UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 10-K (Mark One) [x] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1998 OR [ ]Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] (No fee required) For the Transition period from to Commission file number: 0-10067 _________________________________ REXHALL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) California 95-4135907 (State or other jurisdiction of Incorporation or organization) (IRS Employer Identification No.) 46147 7th Street West Lancaster, CA 93534 (Address of principal executive offices) Registrant's telephone number, including area code: (805) 726-0565 Securities registered pursuant to Section 12(b) of the Act: None Name of each exchange on which registered: NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) 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 periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 18, 1999 the aggregate market value of voting stock held by non-affiliates was approximately $12,063,031. Shares of common stock held by each officer, director and holder of 5% or more of the outstanding Common Stock of the Registrant have been excluded in that such persons may be deemed to be affiliates. Total shares of common stock held by those deemed to be affiliates at March 18, 1999 totaled 1,570,000. This determination of affiliate status is not necessarily a conclusive determination of other purposes. As of March 30, 1999 there were 3,010,362 shares of the Registrant's common stock outstanding. PART I Item 1. Business 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. The Company began operations in July 1986 as a general partnership and conducted business activities in that form until December 31, 1986, when the assets and business of the partnership were contributed to Rexhall Industries, Inc., a California corporation, which assumed the liabilities of the partnership. Rexhall Industries, Inc. was incorporated in June 1986 and, except for organizational activities, conducted no operations until January 1, 1987. In June 1989, the Company completed an initial public offering of 1,150,000 shares of Common Stock (including 150,000 sold upon exercise of the underwriters' over-allotment option). As used herein, the "Company" refers to Rexhall Industries, Inc. and the predecessor partnership. The Company produces all of its products from its manufacturing facility in Lancaster, California, which also serves as its Corporate Headquarters. The Company has subcontracted to handle its service and warranty in the eastern half of the country. Class A Motorhomes Based upon industry standards established by the Recreation Vehicle Industry Association ("RVIA"), the Company manufactures certain product lines classified as conventional or class A motorhomes. Conventional or class A motorhomes are self-powered vehicles built on a motor vehicle chassis, with engine and drive train components which are supplied by a motor vehicle manufacturer (i.e. Ford, Workhorse Custom Chassis LLC (formerly GM), and Spartan. The interior of the vehicle typically includes a driver's area, kitchen, bathroom, dining and sleeping areas. Class A motorhomes are self-contained with their own lighting, heating, cooking and refrigeration facilities, waste disposal and water storage tanks, permitting occupancy without requiring connection to utilities. While not designed or intended as permanent housing, Class A motorhomes do provide comfortable living quarters for short periods, particularly for people interested in travel and outdoor recreational activities. Class A motorhomes are different from mobile homes, which are manufactured housing designed for permanent or semi-permanent residential dwelling and, although movable, are not used for transportation. Class A motorhomes are also different from other recreational vehicles, such as class B van campers, which are smaller than, and do not provide all of the features that typically are standard on, Class A motorhomes; Class C mini-low profile and compact motorhomes, which are built on a van or small truck chassis that is supplied with an engine and finished cab section and are differentiated by size; and travel trailers, which are non-motorized vehicles designed to be towed by automobiles, pick-up trucks and vans, and generally by law may not be used as living quarters unless stationary. Travel trailers are further classified as conventional, fifth wheel and park trailers and generally are differentiated by the method and vehicle employed for towing, size configuration and use. Other recreational vehicle categories include folding camping trailers, truck campers and van conversions. As Class A motorhomes are self-contained with kitchen, bathroom facilities and sleeping quarters, it is eligible to be treated as a "qualified residence" under the Internal Revenue Code of 1986, as amended. Thus, as in the case of other recreational vehicles suitable for overnight use, a purchaser may generally deduct interest on debt incurred to acquire a Class A motorhome provided the purchaser designates and uses it as one of no more than two residences and otherwise meets the