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Filed pursuant to Rule 424 (b) (3)
Registration No. 333-43335
PROSPECTUS
AIRXCEL, INC.
[AIRXCEL, INC. LOGO]
OFFER TO EXCHANGE ITS SERIES B 11% SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING 11% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 13,
1998, UNLESS EXTENDED.
Airxcel, Inc., a Delaware corporation ("Airxcel" or the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its Series B
11% Senior Subordinated Notes due 2007 (the "Exchange Notes"), which will have
been registered under the Securities Act of 1933, as amended (the "Securities
Act") pursuant to a Registration Statement of which this prospectus is a part,
for each $1,000 principal amount of its outstanding 11% Senior Subordinated
Notes due 2007 (the "Notes"), of which $90,000,000 principal amount is
outstanding. The form and terms of the Exchange Notes are the same as the form
and term of the Notes (which they replace) except that the Exchange Notes will
bear a Series B designation and will have been registered under the Securities
Act and, therefore, will not bear legends restricting their transfer and will
not contain certain provisions relating to an increase in the interest rate
which were included in the terms of the Notes in certain circumstances relating
to the timing of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Notes (which they replace) and will be issued under and be entitled
to the benefits of the Indenture dated November 10, 1997 between Airxcel and
United States Trust Company of New York (the "Indenture") governing the Notes.
See "The Exchange Offer" and "Description of Exchange Notes."
Airxcel has not issued, and does not have any current firm arrangements to
issue, any indebtedness to which the Exchange Notes would rank senior or pari
passu in right of payment. The Exchange Notes will be subordinated in right of
payment to all Senior Indebtedness of Airxcel (including debt under the Credit
Facility (as defined)). The amount of the Company's outstanding Senior
Indebtedness is $25.4 million.
Airxcel will accept for exchange any and all Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on May 13, 1998, unless
extended by Airxcel in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, Airxcel will not extend the Expiration Date
beyond May 20, 1998. Tenders of Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes were sold by Airxcel on November 10, 1997 to the Initial
Purchasers (as defined) in a transaction not registered under the Securities Act
in reliance upon an exemption under the Securities Act. The Initial Purchasers
subsequently placed the Notes with qualified institutional buyers in reliance
upon Rule 144A under the Securities Act and with a limited number of
institutional accredited investors that agreed to comply with certain transfer
restrictions and other conditions. Accordingly, the Notes may not be reoffered,
resold or otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of Airxcel under the
Exchange and Registration Rights Agreement entered into by Airxcel in connection
with the offering of the Notes. See "The Exchange Offer."
With respect to resales of Exchange Notes, based on interpretations by the staff
of the Securities and Exchange Commission (the "Commission") set forth in
no-action letters issued to third parties, Airxcel believes the Exchange Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by any holder thereof (other than any such holder that is
an "affiliate" of Airxcel within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer" and "The Exchange Offer -- Resales of the Exchange Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. Airxcel has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
If any holder of Notes is an affiliate of the Company, is engaged in or intends
to engage in or has any arrangement or understanding with any person to
participate in the distribution of the Exchange Notes to be acquired in the
Exchange Offer, such holder (i) cannot rely on the applicable interpretations of
the Commission and (ii) must comply with the registration requirements of the
Securities Act in connection with any resale transaction.
Holders of Notes not tendered and accepted in the Exchange Offer will continue
to hold such Notes and will be entitled to all the rights and benefits and will
be subject to the limitations applicable thereto under the Indenture and with
respect to transfer under the Securities Act. Airxcel will pay all the expenses
incurred by it incident to the Exchange Offer. See "The Exchange Offer."
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SEE "RISK FACTORS" ON PAGE 13 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 7, 1998
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There has not previously been any public market for the Notes or the
Exchange Notes. Airxcel does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors -- Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Notes are tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form.
Airxcel expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Certificate (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depositary")
and registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Certificate representing the Exchange Notes will be
shown on, and transfers thereof to qualified institutional buyers will be
effected through, records maintained by the Depositary and its participants.
After the initial issuance of the Global Certificate, Exchange Notes in
certified form will be issued in exchange for the Global Certificate only on the
terms set forth in the Indenture. See "Description of Exchange
Notes -- Book-Entry; Delivery and Form."
AVAILABLE INFORMATION
Airxcel has filed with the Commission a Registration Statement on Form S-4
(the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Notes being offered hereby. This Prospectus includes a discussion of all
material elements of the Exchange Offer Registration Statement, but does not
contain all of the information set forth therein. For further information with
respect to Airxcel and the Exchange Offer, reference is made to the Exchange
Offer Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration Statement, including
the exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the commission at 7 World
Trade Center, Suite 1300, New York, NY 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Additionally, the Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, Airxcel will become subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The obligation of Airxcel to file periodic
reports and other information with the Commission will be suspended if the
Exchange Notes are held of record by fewer than 300 holders as of the beginning
of any fiscal year of Airxcel other than the fiscal year in which the Exchange
Offer Registration Statement is declared effective. Airxcel will nevertheless be
required to continue to file reports with the Commission if the Exchange Notes
are listed on a national securities exchange. In the event Airxcel ceases to be
subject to the informational requirements of the Exchange Act, Airxcel will be
required under the Indenture to continue to file with the Commission the annual
and quarterly reports, information, documents or other reports, including,
without limitation, reports on Forms 10-K, 10-Q and 8-K, which would be required
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pursuant to the informational requirements of the Exchange Act. Under the
Indenture, Airxcel shall file with the Trustee annual, quarterly and other
reports within fifteen days after it files such reports with the Commission.
Further, to the extent that annual, quarterly or other financial reports are
furnished by Airxcel to stockholders generally it will mail such reports to
holders of Exchange Notes. Airxcel will furnish annual and quarterly financial
reports to stockholders of Airxcel and will mail such reports to holders of
Exchange Notes pursuant to the Indenture, thus holders of Exchange Notes will
receive financial reports every quarter. Annual reports delivered to the Trustee
and the holders of Exchange Notes will contain financial information that has
been examined and reported upon, with an opinion expressed by an independent
public or certified public accountant. Airxcel will also furnish such other
reports as may be required by law.
FORWARD LOOKING STATEMENTS
THE PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA
FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD
LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY THE MANAGEMENT
OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY
UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES
AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES WILL BE
REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2) INCREASED COSTS; (3) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4) INCREASES IN THE COMPANY'S COST OF
BORROWING OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL;
(5) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS
IN PENDING LITIGATION; AND (6) CHANGES IN GENERAL ECONOMIC CONDITIONS AND/OR IN
THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH
FACTORS ARE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. FOR FURTHER,
INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE
COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS."
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes included elsewhere in this Prospectus. Holders of Notes are urged
to read this Prospectus in its entirety. Unless the context otherwise requires,
references in this Prospectus to "Airxcel" refer to Airxcel, Inc., references to
"RVP" refer to Recreation Vehicle Products, a division of Airxcel, references to
"Crispaire" refer to Crispaire Corporation, and references to the "Company"
refers to Airxcel after giving effect to the Transactions (as defined). As used
in this Prospectus, the term "pro forma" reflects the Transactions. References
in this Prospectus to "fiscal year" refer, as applicable, to a December 31
fiscal year-end for Airxcel and an October 31 fiscal year-end for Crispaire.
THE COMPANY
OVERVIEW
The Company is a designer, manufacturer and marketer of recreation vehicle
("RV") air conditioners and specialty wall mount air conditioners, environmental
control units ("ECUs") and heat pumps for various applications. The combination
of RVP and Crispaire is the first step in the Company's strategy to establish
itself as a leading designer, manufacturer and marketer of specialty heating,
air conditioning and water heating products. The Company believes that it is
well positioned to effectively pursue this strategy with strong positions in
each of its principal markets and a range of products serving separate customer
bases. The combination of RVP's low cost, high volume manufacturing expertise
with Crispaire's ability to provide customized products will allow the Company
to capitalize on the growing opportunities presented in each of its markets. The
Company's pro forma net sales and EBITDA were approximately $135.5 million and
$16.8 million in fiscal 1997.
RVP supplies a variety of air conditioners to several of the world's
largest RV original equipment manufacturers ("OEMs"), marketing these products
under the popular and well-established "Coleman" brand name. RVP believes that
its air conditioners are more effective to those of its competitors due to
greater air flow capacity, cooling efficiency and more aerodynamic design. RVP's
reputation as a dependable source of high-quality, durable products has resulted
in its long-term relationships with leading RV manufacturers such as Fleetwood
Enterprises ("Fleetwood"), Winnebago, Gulf Stream and Jayco, who have relied on
RVP for substantially all of their RV air conditioner needs for each of the past
six years. Sales to such OEMs provide RVP with a large installed base of
products which generates a significant recurring stream of revenue through sales
of parts and replacement units in the aftermarket. Aftermarket sales to
customers such as RV dealers, supply and service centers are achieved primarily
through an agreement with Coast Distribution System ("Coast"), the largest
wholesale distributor of aftermarket products in the RV industry. RVP believes
that Coast's extensive market penetration and large sales force provide broad
aftermarket coverage and distribution capabilities which enhance its substantial
aftermarket business. In fiscal 1996, as a percentage of Airxcel's net sales,
OEM sales represented 66.3%, and aftermarket sales represented 33.7%. In
addition to serving the RV industry, RVP designs, manufactures and markets air
conditioners for marine applications, the cooling and heating of elevators,
petroleum "logging" trucks and for a wide variety of small-space cooling
applications.
Crispaire is a designer, manufacturer and marketer of specialty wall mount
air conditioners, ECUs and heat pumps for various applications. Crispaire's
customers are principally telecommunications companies, manufacturers of
telecommunication shelters in the cellular, cable, wireless, satellite and
personal communication services ("PCS") markets, wholesale distributors for
foreign telecommunications sales, school districts and construction companies.
The Company believes that Crispaire is one of the largest providers of
environmental control equipment for the U.S. telecommunication shelter market,
through sales to both telecommunications companies and manufacturers of
telecommunication shelters. The Company believes that it is positioned to
benefit from growth in cellular, wireless and PCS telecommunications markets and
the resulting demand for telecommuni-
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cation shelters. The Company believes that Crispaire's focus on customer service
and quality control and its strong reputation for its ability to offer a broad
and innovative line of products in a timely manner has attracted significant
customers, including MCI, Motorola, AT&T Wireless, Lucent Technologies and other
wireless communication providers. The Company also believes that it will benefit
from an increasing need for cooling units in the nation's schools due to new
state regulations and certain building codes that mandate fresh air
requirements, the rebuilding of school system infrastructures and the steadily
growing student population. Crispaire supplies wall mount air conditioners to
multiple school districts throughout the country, including the Los Angeles
Unified School District. Crispaire has a strong position in each of its
principal markets, through solid relationships with its customers who generally
require tailored products and a high level of customer service. Crispaire's
ability to customize products without interruption of its larger production
lines allows it to work closely with customers to develop and produce equipment
that meets their specific needs quickly and efficiently. In fiscal 1996, sales
to the telecommunication shelter industry and school industry represented 61%
and 23%, of Crispaire's total net sales, respectively. Airxcel's net sales to
Fleetwood, Coast, JayCo and Winnebago, its largest customers, accounted for
approximately 33%, 27%, 12% and 8%, respectively, of the Company's net sales for
1997. Crispaire's net sales to Motorola and UNR-Rohn accounted for approximately
3.8% and 4.2% of its net sales in 1997.
The combination of RVP and Crispaire creates a diversified specialty air
conditioning company with a strong market presence. By combining the major
supply purchasing contracts, it is anticipated that at least a 1% or $700,000
savings in the annual purchases of raw materials and components of the combined
Company would be achieved. Management believes that the Company will benefit
from RVP's low variable cost structure and its cost controlling culture, and
that the Company will be able to streamline Crispaire's operations to achieve
additional cost savings and manufacturing efficiencies. Additionally, management
believes that the Company will be able to leverage off of Crispaire's proven
success in identifying new, emerging markets and customizing its products to
suit the needs of its customers.
INDUSTRY OVERVIEW
RV Industry
In 1996, the North American RV market was approximately $6.3 billion. The
RV market is broadly classified as "motorhomes" and "towables." Motorhomes are
self-propelled and grouped in three main classes: A, B and C. Class A motorhomes
typically have two air conditioners, and Class B and C motorhomes have a minimum
of one air conditioner. Towables typically have a minimum of one standard air
conditioner, with larger towables requiring two and air conditioners being
optional for campers. According to a University of Michigan study sponsored by
the Recreational Vehicle Industry Association ("RVIA"), approximately 8.2
million households owned RVs in 1993, an increase from 5.8 million in 1980. In
general, RV ownership has grown by an average of 100,000 units per year over the
last 17 years, and management currently estimates that one out of every eleven
households in the U.S. owns an RV.
The consistent growth in the RV industry is attributable to the general
maturing of the industry and several key factors, including (i) the overall
increasing number of RV owners, (ii) the growth in the number of potential
consumers, as baby boomers begin entering the typical demographic profile for
premium RV owners, (iii) the changing lifestyle of the U.S. population on
average, which is aging and devoting more time to recreational activities, (iv)
an increase in population in states such as California, Florida and Texas, where
RVs are common, (v) a favorable economic environment, and (vi) the availability
of gasoline.
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HVAC Industry
According to the Air Conditioning and Refrigeration Institute, the
worldwide air conditioning market is currently estimated at $40 to $45 billion
and is expected to grow to $50 billion by 2005. In 1995, the U.S. heating,
ventilation and air conditioning ("HVAC") market was estimated to be $19.2
billion and is forecasted to grow by approximately 6.8% to reach approximately
$20.5 billion by 2000. The Company's principal niche markets within the larger
HVAC market, telecommunication shelters and schools, are forecasted to
experience significant growth.
The telecommunications industry has experienced rapid growth over the last
several years due to deregulation and growth in wireless communication.
According to an article published in Mobile Phone News, the Wireless
Communications Bureau reports that the number of telecommunication sites
constructed has increased from 2,305 in 1987 to 30,045 in 1996. It is estimated
that the number of subscribers for wireless communication is approximately 58.3
million and is expected to grow to 160.6 million by 2007. Growth is expected to
result in an increased demand for telecommunication shelters and cabinets as new
wireless networks are constructed and old networks are overlaid with digital
technology. According to the Cellular Telecommunications Industry Association as
published in the Financial Times, revenues in the cellular market have grown by
over 20% per year, exceeding $23 billion in 1996. In addition to the domestic
market, future growth is also anticipated in international markets such as Latin
America, Europe, Asia and Canada, where land lines are limited and a greater
demand for wireless communications systems is expected. Suppliers of wireless
communications equipment should continue to benefit from the expected
acceleration in the deployment of wireless networks.
Beginning in the 1970's, many schools, primarily in the Sunbelt region of
the U.S., began adding air conditioners to their facilities. Currently, a
significant number of states have passed regulations and have building codes
that require a certain amount of fresh air in classrooms. Today, one-third of
the nation's schools, serving more than 14 million students, needs extensive
repair and renovation with air cooling and air conditioning being some of the
major systems needing overhaul. According to the U.S. General Accounting Office,
Report to Congressional Requesters, School Facilities (1995/1996), 20,104 public
elementary schools nationwide are in need of HVAC repair with an estimated cost
of $3 billion. The U.S. Bureau of the Census has reported that by the year 2005,
U.S. student enrollment in elementary and secondary schools is expected to
increase significantly, requiring an additional 6,000 schools. The public
elementary school HVAC new construction market is estimated to be $314 million
annually through the year 2005.
COMPETITIVE ADVANTAGES
The Company attributes its success and its continued opportunities for
growth and profitability to the following competitive advantages:
- Strong Market Position in Principal Niche Markets.
- Existing Long-Term Customer Relationships.
- Strong Brand Name Recognition.
- High Quality Products, Customer Service and Product Design Capabilities.
- Extensive Distribution Network and Experienced Sales Force.
- Recurring Revenues from Installed Base.
- Experienced Management.
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BUSINESS STRATEGY
The key elements of the Company's business strategy to maintain its
leadership position are to:
- Capitalize on Anticipated Industry Growth.
- Generate Growth Through New Product Development.
- Pursue Growth Through Acquisitions.
See "The Business -- Competitive Advantages" and "-- Business Strategy" for
a more detailed discussion.
The Company is a Delaware corporation. Holdings is a Delaware corporation
whose sole asset is the capital stock of the Company. The Company's principal
executive offices are located at 3050 North Saint Frances Street, Wichita,
Kansas 67219, and its telephone number is (316) 832-3400.
THE TRANSACTIONS
On November 10, 1997 the Company completed the offering of the Notes (the
"Offering") and the acquisition of Crispaire (the "Crispaire Acquisition")
whereby, among other things, the management of Crispaire made a cash equity
investment in Holdings, and Holdings contributed the cash equity investment and
PIK Notes to Airxcel. It is anticipated that Airxcel will acquire 100% of the
outstanding common stock of KODA Enterprises Group, Inc. ("KODA") whereby, among
other things, a $4 million cash equity investment will be made in Holdings which
will be contributed to Airxcel (the "KODA Acquisition" and together with the
Crispaire Acquisition, the "Acquisitions"). The Offering, the Acquisitions, and
the Contributions (as defined) are collectively referred to herein as the
"Transactions." See "The Transactions."
THE OFFERING
Notes..................
The Notes were sold by the Company on November 10, 1997 to
Chase Securities Inc. and NationsBanc Montgomery
Securities, Inc. (the "Initial Purchasers") pursuant to a
Purchase Agreement dated November 5, 1997 (the "Purchase
Agreement"). The Initial Purchasers subsequently resold
the Notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and to a limited number
of institutional accredited investors that agreed to
comply with certain transfer restrictions and other
conditions.
Exchange and
Registration Rights
Agreement............
Pursuant to the Purchase Agreement, the Company and the
Initial Purchasers entered into an Exchange and
Registration Rights Agreement dated November 10, 1997,
which grants the holder of the Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.....
$90,000,000 aggregate principal amount of Series B 11%
Senior Subordinated Notes due 2007 (the "Exchange Notes").
The Exchange Offer.....
$1,000 principal amount of the Exchange Notes in exchange
for each $1,000 principal amount of Notes. As of the date
hereof, $90,000,000 aggregate principal amount of Notes
are outstanding. The Company will
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issue the Exchange Notes to holders on or promptly after
the Expiration Date.
Based on an interpretation by the staff of the Commission
set forth in no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business
and that such holder does not intend to participate and
has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
Each Participating Broker-Dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection
with resales of Exchange Notes received in exchange for
Notes where such Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for
a period of 180 days after the Expiration Date, it will
make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale.
See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in the
absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Failure to comply with such requirements in such instance
may result in such holder incurring liability under the
Securities Act for which the holder is not indemnified by
the Company.
Expiration Date........
5:00 p.m., New York City time, on May 13, 1998 unless the
Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and
the Notes............
Each Exchange Note will bear interest from its issuance
date. Holders of Notes that are accepted for exchange will
receive, in cash, accrued interest thereon to, but not
including, the issuance date of the Exchange Notes. Such
interest will be paid with the first interest payment on
the Exchange Notes. Interest on the Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes.
Conditions to the
Exchange Offer.......
The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer -- Conditions."
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Procedures for
Tendering Notes......
Each holder of Notes wishing to accept the Exchange Offer
must complete, sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Notes and any other required
documentation to the Exchange Agent (as defined) at the
address set forth herein. By executing the Letter of
Transmittal, each holder will represent to the Company
that, among other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder,
that neither the holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and
that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities
Act, of the Company. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer" and "-- Procedures for
Tendering."
Untendered Notes.......
Following the consummation of the Exchange Offer, holders
of Notes eligible to participate but who do not tender
their Notes will not have any further exchange rights and
such Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of
the market for such Notes could be adversely affected.
Consequences of Failure
to Exchange..........
The Notes that are not exchanged pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such
Notes may be resold only (i) to the Company, (ii) pursuant
to Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the Securities Act,
(iii) outside the United States to a foreign person
pursuant to the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act. See "The
Exchange Offer -- Consequences of Failure to Exchange."
Shelf Registration
Statement............
If any holder of the Notes (other than any such holder
which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) is not eligible
under applicable securities laws to participate in the
Exchange Offer, and such holder has provided information
regarding such holder and the distribution of such
holder's Notes to the Company for use therein, the Company
has agreed to register the Notes on a shelf registration
statement (the "Shelf Registration Statement") and use its
best efforts to cause it to be declared effective by the
Commission as promptly as practical on or after the
consummation of the Exchange Offer. The Company has agreed
to maintain the effectiveness of the Shelf Registration
Statement for, under certain circumstances, a maximum of
three years, to cover resales of the Notes held by any
such holders.
