National R.V. Holdings, Inc. Announces Delay in Filing of 2004 Annual Report on Form 10-K and Restatement of Financial Information
PERRIS, Calif., April 1 -- National R.V. Holdings, Inc. announced today that it was unable to file its Annual Report on Form 10-K for the fiscal year 2004 with the United States Securities and Exchange Commission (SEC) by the extension deadline of March 31, 2005. The delay is due to the Company's need to finalize its required review procedures and enable management to finalize its assessment of internal control over financial reporting as of December 31, 2004 as required under Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404).
Late in the course of finalizing the Company's financial results for 2004 and in connection with its response to a "comment letter" received from the SEC in connection with the SEC's statutory review of the Company's SEC filings, management determined that the Company had made an error in the reporting of a correction in the calculation of the Company's self-insured reserves for estimated worker compensation claims in the State of California. As a result, the Company will restate its previously issued financial statements for the 2002, 2001 and 2000 fiscal years in its Form 10-K for the year ended December 31, 2004 to allocate the adjustment to the appropriate years. In addition, while reviewing its revenue recognition of a limited number of motorhomes sold in the third and fourth quarters of 2004 with deferred payment arrangements, the Company determined that it did not correctly recognize such revenue. The Company will restate its financial statements for the third quarter of 2004 by amending its Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and will adjust previously disclosed fourth quarter financial information. The Company is also seeking to resolve issues relating to the comment letter.
Accordingly, the previously issued financial statements for the fiscal year ended December 31, 2002 and the quarter ended September 30, 2004, and financial information for the years ended 2001 and 2000 and for the fourth quarter of 2004 should not be relied upon. The decision to restate prior financial statements was made by the Company's Audit Committee on March 31, 2005. This conclusion was also discussed with the Company's independent registered public accounting firm.
Workers Compensation Reserves
During the fourth quarter in 2002, the Company changed its methodology for calculating workers compensation self-insurance reserves. The Company changed to an actuarial based method involving incurred but not reported (IBNR) claims analysis from the specific reserve method. The total adjustment to the reserve of $4.2 million was recorded in 2002 of which $2.3 million should have been recorded in prior years. The Company treated the change as a revision of an estimate, but should have treated it as a correction of an error, and restated prior years. As a result of such restatement, the Company expects that its previously expected cost of goods sold will be reduced in 2002 and will be increased in 2001 and 2000. The Company is continuing to work to finalize the amount and appropriate time frame of the adjustments.
Third and Fourth Quarter 2004 Revenue Recognition
In addition, the Company also determined that its treatment of revenue recognition relating to the sale of a limited number of motorhomes in the third and fourth quarters of 2004 under a deferred payment arrangement in which the Company held the manufacturer's certificate of origin as security for payment was incorrect. On a preliminary basis, the Company believes that the review will result in a restatement of approximately $4.2 million in revenues previously recorded in the third quarter of 2004, which would be recognized in the fourth quarter of 2004, and a decrease of $0.02 earnings per share in the Company's third quarter 2004. Also, revenues of $2.9 million previously recognized in the fourth quarter 2004 and will be recognized in the first quarter of fiscal 2005 resulting in a net increase of $1.3 million in the Company's fourth quarter 2004 revenues. The Company previously reported a net loss of $0.09 per share in the fourth quarter of 2004. The Company has recorded other adjustments since disclosing its financial results for the 2004 fourth quarter. These other adjustments, when combined with the positive impact of the adjustment described above, will result in no change to the Company's previously reported loss per share for the 2004 fourth quarter. The Company's reported cash flows will not be impacted by this restatement or adjustment.
Default Under Credit Facility
In addition, the Company is a party to an asset-based revolving credit facility of $15 million with UPS Capital Corporation (UPSC) that expires in August 2005 (Credit Facility). The Credit Facility contains certain covenants, which, among other things, requires the Company to provide UPSC with audited financial statements for each year within 90 days following the end of the year and related financial statement covenants. The Company's inability to satisfy these covenants constitutes an event of default under the Credit Facility, which if unremedied or not waived, would enable UPSC to seek immediate repayment of all obligations. UPSC has indicated to the Company that it will furnish a written waiver of these defaults. The Company is actively seeking a new credit facility that would extend beyond December 31, 2005.
Sarbanes-Oxley Section 404 Assessment
As a result of the Company's assessment of its compliance with Section 404 of Sarbanes-Oxley Act of 2004 (SOX 404), the Company identified, as of December 31, 2004, the following material weaknesses in the Company's assessment of the effectiveness of internal control over financial reporting:
1. Insufficient personnel resources and technical expertise within the
Company's accounting function. As of December 31, 2004, the Company
did not maintain effective controls over the financial reporting
process at one of its divisions because of insufficient personnel
resources and technical expertise within the accounting function.