requirements of the Internal Revenue Code of 1986. Industry Source of Information: Recreation Vehicle Industry Association in Reston, Virginia The following table sets forth comparisons of units and dollar sales of all recreational vehicles and ClassA motorhomes in the United States compared with units and dollar sales of the Company during the years ended December 31, 1996, 1997 and 1998: % Change % Change Unit From Prior Revenues From Prior Sales Year (000) Year Total Recreational Vehicles 1998 441,300 .6% 10,337,006 6.6% 1997 438,800 (6.0)% 9,696,588 (3.8)% 1996 466,800 (1.8)% 10,081,182 2.1% Class A Motorhomes 1998 42,900 14.1% 3,249,846 23.6% 1997 37,600 3.0% 2,629,180 14.0% 1996 36,500 10.6% 2,305,788 5.3% Rexhall Industries, Inc. 1998 1,122 3.7% 71,454 13.4% 1997 1,082 (7.5)% 63,012 (3.0)% 1996 1,170 2.4% 64,959 7.0% Approximately 77 million Americans were born between the years of 1946 and 1964. Commonly known as "baby boomers", this demographic accounts for what the Company believes to be a rapidly growing population of potential Class A motorhome purchasers. Typically, Class A motorhome buyers are over the age of 60, however, increasing disposable income in the 40 to 60 age group is growing the potential Class A market. The Company's continued product development combined with the unified efforts of the RV industry as a whole to capture the attention of this buying demographic, would indicate significant future growth potential for the Company. The Company's 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 (See Item 1. Raw Materials and Chassis.): - 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 wheelbase 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 accommodations. 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 include leak detector for propane, back up camera, washer 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 varyin 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. Specialty Vehicles In addition to its line of Class A motorhomes, the Company also manufactures and sells specialty vehicles. These vehicles are designed for diverse purposes and varied users from the disabled to mobile command posts for police and fire departments and even mobile classrooms. This year the company manufactured several vehicles for use by the United States Air Force as mobile telemetry testing vehicles. During 1996, 1997, and 1998, sales of specialty vehicles amounted to less than 1% of total revenues. Although the Company has no intention of phasing out its specialty vehicle business, it anticipates that such business will constitute a low percentage of the Company's overall revenues in the future. Production The Company's manufacturing facility has been designed to permit production of motorhomes on an assembly-line basis. At the beginning of the line and in an effort to achieve uniformity, a partial steel cage is pre-assembled by the Company on a jig. The steel cage is welded together on the jig and then welded to a wall that is welded directly to the chassis to form what the Company terms a "uni-body" design. Steel outriggers are welded in place to support floor and basement storage compartments. Seamless gel coated fiberglass is vacuum bonded to a steel frame to form the exterior walls; additionally, the roof wall is vacuum bonded. When all the exterior walls are in place, polyurethane foam insulation is sprayed inside the ceiling radius to fill voids and further bond the exterior shell to the frame. Exterior doors and interior paneling complete the basic construction. Vehicle components, cabinet work, auxiliary power units, appliances, plumbing fixtures, floor coverings, window treatments, hardware, furniture and furnishings are then added. These components are generally purchased in finished form from various suppliers, none of which are a sole source. The Company manufactures its own drivers door, compartment doors, grills, bumpers, cabinet work, draperies, fiberglass parts and also makes some of the furniture used in its motorhomes. The Company plans to continue this practice of producing many of the components and certain of the production equipment used in the manufacturing of its motorhomes as long as such practice is practical and results in cost savings. The Company operated one production shift, producing an average of 95 units per month during 1998. Total gross units produced in 1998, was 1,147 units. Increases in production can be achieved at a relatively low incremental cost on the existing production shift by increasing the number of production employees. Raw Materials and Chassis The principal raw materials used in the manufacturing process are steel, fiberglass, lumber, plywood and plastic. These materials are purchased from third parties and are generally available from numerous sources. The Company has not experienced any significant delays or problems in acquiring raw materials needed for production. The principal component used in the manufacturing process is the chassis, which includes the engine and drive train. The Company obtains front engine chassis from Ford Motor Company and Chevrolet Motor Division (GM Corporation, now