Special Procedures for
Beneficial Owners....
Any beneficial owner whose Notes are registered in the
name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's
6
<PAGE> 10
behalf. If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and delivering its
Notes, either make appropriate arrangements to register
ownership of the Notes in such owner's name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time. The Company will keep the Exchange Offer open for
not less than twenty days in order to provide for the
transfer of registered ownership.
Guaranteed Delivery
Procedures...........
Holders of Notes who wish to tender their Notes and whose
Notes are not immediately available or who cannot deliver
their Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date must
tender their Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights......
Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
Acceptance of Notes and
Delivery of Exchange
Notes................
The Company will accept for exchange any and all Notes
which are properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration Date. See
"The Exchange Offer -- Terms of the Exchange Offer."
Use of Proceeds........
There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent.........
United States Trust Company of New York
THE EXCHANGE NOTES
General................
The form and terms of the Exchange Notes are the same as
the form and terms of the Notes (which they replace)
except that (i) the Exchange Notes bear a Series B
designation, (ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (iii) the
holders of Exchange Notes will not be entitled to certain
rights under the Exchange and Registration Rights
Agreement, including the provisions providing for an
increase in the interest rate on the Notes in certain
circumstances relating to the timing of the Exchange
Offer, which rights will terminate when the Exchange Offer
is consummated. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer." The Exchange Notes will
evidence the same debt as the Notes and will be entitled
to the benefits of the Indenture. See "Description of
Exchange Notes." The Notes and the Exchange Notes are
referred to herein collectively as the "Senior
Subordinated Notes."
Securities Offered.....
$90,000,000 aggregate principal amount of Series B 11%
Senior Subordinated Notes due 2007 of the Company.
Maturity Date..........
November 15, 2007.
7
<PAGE> 11
Interest Payment
Dates................
May 15 and November 15, commencing May 15, 1998.
Events of Default......
The Indenture under which the Exchange Notes will be
issued provides for certain events which, should they
occur, would constitute a default thereunder. Such events
include the following: (a) the failure to make principal
payments on any of the Exchange Notes; (b) the failure to
pay interest on the Notes when due, if continued for 30
days or more; (c) default in the payment of principal of
or interest on any Note required to be purchased pursuant
to any Offer to Purchase required by the Indenture when
due and payable or failure to pay on the Purchase Date the
Purchase Price for any Note validly tendered pursuant to
any Offer to Purchase; (d) the failure to comply with any
of the provisions described under "Certain Covenants --
Merger, Sale of Assets, etc." therein; (e) the failure to
perform any other covenant, warranty or agreement of the
Company under the Indenture; (f) defaults under the terms
of one or more instruments evidencing or securing
Indebtedness of the Company having an outstanding
principal amount of $5 million or more individually or in
the aggregate that has resulted in the acceleration of the
payment of such Indebtedness or failure by the Company to
pay principal when due at the stated maturity of any such
Indebtedness and such default shall have continued after
any applicable grace period and shall not have been cured
or waived; (g) the rendering of a final judgment or
judgments (not subject to appeal) against the Company in
an amount of $5 million or more (net of any amounts
covered by reputable and creditworthy insurance companies)
which remain undischarged or unstayed for a period of 60
days after the date on which the right to appeal has
expired; or (h) certain events of bankruptcy, insolvency
or reorganization affecting the Company. See "Description
of Exchange Notes -- Events of Default."
Optional Redemption....
Except as described below, the Company may not redeem the
Exchange Notes prior to November 15, 2002. On or after
such date, the Company may redeem the Exchange Notes, in
whole or in part, at the redemption prices set forth
herein, together with accrued and unpaid interest to the
redemption date. In addition, at any time and from time to
time on or prior to November 15, 2000, the Company may
redeem up to 35% of the original aggregate principal
amount of the Exchange Notes with the cash proceeds of one
or more Public Equity Offerings (as defined) by the
Company or Holdings, at a redemption price equal to 111%
of the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption provided that at least $60 million of the
Exchange Notes remains outstanding immediately after each
such redemption. See "Description of Exchange
Notes -- Optional Redemption."
Change of Control......
Upon the occurrence of a Change of Control (as defined),
each holder will have the right to require the Company to
make an offer to repurchase all or any portion of such
holder's Exchange Notes at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. See
"Description of Exchange Notes -- Offer to Purchase Upon
Change of Control." The Credit Facility prohibits the
repurchase of outstanding Exchange Notes prior to
repayment of the borrowings under the Credit Facility.
There can be no assurance that upon a Change of Control
the Company will have sufficient
8
<PAGE> 12
funds to repurchase any of the Exchange Notes. See
"Description of the Revolving Credit Facility."
Ranking................
The Exchange Notes will constitute unsecured debt
obligations of the Company and will rank subordinate in
right of payment to all existing and future Senior
Indebtedness (as defined) including any Indebtedness under
the Credit Facility. The Exchange Notes do not rank senior
to any outstanding indebtedness. At December 31, 1997,
after giving pro forma effect to the Transactions, there
would have been approximately $25.4 million of
indebtedness or other liabilities to which the Exchange
Notes would have been subordinated. The Company could have
borrowed up to approximately $13 million under the terms
of the New Credit Facility, subject to borrowing base and
certain other requirements, all of which would have
constituted Senior Indebtedness. See "Description of the
Revolving Credit Facility."
Restrictive
Covenants..............
The Indenture under which the Exchange Notes will be
issued limits (i) the incurrence of additional
Indebtedness by the Company and its Restricted
Subsidiaries (as defined); (ii) the payment of dividends
on and redemption of, capital stock of the Company and its
Restricted Subsidiaries; (iii) certain other Restricted
Payments, including without limitation, Investments; (iv)
sales of assets and Restricted Subsidiary stock; (v)
certain transactions with Affiliates; (vi) the sale or
issuance of capital stock of its Restricted Subsidiaries;
(vii) the creation of Liens; (viii) the lines of business
in which the Company and its Restricted Subsidiaries may
operation; (ix) consolidations, mergers and transfers of
all or substantially all of the Company's assets; and (x)
sale and leaseback transactions. The Indenture also
prohibits certain restrictions on distributions from
Restricted Subsidiaries. However, all of these limitations
and prohibitions are subject to a number of important
qualifications and exemptions. See "Description of
Exchange Notes -- Certain Covenants."
For additional information regarding the Exchange Notes, see "Description of
Exchange Notes."
RISK FACTORS
Holders of Notes should carefully consider all of the information set forth
in this Prospectus and, in particular, should evaluate the specific factors
under "Risk Factors" as well as the other information and data included in this
Prospectus prior to tendering their Notes in the Exchange Offer. Such Risk
Factors include, but are not limited to, the following: Substantial Leverage and
Potential Inability to Service Debt; Dependence Upon Significant Customers;
Risks Associated with Fluctuations in Costs of Raw Materials; Potential
Termination of Supplier Relationships; Dependence Upon Conditions in Various
Industries; Subordination of Exchange Notes; Substantial Competition;
Limitations on Change of Control; Pending Patent Litigation; Limited Use of
Coleman Brand Name and Restrictions Imposed by the Credit Facility and the
Indenture. For a more detailed discussion of the above, see "Risk Factors"
beginning on page 13.
9
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
The following table sets forth summary unaudited pro forma financial and
other data of the Company for the fiscal year ended December 31, 1997. The
summary unaudited pro forma statement of operations data gives effect to the
KODA Acquisition as if it occurred on January 1, 1997. The summary unaudited pro
forma balance sheet data gives effect to the KODA Acquisition as if it occurred
on December 31, 1997. The pro forma financial and other data for the year ended
December 31, 1997 were derived from the "Unaudited Pro Forma Financial
Information" included elsewhere herein. The pro forma financial and other data
do not purport to represent what the Company's financial position or results of
operations would actually have been had the Transactions in fact occurred on the
assumed dates or to project the Company's financial position, results of
operations or cash flows for any future date or period. The information
contained in the following table should also be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Financial Information," and the
historical financial statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA (1):
Net sales................................................. $135,527
Cost of sales............................................. 102,781
--------
Gross profit.............................................. 32,746
Selling, general and administrative expenses.............. 19,624
Engineering, research and development expenses............ 1,139
--------
Operating income.......................................... 11,983
Interest expense.......................................... 11,052
Income from continuing operations before income taxes..... 1,648
OTHER DATA (1):
Gross margin.............................................. 24.2%
EBITDA(2)................................................. 16,782
EBITDA margin (3)......................................... 12.4%
Depreciation and amortization............................. 4,082
Capital expenditures...................................... 1,590
Cash interest expense..................................... 11,052
Ratio of EBITDA to cash interest expense (4).............. 1.5x
Ratio of net debt to EBITDA............................... 6.9x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (5)....................................... $ 28,194
Total assets.............................................. 112,595
Total debt................................................ 115,355
Total stockholders' (deficiency).......................... (21,009)
</TABLE>
- ---------------
(1) See the historical financial statements and related notes of Airxcel, Inc.
included elsewhere in this Prospectus for discontinued operations and
extraordinary item.
(2) EBITDA represents earnings before interest expense, net, other nonoperating
income, net, income tax expense, depreciation and amortization. Other
nonoperating income was $717 for the year ended December 31, 1997. EBITDA,
as calculated by the Company, may not be similar to the method used by other
companies. The Company has included information concerning EBITDA because it
is relevant for covenant analysis under the Indenture, which defines EBITDA
as set forth above for the period shown, and is presented because it is used
by certain investors as a measure of a company's ability to service debt.
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows or other consolidated income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(3) EBITDA margin reflects EBITDA as a percentage of net sales.
(4) See "Selected Financial and Other Data," and "Unaudited Pro Forma Financial
Information," and the historical financial statements and related notes
included elsewhere in this Prospectus for information as to Ratio of
earnings to fixed charges.
(5) Working capital represents current assets less current liabilities,
including net liabilities of the discontinued Faulkner manufacturing
division of $466 as of December 31, 1997.
10
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
AIRXCEL (FORMERLY KNOWN AS RECREATION VEHICLE PRODUCTS, INC. ("RVP"))
The following summary historical financial and other data of Airxcel are
derived from audited historical financial statements. The historical financial
statements of Airxcel as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997, included elsewhere herein, have
been audited by Coopers & Lybrand, L.L.P., independent accountants. The
historical financial statements of Airxcel as of December 31, 1993, 1994 and
1995 and for each of the two years in the period ended December 31, 1994 have
been derived from the audited consolidated financial statements of Airxcel
Holdings Corporation, formerly known as RV Products Holding Corp. and
Subsidiary, which are not included herein. The information contained in the
following table should also be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Information," and the historical
financial statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $50,743 $56,162 $55,788 $ 58,169 $ 58,323
Cost of sales............................................. 38,338 41,614 42,257 43,803 44,732
------- ------- ------- -------- --------
Gross profit.............................................. 12,405 14,548 13,531 14,366 13,590
Selling, general and administrative expenses(1)........... 9,979 7,886 10,959 5,980 4,862
------- ------- ------- -------- --------
Operating income.......................................... 2,426 6,662 2,572 8,386 8,729
Interest expense(2)....................................... 2,273 1,282 1,097 2,273 4,619
Income from continuing operations before income taxes..... 138 5,352 1,383 5,968 4,087
Net income (loss)......................................... (1,878) 2,616 (453) 1,074 (4,548)
OTHER DATA:
Gross margin.............................................. 24.4% 25.9% 24.3% 24.7% 23.3%
EBITDA(3)................................................. 5,422 9,683 5,554 10,369 9,850
EBITDA margin............................................. 10.7% 17.2% 10.0% 17.8% 16.9%
Cash provided by operating activities..................... 4,201 6,472 857 4,249 7,229
Cash used in investing activities......................... (619) (821) (1,183) (434) (44,083)
Cash (used in) provided by financing activities........... (3,444) (5,395) 553 (4,210) 46,319
Depreciation and amortization(4).......................... 2,996 3,021 2,982 1,983 1,144
Capital expenditures...................................... 621 843 356 459 716
Cash interest expense(2).................................. 2,087 1,267 1,083 2,170 4,311
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(5)........................................ $ 7,131 $ 9,301 $ 8,819 $ 5,632 $ 23,186
Total assets(6)........................................... 26,920 24,753 26,561 24,748 76,933
Total debt................................................ 20,907 15,581 24,824 48,280 90,355
Total stockholders' equity (deficiency)................... 735 3,718 (4,255) (28,701) (25,009)
</TABLE>
- ---------------
(1) Selling, general and administrative expenses for 1995 includes $4,279 of
nonrecurring expenses related to costs incurred to compensate certain option
holders for their personal tax liabilities incurred when such options were
exercised.
(2) Excludes interest expense related to the discontinued Faulkner manufacturing
division.
(3) EBITDA represents earnings before interest expense, net, other nonoperating
expense, net, income tax expense, depreciation and amortization. Other
nonoperating expenses were $15, $28, $92, $145 and $23 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997, respectively. EBITDA, as
calculated by the Company, may not be similar to the method used by other
companies. Airxcel has included information concerning EBITDA because it is
relevant for covenant analysis under the Indenture, which defines EBITDA as
set forth above for the periods shown, and is presented because it is used
by certain investors as a measure of a company's ability to service debt.
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows or other consolidated income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(4) Excludes depreciation and amortization related to the discontinued Faulkner
manufacturing division.
(5) Working capital represents current assets less current liabilities,
including net assets (liabilities) held for sale of the discontinued
Faulkner manufacturing division of $4,789, $3,704, $5,634, $6,421 and ($466)
as of December 31; 1993, 1994, 1995, 1996 and 1997, respectively.
(6) Total assets include net assets held for sale of $4,789, $3,704, $5,634 and
$6,421 as of December 31, 1993, 1994, 1995, 1996, respectively, and exclude
net liabilities of the discontinued Faulkner manufacturing division of $466
as of December 31, 1997.
11
<PAGE> 15
CRISPAIRE
The following summary historical financial and other data of Crispaire are
derived from the audited historical financial statements of Crispaire. The
historical financial statements of Crispaire as of and for the year ended
October 31, 1997 have been audited by Coopers & Lybrand L.L.P., independent
accountants. The historical financial statements of Crispaire as of October 31,
1993, 1994, 1995 and 1996 and for each of the fiscal years in the four-year
period ended October 31, 1996, have been audited by Mauldin & Jenkins, LLC,
independent accountants. The historical financial statements of Crispaire as of
October 31, 1995, 1996 and 1997 and for each of the fiscal years in the
three-year period ended October 31, 1997 are included elsewhere herein. The
information contained in the following table should also be read in conjunction
with "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Financial
Information," and the historical financial statements and related notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 17,701 $ 24,152 $ 27,304 $ 34,138 $ 39,114
Cost of sales.................................. 13,667 18,143 20,104 24,758 28,160
-------- ----------- ----------- ----------- -----------
Gross profit................................... 4,034 6,009 7,200 9,380 10,954
Engineering, research and development.......... 580 537 752 878 1,111
Selling, general and administrative expenses... 2,632 3,547 4,089 5,129 5,857
Operating income............................... 843 1,989 2,381 3,438 3,986
Interest expense, net.......................... 194 160 94 146 125
Net income..................................... 649 1,829 2,287 3,292 3,861
OTHER DATA:
Gross margin................................... 22.8% 24.9% 26.4% 27.5% 28.0%
EBITDA(1)...................................... 994 2,150 2,571 3,668 4,266
EBITDA margin.................................. 5.6% 8.9% 9.4% 10.7% 10.9%
Cash provided by operating activities.......... 10 3,140 1,646 2,671 3,713
Cash used in investing activities.............. (42) (515) (512) (1,452) (498)
Cash (used in) provided by financing
activities................................... 36 (2,561) (1,133) (1,165) (3,211)
Depreciation and amortization.................. 151 161 190 231 280
Capital expenditures........................... 42 565 393 1,419 504
Cash interest expense.......................... 194 160 94 146 124
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(2)............................. $ 2,902 $ 4,286 $ 4,800 $ 6,213 $ 7,811
Total assets................................... 8,000 9,007 10,647 14,106 16,081
Total debt..................................... 550 758 595 1,242 471
Total stockholders' equity..................... 3,133 4,731 5,717 8,298 10,249
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest expense, net, income tax expense,
depreciation and amortization. EBITDA, as calculated by Crispaire, may not
be similar to the method used by other companies. The Company has included
information concerning EBITDA because it is relevant for covenant analysis
under the Indenture, which defines EBITDA as set forth above for the periods
shown, and is presented because it is used by certain investors as a measure
of a company's ability to service debt. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other
consolidated income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.
(2) Working capital represents current assets less current liabilities.
12
<PAGE> 16
RISK FACTORS
Holders of Notes should consider carefully the following factors, which the
Company believes represent all material risks, in addition to the other
information set forth in this Prospectus prior to tendering their Notes in the
Exchange Offer. The risk factors set forth below are generally applicable to the
Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE AND POTENTIAL INABILITY TO SERVICE INDEBTEDNESS
As a result of the consummation of the Transactions, the Company is highly
leveraged. After giving pro forma effect to the Transactions as of December 31,
1997, the Company would have had Indebtedness of $115.4 million and the
Company's stockholders' deficiency would have been $21.0 million. In addition,
the Company would have had the ability, subject to borrowing base and certain
other requirements, to borrow an additional $13 million under the New Credit
Facility, and subject to the restrictions in the New Credit Facility and the
Indenture, the Company may incur additional indebtedness from time to time. The
degree to which the Company is leveraged could have important consequences to
holders of the Exchange Notes, including the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be limited; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on the Exchange Notes, the New Credit Facility and
its other existing indebtedness, thereby reducing the funds available to the
Company for other purposes; (iii) all of the indebtedness under the New Credit
Facility will be at variable rates of interest, which will cause the Company to
be vulnerable to increases in interest rates; (iv) all of the indebtedness
outstanding under the New Credit Facility will be secured by security interests
in, or liens on, the accounts receivable, inventory and real property of the
Company, and will become due prior to the time the principal on the Exchange
Notes will become due; (v) the Company may be hindered in its ability to adjust
rapidly to changing market conditions and (vi) the Company's substantial degree
of leverage could make it more vulnerable in the event of a downturn in general
economic conditions or in its business.
The Company's ability to pay interest on the Exchange Notes and to satisfy
its other debt obligations will depend on its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control. If the Company's
cash flow and capital resources are insufficient to fund its debt service
obligations, the Company may be forced to reduce or delay capital expenditures,
sell assets, obtain additional equity capital or restructure its debt. There can
be no assurance that the Company's cash flow and capital resources will be
sufficient for payment of its indebtedness in the future. In the absence of such
operating results and resources, the Company could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations, and there can be no assurance as to
the timing of such sales or the proceeds which the Company could realize
therefrom. The financial covenants and other restrictions in the Credit Facility
and the Indenture limit the Company's ability to borrow additional funds and
dispose of certain assets. See "Description of the Revolving Credit Facility"
and "Description of Exchange Notes."
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
Airxcel's net sales to Fleetwood, Coast, Jayco and Winnebago, its largest
customers, accounted for approximately 33%, 27%, 12% and 8%, respectively, of
the Company's net sales for 1997. Crispaire's net sales to Motorola and
UNR-Rohn, its largest customers, accounted for approximately 3.8% and 4.2% of
its net sales in 1997. There can be no assurance that the Company will maintain
or improve these relationships or that the Company will continue to supply these
customers at current levels. The loss of a significant portion of sales to any
of these customers could have a material adverse effect on the Company's
business. In addition, many of the arrangements that the Company has with such
customers are by purchase order and terminable at
13
<PAGE> 17
will at the option of either party. A significant decrease or interruption in
businesses of any of the Company's significant customers could have a material
adverse effect on the Company. See "Business -- Sales, Distribution and
Marketing."
DEPENDENCE UPON CONDITIONS IN VARIOUS INDUSTRIES
A significant part of the Company's operations are directly dependent upon
the conditions in the highly cyclical RV industry, highly competitive
telecommunications industry and the commercial and public construction industry.
Companies within these industries, including the Company's largest customers,
are subject to volatility in operating results due to external factors such as
economic, demographic and political changes. These factors include seasonal
factors, fuel availability and fuel prices, overall consumer confidence and
general economic conditions, the level of discretionary consumer spending,
government regulation, interest rates and unemployment. To the extent such
factors have a substantial adverse effect on the Company's largest customers in
such industries, there could be a material adverse effect on the Company.
