Accounting problems cloud prospects for maker of RVs. (Corporate Focus).

THIS ought to be a banner year for Rexhall Industries Inc., the Lancaster-based maker of recreational vehicles.

Rexhall's own sales surged by 20 percent in the first quarter, as Americans' vacation plans veered away from the hassles of air travel, and toward road trips to places like the Alamo and Mt. Rushmore.

Wholesale shipments of RVs nationwide were up 16 percent through July, after falling in 2000 and 2001, according to the Recreational Vehicle Industry Association.

But an accounting mess disclosed on Aug. 19 has Rexhall's own management trying to figure out what shape the company's finances are in.

Since Aug. 15, when the company said it needed more time to file its second-quarter results, Rexhall's stock has fallen by 43 percent, to a recent price of $2.20 a share. On the 19th, it said it would have to restate its first-quarter results. The following week, Rexhall said it faces possible delisting by Nasdaq for failing to file a timely 10-Q.

The year could still turn out to be a good one for Rexhall, maker of the RoseAir, Amen-. can Clipper and Aerbus brands of RVs.

But to find out, investors must wait for the company to complete an investigation into a discrepancy in its raw materials inventory. The inventory problems are at the root of the second quarter delay, the first quarter restatement and the firing of Rexhall's chief financial officer, Dawn E. Diaz.

Company officials did not return calls seeking comment.

In a statement accompanying its disclosure of the first quarter restatement, Chairman and Chief Executive William J. Rex said he holds himself responsible to shareholders. He reinstated Michael Bourne, who was already chief operating officer, as chief financial officer, a post he had earlier held at Rexhall.

Earnings restatement

The company estimates that its reported earnings of $181,000 (3 cents a share) for the first quarter ended March 31 will likely be recast to a loss of about 4 cents per share.

It also said that based on "best available information, we believe we were profitable enough in the second quarter to offset the restated first quarter loss, which should make us either break even or slightly profitable year-to-date."

One of Rexhall's few institutional shareholders said he believes the stock has been sold down too far in today's unforgiving markets.

"The timing of this is atrocious" said John Buckingham, president of Al Frank Asset Management in Laguna Beach. Nevertheless, Buckingham said he's thinking about buying more .shares. At last count, Al Frank held 73,580 shares of Rexhall, or 1.2 percent of all outstanding shares.

Rex, the company chairman, holds about 53.5 percent of Rexhall's shares.

Despite the company's assurances, there are still many questions to be answered before more investors muster the optimism of Buckingham.

First, how long will it take to complete the first quarter restatement and file the second quarter results? As one participant in a Yahoo message board noted last week, it's been more than two months since the second quarter ended. While deciding whether a particular piece of inventory should be classified as raw material, 25 percent complete or 95 percent complete can be tricky, it's not the most esoteric accounting task out there.

Search for details

Other questions: if inventory controls were lacking in the first and second quarters, do the problems date back further? Is there any allegation of wrongdoing on the part of Diaz, who first signed a quarterly 10-Q for Rexhall in November 2001? She couldn't be reached for comment.

Buckingham said he's hasn't gleaned any details from the company beyond what Rexhall has said in its public statements. "While it's not good, clearly, I'm still operating under the assumption that it's an honest mistake' he said.

If Rexhall, which hired KPMG to assist the company in determining how the accounting problems occurred, can come up with some acceptable answers, there may be some mileage left in the stock.

While Rexhall's stock has gone down in the past year, competitors such as Winnebago Industries Inc.; have seen their stock rise as much as 30 percent.

And for good reason--there is opportunity in the RV business. Baby boomers are turning 50 at the rate of 10,000 a day, and the University of Michigan has predicted a 15 percent increase in households owning RVs by 2010, noted Ken Sommer, media relations director for the Recreational Vehicle Industry Association.

"(Baby boomers) are going to be reaching their prime RV buying years by 2010" he said.

[GRAPH OMITTED]

Rexhall Industries Inc.

Stock Prices

Sept. 4, 2001  $3.25
Sept. 4, 2002  $2.20

Note: Table made from line graph
YEAR (Dec. 31)                  2001   2000

Revenue (millions)             $56.7    $67
Total Expenses (millions)       58.9   62.6
Operating Income (millions)    (2.2)    4.3
Net Income (millions)            (2)    2.3
Earnings Per Share           $(0.33)  $0.37

SUMMARY

Business: Maker of recreational vehicles

Headquarters: Lancaster

CEO: William J. Rex

Market Cap: $13.4 million

Dividend Yield: N/A *

Total Liabilities: $11.4 million

P/E Ratio: N/A

Long-Term Debt: $662,000

* Company does not pay a dividend.

RELATED ARTICLE: Risk vs. Uncertainly

AT least we're learning something.

So goes the all-purpose pep talk as people try to find some redeeming feature in the stock market's worst decline of the past quarter-century. Sad to say, one of the biggest lessons the 2-year bear market can teach is how much we don't know.

"Although we have a fairly good understanding of stock- market risk, assessing stock market uncertainty is incomparably harder," says Frank Schmid, senior economist at the Federal Reserve Bank of St. Louis.

Risk, uncertainty--what's the difference? Schmid, citing the 1921 writings of economist Frank Knight, says in the bank's Regional Economist publication that risk refers to unpleasant possibilities that can be measured, by math or historical observation. Uncertainty refers to what can't be quantified--the possibility, for instance, terrorists would strike last Sept. 11.

The stock market abounds in both risk and uncertainty. Studying the history of the markets, investors can manage and mitigate the hazards to an extent by taking a long-term approach and diversifying.

In an economy that grows over time, we can calculate that our chances of making good return are much better over a 10-year period than in any single year. The risk of drastic loss is also cushioned if we own 40, 50 or 100 stocks from different industries, say via a mutual fund, than if we stake everything on one or two companies.

The observable past only tells us so much, though, because we can't tell whether the future will follow the patterns of yore. "Uncertainty arises from imperfect knowledge about the way the world behaves," Schmid says.

The idea of uncertainty can get muddled in the daily chatter that surrounds the market. When stocks aren't doing well, someone invariably observes, "the market hates uncertainty."

If that were literally true, the market would never do well, given that uncertainty is ever-present. So the best translation might be, "the market hates it when people become more conscious of uncertainty than they were the day before."

Investors have also learned things about the practical math of risk. Consider a phenomenon we might call RONDE, or the Rule of Never-Diminishing Exposure. It says that the maximum possible loss in a stock is never less than 100 percent of your money.

Knowing this rule helps guard against the temptation to go bargain-hunting in any stock or fund simply because the price has fallen. As Enron Corp.'s shares wended their way from above $80 to below 10 cents, many a buyer stepped up, evidently thinking that the risk in the stock was reduced along with the price.

Not so. As it turned out, buyers at $5 could lose just about as much as buyers at $50--which is to say, almost all their money.

The short answer is, stocks quite often sell at prices that compensate the buyer for taking a chance. Sometimes they pay off big. When most investors are fleeing the market, the chances of getting in at an advantageous price tend to improve.

Chet Currier, Bloomberg News

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].