Workhorse Custom Chassis, LLC). Rear engine pushers are purchased from Spartan Motors under a separate arrangement. The Company acquires Ford products under a converters agreement which is used by the Company to purchase the chassis with financing provided by the supplier's affiliate. The financing provided to obtain chassis under the converters agreement bears interest at the rate prime plus 1% for both lenders (8.75% at December 31, 1998) and is secured by the Company's assets. Upon starting production of the motorhome, the Company is required to pay to the lender the amount advanced for the purchase of the underlying chassis plus accrued interest. The rear engine diesel chassis from Spartan has net 30 day terms. Approximately 94% of all chassis were purchased from Ford and GM. In the first quarter of 1999, GM completed the sale of their motorhome chassis manufacturing division to Workhorse Custom Chassis, LLC. Future purchases of chassis, previously provided by GM, will be purchased from Workhorse Custom Chassis, LLC. Availability of chassis ordered from Workhorse Custom Chassis, LLC, appears to be okay, however, the Company has little experience with this vendor. As is standard in the industry, arrangements with chassis suppliers provide that either the Company or the chassis supplier may terminate their relationship at any time. To date, the Company has not experienced any substantial shortages of chassis. The recreational vehicle industry as a whole has from time to time experienced shortages of chassis due to the concentration or allocation of available resources by suppliers of chassis to the manufacturers of vehicles other than recreational vehicles or for other causes. If Ford were to discontinue the manufacturing of motorhome chassis, or if as a group all of the Company's chassis suppliers significantly reduced the availability of chassis to the industry, the Company could be adversely effected. Sales and Distribution Sales are usually made to dealers on terms requiring payments 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. Dealers do not have the right to return motorhomes, except by statute in some states. The Company's liability under the repurchase agreements is limited to the total unpaid balance (including interest and other charges) owed to the lending institution by reason of its extension of credit to purchase the Company's motorhomes. The contingent liability under repurchase agreements varies significantly from time to time, depending upon shipments. At December 31, 1997 and December 31, 1998, the Company's contingent liability was approximately $22,130,000 and $25, 530,000 respectively. The risk of loss under these agreements is spread over numerous dealers and financing institutions and is further reduced by the resale value of any motorhomes that may be repurchased. To date, the Company's losses under these repurchase agreements have been minimal. Advertising and Promotion The Company advertises its motorhomes to consumers in recreational vehicle magazines and to dealers in trade publications and also uses point-of-purchase promotional materials. Its promotional activities generally consist of participation at three major recreational vehicles shows (California RV Show in Pomona, California Louisville Show in Kentucky and Tampa Super Show in Florida) held during the year, as well as local recreational vehicles shows held by its dealers. The company also advertises its product on the World Wide Web under the following site: http://www.rexhall. com. E-Mail responses from consumers shows great promise for this advertising media. Seasonality and Backlog The recreational vehicle business generally has been seasonal with most sales occurring in the months of February through October, with November through January sales generally being considerably slower. Historically, the Company does not maintain a significant inventory of finished motorhomes. Production is based on dealer orders and shipments which usually occur within four to eight weeks of the receipt of an order. At December 31, 1996, 1997 and 1998, the Company's backlog of dealer orders were $3,688,000, $3,864,000 and $15,232,000 respectively. The Company believes that backlog is not necessarily a reliable indication of future sales because dealer orders not only fluctuate but, by industry customs, are cancelable without penalty and because motorhomes have a relatively short manufacturing cycle. Product Warranty The Company currently 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. Warranty expense was $959,000, $1,753,000 and $1,041,000 for the years ended December 31, 1996, 1997, and 1998 respectively. The fluctuations in warranty cost were primarily attributed to units produced at the Indiana facility. In most cases, warranty work is performed by a member of the Company's dealer network. The Company owns two service facilities; one in Lancaster, California and the other in Elkhart, Indiana, which as of December 31, 1998, the Company has decided to sell. The Company is now using the Lancaster facility to accomplish warranty repairs which normally would have been performed by one