RISKS ASSOCIATED WITH FLUCTUATIONS IN COSTS OF RAW MATERIALS
The Company depends on certain raw materials such as copper and aluminum
for the manufacturing of its products. The prices for such materials have shown
considerable volatility during the past few years. In order to hedge against
price increases in these materials, the Company actively manages its materials
costs through futures contracts on copper and aluminum; however, no assurance
can be given that the Company will continue to be successful in managing such
price fluctuations or that future price fluctuations in copper and aluminum and
other raw materials will not have a material adverse effect on the Company.
Fluctuation in copper and aluminum prices can have an adverse effect on the
Company. See "-- Supplier Relationships" and "Management's Discussion and
Analysis of Financial Condition and Result of Operations -- Overview."
POTENTIAL TERMINATION OF SUPPLIER RELATIONSHIPS
The Company's relationships with its suppliers often afford it certain
purchasing advantages, including stable supply and favorable pricing
arrangements. The arrangements, however, are by purchase order with an average
term of one year, although terminable at will at the option of either party with
prior notice. Therefore, there can be no assurance that any of the supplier
relationships will not be terminated in the future. In addition, the Company
annually confirms existing pricing with competitive bids and while the Company
has been able to obtain sufficient supplies at competitive prices, fluctuating
raw material prices cause volatility in supplier pricing. The Company is subject
to the risk that a significant variance in the supplier pricing may trigger a
change of the product's price to customers. An interruption in the Company's
supplies or volatility in supplier pricing could have a material adverse effect
on the Company. See "Business -- Products and Services".
SUBORDINATION OF EXCHANGE NOTES
The Exchange Notes are contractually subordinated to all Senior
Indebtedness including all obligations under the Credit Facility. In the event
of a circumstance in which the contractual subordination provisions apply,
holders of the Exchange Notes will not be entitled to receive, and will have an
obligation to pay over to holders of Senior Indebtedness, any payments they may
receive in respect of the Exchange Notes. At December 31, 1997, after giving pro
forma effect to the Acquisitions adjusting for the issuance of the Exchange
Notes, there would have been approximately $25.4 million of indebtedness or
other liabilities outstanding to which the Exchange Notes would have been
subordinated. Subject to certain limitations, the Indenture permits the Company
to incur additional indebtedness. See "Description of Exchange
Notes -- Covenants -- Limitation on Indebtedness." Substantially all of the
assets of the Company are or may be pledged to secure other indebtedness of the
Company. See "Description of the Revolving Credit Facility" and "Description of
Exchange Notes."
14
<PAGE> 18
RESTRICTIONS IMPOSED BY THE CREDIT FACILITY AND THE INDENTURE
The Credit Facility requires the Company to maintain specified financial
ratios and tests, among other obligations, including a minimum interest coverage
ratio and a maximum leverage ratio. In addition, the Credit Facility restricts,
among other things, the Company's ability to incur additional indebtedness and
make acquisitions and capital expenditures beyond a certain level. A failure to
comply with the restrictions contained in the Credit Facility could lead to an
event of default thereunder which could result in an acceleration of such
indebtedness. Such an acceleration would constitute an event of default under
the Indenture relating to the Exchange Notes. In addition, the Indenture
restricts, among other things, the Company's ability to incur additional
indebtedness, sell assets, make certain payments and dividends or merge or
consolidate. A failure to comply with the restrictions in the Indenture could
result in an event of default under the Indenture. See "Description of the
Revolving Credit Facility" and "Description of Exchange Notes."
SUBSTANTIAL COMPETITION
The Company competes with a number of established companies that have
greater financial, technological and marketing resources than the Company. There
can be no assurance that the Company will be able to maintain its current market
share. The ability of the Company to compete as a supplier to the RV industry is
largely dependent on its ability to provide name brand high quality products at
competitive prices and to manufacture and deliver products on a timely basis.
Certain of the Company's principal competitors are less highly-leveraged than
the Company and may be better able to withstand volatile market conditions
within the RV industry which could lead to adverse changes in the Company's
relationships with its customers. In addition, the Company faces substantial
competition in the broader HVAC industry which is comprised of hundreds of small
to medium-sized companies with various niche markets and several large,
well-capitalized, highly diversified industrial corporations with major market
shares of standard residential and commercial HVAC product lines. There can be
no assurance that the Company will not encounter increased competition in the
future, which could have a material adverse effect on the Company. See
"Business -- Competition."
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to make
an offer for cash to repurchase the Exchange Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the
repurchase date. A Change of Control will result in an event of default under
the Credit Facility and may result in a default under other indebtedness of the
Company that may be incurred in the future. The Credit Facility prohibits the
purchase of outstanding Exchange Notes prior to repayment of the borrowings
under the Credit Facility and any exercise by the holders of the Exchange Notes
of their right to require the Company to repurchase the Exchange Notes will
cause an event of default under the Credit Facility. Finally, there can be no
assurance that the Company will have the financial resources necessary to
repurchase the Exchange Notes upon a Change of Control. See "Description of
Exchange Notes -- Offer to Purchase Upon Change of Control."
IMPACT OF ENVIRONMENTAL REGULATION
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations,
among other things, impose limitations on the discharge of pollutants and
establish standards for management of waste. As is the case with manufacturers
in general, if a release or threat of release of hazardous materials occurs on
or from the Company's properties or any associated offsite disposal location, or
if contamination from prior activities is discovered at any properties owned or
operated by the Company, the Company may be held liable for response costs and
damages to natural resources. There can be no assurance that the amount of any
such liability would not be material.
15
<PAGE> 19
LIMITED USE OF COLEMAN BRAND NAME
The Company has an exclusive, royalty-free license to use the name
"Coleman" on its products for a period of 50 years ending in 2041. Such license
automatically renews for another 50 years provided the Company is in compliance
with all material terms of the trademark license agreement. The Company's
license to use the "Coleman" brand name on a standalone basis expired on April
30, 1997. As a result, the Company must use a name or product name in
conjunction with the "Coleman" brand name; thus, there can be no assurance that
this will not have an adverse effect on the Company.
PENDING PATENT LITIGATION
Crispaire has been named a defendant in a lawsuit claiming that Crispaire
infringes certain trademarks and patents with respect to certain of its air
conditioning and heating products. No assurance can be given as to the ultimate
outcome of this matter. See "Business -- Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. The loss of such key personnel could have a material adverse effect on the
Company. The Company maintains key-person insurance for Melvin L. Adams, and
George D. Wyers. See "Management."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in this
Exchange Offer. The holders of Notes (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Notes. The Exchange Notes are new
securities for which there currently is no market. The Initial Purchasers are
not obligated to make a market in the Exchange Notes and any such market making
may be discontinued at any time without notice in the sole discretion of the
Initial Purchasers. In addition, such market making activity may be limited
during the pendency of the Exchange Offer or the effectiveness of a shelf
registration statement in lieu thereof. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Notes. The
Exchange Notes are eligible for trading by qualified buyers in the Private
Offerings, Resale and Trading though Automated Linkages (PORTAL) market. The
Company does not intend to apply for listing of the Exchange Notes, on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
The Exchange Notes generally will be permitted to be resold or otherwise
transferred (subject to the restrictions described under "Exchange and
Registration Rights Agreement" and "Transfer Restrictions") by each holder
without the requirement of further registration. The Exchange Notes, however,
will also constitute a new issue of securities with no established trading
market. The Exchange Offer will not be conditioned upon any minimum or maximum
aggregate principal amount of Notes being tendered for exchange. No assurance
can be given as to the liquidity of the trading market for the Exchange Notes,
or, in the case of non-exchanging holders of Notes, the trading market for the
Notes following the Exchange Offer.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market or by declines in the
market for similar securities. Such declines may adversely affect such liquidity
and trading markets independently of the financial performance of, and prospects
for, the Company.
16
<PAGE> 20
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Exchange and Registration Rights Agreement will
terminate. In addition, any holder of Notes who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transactions. Each Participating
Broker-Dealer that receives Exchange Notes for its own account in exchange for
Notes, where such Notes were acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Notes could be adversely affected. See "The Exchange Offer."
17
<PAGE> 21
THE TRANSACTIONS
CRISPAIRE ACQUISITION:
Pursuant to an Asset Purchase Agreement dated as of October 17, 1997 among
Holdings, Airxcel and Crispaire, Airxcel purchased substantially all of the net
assets, properties and rights and assumed certain related liabilities of
Crispaire. Crispaire received, as part of the consideration for the Acquisition,
$5.3 million of PIK Notes of Holdings. A cash equity investment was made in
Holdings in connection with the financing of the Crispaire Acquisition through
the purchase of common stock and preferred stock of Holdings by the management
of Crispaire for an aggregate purchase price of approximately $3.1 million. The
PIK Notes, as well as the cash equity investment in Holdings, were contributed
by Holdings to Airxcel. The contributions to Airxcel are collectively referred
to herein as the "Contributions."
Concurrently, the Company consummated the Offering, and a portion of the
net proceeds from the Offering together with the proceeds from the sale of
securities to certain affiliates of Crispaire, including management, were used
to finance the Crispaire Acquisition and the repayment of certain indebtedness.
A portion of the indebtedness repaid was held by a mezzanine investment fund
managed by an affiliate of Citicorp. The remainder of the indebtedness repaid
was under a credit facility for which The Chase Manhattan Bank, an affiliate of
Chase Securities Inc., received its proportionate share of any repayment. The
Company entered into an agreement with The Chase Manhattan Bank to provide for a
Revolving Credit Facility. Consummation of the Offering was conditioned upon the
concurrent consummation of the Crispaire Acquisition and the Contributions.
The Exchange Offer results in no sources or uses of cash to the Company.
The estimated sources and uses of cash which occurred in connection with the
closing of the Crispaire Acquisition on November 10, 1997, are set forth below
(dollars in thousands):
<TABLE>
<S> <C>
SOURCES:
Proceeds from sale of the Notes............................. $90,000
Contributions from Holdings................................. 8,354
-------
Total sources..................................... $98,354
=======
USES:
Repayment of KODA borrowings................................ $42,539
Consideration paid for Crispaire............................ 43,400
Working capital............................................. 7,415
Estimated fees and expenses................................. 5,000
-------
Total uses........................................ $98,354
=======
</TABLE>
KODA ACQUISITION:
Pursuant to a Stock Purchase Agreement dated March 8, 1998, between Airxcel
and William S. Karol, Airxcel acquired 100% of the outstanding common stock of
KODA Enterprises Group, Inc. (the "Stock Purchase") and repaid certain KODA
obligations. A cash equity investment was made in Holdings in connection with
the financing of the Stock Purchase through the sale of common stock for
approximately $4 million. The cash equity investment was contributed to Airxcel.
In conjunction with the Stock Purchase, Airxcel amended and restated the
Credit Facility with The Chase Manhattan Bank to provide for borrowings in an
aggregate principal amount of up to $38 million (the "New Credit Facility".) The
New Credit Facility consists of a $28 million revolving credit facility (the
"Senior Revolving Credit Facility") and a $10 million term loan (the "Senior
Term Loan"). Airxcel used the Senior Term Loan plus a portion of the Senior
Revolving Credit Facility (approximately $15 million) to partially finance the
Stock Purchase.
18
<PAGE> 22
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Exchange and Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the Exchange Notes in
the Exchange Offer. The net proceeds of $90 million to the Company from the sale
and issuance of the Notes on November 10, 1997, together with the approximately
$3.1 million cash contribution made to the Company by Holdings, were used to
fund the cash portion of the consideration for the Crispaire Acquisition, to
refinance an existing credit facility (the "Old Credit Facility"), to repay
certain subordinated indebtedness, and to pay related fees and expenses.
Out of the proceeds of the Offering, the Company repaid its Tranche A and
Tranche B term loan commitments under the Old Credit Facility. The Tranche A
Term Loan (as defined under the Old Credit Facility) bore interest at a rate per
annum equal to the Alternate Base Rate plus one and one-half percent (1 1/2%),
and was to mature on January 1, 2002. The Tranche B term loan thereunder bore
interest at a rate per annum equal to the Alternate Base Rate plus two percent
(2%), and was to mature on July 1, 2003. As defined therein, the Alternate Base
Rate means, for any day, a rate per annum equal to the greater of (a) the Prime
Rate (as defined therein) in effect on such day, (b) the Base CD Rate (as
defined therein) in effect on such day plus 1%, and (c) the Federal Funds
Effective Rate (as defined therein) in effect on such day plus 1/2 of 1%.
The Company also used proceeds from the Offering to repay certain
subordinated indebtedness, which bore interest on the unpaid principal amount
thereof from August 22, 1996 through maturity on August 22, 2005 at a rate equal
to 12.00% per annum.
19
<PAGE> 23
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of December 31, 1997 (i) on a historical basis, and (ii) on a pro forma
combined basis after giving effect to the KODA Acquisition assuming it was
consummated on such date. This table should be read in conjunction with the
"Selected Consolidated Financial and Other Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma
Consolidated Financial Information" and the consolidated financial statements
and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
PRO FORMA PRO FORMA
AIRXCEL KODA ADJUSTMENTS AS ADJUSTED
-------- ------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 9,691 $ 645 $ (8,930) $ 1,406
======== ======= ======== ========
Debt:
Senior Subordinated Notes due 2007......... $ 90,000 $ -- $ $ 90,000
Term Loan.................................. -- 6,321 (6,321) --
Revolving Credit........................... -- 6,441 (6,441) --
Senior Term Loan due 2005.................. -- -- 10,000 10,000
Senior Revolving Credit Facility(1)........ -- -- 15,000 15,000
Other debt................................. 355 655 (655) 355
-------- ------- -------- --------
Total debt......................... 90,355 13,417 11,583 115,355
Total stockholders' equity (deficiency)...... (25,009) 11,204 (7,204) (21,009)
-------- ------- -------- --------
Total capitalization............... $ 65,346 $24,621 $ 4,379 $ 94,346
======== ======= ======== ========
</TABLE>
- ---------------
(1) On a pro forma basis, the Company's unused availability under the New Credit
Facility would be up to $13.0 million based on eligible receivables and
inventory. See "Description of the Revolving Credit Facility."
20
<PAGE> 24
SELECTED FINANCIAL AND OTHER DATA
AIRXCEL (FORMERLY KNOWN AS RECREATION VEHICLE PRODUCTS, INC. ("RVP")
The following table sets forth the selected historical financial and other
data of Airxcel as of and for each of the fiscal years in the five-year period
ended December 31, 1997. The selected historical financial and other data as of
December 31, 1993, 1994 and 1995 and for each of the fiscal years in the
two-year period ended December 31, 1994 have been derived from audited
historical consolidated financial statements of Airxcel Holdings Corporation,
formerly known as RV Products Holding Corp. and Subsidiary not included herein.
The selected historical financial and other data as of December 31, 1996 and
1997 and for each of the fiscal years in the three-year period ended December
31, 1997 have been derived from the historical financial statements of Airxcel,
audited by Coopers & Lybrand, L.L.P., and included elsewhere herein. The
information contained in the following table should also be read in conjunction
with "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Financial
Information," and the historical financial statements and related notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................... $50,743 $56,162 $55,788 $ 58,169 $ 58,323
Cost of sales........................................... 38,338 41,614 42,257 43,803 44,732
------- ------- ------- -------- --------
Gross profit............................................ 12,405 14,548 13,531 14,366 13,591
Selling, general and administrative expenses(1)......... 7,646 5,555 8,627 4,558 4,223
Amortization of intangible assets and computer
software.............................................. 2,333 2,331 2,332 1,422 639
------- ------- ------- -------- --------
Operating income........................................ 2,426 6,662 2,572 8,386 8,729
Interest expense(2)..................................... 2,273 1,282 1,097 2,273 4,619
Other nonoperating expense, net......................... 15 28 92 145 23
------- ------- ------- -------- --------
Income from continuing operations before income taxes
and extraordinary item................................ 138 5,352 1,383 5,968 4,087
Income tax expense...................................... (48) (2,071) (831) (2,411) (1,553)
------- ------- ------- -------- --------
Income from continuing operations before extraordinary
item.................................................. 90 3,281 552 3,557 2,534
Loss from discontinued Faulkner manufacturing
division.............................................. 731 601 960 2,299 1,880
Loss on disposal of discontinued Faulkner manufacturing
division, including operating losses.................. -- -- -- -- 3,571
------- ------- ------- -------- --------
Income (loss) before extraordinary item................. (641) 2,680 (408) 1,258 (2,917)
Extraordinary loss on early extinguishment of debt, net
of tax................................................ 1,237 64 45 184 1,631
------- ------- ------- -------- --------
Net income (loss)....................................... $(1,878) $ 2,616 $ (453) $ 1,074 $ (4,548)
======= ======= ======= ======== ========
OTHER DATA:
Gross margin............................................ 24.4% 25.9% 24.3% 24.7% 23.3%
EBITDA(3)............................................... 5,422 9,683 5,554 10,369 9,850
EBITDA margin........................................... 10.7% 17.2% 10.0% 17.8% 16.9%
Cash provided by operating activities................... 4,201 6,472 857 4,249 7,229
Cash used in investing activities....................... (619) (821) (1,183) (434) (44,083)
Cash (used in) provided by financing activities......... (3,444) (5,395) 553 (4,210) 46,319
Depreciation and amortization(4)........................ 2,996 3,021 2,982 1,983 1,144
Capital expenditures.................................... 621 843 356 459 716
Cash interest expense(2)................................ 2,087 1,267 1,083 2,170 4,311
Ratio of earnings to fixed charges(5)................... 1.1x 4.9x 2.2x 3.5x 1.9x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(6)...................................... $ 7,131 $ 9,301 $ 8,819 $ 5,632 $ 23,186
Total assets(7)......................................... 26,920 24,753 26,561 24,748 76,933
Total debt.............................................. 20,907 15,581 24,824 48,240 90,355
Total stockholders' equity (deficiency)................. 735 3,718 (4,255) (28,701) (25,009)
</TABLE>
- ---------------
(1) Selling, general and administrative expense for 1995 includes $4,279 of
nonrecurring expenses related to costs incurred to cover the tax
consequences of certain individuals who exercised stock options.
(2) Excludes interest expense related to the discontinued Faulkner manufacturing
division.
(3) EBITDA represents earnings before interest expense, net, other nonoperating
expense, net, income tax expense, depreciation and amortization. EBITDA, as
calculated by the Company,
21
<PAGE> 25
may not be similar to the method used by other companies. Airxcel has
included information concerning EBITDA because it is relevant for covenant
analysis under the Indenture, which defines EBITDA as set forth above for
the periods shown, and is presented because it is used by certain investors
as a measure of a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows or
other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
(4) Excludes depreciation and amortization related to the discontinued Faulkner
manufacturing division.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
include income from continuing operations before income taxes and
extraordinary item, plus fixed charges. Fixed charges consist of interest
expense, amortization of debt issuance costs and a portion of rental expense
deemed representative of the interest factor.
(6) Working capital represents current assets less current liabilities,
including net assets (liabilities) of the discontinued Faulkner
manufacturing division of $4,789, $3,704, $5,634, $6,421 and ($466) as of
December 31, 1993, 1994, 1995, 1996 and 1997, respectively.
(7) Total assets include net assets held for sale of $4,789, $3,704, $5,634, and
$6,421 as of December 31, 1993, 1994, 1995 and 1996, respectively and
exclude net liabilities of the discontinued Faulkner manufacturing division
of $466 as of December 31, 1997.
