversely affected in the long term and should become beneficial if the Company can establish more dealers in the Arizona market. Now that the state of Arizona is not exclusive territory and limited to this one dealership, the Company believes it has the opportunity to expand its dealer network throughout Arizona. The short-term impact has resulted in a decrease in the Company's sales in the first half of 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. The Company has made significant progress toward establishing a new dealer base in Arizona by the end of August 2000. Management is currently working with the dealer and related flooring agents to assist him in selling units to retail customers. Through the date of this report, 19 units have been repurchased or accrued for repurchase by Rexhall and another 12 sold. In addition to the 11 units required to be repurchased in August and which have been accrued for at $733,000 at June 30, 2000, the Company is negotiating for the repurchase of an additional 30 units from one of the flooring sources at favorable terms. Upon completion of the August 2000 transaction, approximately 22 units will remain in the Arizona dealers inventory. No additional units have been identified to be repurchased from this significant customer under the financial institutions' repurchase agreements. If required to repurchase these units, management believes it will be able to satisfy its ongoing cash requirements through cash on hand and existing credit facilities. This paragraph and section should be read together with the comments in the "Forward-Looking Statements". Subsequent Event- 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, not to exceed $800,000, of which $742,500 was paid at closing in addition to a $50,000 escrow deposit made in the second quarter. The Company will also fund the completion of the commercial building and related improvements , not to exceed $450,000 and shall be paid in a series of progress payments to be determined by mutual written agreement of Buyer and Seller. 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 this report to be signed on its behalf by the undersigned thereunto duly authorized. REXHALL INDUSTRIES, INC. by (Registrant) Date: /s/William J. Rex William J. Rex Chairman, President and Chief Executive Officer Date: /s/Richard K. Krueger Richard K. Krueger Controller