of its dealers and effective January 1999, the Company has subcontracted with a Pennsylvania dealer to do service and warranty work in the eastern states. Management believes that the Service Center allows the Company the benefit of providing better customer service and satisfaction. Competition and Other Business Risks Competition in the manufacture and sale of motorhomes and other recreational vehicles is intense. The Company has been manufacturing Class A motorhomes for thirteen years and competes with many manufacturers (such as Fleetwood, National RV, Damon, Thor Industries, and Coachman), several having multiple product lines of Class A motorhomes and other recreational vehicles and most being larger and having substantially greater financial and other resources than the Company. The Company sells motorhomes in most of the 48 states. Additionally, the Company sells to dealers in Canada. The Company believes that the quality, design and value offered by its motorhomes to be appealing to the consumer market. The Company, like others in the recreational vehicle industry, is dependent upon the availability of chassis from both Ford and GM, now Workhorse Chassis, LLC and upon terms of financing to dealers and retail purchasers. Substantial increases in interest rates, the tightening of credit, a general economic downturn or other factors negatively affecting the amount of consumer's disposable income could have a material adverse impact on the Company's business. Shortage of gasoline has in the past had a materially adverse effect on the recreational vehicle industry as a whole and could have a materially adverse effect on the Company's business in the future. In addition, a substantial increase in the price of gasoline could also adversely affect the sale of the Company's motorhomes. Forward-Looking Statements & Risks: 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. Regulation The Company is subject to the provisions of the National Traffic and Motor Vehicle Safety Act and the safety standards for recreational vehicles and components which have been promulgated thereunder by the Department of Transportation. The regulations under that legislation permit the National Highway Traffic Safety Administration to require a manufacturer to remedy vehicles containing "defects related to motor vehicle safety" or vehicles that fail to conform to all applicable Federal Motor Vehicles Safety Standards. The National Traffic and Motor Vehicles Safety Act also provides for the recall and repair of recreational vehicles that contain certain hazards or defects. The Company is subject to the provisions of Transport Canada for vehicles exported to Canada. The regulations under that legislation is similar in nature and design to its American counterparts. The Company relies on certifications obtained from chassis suppliers with respect to compliance of the Company's vehicles with applicable emission control standards and load bearing capacity. The Company believes that its facilities and products comply in all material respects with applicable environmental regulations and standards. The Company is a member of the RVIA (Recreational Vehicle Industry Association). This association has promulgated stringent standards for health and safety in connection with the manufacture of recreational vehicles. Each of the units manufactured by the Company has a RVIA seal placed upon it to certify that such standards have been met. The Company's facility is periodically inspected by government agencies and the RVIA to ensure that the Company's motorhomes comply with applicable governmental and industry standards. Patents and Trademarks The Company claims "Aerbus", "Rexair", "RoseAir", "Vision", "Anthem", and "American Clipper" as trademarks but believes its business is not dependent on these names or any other marketing device. The Company does not have any patents or licenses in the conduct of its business. Employees At December 31, 1998, the Company had a total of 454 employees (453 in California and 1 in Indiana). None of the Company's employees is represented by a labor union. The Company considers its relations with its employees to be good. Item 2. Properties 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. The Company believes that its facilities are adequate to meet its foreseeable needs. Item 3. Legal Proceedings 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 Settlement Agreement Rexhall paid $825,000 in cash, and issued one coupon per vehicle owned by members of the class for $1,250 towards the 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. Purchasers of Indiana manufactured vehicles will be added as members of the settlement class. The total number of vehicles owned by class members is estimated at approximately 5,000. During 1997 the Company recorded a charge and established a liability of $1,590,000 related to this settlement. At December 31, 1998, the remaining settlement liability is $765,000. 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. The Company's position is that this personal injury case is without merit. 