22
<PAGE> 26
CRISPAIRE
The following table sets forth the selected historical financial and other
data of Crispaire as of and for each of the fiscal years in the five-year period
ended October 31, 1997. The selected historical financial and other data as of
and for the year ended October 31, 1997 are derived from financial statements of
Crispaire, audited by Coopers & Lybrand, L.L.P., independent accountants, and
are included elsewhere herein. The selected historical financial and other data
for each fiscal year in the three-year period ended October 31, 1996 are derived
from the financial statements of Crispaire, audited by Mauldin & Jenkins, LLC,
independent accountants, and included elsewhere herein. The selected historical
financial and other data as of October 31, 1993 and 1994 and the year ended
October 31, 1993 are derived from audited financial statements of Crispaire, not
included herein. The information contained in the following table should also be
read in conjunction with "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Unaudited Pro Forma
Financial Information," and the historical financial statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $17,701 $24,152 $27,304 $34,138 $39,114
Cost of sales................................ 13,667 18,143 20,104 24,758 28,161
------- ------- ------- ------- -------
Gross profit................................. 4,034 6,009 7,200 9,380 10,954
Engineering, research and development........ 580 537 752 878 1,111
Selling, general and administrative
expenses................................... 2,632 3,547 4,089 5,129 5,857
Other operating income, net.................. 21 64 22 65 --
------- ------- ------- ------- -------
Operating income............................. 843 1,989 2,381 3,438 3,986
Interest expense, net........................ 194 160 94 146 125
Income tax expense........................... -- -- -- -- --
------- ------- ------- ------- -------
Net income................................... $ 649 $ 1,829 $ 2,287 $ 3,292 $ 3,861
======= ======= ======= ======= =======
OTHER DATA:
Gross margin................................. 22.8% 24.9% 26.4% 27.5% 28.0%
EBITDA(1).................................... 994 2,150 2,571 3,668 4,266
EBITDA margin................................ 5.6% 8.9% 9.4% 10.7% 10.9%
Cash provided by operating activities........ 10 3,140 1,646 2,671 3,713
Cash used in investing activities............ (42) (515) (512) (1,452) (498)
Cash (used in) provided by financing
activities................................. 36 (2,561) (1,133) (1,165) (3,211)
Depreciation and amortization................ 151 161 190 231 280
Capital expenditures......................... 42 565 393 1,419 504
Cash interest expense........................ 194 160 94 146 125
Ratio of earnings to fixed charges(2)........ 4.3x 6.6x 14.0x 17.7x 19.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(3)........................... $ 2,902 $ 4,286 $ 4,800 $ 6,213 $ 7,811
Total assets................................. 8,000 9,007 10,647 14,106 16,081
Total debt................................... 550 758 595 1,242 471
Total stockholders' equity................... 3,133 4,731 5,717 8,298 10,249
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest expense, net, income tax expense,
depreciation and amortization. EBITDA, as calculated by Crispaire, may not
be similar to the method used by other companies. The Company has included
information concerning EBITDA because it is relevant for covenant analysis
under the Indenture, which defines EBITDA as set forth above for the periods
shown, and is presented because it is used by certain investors as a measure
of a company's ability to service debt. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other
consolidated income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
include net income, plus fixed charges. Fixed charges consist of interest
expense and a portion of rental expense deemed representative of the
interest factor.
(3) Working capital represents current assets less current liabilities.
23
<PAGE> 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
(the "Unaudited Pro Forma Financial Information") give effect to the
Transactions. The Crispaire Acquisition occurred simultaneously with the closing
of the Offering and the KODA Acquisition occurred on March 17, 1998. Both of the
Acquisitions will be accounted for using the purchase method of accounting.
These unaudited pro forma condensed combined financial statements are based on
the historical financial statements of Airxcel, Crispaire and KODA included
elsewhere in this Prospectus, and the estimates and assumptions set forth below,
and in the notes to the Unaudited Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet gives effect to
the KODA Acquisition as if it occurred on December 31, 1997. The unaudited pro
forma condensed combined statements of operations give effect to the
Transactions as if they occurred on January 1, 1997. The Unaudited Pro Forma
Statements of Operations presented herein are not necessarily indicative of the
combined results that would have been obtained had the Transactions occurred at
the beginning of the period, as assumed, or of the future results of the
combined companies. The Unaudited Pro Forma Financial Information should be read
in conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
The pro forma adjustments are based on preliminary estimates, currently
available information and certain assumptions that management believes are
appropriate. For the KODA Acquisition, the aggregate purchase price has been
allocated to the tangible and identifiable intangible assets and liabilities of
the acquired business based upon the Company's preliminary estimates of their
fair value, with the remainder allocated to goodwill. In management's opinion,
the preliminary estimates regarding allocation of the purchase price of KODA are
not expected to materially differ from the final allocations. Adjustments to the
allocation of the purchase price will be finalized and will include the effect
of the finalized results of asset appraisals.
The purchase price paid for the KODA Acquisition was subject to reduction
to the extent that working capital of KODA upon the closing of the Acquisition,
as defined, is less than the average working capital of KODA, as defined, during
the twelve months ended February 28, 1998 ("Working Capital Adjustment").
24
<PAGE> 28
AIRXCEL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AIRXCEL KODA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 9,691 $ 645 $(8,930)(a) $ 1,406
Marketable Securities......................... -- 2,336 -- 2,336
Accounts receivable, net...................... 8,310 5,032 -- 13,342
Inventories................................... 13,129 9,104 -- 22,233
Other current assets.......................... 3,307 2,456 -- 5,763
-------- ------- ------- --------
Total current assets.................. 34,437 19,573 (8,930) 45,080
Property, plant and equipment, net.............. 8,693 3,660 1,954(b) 14,307
Other assets, net............................... 20 4,028 -- 4,048
Identifiable intangible assets, net............. 24,532 4,022 9,117(b) 37,671
Loan financing costs, net....................... 3,244 -- 285(c) 3,529
Goodwill........................................ 6,007 -- 1,953(b) 7,960
-------- ------- ------- --------
Total assets.................................... $ 76,933 $31,283 $ 4,379 $112,595
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............. $ 27 $ 1,482 $(1,482)(d) $ 27
Accounts payable.............................. 6,197 4,363 -- 10,560
Accrued warranty.............................. 1,052 -- -- 1,052
Accrued vacation.............................. 343 -- -- 343
Net liabilities of discontinued operations.... 466 -- -- 466
Other current liabilities..................... 3,166 1,272 -- 4,438
-------- ------- ------- --------
Total current liabilities............. 11,251 7,117 (1,482) 16,886
Long-term debt, net of current maturities....... 90,328 11,935 13,065(e) 115,328
Other liabilities............................... 363 1,027 -- 1,390
-------- ------- ------- --------
Total liabilities..................... 101,942 20,079 11,583 133,604
-------- ------- ------- --------
Stockholders' equity(deficiency)................ (25,009) 11,204 (7,204)(f) (21,009)
-------- ------- ------- --------
Total liabilities and stockholders' equity...... $ 76,933 $31,283 $ 4,379 $112,595
======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
25
<PAGE> 29
AIRXCEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
1. HISTORICAL FINANCIAL STATEMENTS
The historical balance sheets present the financial position of Airxcel and
KODA as of December 31, 1997 and were derived from the historical balance sheets
of Airxcel and KODA. Airxcel has a December 31 fiscal year-end, KODA has an
April 30 fiscal year-end and, prior to the acquisition by Airxcel, Crispaire had
an October 31 fiscal year-end. The audited historical financial statements of
Airxcel, Crispaire and KODA have been included elsewhere in this Prospectus. The
financial statements of KODA as of December 31, 1997 and for the eight months
then ended which have also been included elsewhere in this Prospectus are
unaudited.
The Crispaire Acquisition was consummated on November 10, 1997, and
therefore the Airxcel historical balance sheet as of December 31, 1997 includes
the effect of this transaction.
2. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the KODA
Acquisition as if it occurred on December 31, 1997, as follows:
<TABLE>
<S> <C> <C>
(a) Reflects the changes in the Company's cash due to the
Acquisition:
Proceeds from term and revolving debt....................... $ 25,000
Cash contributed by Holdings................................ 4,000
Retirement of the KODA debt................................. (13,417)
Cash paid to purchase KODA.................................. (23,228)
Loan financing costs........................................ (285)
Direct acquisition costs.................................... (1,000)
--------
Net decrease in cash........................................ $ (8,930)
========
</TABLE>
(b) The Acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations (ABP
16). The purchase price is being allocated first to the identifiable
assets and liabilities of KODA based upon preliminary estimates of
their fair market values, with the remainder allocated to goodwill.
The total purchase price is as follows:
<TABLE>
<S> <C> <C>
Cash paid to purchase KODA.................................. $23,228
Direct acquisition costs.................................... 1,000
-------
Total purchase price........................................ 24,228
-------
Book value of net assets of KODA at the Acquisition date.... 11,204
-------
Increase in basis of net assets purchased................... $13,024
=======
Allocation of increase in basis:
Amount allocated to identifiable intangible assets.......... $ 9,117
Increase in fair value of property, plant and equipment..... 1,954
Amount allocated to goodwill................................ 1,953
-------
$13,024
=======
(c) Reflects loan financing costs:
Deferred financing fees and expenses incurred with the new
term and revolving debt..................................... $ 285
=======
</TABLE>
26
<PAGE> 30
AIRXCEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET -- (CONTINUED)
<TABLE>
<S> <C> <C> <C>
(d) Reflects retirement of existing short-term debt:
Retirement of the KODA short-term debt using the proceeds from
new term and revolving debt...................................... $ (1,482)
========
(e) Reflects net change in long-term debt:
Issuance of new term and revolving debt............................ $ 25,000
========
Retirement of KODA long-term debt using the proceeds from the new
term and revolving debt............................................ (11,935)
--------
Net increase in long-term debt..................................... $ 13,065
========
(f) Reflects net changes in stockholders' equity (deficiency):
Elimination of KODA equity......................................... $(11,204)
Cash Contribution of capital from Holdings to Airxcel.............. 4,000
--------
Net decrease in stockholders' equity (deficiency).................. $ (7,204)
========
</TABLE>
27
<PAGE> 31
AIRXCEL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AIRXCEL CRISPAIRE KODA CRISPAIRE KODA PRO
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS FORMA
---------- ---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $58,323 $33,739 $43,465 -- -- $135,527
Cost of sales........... 44,732 13,856 33,897 $ 187(a) $ 109(a) 102,781
------- ------- ------- ------- ------- --------
Gross profit............ 13,591 9,883 9,568 187 109 32,746
Selling, general and
administrative
expenses.............. 4,862 4,894 8,257 1,001(a)(b) 610(a) 19,624
Engineering, research
and development....... -- 1,139 -- -- -- 1,139
------- ------- ------- ------- ------- --------
Operating income........ 8,729 3,850 1,311 (1,188) (719) 11,983
Interest expense, net... 4,619 3 1,159 4,163(c) 1,108(c) 11,052
Other nonoperating
expense (income),
net................... 23 (256) (484) -- -- (717)
------- ------- ------- ------- ------- --------
Income from continuing
operations before
income taxes.......... $ 4,087 $ 4,103 $ 636 $(5,351) $(1,827) $ 1,648
======= ======= ======= ======= ======= ========
Ratio of earnings to
fixed charges(1)...... 1.1x
</TABLE>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include income from continuing operations before income taxes plus fixed
charges. Fixed charges consist of interest expense, amortization of debt
issuance costs and a portion of rental expense assumed representative of the
interest factor.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statements of
Operations
28
<PAGE> 32
AIRXCEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
1. HISTORICAL FINANCIAL STATEMENTS
Airxcel has a December 31 fiscal year-end. The historical statements of
operations of Airxcel for the year ended December 31, 1997 were derived from the
audited financial statements included elsewhere herein. Prior to the acquisition
by Airxcel, Crispaire had an October 31 fiscal year-end. KODA has an April 30
fiscal year-end. The unaudited historical financial statements of Crispaire and
KODA for the year ended December 31, 1997 were derived from unaudited financial
statements not included herein.
2. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(a) Reflects amortization of identifiable intangible assets over periods
ranging from five to 40 years; amortization of goodwill over 40 years and
depreciation of the increase in the carrying value of certain property, plant,
and equipment related to the Acquisition on a straight-line basis over periods
ranging from five to 20 years. Eighty percent of depreciation is allocated to
cost of sales; 20 percent of depreciation is allocated to selling, general and
administrative expenses.
<TABLE>
<CAPTION>
CRISPAIRE KODA
--------- ----
<S> <C> <C>
Amortization of identifiable intangible assets............ $1,146 $534
Amortization of goodwill.................................. 101 49
Increase in depreciation expense allocated to selling,
general and administrative expenses..................... 46 27
------ ----
$1,293 $610
====== ====
Increase in depreciation expense allocated to cost of
sales................................................... $ 187 $109
====== ====
</TABLE>
(b) In connection with the Crispaire Acquisition, the President of
Crispaire agreed to modify his employment and compensation agreements such that
his continuing compensation was reduced. Adjustment reflects the resulting
decrease in the President's compensation of $292 for the year ended December 31,
1997.
29
<PAGE> 33
AIRXCEL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(c) Reflects the net change in interest expense:
<TABLE>
<CAPTION>
CRISPAIRE KODA
--------- ----
<S> <C> <C> <C>
Interest expense related to Interest expense related to
the Notes issued pursuant new debt incurred in
to the Offering.......... $ 8,248 connection with the KODA
Acquisition at an assumed
rate of 8%............... $ 2,215
Elimination of historical Elimination of historical
interest expense related interest expense of KODA
to Airxcel's debt retired for debt retired as part
using the proceeds of the of the KODA
Offering and elimination Acquisition.............. (1,159)
of historical interest
expense of Crispaire for
debt not assumed as part
of the Crispaire
Acquisition.............. (4,099)
Amortization of deferred Amortization of deferred
financing costs incurred financing cost incurred
in the Offering, over the with the new debt, over
10-year term of the the average term of the
Notes.................... 312 debt, 66 months.......... 52
Elimination of historical
amortization of financing
costs related to the
Company's debt retired
using the proceeds of the
Offering................. (298)
------- -------
Net increase in interest
expense.................. $ 4,163 $ 1,108
======= =======
</TABLE>
30
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations covers periods before completion of the KODA Acquisition. The
following discussion and analysis should be read in conjunction with "Selected
Financial and Other Data" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. Except for the historical information
contained herein, the discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors," as
well as those discussed elsewhere in this Prospectus.
GENERAL
The Company is a designer, manufacturer and marketer of RV air
conditioners, specialty wall mount air conditioners, ECUs and heat pumps for
various applications. The combination of RVP and Crispaire is the first step in
the Company's strategy to establish itself as the leading designer, manufacturer
and marketer of specialty heating, air conditioning and water heating products.
The Company believes that it is well positioned to effectively pursue this
strategy with a leading position in each of its principal markets and a range of
products serving separate customer bases. The Company will conduct its business
through two distinct operating divisions: The Recreation Vehicle Products
Division ("RVP") and the Crispaire Division ("Crispaire"). Each of the divisions
will continue to maintain its own sales, marketing, engineering, manufacturing
and accounting personnel. The Company does not anticipate significant savings
from consolidation of functions. However, the Company does expect improved
volume discounts on similar component purchases through master contracts with
suppliers.
The combination of RVP and Crispaire creates a diversified specialty air
conditioning company with a strong market presence. By combining the major
supply purchasing contracts, it is anticipated that at least a 1% or $700,000
savings in the annual purchases of raw materials and components of the combined
Company would be achieved. Management believes that the Company will benefit
from RVP's low variable cost structure and its cost controlling culture, and
that the Company will be able to streamline Crispaire's operations to achieve
additional cost savings. Additionally, management believes that the Company will
be able to leverage off of Crispaire's proven success in identifying new,
emerging markets and customizing its products to suit the needs of its
customers.
In certain of the niche markets in which the Company competes, OEMs and
other customers (as is sometimes the case with the telecommunications shelters)
often rely on the Company to design, engineer, manufacture and conduct quality
control testing in order to create or adapt a product to meet certain
engineering or other industry specifications. The Company believes its ability
to satisfy these demands on a consistent, timely and economical manner is a
reason that the Company enjoys strong relationships with its customers. In
addition, the price of the Company's units represent a small portion of the cost
of the customer's end product. For instance, the cost of a unit which provides
environmental control for telecommunication shelters represents a very small
percentage of the cost of the circuitry and service which the unit protects, and
the cost of an RV air conditioning unit to OEMs represents a small percentage of
the entire cost of the vehicle. The Company believes its customers value its
strong reputation, dependability, innovative product design and engineering and
make purchasing decisions on these merits in addition to system price. The
Company believes that these factors protect it from competition as well as
protect the Company's operating margin.
31
<PAGE> 35
The Company is a diversified specialty air conditioning company of a
significant size and diversified product mix such that the impact of any
industry cyclical effects and some general economic effects are minimized.
Additionally, RVP and Crispaire have a limited international presence and will
utilize common international sales representatives (unless other agreements are
in place) and strategy to improve its presence.
RESULTS OF OPERATIONS -- AIRXCEL
GENERAL
RVP is a manufacturer of RV air conditioners. RVP has sold over two million
units under the brand name "Coleman". RVP sells to OEMs and aftermarket
distributors. OEMs produce RVs year round with only minor fluctuations due to
seasonality. RV sales are, however, sensitive to general economic conditions and
have shown significant correlation to the movements in consumer borrowing rates.
RVP sells aftermarket products through distributors who, in turn, may sell to
retailers. The aftermarket experiences seasonality with higher sales in the late
spring and early summer months. Aftermarket sales and, to a much lesser degree,
RV sales are negatively impacted by weather characterized as cold-wet springs.
Aftermarket sales are not as affected as the sales to OEMs by adverse general
economic conditions because this market generates sales from the existing base
of RVs and does not rely on new RV sales.
Future sales from aftermarket replacements and from favorable demographic
changes appear positive. There are currently 8.6 million RVs in use, and
management expects the historic trend of 100,000 new households purchasing RVs
per year since 1980 to continue. The average age of an RV owner is 48 years old,
and as baby boomers continue to enter such age group at increasing rates over
the next 10 to 15 years, the RV industry should experience above average growth.
In addition, there is a strong population growth in the South and West regions
of the U.S., where the RV lifestyle is more popular. The U.S. Census Bureau
projects over 71% growth for the 45-64 year old age group in the West by the
year 2010, compared to the projected national growth rate of 51% for this age
group.
RVP manufactures and sells five models of RV air conditioners. RVP builds
aerodynamically designed units which the Company believes are more attractive
and functional than the standard box style sold by RVP's competitors. The
Company also believes that RVP leads the industry in producing units which
combine quiet operation and high cooling capacity. In addition, RVP manufactures
air conditioning units for elevators and heavy duty applications such as oil
logging trucks.
The following table sets forth, for the periods indicated, selected items
from Airxcel's statement of operations expressed as a percentage of net sales.
Any trends reflected by the following table may not be indicative of futures
results:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
FISCAL YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................... 75.8 75.3 76.7
Gross profit............................................... 24.2 24.7 23.3
Selling, general and administrative expenses............... 19.6 10.3 8.3
Operating income........................................... 4.6 14.4 15.0
Interest expense........................................... 2.0 3.9 7.9
Income from continuing operations before income taxes...... 2.5 10.3 7.0
Net income (loss).......................................... (0.8) 1.9 (7.8)
</TABLE>
32
<PAGE> 36
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales. Net sales increased 0.2% from $58.2 million in 1996 to $58.3
million in 1997. Net sales increased primarily due to the $4.0 million of
additional sales related to the acquisition of the Crispaire Corporation on
November 10, 1997, offset by the decrease in volume of motor home and after
market sales, which the Company believes was the result of unseasonably cold
weather.
Gross profit. Gross profit decreased 5.4% from $14.4 million in 1996 to
$13.6 million in 1997. The decrease was principally attributable to weaker motor
home and aftermarket sales, which the Company believes was the result of
unseasonably cold weather. Gross margin percentages also decreased from 24.7% to
23.3% in 1996 and 1997, respectively.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expense decreased 18.7% from $6.0 million in 1996 to $4.9 million in 1997.
Selling, general and administrative expenses as a percentage of net sales
decreased from 10.3% in 1996 to 8.3% in 1997. The decrease was primarily due to
$458,000 of compensation expense incurred in 1996 related to stock compensation
and a decrease in amortization of intangibles of $783,000 due to the fact that
the carrying value of certain intangibles were fully amortized by the end of
1996.
Interest expense. Interest expense, net increased 103.2% from $2.3 million
in 1996 to $4.6 million in 1997, primarily as a result of the issuance of $90.0
million of senior subordinated debt in November, 1997, although $47.0 million of
the proceeds from this debt was used to repay existing debt. The increase in
interest expense was also partially due to an increase in borrowings under the
Company's existing credit agreement.
EBITDA. EBITDA was $10.4 million in 1996 and $9.9 million in 1997,
primarily due to the decrease in gross profit attributable to weaker motor home
and after market sales offset by lower compensation expense as noted above.
Income from continuing operations before income tax expense and
extraordinary item. Income from continuing operations before income tax expense
and extraordinary item decreased 31.5% from $6.0 million in 1996 to $4.1 million
in 1997 primarily due to lower gross profit and higher interest expense offset
by lower selling, general and administrative expense as described above. In
addition, the net sales and gross profit of Crispaire, included in the Company's
fourth quarter 1997 operations, were both lower than anticipated by management
due to what management believes are temporary integration issues. These
integration issues caused Crispaire's contribution to operating income to be at
levels below those expected by management.
Net income (loss). Net income decreased from $1.1 million in 1996 to a net
loss of $4.5 million in 1997 primarily as a result of the $1.0 million decrease
in income from continuing operations before extraordinary loss as previously
noted, a $3.2 million increase in losses from operations of the discontinued
Faulkner manufacturing division ("Faulkner"), including a $1.7 million increase
in estimated losses from disposal of Faulkner recorded in the fourth quarter of
1997, and a $1.4 million increase in extraordinary loss on early extinguishment
of debt.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales. Net sales increased 4.3%, from $55.8 million in 1995 to $58.2
million in 1996. Net sales increased primarily due to the increase in shipments
to Fleetwood and shipments of aftermarket product related to the Coast
distribution agreement. During 1995, Airxcel entered into an exclusive
distribution agreement with a major customer. The agreement disallowed sales to
competitors of this major customer, therefore, a significant amount of product
of the competitors was returned to the Company prior to December 31, 1995.