This control deficiency resulted in: (a) errors in the preparation
and review of schedules and reconciliations supporting the general
ledger account balances. As a result, errors were not detected in
certain accrued liability accounts, including sales and marketing,
warranty, legal and workers' compensation, and the related income
statement accounts, primarily cost of goods sold; (b) inadequate
financial statement disclosures, primarily related to the sale of a
division and capital leases; (c) accounting cutoff errors and an
inability to properly and timely account for capital leases entered
into during the year. Accrued liabilities, property, plant and
equipment, and the related income statement accounts, primarily cost
of goods sold, selling, general and administrative, amortization and
interest, were affected as a result of this deficiency; and (d)
inappropriate recognition of revenue in the third and fourth quarters
of 2004.
As a result of the control deficiency, described above, the Company
is restating its consolidated financial statements for the three
years ended December 31, 2002 and the third quarter 2004 financial
statements. This control deficiency also resulted in audit
adjustments to the fourth quarter 2004 financial statements.
Additionally, this control deficiency could result in misstatements
in the aforementioned accounts that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented of detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.
2. Physical inventory process. As of December 31, 2004, the Company did
not maintain effective controls over the physical inventory process
at one of its divisions. Specifically, the Company did not have
controls to ensure all of the individuals involved in the physical
inventory process were properly trained and supervised and that
discrepancies between quantities counted and the accounting records
were properly investigated. Further, the Company did not have
controls to ensure the accounting records were adjusted to reflect
the actual quantities counted during the physical inventory process.
As a result, the Company did not detect an error affecting inventory
and cost of goods sold. This control deficiency resulted in an audit
adjustment to the fourth quarter 2004 financial statements.
Additionally, this control deficiency could result in a misstatement
of inventory and cost of goods sold that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented of detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.
3. Unrestricted access to programs and data. As of December 31, 2004,
the Company did not maintain effective controls over access to
application programs and data at one of its divisions. Specifically,
the following deficiencies were noted: a) there were instances in
which financial accounting personnel had unrestricted access to
financial application program and data and there were also instances
in which the access granted to financial accounting personnel and IT
personnel did not comply with the Company's segregation of duties
requirements; b) the Company did not maintain effective controls over
the access rights granted to information technology staff and the
activities of these individuals were not subject to independent
monitoring. These control deficiencies did not result in an
adjustment to the 2004 interim or annual consolidated financial
statements. However, these control deficiencies could result in a
misstatement to financial statement accounts that would result in a
material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined that these control deficiencies constitute
a material weakness.
The existence of one or more material weaknesses as of December 31, 2004 would preclude a conclusion that the Company's internal control over financial reporting was effective as of that date. Upon completion of its assessment, management expects to conclude that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, based on criteria in Internal Controls-Integrated Framework.
Management's evaluation of its internal control over financial reporting as of December 31, 2004 is not complete. Further, upon completion of its ongoing evaluation of internal control over financial reporting the Company may identify additional control deficiencies, and those deficiencies, alone or in combination with others, may be considered additional material weaknesses.
The Company also expects that the report of its independent registered public accounting firm will contain an adverse opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004.
The Company's year-end review to finalize its 2004 financial statements is incomplete. Such review includes a "going concern" analysis, which is not final. There can be no assurance that other financial statement issues will not arise. At this time, although the Company is working as quickly as possible to finalize its 2004 financial statements, the Company is unable to predict when it will be in a position to file its Form 10-K for the fiscal year ended December 31, 2004.
About National R.V. Holdings, Inc.
National R.V. Holdings, Inc., through its two wholly owned subsidiaries, National RV, Inc. (NRV) and Country Coach, Inc. (CCI), is one of the nation's leading producers of motorized recreation vehicles. NRV is located in Perris, California where it produces Class A gas and diesel motor homes under model names Dolphin, Islander, Sea Breeze, Tradewinds and Tropi-Cal. CCI is located in Junction City, Oregon where it produces high-end Class A diesel motor homes under the model names Affinity, Allure, Inspire, Intrigue, Lexa and Magna, and bus conversions under the Country Coach Prevost brand.
This release and other statements by the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results may differ materially from that projected or suggested herein due to certain risks and uncertainties including, without limitation, the cyclical nature of the recreational vehicle industry; seasonality and potential fluctuations in the Company's operating results; any material weaknesses in the Company's internal control over financial reporting or any failure to implement required new or improved controls; the Company's dependence on chassis suppliers; potential liabilities under dealer/lender repurchase agreements; competition; government regulation; warranty claims; product liability; and dependence on certain dealers and concentration of dealers in certain regions. Certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested are set forth in the Company's filings with the SEC and the Company's public announcements, copies of which are available from the SEC or from the Company upon request.