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. Other than the above referenced cases, the Company is a defendant in other various legal proceedings resulting from the normal course of business. In the opinion of company management, the resolution of such matter will not have a material effect on its financial statements or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to the vote of security holders during the fourth quarter of 1998. PART II Item 5. Market for Common Equity and Related Stockholders Matters. 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. Item 6. Selected Financial Data. The following selected financial information of the Company should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto of the Company included elsewhere herein. The following table presents selected historical financial data of the Company for each of the five fiscal years in the period from December 31, 1994 through December 31, 1998. The financial information as of and for each of the five years in the period ended December 31, 1998 were derived from audited financial statements of the Company. Statement of Operations Data: (in thousands, except per-share date) Year Ended December 31, 1994 1995 1996 1997 1998 Net Revenues $ 50,090 $ 60,709 $ 64,959 $ 63,012 $ 71,454 Cost of Goods Sold 43,184 51,981 56,167 59,921 59,314 Gross Profit 6,906 8,728 8,792 7,091 12,140 Selling, General, and Administrative Expenses 3,841 5,281 6,426 7,286 6,749 Restructuring Charge --- --- --- 1,042 (282) Income (Loss) from Operations 3,065 3,447 2,366 (1,237) 5,673 Interest Income 181 69 29 3 157 Interest Expense (48) (136) (171) (134) (101) Legal Settlement --- --- --- (1,590) --- Other Income(Expense) 24 14 (93) 46 135 Income (Loss) Before Income Taxes 3,222 3,394 2,131 (2,912) 5,864 Provision for Income Taxes (Benefit) 1,300 1,360 847 (1,077) 2,474 Net Income (Loss) $ 1,922 $ 2,034 $ 1,284 ($1,835) $ 3,390 Net Income (Loss) Per Share - Basic (1) $ .66 $ .69 $ .44 ($ .64) $ 1.14 Net Income (Loss) per Share - Diluted (1) $ .64 $ .68 $ .43 ($ .64) $ 1.13 Weighted Average Shares Outstanding - Basic (1) 2,893,000 2,934,000 2,948,000 2,882,000 2,968,000 Weighted Average Shares Outstanding- Diluted (1) 2,993,000 3,004,000 2,998,000 2,882,000 2,990,000 Balance Sheet Data: (in thousands) As of December 31, 1994 1995 1996 1997 1998 Working Capital $ 8,858 $ 9,269 $ 9,519 $ 7,356 $10,805 Total Assets 15,991 19,975 23,496 23,178 28,471 Long Term Debt less Current Portion --- 852 826 797 767 Shareholders Equity $10,376 $12,225 $13,581 $11,480 $14,992 (1) Retroactively adjusted to give effect to a 5% stock dividend of 142,000 shares in 1998. Item 7. 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 (0.3) 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% 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 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. Comparison of 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 is 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 Lancaster 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 is 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 is 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 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. 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. IT Systems: The Company began undertaking changes to bring non-compliant systems and accompanying methodology to Year 200 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-IT 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. 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. 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. New 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 ofcomprehensive 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 this statement does not impact the financial statements of the Company as there is no difference between net income and comprehensive income for any of 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. The Company operates in only one business segment, the manufacture and distribution of f recreational vehicles. Accordingly, SFAS 131 does not have an impact on the Company's financial reporting. 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. Item 8. Financial Statements 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 AUDITORS' 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 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 Accrued 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 SHAREHOLDERS' EQUITY 11,480,000 14,992,000 Commitments and Contingencies (note 8) TOTAL LIABILITIES AND SHAREHOLDER EQUITY $23,178,000 $28,471,000 (1) Retroactivity adjusted to give effect to 5% stock dividend of $142,000 shares in 1998. See accompanying notes to financial statements 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 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 exercise of stock 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 REXHALL INDUSTRIES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1996 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income(loss) $ 1,284,000 ($1,835,000) $3,390,000 Adjustments to reconcile net income (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 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. 