Gross profit. Gross profit increased 6.2%, from $13.5 million in fiscal
1995 to $14.4 million in fiscal 1996. Gross margin remained relatively unchanged
at 24.2% and 24.7% for the years ended
33
<PAGE> 37
December 31, 1995 and 1996, respectively. The increase in gross profit was due
primarily to the increase in shipments to Fleetwood and shipments of aftermarket
product related to the Coast distribution agreement.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expenses decreased 45.4% from $11.0 million in 1995 to $6.0 million in 1996
primarily due to $4.3 million of expenses incurred in 1995 related to costs
associated with compensating certain option holders for their personal tax
liabilities incurred when such options were exercised. Selling, general and
administrative expense as a percentage of net sales decreased from 19.6% in 1995
to 10.3% in 1996 primarily due to this $4.3 million compensation expense.
Interest expense. Interest expense, net increased from $1.1 million in
1995 to $2.3 million in 1996, primarily as a result of the issuance of $14
million of subordinated debt in August of 1996.
EBITDA. EBITDA increased 86.7%, from $5.6 million in 1995 to $10.4 million
in 1996. EBITDA adjusted in 1995 for a one-time expense related to $4.3 million
of expenses incurred in 1995 related to costs associated with compensating
certain option holders for their personal tax liabilities incurred when such
options were exercised increased 5.2% from $9.9 million in 1995 to $10.4 in
1996. The increase in this adjusted EBITDA was principally a result of the
increase in net sales in 1996 and the stability of Airxcel's gross margin.
Income from continuing operations before income tax expense and
extraordinary item. Income from continuing operations before income tax expense
and extraordinary item increased 331.3% from $1.4 million in 1995 to $6.0
million in 1996. This increase of $4.6 million despite only a $900,000 increase
in gross profit reflects the fact that 1995 operations included a $4.3 million
charge to compensate certain option holders as described above.
Net income (loss). Net income (loss) improved from $500,000 net loss in
1995 to net income of $1.1 million in 1996 primarily as a result of the one-time
$4.3 million compensation expense in 1995 mitigated by a $1.6 million tax
benefit related to net operating losses and a $1.3 million increase in net
losses from operations of the discontinued Faulkner Manufacturing division.
34
<PAGE> 38
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data for the twelve quarters ended December 31, 1997, as well as such data
expressed as a percentage of Airxcel's net sales for the period indicated. This
data has been derived from unaudited financial statements that, in the opinion
of Airxcel, include all adjustments (consisting of normal recurring adjustments
except for adjustments related to the discontinued Faulkner manufacturing
division) necessary for fair presentation of such information when read in
conjunction with Airxcel's Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $15,257 $15,029 $14,351 $11,151 $14,726 $18,298 $14,187 $10,958 $13,532 $15,428
Cost of goods
sold............... 11,575 11,421 11,111 8,150 11,111 13,583 10,824 8,285 10,241 11,456
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 3,682 3,608 3,240 3,001 3,615 4,715 3,363 2,673 3,291 3,972
Selling, general and
administrative
expenses(1)........ 1,777 1,719 1,527 5,936 1,815 1,460 1,487 1,218 1,227 905
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income.... 1,905 1,889 1,713 (2,935) 1,800 3,255 1,876 1,455 2,064 3,067
Interest expense.... 288 319 257 233 363 366 432 1,112 564 944
Income (loss) from
continuing
operations before
income taxes....... 1,576 1,546 1,408 (3,147) 1,397 2,815 1,459 297 1,480 2,138
Net income (loss)... $ 573 $ 405 $ 986 $(2,417) $ 483 $ 1,080 $ 81 $ (570) $ 132 $ 705
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
------------------
SEPT. 30, DEC. 31,
1997 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales........... $14,947 $14,416
Cost of goods
sold............... 11,792 11,243
------- -------
Gross profit........ 3,155 3,173
Selling, general and
administrative
expenses(1)........ 930 1,800
------- -------
Operating income.... 2,225 1,373
Interest expense.... 928 2,183
Income (loss) from
continuing
operations before
income taxes....... 1,291 (822)
Net income (loss)... $(1,668) $(3,717)
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods
sold............... 75.9 76.0 77.4 73.1 75.5 74.2 76.3 75.6 75.7 74.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 24.1 24.0 22.6 26.9 24.5 25.8 23.7 24.4 24.3 25.7
Selling, general and
administrative
expenses(1)........ 11.6 11.4 10.6 53.2 12.3 8.0 10.5 11.1 9.1 5.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income.... 12.5 12.6 11.9 (26.3) 12.2 17.8 13.2 13.3 15.3 19.9
Interest expense.... 1.9 2.1 1.8 2.1 2.5 2.0 3.0 10.1 4.2 6.1
Income (loss) from
continuing
operations before
income taxes....... 10.3 10.3 9.8 (28.2) 9.4 15.4 10.3 2.8 10.9 13.9
Net income (loss)... 3.8% 2.7% 6.9% (21.7)% 3.3% 5.9% 0.6% (5.2)% 1.0% 4.6%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
PERCENTAGE OF NET SALES
-----------------
<S> <C> <C>
Net sales........... 100.0% 100.0%
Cost of goods
sold............... 78.9 78.0
------- -------
Gross profit........ 21.1 22.0
Selling, general and
administrative
expenses(1)........ 6.2 12.5
------- -------
Operating income.... 14.9 9.5
Interest expense.... 6.2 15.1
Income (loss) from
continuing
operations before
income taxes....... 8.6 (5.7)
Net income (loss)... (11.2)% (25.8)%
======= =======
</TABLE>
- ---------------
(1) Selling, general and administrative expenses for the quarter ended December
31, 1995 includes $4,279 of nonrecurring expenses related to costs incurred
to compensate certain option holders for their personal tax liabilities
incurred when such options were exercised.
35
<PAGE> 39
The Company's business is subject to seasonal fluctuations. Given the
Company's historical results, management anticipates that the majority of the
Company's net sales will be during the second and third quarters. As a result,
the Company expects its sales and results of operations generally to be lower in
the first and fourth quarters. The Company believes that this seasonality will
continue in the future. The Company's quarterly results may fluctuate as a
result of various factors, including factors beyond the Company's control, such
as general economic conditions and actions of competitors. Accordingly, results
of operations in any quarter will not necessarily be indicative of the results
that may be achieved for full fiscal year or any future quarters.
RESULTS OF OPERATIONS -- CRISPAIRE
GENERAL
Crispaire is a designer, manufacturer and marketer of specialty heating,
air conditioning and water heating products primarily for industrial and
commercial uses. Crispaire's products are marketed under the "Marvair" trade
name to three industry segments -- telecommunications, school and construction.
Crispaire sells vertical wall mount air conditioners and heat pumps, specialty
heat pumps, ECUs, heat pump water heaters and various applied products. The
majority of such products range in capacity from a half ton to five tons.
Crispaire's products are sold worldwide primarily by its internal sales force
and independent sales agents, as well as international distributors for overseas
sales. Crispaire's main product lines are targeted towards two primary industry
segments: telecommunications and schools.
Revenues. Crispaire's net revenues increased at an average compound annual
growth rate ["CAGR"] of 25% from fiscal 1993-1996. A large portion of this
growth is attributed to Crispaire's success in new and progressive product lines
and an increased customer base as they have moved aggressively into the
telecommunications market. This growth resulted from Crispaire's leading
positions in the supply of HVAC units to two major markets -- telecommunication
shelters and schools. Crispaire's gross margin increased from 26.4% in 1995 to
27.5% in 1996. The gross margin improvement reflects the efforts of Crispaire's
management to de-emphasize modular expansion and emphasize the telecommunication
and school markets in which the margins are greater and more opportunities
exist. With the substantial volume increases in Crispaire's core product lines,
gross profit rose to almost $9.4 million in 1996 from $7.2 million in 1995.
The telecommunications industry has experienced rapid growth due to
deregulation and continued rapid growth is anticipated. Such growth is expected
to result in an increased demand for telecommunication facilities such as
shelters and cabinets as new wireless networks are constructed and old networks
are overlaid with digital technology. Suppliers of wireless communications
equipment should continue to benefit from the expected acceleration in the
deployment of wireless networks. Beginning in the 1970's, many schools,
primarily in the Sunbelt region of the U.S., began installing air conditioners
to their facilities. Today, one-third of the nation's schools, serving more than
14 million students, need extensive repair or renovation. According to the U.S.
General Accounting Office for School Facilities, 20,104 public elementary
schools nationwide are in need of HVAC repair with an estimated cost of $3
billion. In addition, it is estimated that school districts need to build 6,000
schools by the year 2005 to meet the growing student population. The public
elementary school HVAC new construction market is estimated to be $315 million
annually through the year 2005.
36
<PAGE> 40
The following table sets forth, for the periods indicated, selected items
from Crispaire's statement of operations expressed as a percentage of net sales.
Any trends reflected by the following table may not be indicative of future
results.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
FISCAL YEAR ENDED
OCTOBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100% 100% 100%
Cost of goods sold.......................................... 73.6% 72.5% 72.0%
Gross profit................................................ 26.4% 27.5% 28.0%
Selling, general and administrative expenses................ 17.7% 17.6% 17.8%
Operating income............................................ 8.7% 10.1% 10.2%
Interest expense, net....................................... 0.3% 0.4% 0.3%
Net income.................................................. 8.4% 9.6% 9.9%
</TABLE>
COMPARISON OF FISCAL YEARS 1996 AND 1997
Net Sales. Net sales increased 14.6%, from $34.1 million in 1996 to $39.1
million in 1997. Net sales increased primarily due to an increase in sales in
the telecommunications market, particularly driven by sales of ECUs which are
mainly purchased for use in PCS cabinets and other wireless services. Management
expects that the Company will continue to generate increasing sales from this
sector as it has in previous periods and anticipates continued significant
growth for the foreseeable future in the telecommunications segment due to the
continuing expansion and acceptance of all types of communications and
information systems, including cellular, satellite and PCS. Another contributing
factor to the increase in sales was the successful introduction of new products
for the school market, including the new package terminal heat pump type.
Gross profit. Gross profit increased 16.8% from $9.4 million in 1996 to
$11.0 million in 1997. Gross margin increased 0.5% from 27.5% to 28.0% over the
same periods. Gross margin improved primarily due to a continuing shift in the
mix of products sold away from lower margin products and toward higher margin
products. This contributing trend of improving gross margin is due to
management's decision over the past five years to dedicate more time and
resources to higher margin product lines such as interior classroom heat pumps,
namely the Scholar and the Graduate, as well as the majority of products sold to
the telecommunications industry.
Operating expenses. Operating expenses, consisting primarily of selling,
general and administrative expenses, increased 16.0% from $6.0 million in 1996
to $7.0 million in 1997. Operating expenses as a percentage of sales remained
approximately the same at 17.8%. Operating expenses increased due to the
additional expenses associated with additional staffing in sales and
engineering. These additional selling costs were a result of an increase in the
number of sales people and support personnel and facilities associated with
them. The increased engineering expenses were incurred to support the
development of new product initiatives in both the telecommunications and school
industries and included additional engineers, support personnel and facilities
associated with them. In addition, during the fourth quarter of 1997, Crispaire
incurred approximately $0.3 million of legal and other general and
administrative expenses, primarily in connection with the acquisition by
Airxcel.
Interest expense. Interest expense decreased 14.5% from $146,000 in 1996
to $125,000 in 1997. Interest expense decreased primarily as a result of the
retirement of $0.8 million of long term debt in September, 1997.
EBITDA. EBITDA increased 16.3% from $3.7 million in 1996 to $4.3 million
in 1997, principally a result of the increase in sales and improvement in gross
margin partially offset by the increase in operating expenses.
37
<PAGE> 41
Net income. Net income increased 17.3% from $3.3 million in fiscal 1996 to
$3.9 million in fiscal 1997 due to the increase in sales and improvement in
gross margin partially offset by the increase in operating expenses.
COMPARISON OF FISCAL YEARS 1995 AND 1996
Net sales. Net sales increased 25.0%, from $27.3 million in fiscal 1995 to
$34.1 million in fiscal 1996. Net sales increased primarily due to an increase
in sales in the telecommunications market, following similar trends discussed in
the comparison of the nine month periods ended July 31st. More specifically, the
Company generated significant sales from its first full year of supplying ECUs
to Motorola for their PCS wireless telecommunication shelters. Management feels
that these sales further support the expectation of significant growth in the
telecommunications market. In addition, the Company generated international
sales from sale of ECUs to the Spanish telecommunications market as they
continue their cellular build-out.
Gross profit. Gross profit increased 30.3% from $7.2 million in fiscal
1995 to $9.4 million in fiscal 1996. Gross margin increased 1.1% from 26.4% in
fiscal 1995 to 27.5% in fiscal 1996. The improvement was primarily due to a
continuing trend toward a product mix more heavily focused on the
telecommunications and school markets, both higher margin products, as discussed
in the comparison of the nine month periods ended July 31, 1996 and 1997.
Operating expenses. Operating expenses increased 24.1% from $4.8 million
in fiscal 1995 to $6.0 million in fiscal 1996. Selling, general and
administrative expenses as a percentage of net sales remained approximately the
same at 17.8% in fiscal 1995 and 17.6% in fiscal 1996. Operating expenses in
fiscal 1996 included non-recurring expenses, including excess executive
management compensation associated with the exercise of management options and
certain legal expenses.
Interest expense. Interest expense increased 55.9%, from $93,500 in fiscal
1995 to $145,700 in fiscal 1996, primarily as a result of interest paid on plant
expansion financing.
EBITDA. EBITDA increased 42.7% from $2.6 million in fiscal 1995 to $3.7
million in fiscal 1996. EBITDA margin improved 1.3% from 9.4% in fiscal 1995 to
10.7% in fiscal 1996. EBITDA adjusted for non-recurring expenses, as discussed
in operating expenses, would have increased 47.1% from $3.4 million in fiscal
1995 to $5.0 million in fiscal 1996. EBITDA margin adjusted for non-recurring
expenses increased 2.1% from 12.5% in fiscal 1995 to 14.6% in fiscal 1996,
principally a result of the increase in sales and the improvement in gross
margin and operating expenses as a percentage of sales.
Net income. Net income increased 43.9% from $2.3 million in fiscal 1995 to
$3.3 in fiscal 1996 principally due primarily to the increase in sales and
improvements in gross margin.
38
<PAGE> 42
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data for the twelve quarters ended October 31, 1997, as well as such data
expressed as a percentage of Crispaire's net sales for the periods indicated.
This data has been derived from unaudited financial statements that, in the
opinion of Crispaire, include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of such information when
read in conjunction with Crispaire's Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $5,827 $6,683 $7,562 $7,232 $7,018 $8,628 $8,978 $9,514 $8,275 $9,220
Cost of goods sold.. 4,362 4,914 5,493 5,335 5,049 6,092 6,473 7,144 6,015 6,473
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit........ 1,465 1,769 2,069 1,897 1,969 2,536 2,505 2,370 2,260 2,747
Selling, general and
administrative
expenses........... 918 1,267 1,464 1,192 1,174 1,539 1,566 1,728 1,298 1,534
Operating income.... 559 498 618 705 811 1,023 937 666 979 1,227
Interest expense
(income), net...... (5) (3) 7 94 49 42 36 18 18 39
Net income.......... $ 564 $ 501 $ 611 $ 611 $ 762 $ 981 $ 901 $ 648 $ 961 $1,188
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
-------------------
JULY 31, OCT 31,
1997 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales........... $11,050 $10,569
Cost of goods sold.. 7,574 8,099
------- -------
Gross profit........ 3,476 2,470
Selling, general and
administrative
expenses........... 1,725 2,410
Operating income.... 1,753 27
Interest expense
(income), net...... 49 19
Net income.......... $ 1,704 $ 8
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.. 74.8% 73.5% 72.6% 73.8% 71.9% 70.6% 72.1% 75.1% 72.7% 70.2%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit........ 25.2% 26.5% 27.4% 26.2% 28.1% 29.4% 27.9% 24.9% 27.3% 29.8%
Selling, general and
administrative
expenses........... 15.8% 19.0% 19.4% 16.5% 16.7% 17.8% 17.4% 18.2% 15.7% 16.6%
Operating income.... 9.6% 7.4% 8.2% 9.7% 11.6% 11.9% 10.5% 7.0% 11.8% 13.3%
Interest expense
(income), net...... (0.1)% (0.1)% 0.1% 1.3% 0.7% 0.5% 0.4% 0.2% 0.2% 0.4%
Net income.......... 9.7% 7.5% 8.1% 8.4% 10.9% 11.4% 10.1% 6.8% 11.6% 12.9%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
PERCENTAGE OF NET SALES
--------------------
<S> <C> <C>
Net sales........... 100.0% 100.0%
Cost of goods sold.. 68.5% 76.4%
------- -------
Gross profit........ 31.5% 23.4%
Selling, general and
administrative
expenses........... 15.6% 22.8%
Operating income.... 15.8% 0.3%
Interest expense
(income), net...... 0.4% 0.2%
Net income.......... 15.4% 0.1%
======= =======
</TABLE>
In the early 1970's, the management of Crispaire left Muncie Gear Works to
form Crispaire, at which time the majority of revenues were derived from HVAC
renovation of existing classrooms during the months of May through September.
Approximately 50% of sales to the school markets occurred during the months of
June, July and August. October 31 was the optimum time for financial reporting
due to lower inventory and receivables levels, a strong liquidity position and
slower sales during the months of October and November which resulted in the
ability to dedicate greater time to financial reporting.
As Crispaire entered and grew its telecommunications business segment, its
operations became less seasonal. Today, Crispaire's operating performance
demonstrates minimal seasonality. In 1996, sales were spread out fairly evenly
throughout the year with 61% of total revenues to the telecommunications
industry and 23% to the school industry including new construction which is less
seasonal than renovation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations through a combination of
funds generated from operations, bank credit facilities and the private sales of
debt and equity securities. The Company experienced an increase in inventory
during fiscal 1997 as compared to fiscal 1996
39
<PAGE> 43
primarily as a result of $6.6 million of inventories acquired in connection with
the acquisition of Crispaire Corporation. Working capital requirements generally
precede the realization of net sales. The Company's liquidity needs will arise
primarily from debt service for indebtedness incurred in connection with the
Acquisition and the funding of planned capital expenditures. The Company
incurred substantial indebtedness in connection with the Acquisitions. As of
December 31, 1997, on a pro forma basis, after giving effect to the Acquisitions
and adjusting for the Offering (including the application of the net proceeds
therefrom), the Company would have had outstanding $115.4 million of
indebtedness, consisting of $90 million of the Notes, $10 million Senior Term
Loan, $15 million under the Senior Revolving Credit Facility and approximately
$400,000 of other debt.
As of December 31, 1997, Holdings has preferred stock plus accrued
dividends of $10,657,263 and $10,217,764 of junior subordinated notes
outstanding. Although the preferred stock is not subject to redemption until
August, 2006 and no cash payments are required on the notes until November 2008,
Holdings is entirely dependent upon Airxcel for its cash requirements (see Note
1 to Airxcel historical financial statements). In fiscal 1995, the Company paid
$4.4 million of cash in order to fund Holdings' repurchase of common stock from
one of its shareholders. This cash payment was recorded as a return of capital
from the Company to Holdings.
Interest payments under the Credit Facility and interest payments on the
Senior Subordinated Notes will represent significant liquidity requirements for
the Company. The borrowings under the Credit Facility will bear interest at
floating rates based upon the interest rate option selected by the Company. For
a description of the Credit Facility, See "Description of the Revolving Credit
Facility."
The Company's capital expenditures were $355,990, $458,549 and $716,220 in
fiscal 1995, 1996 and 1997, respectively. The Company may seek to make selective
acquisitions although the Company currently has no commitments with respect to
such. Future acquisitions may require third party financing and there can be no
assurance that such financing could be obtained. Expected capital expenditures
for 1998 are expected to be $1.1 million and to be used primarily for
maintenance.