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 forma 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. 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, 31.5 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 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 payments 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 12/31/98 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 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 The components of deferred tax assets (liabilities) at December 31, 1997 and 1998 are as follows: 1997 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. 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 Marshal 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. 10. STOCK 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: Number of Range of Options Weighted Average Options Prices 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 Exercise Outstanding at Average Remaining Weighted Average Price December 31, 1997 Contractual Life Exercise Price $3.25 11,000 1.2 $3.25 Shares Exercisable Weighted Average at December 31, 1998 Exercise Price 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. 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 use to house 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 Shares 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 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 Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure. None. Part III Item 10. Directors and Executive Officers of the Registrant. The executive officers and directors of the Company and their ages as of March 31, 1999 are as follows: Name Age Positions Held Director Term William J. Rex (1) (2) 48 Chairman of the Board of 6/01/96 thru Directors, CEO and President 5/31/99 Donald C. Hannay, Sr. 71 Vice President of Sales 6/01/96 thru and a Director 5/31/99 Al J. Theis (1) (2) 81 Director 6/01/96 thru 5/31/99 Robert A Lopez (1) (2) 59 Director 6/01/96 thru 5/31/99 Frank A. Visco (3) 54 Director 12/17/98 thru 5/31/99 Cheryl L. Rex 46 Corporate Secretary (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Mr. Visco was appointed to the Board of Directors December 17, 1998. Directors of the Company hold office until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed by and serve at the discretion of the Board of Directors. The Company has an "executive officer" within the meaning of the rules and regulations promulgated by the Securities and Exchange Commission. Except for William J. and Cheryl Rex, who are husband and wife, there are no family relationships between any directors or officers of the Company. For their services as members of the Board of Directors, outside directors receive $500 for each Board meeting attended. Mr. Rex, a founder of the Company, has served as the Company's Chief Executive Officer from its inception as a general partnership to date. Upon commencing operations in corporate form, Mr. Rex became the Company's President and Chairman of the Board, offices which he continues to hold. From March 1983 until founding the Company, Mr. Rex served in various executive capacities for Establishment Industries, Inc., a manufacturer of Class A and Class C motorhomes which was acquired in June 1985 by Thor Industries, Inc., a large manufacturer of recreational vehicles. His last position with Establishment Industries, Inc. was President. From 1970 until March 1983, Mr. Rex was employed in various production capacities by Dolphin Trailer Company, a manufacturer of a wide range of recreational vehicles products. At the time he left Dolphin Trailer Company (which changed its name to National R.V., Inc. in 1985), Mr. Rex was Plant Manager in charge of all production and research and development. Mr. Hannay, Sr. joined the Company in December 1987 and is responsible for product sales. He became a director in May 1989. From April 1982 until August 1987, he was employed by Establishment Industries, Inc. as Vice President, Sales and Marketing, where he built Establishment's dealer network and was responsible for dealer sales. From August 1987 until joining the Company, he was employed as General Sales Manager by Komfort Industries of California, Inc., a recreational vehicle manufacturer located in Riverside, California. Mr. Theis joined the Company as its Chief Financial Officer and a member of the Board of Directors in August 1987. In February 1991, he resigned as Chief Financial Officer and began serving the Company as a consultant for financial matters and in development of global sales. He continues to serve as a member of the Board of Directors. From July 1984 until joining the Company, Mr. Theis was self-employed as a management consultant to recreational vehicles industry manufacturers. From February 1982 until June 1984, he was employed by Establishment Industries, Inc. as Chief Financial Officer and Corporate Planner. Mr. Robert A. Lopez is President of Nickerson Lumber and Plywood. Mr. Lopez started his employment with Nickerson as an outside salesman in 1969 and in 1980 he became a partner and purchased Nickerson Lumber stock. He was elected as President of Nickerson in 1981. His background in marketing products is primarily to residential builders, manufactured housing and recreational vehicle assemblers. Mr. Lopez will be a great asset to further developments of marketing Rexhall products in both the domestic and global markets. In his spare time, if any, Mr Lopez is captain of the San Fernando Rangers, a non-profit organization working to use horses as therapeutic conditioning for mentally and physically disabled children. Mr. Frank A. Visco was elected to the Board of Directors on December 17, 1998. Mr. Frank A. Visco is owner of Frank A. Visco & Associates insurance company. Mr. Visco began his insurance career in 1970 with New York Life Insurance Company as a Sales Manager in their Antelope Valley office. From 1975-1984 he was the co-owner of APS Co. Inc., producing aircraft parts for the aircraft industry. In 1980, in addition to his insurance activities, he began developing properties in Los Angeles County and Kern County. Mr. Visco is involved in many community services. He assists the YMCA in various capacities as well as his participation in their annual fund-raisers. He has served as Vice Chairman of the United Way from 1972 - 1974. Mr. Visco was co-founder and Charter President of the North Los Angeles County Regional Center for the Developmentally Disabled. Mr. Visco financially supports many organizations from the Boy Scouts of America to the Child Abuse Center, American Cancer Society and other organizations that support the mentally retarded citizens of the Antelope Valley. He assisted, along with Kaufman & Broad, in building the Antelope Valley Assistance League Day Care Center. Mr. Visco began his political career in 1974 when he was appointed to the Republican State Central Committee and subsequently assisted many State candidates as well as Presidential campaigns. He was a delegate to the Republican National Convention of 1976, 1980 and 1984 supporting Ronald Reagan for President and had the high honor of being selected as a member of the Electoral College to accomplish the constitutional duty of electing the President of the United States. Mr. Visco was a delegate to the National Conventions in 1992 and 1996. Mr. Visco currently serves on the Republican Party Executive Committee and as an ex-officio member of the Republican Central Committee. Mrs. Cheryl L. Rex is the Corporate Secretary and has been with Rexhall since 1986 serving in many different capacities. Mrs. Rex served as Administrative Operations Manager, in addition to being responsible for the interior design and decor of the motorhomes, as well as assisting in the production of the Company's product brochures. Item 11. Executive Compensation. Cash Compensation The following table sets forth certain information as to the five highest paid(1) of the Company's executive officers whose cash compensation exceeded $100,000 for the year ended December 31, 1998: SUMMARY COMPENSATION TABLE Annual Compensation Name and Other Annual Principal Position Year Salary ($) Bonus($) Compensation (2) William J. Rex 98 250,000 604,917 --------- President & CEO 97 250,000 168,243 --------- 96 250,000 199,890 --------- Donald C. Hannay, Sr. 98 52,000 177,600 --------- V.P. of Sales & Marketing 97 52,800 170,391 --------- 96 52,800 171,550 --------- Demetrio Arias 98 47,000 93,000 --------- V.P. of Production Anthony J. Partipilo 98 77,100 46,325 --------- Chief Financial Officer (1) Note: Only four executive officers received cash compensation in excess of $100,000. (2) The unreimbursed incremental cost to the Company of providing perquisites and other personal benefits during 1997 did not exceed, as to any named officer, the lesser of $50,000 or 10% of the total 1997 salary and bonus paid to such named officer and, accordingly, is omitted from the table. These benefits included (I) reimbursement for medical expenses and (ii) amounts allocated for personal use of a company-owned automobile provided to Mr. Rex. Compensation Committee Report On August 1, 1996, the Company renewed for 5 years (expires July 31, 2001) an employment agreement with William Rex. The employment agreement provides for an annual salary of $250,000 plus a bonus determined monthly equal to 10% of income before bonus and taxes. Other executive officers are compensated based on the following factors as determined by the Board of Directors: (1) the financial results of the Company during the prior year, (2) compensation paid to executive officers in prior years, (3) extraordinary performance during the year and (4) compensation of executive officers employed by competitors. Directors who are not Executive Officers are paid $500 per Board Meeting and there are four Board Meetings per year. The Company also has an incentive program under which it pays supervisory employees involved in the sales and production a cash bonus based on specific performance criteria. Committee members: William J. Rex, Robert A. Lopez and Al J. Theis. Stock Option Plan In May 1989, the Company adopted the 1989 Incentive and Nonstatutory Stock Option pursuant to Section 