The Company estimates its principal source of cash to fund its liquidity
needs will be net cash provided by operating activities and from availability
under the Credit Facility. The Company believes that net cash expected to be
generated from operations, together with the amounts available under the Credit
Facility will be adequate to meet its debt service requirements, capital
expenditures and working capital needs for the foreseeable future, although no
assurance can be given in this regard. The Company's future operating
performance and ability to service or refinance the Senior Subordinated Notes
and to extend or refinance the Credit Facility will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control. The Company may be required to seek additional
sources of funds in the future, and there can be no assurance that such funds
will be available on satisfactory terms or at all. Failure to obtain such
financing on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
DERIVATIVES
The Company uses noncancelable contracts and forward contracts in its
purchasing cycle. These instruments are all used to purchase Copper and Aluminum
for the Company's internal needs, and to manage purchase prices and inventory
values. All such contracts have determinable market values. Unrealized gains and
losses are deferred until the copper and aluminum costs flow through cost of
goods sold. The net gains and losses recorded are immaterial. At December 31,
1996 and 1997, the aggregate fair value of the Company's copper and aluminum
position was approximately $1.7 million and $6.7 million, respectively.
40
<PAGE> 44
YEAR 2000
In response to the upcoming Year 2000 issue, the Company is in the process
of hiring an MIS director who will be primarily responsible for devising a
company-wide strategy for addressing the issues. Management believes that all
KODA and Crispaire systems have achieved complete Year 2000 compliance.
Management believes that Airxcel systems will be able to achieve Year 2000
compliance by the fourth quarter of fiscal 1998 without material cost to the
Company. The Company is also devising a plan to address the Year 2000 compliance
of its vendor and customer systems.
INFLATION
Results of operations have not been significantly affected by inflation
since inception. The Company, in the normal course of business, has been able to
offset the impact of increased costs through operating efficiencies and selected
price increases.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective at year-end 1998, the Company will adopt Statement of Financial
Accounting Standards No. 131 (SFAS No. 131), "Disclosure About Segments of an
Enterprise and Related Information," which requires disclosure of segment data
in a manner consistent with that used by an enterprise for internal management
reporting and decision making. The Company believes that it will report separate
segment information for its Airxcel, Crispaire and KODA operations in accordance
with SFAS No. 131.
41
<PAGE> 45
INDUSTRY
RECREATION VEHICLES
RVs encompass a wide variety of mobile means of transportation and
temporary dwelling, from the largest motor coaches to small towables. In 1996,
according to the RVIA, RV manufacturers shipped units (excluding van conversion
vehicles) with an aggregate retail value of approximately $6.3 billion. RVs are
used for a variety of purposes such as camping, travel, vacation, retirement
activities and outdoor activities.
According to a 1993 University of Michigan study sponsored by the RVIA,
approximately 8.2 million households owned RVs in 1993, an increase from 7.7
million in 1988 and 5.8 million in 1980. RV ownership has grown by an average of
100,000 units per year over the last 17 years. Management currently estimates
that one out of every eleven households in the U.S. owns an RV.
RVs are broadly classified as "motor homes" and "towables." The Company
typically provides air conditioning units to motor homes and larger towables.
Motor homes are self-propelled and grouped into three main classes: A, B, and C.
Towables are mobile living spaces that are attached to a mobile vehicle and
include fifth wheel trailers, truck campers, and folding camper trailers, are
smaller and less expensive than motor homes. The following table(1) summarizes
the various classes and types of RVs and the relative characteristics of each:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AVG. UNITS
RETAIL SOLD AVERAGE
NUMBER OF PRICE (000'S) MEDIAN INCOME AVERAGE
TYPE A/CS (1996) 1996 AGE (OWNER) (000'S) SIZES DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[MOTOR HOME Class A Motor home 2 standard $78,965 36.5 63 $39.0 30'-35' Self-propelled,
GRAPHIC] temporary living for
recreational,
travel, or camping
[MOTOR HOME Class B Motor home 1 standard $42,953 4.1 63 $39.0 18' Self-propelled, van-
GRAPHIC] chassis
[MOTOR HOME Class C Motor home 1 standard $47,060 14.7 63 $39.0 20'-24' Self-propelled mini,
GRAPHIC] 28'-30' built on van frame
and RV manufacturer
adds the living area
[TRAVEL TRAILER Conventional Travel 1 standard $14,213 75.4 52 $41.0 20'-35' Towed by bumper or
GRAPHIC] Trailer frame hitch
[FIFTH WHEEL Fifth-wheel Travel 1 or 2 standard $22,673 48.5 52 $41.0 25'-35' Towed by a vehicle
TRAILER GRAPHIC] trailer with a "fifth wheel
hitch" on top
[FOLDING CAMPING Folding Camping 0 standard (30% $4,957 57.3 43 $36.0 10'+ Towable with
TRAILER GRAPHIC] Trailer buy in collapsible partial
aftermarket) sidewalls which
unfold at campsite
[TRUCK CAMPER Truck camper 0 standard $11,083 11.0 38 $34.0 8'-9'5" A Portable mounted
GRAPHIC] (40% buy in into a pickup truck
aftermarket)
</TABLE>
- --------------------------------------------------------------------------------
(1) The University of Michigan demographic study of the RV consumer, authored by
Richard T. Curtin, did not distinguish between Class A, B and C type motor
homes or between Conventional v. Fifth Wheel Travel trailers. These
classifications have been developed by the Company to identify the air
conditioner usage of the RV consumer. As a result, the median age and income
as derived from the University of Michigan study does not vary between such
classes.
42
<PAGE> 46
The consistent growth in the RV industry is attributable to the general
maturing of the industry and several key factors including (i) the overall
increasing number of RV owners, (ii) the growth in the number of potential
consumers, as baby boomers begin entering the typical demographic profile for
premium RV owners (iii) the changing lifestyle of the U.S. population on
average, which is aging and devoting more time to recreational activities, (iv)
an increase in population in states such as California, Florida and Texas, where
RVs are common, (v) a favorable economic environment, and (vi) the availability
of gasoline.
The average RV owner historically has been 48 years old, married with no
children living at home, with an average income of $39,000. According to the
U.S. Census Bureau, the baby boomers or the population of 45 to 64 year olds,
(the age of the average historical buyer of an RV), is expected to grow from
53.7 million in 1996 to 78.9 million in 2010, or increase by approximately
46.9%. This trend results in a large increase in the number of consumers with
significant disposable incomes and increasing amounts of leisure time.
Historically, older Americans who generally have had more disposable income have
chosen the Class A or fifth wheel trailers and recently premium motorhomes have
grown in popularity.
Throughout the United States, there are thousands of campgrounds and RV
parks that offer the RV user a variety of settings. In addition, there are RV
clubs such as the Good Sam Club and in the Family Motor Coach Association that
have over 900,000 and 100,000 members, respectively, and they sponsor RV
"rallies", offer emergency road side services, publish magazines and offer a
host of other benefits.
Traditionally, the largest group of RV buyers in the United States, with a
15.1% ownership rate, has been located in the West. Recently, there has been an
increase in population in states like California, Florida and Texas where RVs
are more common. According to the Statistical Abstract of the U.S., by 2010, the
population of 45 to 64 year olds in the Pacific, Mountain and South Atlantic
regions is expected to increase 52.4%, 63.5% and 58.4%, respectively, while the
increase in population of the same segment in the nation as a whole is expected
to be 46.9%. In addition, according to the U.S. Bureau of the Census, the 45 and
older age group, which accounted for approximately 31.1% of the U.S. population
in 1990, is expected to grow to 39.8% of the U.S. population by 2010.
The Company believes as the demographics and economic factors continue to
improve, the growth in the RV industry will positively impact the sales of RV
air conditioners. The sales of RVs have historically fluctuated in accordance
with interest rates, consumer confidence and the general economy. A stable
interest rate environment is ideal in generating sales.
HVAC INDUSTRY
According to the Air Conditioning and Refrigeration Institute, the
worldwide air-conditioning market is currently estimated at $40 to $45 billion
and is expected to grow to $50 billion by 2005. While markets in Asia, Latin
America, and Eastern Europe are expanding rapidly, significant growth is also
expected in North America and Western Europe. In 1995, the US HVAC market was
estimated to be $19.2 billion and is forecasted to grow by approximately 6.8% to
reach a value of $20.5 billion by 2000. The HVAC industry grew 11% in units sold
from 1995 to 1996. In 1996, the U.S. market for the products in which Crispaire
principally competes was $950 million.
Telecommunications. The telecommunications industry has experienced rapid
growth over the past several years which is expected to continue. The number of
telecommunications sites constructed has increased from 2,305 in 1987 to 30,045
in 1996. It is estimated that the number of subscribers for wireless
communications is approximately 58.3 million and is expected to grow to 160.6
million by 2007. It is estimated that the wireless data services market will
rise to about $2.7 billion, serving approximately 62.5 million voice and data
customers by 2001. In addition, new wireless phone systems such as PCS is
expanding the wireless telecommunication sites as cellular networks serve the
same geographic area. According to an article published in Mobile Phone News,
43
<PAGE> 47
the Wireless Communications Bureau indicates that during the last 15 years, the
cellular phone industry has built approximately 22,000 antenna tower sites
across the U.S., and it is anticipated that up to 100,000 more sites may be
required to accommodate the rising number of PCS users in the next few years and
the expansion of PCS networks in the domestic and international markets. The PCS
infrastructure requires about five times as many sites as cellular networks to
serve the same area. The increasing popularity of PCS will result in more
shelters and more HVAC units. Currently 10% of U.S. companies use cellular voice
services, and 53% plan to do so within three years. According to the Cellular
Telecommunications Industry Association as published in the Financial Times,
revenues have grown by over 20% per year, topping $23 billion in 1996.
As the demand for wireless components, shelters, cabinets and towers
increase, manufacturing of shelters and cabinets is likely to expand as new
wireless networks are constructed and old networks are replaced with digital
technologies.
Schools. The Company estimates that approximately one third of the schools
in the U.S. serving more than 14 million students, need extensive repair or
renovation of one or more buildings, with replacement or repair of the HVAC
system being the most frequently reported needed repair. According to the U.S.
General Accounting Office for School Facilities, HVAC replacement is needed for
classrooms in 20,104 elementary schools, representing approximately $3 billion
in replacements and repairs. The Company focuses on schools which currently have
cooling or ventilation units in each classroom or need cooling or ventilation
units, including most elementary, middle and high schools and certain secondary
schools, but excluding larger schools with central air conditioning. For
September 1996, the seasonally adjusted rate of construction of public education
buildings was $29.1 billion, up from $27.1 billion in September of 1995. The
main goals of such new construction are to increase health and safety for
students by improving air quality and to increase energy efficiency. In
addition, it is estimated that by the year 2005, U.S. student enrollment in
elementary and secondary schools will increase significantly with the rising
number of annual births since 1977, or the "echo boom". The 30 year growth in
population of 5 to 13 year olds is projected by the U.S. Department of Education
to be 18.1%. Demographics indicate that the regions of highest growth are in the
warmer climates. Approximately 6,000 new schools will be needed by the year 2005
to meet such increased enrollment. In addition, many schools are adding air
conditioning as part of renovation projects. Two hundred and eighty six schools
in Los Angeles, for example, must now install or update air conditioning due to
the passing of Proposition BB of Los Angeles. The push for air conditioning in
these schools comes on the news of the expansion of the school year to a full
year in some school districts to accommodate the greater number of students.
44
<PAGE> 48
THE BUSINESS
OVERVIEW
The Company is a designer, manufacturer and marketer of RV air conditioners
and specialty wall mount air conditioners, ECUs and heat pumps for various
applications. The combination of RVP and Crispaire is the first step in the
Company's strategy to establish itself as the leading designer, manufacturer and
marketer of specialty heating, air conditioning and water heating products. The
Company believes that it is well positioned to effectively pursue this strategy
with strong positions in each of its principal markets and a range of products
serving separate customer bases. The combination of RVP's low cost, high volume
manufacturing expertise with Crispaire's ability to provide customized products
will allow the Company to capitalize on the growing opportunities presented in
each of its markets. The Company's pro forma net sales and EBITDA were
approximately $135.5 million and $16.8 million in fiscal 1997.
Airxcel, Inc. was formed in May, 1991 as Recreational Vehicle Products,
Inc. In November, 1995, the Company acquired Carter Shades, Inc., which was
merged with Faulkner Manufacturing. In October, 1997, the Company changed its
name to Airxcel, Inc. and the Company's board of directors adopted a formal plan
to dispose of the Faulkner Manufacturing division.
RVP supplies a variety of air conditioners to several of the world's
largest RV original equipment manufacturers ("OEMs"), marketing these products
under the popular and well-established "Coleman" brand name. RVP believes that
its air conditioners are superior to those of its competitors due to greater air
flow capacity, cooling efficiency and more aerodynamic design. RVP's reputation
as a dependable source of high-quality, durable products has resulted in its
long term relationships with leading RV manufacturers such as Fleetwood,
Winnebago, Gulf Stream and Jayco, who have relied on RVP for substantially all
of their RV air conditioner needs for each of the past six years. Sales to such
OEMs provide RVP with a large installed base of products which generates a
significant recurring stream of revenue through sales of parts and replacement
units in the aftermarket. Aftermarket sales to customers such as RV dealers,
supply and service centers are achieved primarily through an agreement with
Coast, the largest wholesale distributor of aftermarket products in the RV
industry. RVP believes that Coast's extensive market penetration and large sales
force provide broad aftermarket coverage and distribution capabilities which
enhance its substantial aftermarket business. In fiscal 1996, as a percentage of
Airxcel's net sales, OEM sales represented 66.3%, and aftermarket sales
represented 33.7%. In addition to serving the RV industry, RVP designs,
manufactures and markets air conditioners for marine applications, the cooling
and heating of elevators, petroleum "logging" trucks and for a wide variety of
small-space cooling applications.
Crispaire is a designer, manufacturer and marketer of specialty wall mount
air conditioners, ECUs and heat pumps for various applications. Crispaire's
customers are principally telecommunications companies, manufacturers of
telecommunication shelters in the cellular, cable, wireless, satellite and PCS
markets, wholesale distributors for foreign telecommunications sales, school
districts and construction companies. The Company believes that Crispaire is the
largest provider of environmental control equipment for the U.S.
telecommunication shelter market, through sales to both telecommunications
companies and manufacturers of telecommunication shelters. The Company also
believes that it is well-positioned to benefit from growth in cellular, wireless
and PCS telecommunications markets and the resulting demand for
telecommunication shelters. Crispaire's focus on customer service and quality
control and its strong reputation for its ability to offer a broad and
innovative line of products in a timely manner has attracted significant
customers, including MCI, Motorola, AT&T Wireless, Lucent Technologies and other
wireless communication providers. The Company also believes that it will benefit
from an increasing need for cooling units in the nation's schools due to new
state regulations and certain building codes that mandate fresh air requirements
in classrooms, the rebuilding of school system infrastructure and the steadily
growing student population. Crispaire supplies wall mount air conditioners to
multiple school districts throughout the country, including the Los Angeles
Unified School District. Crispaire has a leading
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position in each of its principal markets, through solid relationships with its
customers who generally require tailored products and a high level of customer
service. Crispaire's ability to customize products without interruption of its
larger production lines allows it to work closely with customers to develop and
produce equipment that meets their specific needs quickly and efficiently. In
fiscal 1996, sales to the telecommunication shelter industry and school industry
represented 61% and 23%, of Crispaire's total net sales, respectively.
COMPETITIVE ADVANTAGES
The Company attributes its success and its continued opportunities for
growth and profitability to the following competitive advantages:
Strong Market Position in Principal Niche Markets. RVP has a large share
of the total North American RV air conditioning market and Crispaire believes it
is the largest provider of environmental control equipment for the U.S.
telecommunications market, through sales to both telecommunications companies
and manufacturers of telecommunication shelters. The Company believes that its
strong market shares enable it to maintain significant competitive advantages in
serving its customers, including manufacturing efficiencies and greater product
development and marketing resources. Success in such markets has historically
been driven by areas in which the Company believes it compares favorably with
its competitors such as strong customer relationships, industry expertise,
product quality and speed and reliability of service.
Existing Long-Term Customer Relationships. The Company has long-term
relationships with most of its customers, including several of the largest OEMs,
major telecommunications companies and equipment manufacturers and school
districts. RVP has supplied leading OEMs such as Fleetwood, Winnebago, Gulf
Stream and Jayco substantially all of their air conditioner needs for each of
the past six years. The Company believes that such customer loyalty coupled with
RVP's focused product line and reputation for meeting high volume production
demands have led to its success in the seasonal RV air conditioning industry and
provide a significant advantage over competitors. Crispaire has worked closely
with its telecommunications customers such as MCI, Motorola, AT&T Wireless and
Lucent Technologies, in some cases for as long as 15 years, to develop equipment
to meet such customers' specialized requirements. To support such equipment,
Crispaire has an extensive network of service dealers across the U.S. The recent
proliferation of shelters for telecommunications equipment and the importance of
protecting such equipment through the use of cooling units and ECUs has
generated an increasing demand for Crispaire's customized products and has
strengthened such relationships. In addition, Crispaire has worked with multiple
school districts throughout the country, such as the Los Angeles Unified School
District, for as long as seven years, to develop products which are designed to
meet the unique heating and cooling needs of the classroom such as achieving
certain industry ventilation standards and addressing other concerns such as
architectural design and ease of servicing considerations. The Company believes
that customization provides a high level of customer satisfaction and will
foster the continued development of significant customer relationships.
Strong Brand Name Recognition. RVP markets its products using the well
established and recognized "Coleman" brand name. The "Coleman" brand name,
established in the early part of the twentieth century, is well recognized as a
leading brand name for a variety of products related to the outdoor recreation
industry. Coleman brand air conditioners have been the leading RV air
conditioners since they were introduced into the market and are recognized by
customers to represent high quality and reliability. Crispaire, with leading
positions in most of its niche markets, benefits from strong brand name
recognition of its "Marvair" name in the telecommunication shelter market and
its "Scholar" name in the school market.
High Quality Products, Customer Service and Product Design
Capabilities. The Company believes it is recognized as a leader in the
industries its serves due to its high product quality and customer service. The
Company believes that its efficient manufacturing and assembly processes
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enable it to offer competitively priced products while maintaining high product
quality. Because of the seasonal nature of the RV industry, timely delivery of
products to OEMs and aftermarket customers has played a critical role in RVP's
long-standing success. Similarly, Crispaire has developed a strong reputation
with its customers for its ability to develop unique solutions to customers'
environmental control needs, respond to short lead times and to deliver its
products in a timely manner. Unlike most of its competitors, Crispaire separates
its volume manufacturing from specialty manufacturing with a second plant that
is ideally suited for customization. Crispaire pursues a three-tiered product
approach, producing i) standard products ii) "fast track" products which involve
a small amount of customization and iii) highly customized products that are
tailored to individual specifications. Crispaire is able to customize products
to the specifications of a given customer without interrupting its larger
production lines. The Company will seek to maintain its reputation for high
quality, reliable products, superior customer service and product design
capabilities which should assist in its efforts to further penetrate markets for
existing products and improve its market position.
Extensive Distribution Network and Experienced Sales Force. The Company
believes that RVP's sales force includes some of the most experienced sales
people in the industry who are located in close proximity to and actively work
with many of the largest OEMs regarding product design issues and estimated
future orders. In addition, RVP provides Coast, the largest wholesale
distributor of replacement parts, supplies and RV accessories, serving more than
15,000 customers throughout the U.S. and Canada, with 100% of its RV air
conditioning products. RVP believes that Coast provides broad aftermarket
coverage and distribution capabilities. Crispaire's sales effort is organized by
industry segments with representatives of its sales force covering the U.S.
telecommunications, school, and construction industries and international sales.
In addition, independent sales agents actively market Crispaire's products,
particularly to school districts, in which sales agents have developed
relationships. Crispaire sells and distributes its products in the U.S. through
a variety of channels, including wholesale distributors, factory direct dealers,
non-stocking representatives, as well as direct to manufacturers and to end
users and in the International market through distributors.
Recurring Revenues from Installed Base. RVP's sales to OEMs have provided
a large installed base of RV air conditioning equipment that generates a
significant recurring stream of revenue through sales of parts and replacement
units in the aftermarket. Such aftermarket sales consist primarily of sales of
replacement parts and new units through RV dealers and supply and service
centers. RV air conditioner units are typically replaced every five to seven
years, which is the expected life of the unit's compressor. Because the cost to
replace the unit is only slightly higher than the cost to repair the compressor,
most owners opt to purchase new units from the original supplier. With the
largest market share in the industry, RVP is well positioned to continue to
recognize revenue from aftermarket sales. In fiscal 1996, aftermarket sales
represented 33.7% of Airxcel's total net sales. Similarly, the Company expects
to generate revenue through the sales of replacement parts and units to
customers of Crispaire. The Company believes that when its customers repair or
replace such equipment, they tend to remain with the original manufacturer who
has the technical expertise to provide compatible and reliable replacement
parts, products and related services.
Experienced Management. The Company's management has over 287 years of
combined experience in the RV air conditioning, specialty HVAC and water heating
industries. Management believes that it has the depth, experience and motivation
to manage the Company's internal and external growth. Assuming all available
options are exercised under an executive stock plan, in the aggregate,
management would own approximately 44.2% of the capital stock of Holdings on a
fully-diluted basis, of which 16% will vest upon the achievement of certain
performance thresholds.
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BUSINESS STRATEGY
The key elements of the Company's business strategy to maintain its
leadership position are to:
Capitalize on Anticipated Industry Growth. With strong positions in its
principal markets, the Company believes that it is well positioned to capitalize
on the anticipated growth in such markets. The Company anticipates that over the
next ten years, baby boomers will begin entering the typical demographic profile
for RV owners, including age, income, family status and location of home.
Because RVP serves several of the largest and best positioned OEMs which
collectively serve over 55% of the RV market, the Company believes that this
anticipated growth will present significant revenue generating opportunities.
The Company also anticipates that the number of telecommunication shelters in
North America will grow in tandem, with the telecommunications industry at an
annual rate of 20% for the next five years. Additionally, the international
cellular market, especially in Latin America, is expected to grow at a high rate
due to limited land lines and a strong demand for wireless telecommunications.
The Company expects to retain its leading position in the telecommunications
industry and benefit from its growth by focusing on new product development and
applications to meet such industry's future needs. In addition, the Company
views the school market as a growth market due to several factors, including (i)
the number of new state regulations and certain building codes that mandate
fresh air requirements in classrooms (ii) the increasing number of students and
required number of new schools and (iii) the number of mandated restorations of
existing school system infrastructures. Based on an analysis prepared by the
U.S. General Accounting Office for School Facilities and the Department of
Education, the replacement HVAC school market is $3 billion and the annual new
construction HVAC school market is $314 million.
Generate Growth Through New Product Development. The Company intends to
continue to emphasize new product development in order to provide
technologically advanced products to its customers and reinforce its market
leadership. In its principal market, RVP works closely with OEMs to design new
types of air conditioners to meet OEM specifications. Crispaire consults closely
with key individuals in the telecommunications industry to develop new product
offerings for customers that are tailored to their particular needs, including
the development of monitoring systems designed to signal the operator when
equipment is in need of repair or when temperature varies from safety
parameters. The Company intends to continue developing new product applications
for use in various markets such as the institutional school, hotel, and elevator
markets.
Pursue Growth Through Acquisitions. In addition to the growth the Company
expects to come from the development of new, differentiated products and product
lines and expanding sales of existing products and product lines, the Company
intends to actively evaluate acquisition candidates. Future strategic
acquisitions may be undertaken to broaden the Company's product lines, expand
its manufacturing capacity, and strengthen its presence within the various
channels of distribution.
PRODUCTS AND SERVICES
The Company provides its customers with a broad array of specialty heating,
air conditioning and water heating products, including RV air conditioners,
vertical wall mount air conditioners and heat pumps, specialty heat pumps, ECUs,
residential and commercial heat pump water heaters and various applied products
such as pool heating dehumidifiers. In addition, the Company provides upgrade,
maintenance and repair services for its products, as well as for those supplied
by other manufacturers.
RVP
RV Air Conditioners. RVP designs and manufactures a variety of air
conditioners for most types of RVs. RVP offers its customers several models of
air conditioners with a nominal cooling capacity between 7,100 and 15,000 BTUs.
The most popular products are 115 volt systems that are installed on the roof of
a vehicle. RVP also produces a line of 115 volt air conditioners that are
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installed in the underframe storage area of motorhomes and travel trailers in
both one and two ton sizes. In addition, RVP produces a complete line of 220
volt systems for the European and Australian RV markets and specialty air
conditioners for several smaller markets including the oil, marine and elevator
industries.
CRISPAIRE
Crispaire offers an innovative line of vertical wall mount air conditioners
and heat pumps under the "Marvair" brand name. Crispaire's product lines include
three types of vertical wall mount air conditioning units, six types of heat
pumps, five types of environmental control units and various applied products.
All of the vertical wall mount units comply with Underwriters Laboratory ("UL")
certifications for safety and are all rated in accordance with the Air
Conditioning & Refrigeration Institute ("ARI") to ensure that advertised
capacities and efficiencies are delivered. All of the models share a high degree
of commonality in certain design and component features in order to maximize
production efficiencies. The products offer a unique advantage to the modular
construction industry as they can be installed in relocatable structures such as
modular homes at the structural assembly point and can travel easily with the
structure. In addition, the units can also be used in certain projects to easily
upgrade facilities with the addition of air conditioning as the units require no
interior floor space and can be installed on an exterior wall. The major markets
for vertical wall mount equipment are telecommunication shelters, institutional
schools and modular facilities.
Vertical Wall Mount Air Conditioning Units. The Marvair line of vertical
wall mount air conditioning units includes three standard products available in
sizes typically ranging from one to five tons in capacity, including the ModPac,
Compac I and Compac II. The ModPac unit is designed for use in modular
buildings. The Compac I and Compac II units are designed for use in
telecommunication shelters and allow operation in cold weather and notification
in the event of failure. The Compac II unit has a standard built-in economizer
for increased energy efficiency and reliability.
Heat Pumps. Crispaire offers six types of heat pumps, including the
Marvair Scholar (the "Scholar") and the Marvair Graduate (the "Graduate"), a
line of heat pumps to be installed in the interior of classrooms. Introduced in
1990, Crispaire believes that the Scholar is an affordable, quiet and efficient
heat pump which does not detract from the exterior architectural style of most
school buildings and is easy to service. The Scholar allows each classroom to
control its room temperature and has an optional Marvair heat recovery
ventilator which provides fresh air to meet certain ventilation standards with
respect to the amount of fresh air required per student. Crispaire recently
developed and introduced the Graduate for cooling and heating classrooms. The
Graduate is a horizontal HVAC console which is installed inside the classroom
that has the appearance and function of a cabinet. It contains two independent
heat pump chassis which it allows it to achieve greater energy efficiency,
giving it one of the highest Energy Efficiency Ratings in the industry. The
Graduate utilizes the heat recovery ventilator system to achieve industry
ventilation standards.
Environmental Control Units for Telecommunication Shelters. Crispaire's
ECUs are designed exclusively for the telecommunications industry to fit inside
a special cabinet and are designed to operate over a wide temperature range. The
units are designed with special controls that allow the system to reliably cool
the telecommunication shelter for long periods of time regardless of the outside
temperature. Some units contain an economizer mechanism which utilizes outside
air during lower temperature days to cool the shelter. Depending upon the
climate, the economizer cycle can reduce the running time of the unit's
compressor, thereby extending the life of the unit. In response to the growing
presence of "walk-in" cabinets in the telecommunications industry, Crispaire
designed the Marvair SlimPac ECU which mounts easily on the exterior of the
walk-in cabinets and provides optimum cooling.
Applied Products. Crispaire offers various applied products, including
custom made products, to its customers in the telecommunications industry. Such
customization involves variations to the design of a product such as its
dimensions or construction material in order to meet the customer's
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specific needs. Crispaire's applied products also include a line of residential
heat pump water heaters marketed under the brand name "E-Tech." The E-Tech water
heater takes heat from the air, transfers it into water, and produces chilled,
dry air. The products are used primarily in single family residences to provide
a cost effective alternative to electric resistance water heaters particularly
in markets such as Hawaii where there are few natural gas alternatives. In
addition, Crispaire offers a similar line of heat pump water heaters that are
sold to the commercial market. Crispaire also offers E-Tech pool heating
dehumidifiers ("PhDs") which are used in an indoor pool to heat the water as
well as dehumidify the air. Crispaire believes that PhDs save energy both by
reducing the cost of heating an indoor pool and controlling the humidity level
of the enclosure.
SALES, DISTRIBUTION AND MARKETING
The Company markets and sells its broad range of products to a wide variety
of customers through full time sales representatives and through distributors.
RVP
RVP has seven full time salesmen who focus on sales to OEMs, the top four
of whom are among the most experienced in the industry. RVP's sales force is
highly proactive, work closely with the largest OEMs and inquire regularly about
their design interests, product issues and estimated future orders. The Company
believes that this has helped foster RVP's long-standing relationships with its
key OEM customers. In addition, RVP has completed two years of a five year
distribution agreement with the Coast Distribution System, the largest wholesale
distributor of replacement parts, supplies and accessories for RVs to primarily
RV dealers, supply and service centers. Coast supplies more than 25,000 products
and serves more than 15,000 customers throughout the U.S. and Canada from 14
regional distribution centers in the U.S., and RVP provides Coast with 100% of
the RV air conditioning products which it distributes. RVP believes that its
relationship with Coast relieves it of a portion of the costs associated with
the distribution of its products while providing geographically dispersed
selling, order processing and delivery capabilities which provides broad
aftermarket coverage. RVP believes that it has benefitted and will continue to
benefit from this distribution relationship.
CRISPAIRE
Crispaire's sales effort is organized by industry segments with two full
time salesmen who focus on sales to the U.S. telecommunications industry, one
salesman for the international telecommunications market, one full time manager
working with 30 independent sales agents for the institutional school market.
Crispaire has nine sales and marketing personnel and 66 independent trade
representatives and distributors. Crispaire markets it products by attending
annual industry and trade shows, as well as through promotions and advertisement
in trade publications. It distributes its products through a variety of
channels, including wholesale distributors, factory direct dealers, as well as
direct to manufacturers and to end users. Crispaire is continually working with
the members of these various channels to increase the efficiency of the
distribution process, thereby reducing lead times and inventory holding costs.
CUSTOMERS
RVP
RVP's customers are principally OEMs and include several of the largest
OEMs in the world, including its top five customers, Fleetwood, Coast, Jayco,
Winnebago and Damon representing an aggregate 47% of the market share of the RV
market. RVP supplies each of these customers with 100% of their RV air
conditioning requirements, and these customers accounted for approximately 56%
of Airxcel's total revenues in 1996. In addition, RVP's aftermarket customers
include (i) RV dealers, which primarily purchase RVP's products for new RVs and
replacement and repair parts for
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their service departments, and (ii) RV supply stores and service centers which
purchase parts for their service centers and for resale to RV owners. RVP
reaches such customers primarily through its distribution relationship with
Coast.
CRISPAIRE
Crispaire's principal customers are telecommunications companies,
manufacturers of telecommunication shelters in the cellular, cable, wireless,
satellite and PCS industries, wholesale distributors for foreign
telecommunications sales, school districts and construction companies. Such
customers include MCI, Motorola, AT&T Wireless and Lucent Technologies and
multiple school districts, including the Los Angeles Unified School District.
RAW MATERIALS AND SUPPLIERS
RVP
RVP purchases most of the major component parts for its products such as
compressors, coils and motors preassembled from its suppliers. RVP also
purchases significant amounts of steel and plastics. RVP customarily orders
relatively standardized products from its suppliers and has a variety of sources
from which it can obtain necessary supplies. RVP has not had difficulties in
procuring raw materials or supplies, and does not expect to encounter any
difficulties in the future. RVP does not account for more than 10% of any of its
major suppliers' total business.
CRISPAIRE
A principal raw material used in Crispaire's products is copper, which is
principally purchased in the form of copper tubing. Crispaire also purchases
various component parts for its products such as compressors, coils, electrical
parts, and motors. Crispaire has strong relationships with its suppliers and
does not rely on any one supplier for any one category of supplies. Crispaire is
offered pricing terms by all of its suppliers and annually confirms existing
pricing with competitive bids. Crispaire customarily obtains its supplies
through purchase orders which are generally for one year. Crispaire selects
among available supply vendors by comparing cost, consistent quality and timely
delivery as well as compliance with ISO-9001 standards.
MANUFACTURING PROCESS
RVP
RVP's manufacturing operations are directed towards high product quality
and efficient manufacturing and assembly processes. The manufacturing operations
utilized by the Company include metal cutting, bending, welding, assembly and
packaging, thermal forming and stamping. RVP utilizes a computer aided design
system ("CAD") for a small portion of its stamping operation. RVP designs, tests
and qualifies all of its air conditioners with in house support of CAD, modeling
shop, environmental test cells and quality test lab. RVP utilizes material
requirements planning ("MRP") for its factory scheduling and procurement of
materials, several just-in-time ("JIT") inventory control methods are in place.
RVP purchases most major component parts preassembled from its suppliers. RVP
performs all of its manufacturing operations in its owned Wichita, Kansas
facility. This facility currently produces over 700 air conditioning units per
day and has the capacity to expand to 900 to 1,000 units without major
expenditures. Finished air conditioners are stored and shipped from a 50,000
square foot warehouse in Wichita. RVP has created a variable cost structure that
has allowed it to operate profitably under a wide range of manufacturing output.
Since purchased materials represent 85% of standard product costs, RVP is able
to achieve a high proportion of variable costs to fixed costs. RVP's strategy is
to manufacture only those components that enhance quality and the competitive
advantage of its products.
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CRISPAIRE
Crispaire's manufacturing operations include fabricating sheet metal, metal
cutting, bending, stamping, welding, and the manufacturing of major
sub-assemblies, assembly and packaging. All units are subject to comprehensive
performance testing and quality inspection. A large portion of Crispaire's major
assembly and production is performed at its 113,000 square foot production
facility in Cordele, Georgia. Assembly and production are also performed at the
37,000 square foot facility in Norcross, Georgia. Crispaire performs most
manufacturing and assembly at these facilities, but also outsources certain
processes depending on the capabilities and capacities of the plants and cost
considerations. Products manufactured at the Cordele plant are generally
designed and built to Crispaire specifications and industry standards, and
products manufactured at the Norcross plant are generally special application or
customized products.
Both facilities utilize a variety of labor-saving automated equipment such
as computer-controlled punch presses and a copper tubing fabricator. In
addition, Crispaire uses computer and managing software to control its
operations, and utilizes an updated management information system that provides
controls into all of the material flow, fabrication assembly and test operations
conducted at the facilities. The Company believes that this production process
improves quality control in the manufacturing and assembly process. The Cordele
facility runs two primary production lines and has operating flexibility to run
different product lines based on product demand. The Company estimates that 60%
of production is done on an order by order basis and 40% is done for inventory.
In addition to the production lines, the facility contains a model shop where
engineers and designers build prototypes and test new products. Computer
monitored and controlled psychrometic chambers are used to simulate different
indoor and outdoor temperatures. Such system assures that new products will meet
the National Appliance Energy Conservation Act standards and other industry
standards. The Norcross facility runs three shorter production lines than the
Cordele plant, and 90% of production in Norcross is for customized products. Due
to its shorter production lines, the Norcross plant is an ideal custom
manufacturing center that provides quick turnaround and flexibility to change
the specifications of the products being manufactured.
Crispaire expects to attain ISO-9001 certification during the first quarter
of 1998, for both facilities and strives to establish quality procedures at each
of its facilities in order to manufacture the highest quality products possible.
COMPETITION
RVP
The RV air conditioning market is highly competitive with competition based
largely on a company's ability to provide name brand high quality products at
competitive prices and to manufacture and deliver products on a timely basis.
Due to the size of market, the RV air conditioning industry has not typically
attracted large air conditioning manufacturers, and there has been considerable
consolidation in the industry. Historically, the business has been driven by
strong relationships and brand name recognition, which has forced several
players out of the industry and has served as a barrier to new entrants. RVP
competes principally on the basis of quality, product performance, price and
service. RVP's principal competitor for RV air conditioning is Dometic, owned by
Electrolux. See "Risk Factors -- Competition."
CRISPAIRE
Broadly defined, the HVAC industry is relatively fragmented with hundreds
of small to medium-sized companies with various niche markets and several large,
well-capitalized, highly diversified industrial corporations with major market
shares of standard residential and commercial HVAC product lines. Within the
more limited air conditioning industry, Crispaire has targeted smaller niche
markets and competes with several manufacturers in such markets. Moreover,
Crispaire encounters different competitors in each of its product lines.
Crispaire competes principally on the basis of its
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reputation for reliability, quality, service and flexibility. Crispaire's direct
competitors in the vertical wall mount and ECU markets include Bard
Manufacturing ("Bard"), Sun Manufacturing and Eubanks Manufacturing. In the
school heat pump market, Crispaire principally competes with Bard, Trane and
American Air Filter. Crispaire attempts to distinguish itself from its
competitors through technological innovation and customization. See "Risk
Factors -- Competition."
INTELLECTUAL PROPERTY
The Company seeks trademark protection for all of its product line trade
names. The Company presently holds trademarks covering designs, symbols and
trade names used in connection with its products. The Company has a royalty-free
license for the exclusive use of the "Coleman" trade name for its products for
50 years. The Company is a party to certain patent litigation involving
competitors of the Company see "Legal Proceedings."
EMPLOYEES
As of June 30, 1997, Airxcel and Crispaire employed approximately 187 and
240 employees, respectively, none of whom was represented by a union or covered
by a collective bargaining agreement. Of the 427 total employees, 134 were
salaried, 293 were hourly and none were part time.
PROPERTIES AND FACILITIES
As of June 30, 1997, Airxcel had these principal facilities, where it
leased or owned an aggregate of approximately 165,000 square feet of space,
while Crispaire had two principal facilities, where it leased or owned an
aggregate of approximately 150,000 square feet of space. The following table
describes the principal facilities and indicates the location, function and
approximate size of each:
<TABLE>
<CAPTION>
FACILITIES
- ----------------------------------------------------------------------------------------
APPROXIMATE
LOCATION SQUARE FEET OWNED/LEASED LEASE EXPIRATION
-------- ----------- ------------ ----------------
<S> <C> <C> <C>
Norcross, Georgia...................... 37,000 Leased 8/31/00
Cordele, Georgia....................... 113,000 Owned --
Elkhart, Indiana....................... 15,000 Leased 4/18/00
Wichita, Kansas........................ 50,000 Leased 5/31/98
Wichita, Kansas........................ 100,000 Owned --
</TABLE>
Airxcel's principal facilities will be pledged as collateral under the
Credit Facility. In addition, Airxcel has a lease for a 60,000 square foot
facility in Malden, Massachusetts that was used in its discontinued awnings
business. Such lease expires on November 1, 1997.
LEGAL PROCEEDINGS
In February 1995, Bard commenced an action against Crispaire in the United
States District Court for the Northern District of Ohio, Western Division. Bard
alleges that Crispaire violates Bard's trade dress, infringes a Bard patent,
infringed Bard's trademark (under state and federal law), and violates the Ohio
Deceptive Trade Practices Act in certain of Crispaire's air conditioning and
heating unit products. In addition to Bard, Airxchange Corp. ("Airxchange") has
joined as a plaintiff against Crispaire, alleging that Crispaire infringes an
Airxchange patent. Crispaire has denied all material allegations and has
asserted a number of affirmative defenses and counterclaims.
Both Bard and Airxchange seek an injunction and monetary damages in an
unspecified amount. Although discovery in the lawsuit is nearly complete and
trial is tentatively set for March 31, 1998, the parties have not engaged in
damages discovery because the proceedings have been bifurcated as to damages and
liability. Discovery as to damages will be undertaken only if there is an
adverse
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finding against Crispaire at trial. If successful in the action, Bard and
Airxchange could be entitled to recovery of a reasonable royalty or lost profits
together with other consequential damages. In addition, if Crispaire is found to
have acted willfully, Bard and Airxchange could recover treble damages and
attorneys' fees.
The Company believes that the claims against Crispaire are unfounded and
that Crispaire should prevail at trial. No assurances can be given as to the
ultimate outcome of this matter.
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations,
among other things, impose limitations on the discharge of pollutants and
establish standards for management of waste. While there can be no assurance
that the Company is at all times in complete compliance with all such
requirements, the Company believes that any such noncompliance is unlikely to
have a material adverse effect on the Company. As is the case with manufacturers
in general, if a release or threat of release of hazardous materials occurs on
or from the Company's properties or any associated offsite disposal location, or
if contamination from prior activities is discovered at any properties owned or
operated by the Company, the Company may be held liable for response costs and
damages to natural resources. There can be no assurance that the amount of any
such liability would not be material.
The Company's facility at St. Frances Avenue, Wichita, Kansas is within an
area undergoing investigation and remediation of contaminated groundwater. The
Company has been identified as a potentially responsible party with respect to a
portion of the area under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, which imposes strict, and in certain
cases, joint and several liability. The Company is one of three parties to a
Consent Decree entered into with the Environmental Protection Agency requiring
remediation. The Company does not expect to incur any material expenditures in
conjunction with this matter both because the former owner of this facility has
entered an Indemnification and Clean Up Agreement with the Company providing
coverage for specified environmental issues existing on the property at the time
of purchase, and because the facility does not appear to be a source of the
groundwater contamination.