422A of the Internal Revenue Code of 1986, as amended, to (i) key employees, and (ii) to directors and consultants to the Company designated by the Board as eligible under the Option Plan. Under the Option Plan, options for up to 225,000 shares may be granted. The Option Plan is administered by the Board of Directors or by a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the options, and the terms and conditions of exercise. No option granted under the Option Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options granted under the Option Plan must be at least equal to the fair market value of such shares on the date of grant, and the maximum term of each option may not exceed 10 years. With respect to any participant who owns stock possessing more then 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any stock option must be not less than 110% of the fair market value on the date of grant and the maximum term of such option may not exceed five years. Stock appreciation rights are not authorized under the Option Plan. Options/SAR Grants Number of % of Total Securities Option/SARs Underlying Grants to Exercise Options/SARs Employeesn or Base Expiration Name Year Granted (#) in Fiscal Year Price ($/SH) Date William J. Rex 1998 -0- -0- -0- 1997 -0- -0- -0- 1996 -0- -0- -0- Donald C. Hannay 1998 -0- -0- -0- 1997 -0- -0- -0- 1996 -0- -0- -0- Option/SAR grants Canceled Number of Securities % of Total Option Securities Underlying Grants canceled Name Year Options/SARS to employees Base Price Grants Canceled (#) (S/SH) William J. Rex 1998 -0- -0- -0- 1997 -0- -0- -0- 1996 -0- -0- -0- Donald C. Hannay 1998 -0- -0- -0- 1997 -0- -0- -0- 1996 -0- -0- -0- Aggregated Option/SAR Exercises in last FY and Fy-End Options/SAR Values Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Unexercisable Unexercisable Realized ($) (1) William J. Rex 112,000 349,000 -0-/-0- - 0-/-0- Donald C. Hannay 11,000 35,750 11,000/-0- $ 63,250/-0- (1) 12/31/98 close price $9.00 vs. option price. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information regarding the ownership of the Company's Common Stock by (I) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors beneficially owning Common Stock and (iii) all of the Company's officers and directors as a group as: Number of Name of Beneficial Owner Shares Percent of Outstanding Beneficially Shares at or Identity of Group Owned (1) March 31, 1999 William J. Rex (1)..... 1,546,000 51.4% c/o Rexhall Industries 46147 7th Street West Lancaster, California 93534 All Directors and Officers as a Group (6 persons) 1,570,000 52.2% (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock Shown as Beneficially owned by him, subject to applicable community property law. Item 13. Certain Relationships and Related Transactions. Not applicable. PART IV Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K Financial Statements See Item 8 Financial Statement Schedule All applicable financial statement schedules have been omitted since required information is not present in amount sufficient to require separate disclosure on the balance sheet or information is included in the financial statements. (3.0) Articles of Incorporation and By Laws. See 1992 10KSB (4.0) Instruments defining the rights of Holders of Common Stock. See Page 24 of Prospectus dated 6/22/89. See 1992 10KSB. (10.1) Revolving Credit Agreement dated May 22, 1998 between Company and Bank of America. Refer to original agreement and subsequent amendments. (10.2) Employee agreement of William J. Rex (10.3) Authorized Ford Motor Company Converter Pool Agreement effective 6/27/90. See 1992 10KSB (10.4) Incentive and Non-Statutory Stock Option Plan. (10.5) Material Contracts - Chevrolet Quality Approved Converter Program dated 10/1/88. See 1992 10KSB. (13.1) Supplemental information pursuant to Section 15D of Exchange Act 1) Proxy Statement dated 1997 2) 1997 Annual Report (13.2) Form 10Q is attached for 1st, 2nd, and 3rd quarter labeled (Exhibit 13) (22.0) Published report regarding matters submitted to vote (Proxy statement dated 1998) (23.0) Consent of experts and counsel. See 1992 10KSB (23.1) Consent of KPMG LLP (23.2) Consent of Deloitte and Touche LLP (24.0) Power of Attorney Exhibits - Donald C. Hannay Sr., Robert A. Lopez, Al J. Theis, and Frank A. Visco, all signed form 10-K for year ended 12/31/98. (27.0) Financial Data Schedule (28.0) Copy of State Insurance Annual Report for year ended 12/31/98 labeled (Exhibit 28). Signatures In accordance with Section 13 or a5(b) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rexhall Industries, Incorporated (Registrant) By /S/ William J. Rex By /S/ Richard K. Krueger (Signature and Title)* (Signature and Title)* William J. Rex Richard K. Krueger President, CEO & Chairman Chief Accounting Officer Date: March 31, 1999 Date: March 31, 1999 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in capacities and on the dates indicated. By /S/ William J. Rex By /S/ Richard K. Krueger (Signature and Title)* (Signature and Title)* William J. Rex Richard K. Krueger President, CEO & Chairman Chief Accounting Officer Date: March 31, 1999 Date: March 31, 1999