RVP has decided to address a potential problem that exists with
approximately 35,000 air conditioning units produced between September 1, 1996
and February 22, 1997. The units were shipped to OEMs which installed them on
RVs that were in turn shipped to retail dealers for sale in the fourth quarter
of 1996 and first quarter of 1997. The units contain a P.C. control board
designed and manufactured for RVP by one of its suppliers. In some instances,
this component could fail in the event of improper or poor wiring connections by
the OEM installer or in the event of inadequate low control voltage. The Company
estimates that the total cost to correct the problem is approximately $2.4
million. The Company has reached an agreement with the supplier pursuant to
which the supplier has agreed to cover substantially all of the potential costs
associated with this problem. The Company recorded a $500,000 reserve during
1997 for the estimated costs to be incurred by the Company.
Although experience and third party failure analysis indicate that the
number of actual failures is minimal, the Company believes it best to address
the situation now to avoid any future failures and customer dissatisfaction.
54
<PAGE> 58
MANAGEMENT
The following sets forth certain information with respect to the persons
who are members of the Board of Directors or executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Melvin L. Adams..................... 51 President and Chief Executive Officer, Director
Gregory G. Guinn.................... 49 Vice President -- Airxcel Sales and Marketing
Richard L. Schreck.................. 45 Chief Financial Officer, Secretary, Treasurer and
Director
T.K. Sellers, Jr.................... 45 Vice President -- Administrative Crispaire
David L. Shuford.................... 46 Vice President -- Crispaire Sales and Marketing
Lonnie L. Snook..................... 62 Vice President -- Airxcel Manufacturing and
Engineering
George D. Wyers..................... 65 President -- Crispaire, Director
Dean DuCray......................... 57 Director
Lawrence Jones...................... 66 Director
Thomas F. McWilliams................ 54 Director
James A. Urry....................... 43 Director
</TABLE>
Melvin L. Adams. Mr. Adams has been a Director, the Chief Executive
Officer and President of Airxcel since 1991. From 1989 until 1991, he served as
Vice President of Coleman. From 1979 through 1984, he served as General Manager
of the Coleman Company's Camping Trailer Division. In 1984, he was promoted to
Corporate Vice President & General Manager of Coleman's RV Group. In 1991, he
and three officers of RVP led the buy out of Coleman RV Products with Berkshire
Partners from MacAndrews and Forbes.
Gregory G. Guinn. Mr. Guinn has been the Vice President of Sales and
Marketing of RVP since 1989. Prior to that, Mr. Guinn held various positions
with the Coleman Company, including National Sales Manager and Marketing Manager
of RV Products and Corporate Vice President and General Manager of RV Products.
Mr. Guinn handles all of RVP's major accounts and its internal sales force.
Richard L. Schreck. Mr. Schreck has been a Director, the Chief Financial
Officer and Secretary of Airxcel since 1991. Beginning in 1981, Mr. Schreck held
various positions at the Coleman Company, including the RV Group Controller and
Controller/Administrative Manager for RV Products. Mr. Schreck is responsible
for all financial and MIS functions at Airxcel.
T.K. Sellers, Jr. Mr. Sellers has been Chief Financial Officer of
Crispaire since 1991. Prior to joining Crispaire, he was employed as controller
for ACC Distributors. Upon completion of the Acquisition, he will serve as Vice
President-Administrative of the Crispaire Division of the Company. From 1981 to
1986, Mr. Sellers was controller for a manufacturing passenger and truck line
company. From 1976 through 1981, he served as assistant controller for Palmyra
Park Hospital in Albany, Georgia.
David L. Shuford. Mr. Shuford has been the Vice President of Sales and
Marketing of Crispaire since 1989. Upon completion of the Acquisition, he will
serve as Vice President-Sales and Marketing of the Crispaire Division of the
Company. From 1980 to 1986, Mr. Shuford held various sales and marketing
positions at E-Tech, including Government Marketing Manager. Prior to that, he
was vice president of a speciality construction company based in Atlanta for
five years.
Lonnie L. Snook. Mr. Snook has been Vice President-Manufacturing and
Engineering of RVP since 1989. Prior to that, Mr. Snook held various positions
at the Coleman Company, including Industrial Engineer, Manager of Industrial
Engineering and Production Superintendent and Factory Manager of RV Products.
55
<PAGE> 59
George D. Wyers. Mr. Wyers has been the President and Chief Executive
Officer of Crispaire since 1988. Upon completion of the Acquisition, he will
serve as President of the Crispaire Division of Airxcel. Prior to joining
Crispaire, Mr. Wyers spent twelve years as a General Manager of a leading air
conditioning equipment distributor based in Dallas, Texas.
Dean T. DuCray. Mr. DuCray has been a director of the Company since 1996.
Since 1987, Mr. DuCray has been Chief Financial Officer and Vice President of
York International Corporation, a manufacturer of heating and air conditioning
equipment.
Lawrence Jones. Mr. Jones has been a director of the Company since 1991.
Mr. Jones retired from The Coleman Company February 1, 1994 having served as its
Chairman and CEO since 1989. Mr. Jones served as Chairman of the Executive
Committee at The Coleman Company from 1994 to 1995. From 1995-1997, Mr. Jones
served as consultant and Chairman of Roller Blade (in line skates) and Prince
Sports (tennis rackets). Mr. Jones currently serves as a Director to Union
Pacific Resources (gas exploration) and The Coleman Company (outdoor sporting
goods). Mr. Jones retired from the Fleming Company's (food distribution) Board
of Directors on January 1, 1998.
Thomas F. McWilliams. Mr. McWilliams has been a director of the Company
since 1996. Mr. McWilliams has been affiliated with Citicorp Venture Capital,
Ltd. ("CVC"), a private equity investment company, since 1983 and presently
serves as managing director of CVC as well as a member of CVC's investment
committee. From 1978 until 1983, Mr. McWilliams served as an executive officer,
including as vice president, president and chief operating officer, of Shelter
Resources Corporation, a publicly-held company with operating subsidiaries in
the manufactured housing industry. From 1967 until 1978, Mr. McWilliams served
in various corporate finance and management positions at Citibank, N.A. Mr.
McWilliams is currently a director of each of Chase Brass Industries, Inc., Ergo
Science Corporation and various privately owned companies.
James A. Urry. Mr. Urry has been a director of the Company since 1996. Mr.
Urry has been with Citibank, N.A. since 1981, serving as a vice president since
1986. He has been a vice president of CVC since 1989. He is a director of
AmeriSource Health Corporation, CLARK Material Handling Corporation, CORT
Business Services Corporation, Hancor Holding Corporation, International Knife
and Saw Corporation, Palomar Technologies, Inc. and York International
Corporation.
COMPENSATION OF DIRECTORS
Directors of the Company who are officers, employees of the Company or its
affiliates are presently not expected to receive compensation for their services
as directors. Directors of the Company who are not officers or employees of the
Company or any of its affiliates receive $1,000 per Board meeting attended. In
addition, directors of the Company will be entitled to reimbursement of their
reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the board of directors or committees thereof.
56
<PAGE> 60
COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers of the Company is determined by the
Board of the Directors of the Company. The following table sets forth
information concerning compensation received by the five most highly compensated
officers of the Company for services rendered in the fiscal year ended December
31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------------------------
NAME AND -------------------- OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION SALARY BONUS SAR(#) PAYOUTS COMPENSATION(1)
- ------------------ --------- -------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Melvin L. Adams........................ $218,826 $ -- -- -- $3,822
President and Chief Executive Officer
Gregory G. Guinn....................... $100,543 $ -- -- -- $ 535
Vice President -- RVP Sales and
Marketing
Richard L. Schreck..................... $100,363 $ -- -- -- $ 355
Chief Financial Officer, Secretary and
Treasurer
Lonnie L. Snook........................ $100,958 $ -- -- -- $ 950
Vice President -- RVP Manufacturing and
Engineering
</TABLE>
- ---------------
(1) The named officers have participated in the Company's profit sharing, 401(k)
match, deferred compensation and excess benefit programs. The aggregate
payments made by the Company pursuant to such programs are listed as All
Other Compensation.
EMPLOYMENT AGREEMENTS
In connection with the Crispaire Acquisition, the Company entered into
employment agreements with each of Messrs. Sellers, Shuford and Wyers on
November 10, 1997. Each agreement is for a term that expires upon the earlier of
October 31, 2000, the executive's death, voluntary termination, termination by
resolution by the Board of Directors, or at the Company's option, the
executive's disability. Mr. Sellers' base salary is $60,840 per year. Mr.
Shuford's base salary is $93,095.20 per year. Mr. Wyers' base salary is $200,000
per year. Each executive is eligible for an annual performance bonus. Each
agreement contains a nonsolicitation provision, and Mr. Wyers' agreement
contains a noncompetition provision.
STOCK OPTION PLAN
The Board of Directors will adopt a stock plan (the "Stock Plan"), which
provides for the grant to certain key employees and/or directors of the Company
of stock options that are non-qualified options for federal income tax purposes.
The total number of shares of common stock of the Company expected to be granted
pursuant to the Stock Plan will represent 16% of the total number of issued and
outstanding shares of the Company. The Stock Plan will be administered by the
Compensation Committee of the Board of Directors. The Compensation Committee has
broad powers under the Stock Plan, including exclusive authority (except as
otherwise provided in the Stock Plan) to determine (i) who will receive awards,
(ii) the type, size and terms of awards, (iii) the time when awards will be
granted, and (iv) vesting criteria, if any, of the awards.
401(k) PLAN
Substantially all employees of the Company are eligible to participate in
the Company's 401(k) plan. Subject to certain conditions, the Company matches
30% of the employees' contributions up to a maximum of 6% of the employees'
annual salary. In addition, the Company can make an additional contribution
determined at the discretion of the Company's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Board of Directors comprise the members of the
Compensation Committee.
57
<PAGE> 61
SECURITY OWNERSHIP
All of the Company's issued and outstanding capital stock is owned by
Holdings. The following table sets forth certain information with respect to the
common and preferred equity interests of Holdings. See "The Transactions."
<TABLE>
<CAPTION>
COMMON STOCK PERCENTAGE OF AGGREGATE
BENEFICIALLY COMMON VOTING
NAME OF BENEFICIAL OWNER OWNED STOCK POWER
------------------------ ------------ ------------- ---------
<S> <C> <C> <C>
Citicorp Venture Capital, Ltd.(1)......................... 901,029.05 58.35(2) 40.46%
399 Park Avenue
New York, New York 10043
Melvin L. Adams........................................... 141,637.30 9.17 13.22%
George D. Wyers........................................... 138,331.53 8.96 12.91%
Gregory G. Guinn.......................................... 76,348.75 4.94 7.13%
Richard L. Schreck........................................ 76,348.75 4.94 7.13%
Lonnie L. Snook........................................... 61,583.75 3.99 5.75%
David L. Shuford.......................................... 30,740.35 1.99 2.87%
T.K. Sellers, Jr. ........................................ 15,370.17 .99 1.44%
All directors and executive officers as a group
(11 persons, including those named above)............... 573,762.58 37.16 52.18%
</TABLE>
- ---------------
* Less than one-percent.
(1) Includes shares held by employees and affiliates of CVC.
(2) Includes shares of (i) voting Class A Common Stock representing 40.46% of
outstanding voting Class A Common Stock and (ii) non-voting Class B Common
Stock.
STOCKHOLDERS AGREEMENT
In connection with the Crispaire Acquisition, Holdings, CVC and its
affiliates, and affiliates of Airxcel and Crispaire entered into an amended
stockholders agreement (the "Stockholders Agreement") which contains certain
agreements among such parties with respect to the equity interests and corporate
governance of Holdings and the Company. The Board of Directors of each of
Holdings and the Company is initially comprised of three (3) or five (5)
directors. CVC has the right to appoint one (1) or two (2) directors. Pursuant
to the Stockholders Agreement, the disposition of Common Stock and Preferred
Stock is restricted. The Stockholders Agreement also contains certain
participation rights, approval rights and rights of first offer exercisable by
certain stockholders in the event of certain sales or proposed sales of equity
interests.
58
<PAGE> 62
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
Concurrently with the consummation of the Transactions, the Company entered
into an agreement with The Chase Manhattan Bank to provide for a Revolving
Credit Facility (the "Credit Facility") which provided for borrowings in an
aggregate principal amount of up to $15 million. In connection with the KODA
Acquisition, the Company amended and restated the Credit Facility to provide for
borrowings in an aggregate principal amount of up to $38 million, consisting of
a $28 million Senior Revolving Credit Facility and a $10 million Senior Term
Loan. The following summary of the New Credit Facility contains all material
terms of the Credit Facility, but does not purport to be complete and is subject
to, and qualified in its entirety by reference thereto.
Borrowing Base. The Borrowing Base shall equal the sum of agreed upon
percentages of Eligible Receivables of the Company and Eligible Inventory of the
Company and cash collateral of the Company.
Security. In addition, the obligations of the Company under the New Credit
Facility are secured by substantially all of the assets of, and all of the
inventory and receivables of Airxcel.
Interest. The Credit Facility is a five-year facility and bears interest
at a rate per annum equal (at the Company's option) to: (i) the Agent's
Eurodollar rate plus an applicable margin or (ii) an alternate base rate plus an
applicable margin. Obligations of the Company under the Credit Facility not paid
when due shall bear interest at a default rate equal to 2% per annum above the
otherwise applicable rate. The Company is required to pay the lenders, on a
quarterly basis, commitment and other similar fees.
Prepayments. Voluntary prepayments of borrowings under the Credit Facility
and voluntary reductions of the unutilized portions of the Credit Facility are
permitted at any time in minimum principal amounts to be agreed upon.
Covenants. The Credit Facility contains a number of covenants that, among
other things, restricts the ability of the Company and its subsidiaries, subject
to certain exceptions, to dispose of assets, incur additional indebtedness,
incur guarantee obligations, prepay other indebtedness or amend other debt
instruments, make distributions or pay dividends on partnership interests or
capital stock, redeem and repurchase partnership interests or capital stock,
create liens on assets, enter into sale and leaseback transactions, make
investments, loans or advances, make acquisitions, engage in mergers or
consolidations, change the business conducted by the Company or its subsidiaries
or engage in certain transactions with affiliates and otherwise restrict certain
business activities. In addition, the Company is required to maintain compliance
with minimum interest coverage ratio and maximum leverage ratio.
The Credit Facility also contains provisions that prohibit any modification
of the Indenture without the consent of such lender.
59
<PAGE> 63
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under an Indenture (the "Indenture")
dated as of November 10, 1997 between the Company and the United States Trust
Company of New York, as trustee (the "Trustee"). The following summary of
includes a discussion of the material provisions of the Indenture, but does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), and to all of the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the Indenture.
The definitions of certain capitalized terms used in the following summary are
set forth below under "Certain Definitions." References in this "Description of
Exchange Notes" section and the "Exchange and Registration Rights Agreement,"
"Transfer Restrictions," and "Plan of Distribution" sections to "the Company"
mean only Airxcel, Inc.
GENERAL
The Notes are, and the Exchange Notes will be unsecured, senior
subordinated obligations of the Company. The Exchange Notes will be issued only
in registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. Pursuant to the Indenture, the Trustee, initially, will
serve as registrar and paying agent. No service charge will be made for any
registration of transfer or exchange of the Notes, except for any tax or other
governmental charge that may be imposed in connection therewith.
Initially, the Trustee will act as paying agent and registrar for the
Exchange Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Notes (which they replace) except that (i) the Exchange
Notes bear a Series B designation, (ii) the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of Exchange Notes will not be entitled
to certain rights under the Exchange and Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Notes in certain circumstances relating to the timing of the Exchange Offer,
which rights will terminate when the Exchange Offer is consummated.
RANKING
The Senior Subordinated Notes will rank junior to, and be subordinated in
right of payment to, all existing and future Senior Indebtedness of the Company,
pari passu in right of payment with all senior subordinated Indebtedness of the
Company and senior in right of payment to all Subordinated Indebtedness of the
Company. At December 31, 1997, on a pro forma basis after giving effect to the
Acquisitions, the Company would have approximately $25.4 million of Senior
Indebtedness outstanding and no senior subordinated Indebtedness, other than the
Notes. All debt incurred under the Senior Revolving Credit Facility will be
Senior Indebtedness of the Company and is secured by substantially all of the
assets of the Company and its Subsidiaries.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be limited to $125 million aggregate
principal amount (of which $90 million was issued in the Offering) and will
mature on November 15, 2007. Cash interest on the Senior Subordinated Notes will
accrue at a rate of 11% per annum and will be payable semi-annually in arrears
on each May 15 and November 15, commencing on May 15, 1998, to the holders of
record of Senior Subordinated Notes at the close of business on May 1 and
November 1, respectively, immediately preceding such interest payment date.
Interest will accrue from the most recent interest payment date to which
interest has been paid or, if no interest has been paid, from the date of
issuance. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
60
<PAGE> 64
OPTIONAL REDEMPTION
The Senior Subordinated Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 15, 2002, at the
redemption prices (expressed as a percentage of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the Redemption Date
(subject to the right of holders of record on the relevant Interest Record Date
to receive interest due on the relevant Interest Payment Date), if redeemed
during the 12-month period commencing on November 15, of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002........................................................ 105.500%
2003........................................................ 103.667%
2004........................................................ 101.833%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to November 15,
2000, the Company may redeem in the aggregate up to 35% of the originally issued
aggregate principal amount of the Senior Subordinated Notes with the net cash
proceeds of one or more Public Equity Offerings by the Company or Holdings at a
redemption price in cash equal to 111% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the Redemption Date (subject to
the right of Holders of record on the relevant Interest Record Date to receive
interest due on the relevant Interest Payment Date); provided, however, that at
least $60 million of the Senior Subordinated Notes must remain outstanding
immediately after giving effect to each such redemption (excluding any Senior
Subordinated Notes held by the Company or any of its Affiliates). Notice of any
such redemption must be given within 60 days after the date of the closing of
the relevant Public Equity Offering of the Company or Holdings.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Senior Subordinated Notes are to be
redeemed at any time pursuant to an optional redemption, selection of such
Senior Subordinated Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Subordinated Notes are listed or, if the Senior
Subordinated Notes are not then listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no Senior Subordinated Notes of a principal
amount of $1,000 or less shall be redeemed in part; provided, further, however,
that if a partial redemption is made with the net cash proceeds of a Public
Equity Offering by the Company or Holdings, selection of the Senior Subordinated
Notes or portions thereof for redemption shall be made by the Trustee only on a
pro rata basis or on as nearly a pro rata basis as is practicable (subject to
the procedures of the Depository), unless such method is otherwise prohibited.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Senior
Subordinated Notes to be redeemed at such holder's registered address. If any
Senior Subordinated Note is to be redeemed in part only, the notice of
redemption that relates to such Senior Subordinated Note shall state the portion
of the principal amount thereof to be redeemed. A new Senior Subordinated Note
in a principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Senior
Subordinated Note. On and after the Redemption Date, interest will cease to
accrue on Senior Subordinated Notes or portions thereof called for redemption as
long as the Company has deposited with the paying agent for the Senior
Subordinated Notes funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
SUBORDINATION OF THE SENIOR SUBORDINATED NOTES
The payment of the principal of, premium, if any, and interest on the
Senior Subordinated Notes is subordinated in right of payment, to the extent and
in the manner provided in the Indenture, to the prior payment in full in cash of
all Senior Indebtedness.
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<PAGE> 65
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities and excluding any payment
from funds deposited in accordance with, and held in trust for the benefit of
Holders pursuant to, "Legal Defeasance and Covenant Defeasance" (a "Defeasance
Trust Payment")), upon any dissolution or winding-up or total liquidation or
reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all Senior
Indebtedness then due shall first be paid in full in cash before the Holders of
the Senior Subordinated Notes or the Trustee on behalf of such Holders shall be
entitled to receive any payment by the Company of the principal of, premium, if
any, or interest on the Senior Subordinated Notes, or any payment by the Company
to acquire any of the Senior Subordinated Notes for cash, property or
securities, or any distribution by the Company with respect to the Senior
Subordinated Notes of any cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment). Before any payment may be made by, or on behalf of, the Company of the
principal of, premium, if any, or interest on the Senior Subordinated Notes upon
any such dissolution or winding-up or total liquidation or reorganization,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, any payment or distribution of assets or securities of the
Company of any kind or character, whether in cash, property or securities
(excluding any payment or distribution of Permitted Junior Securities and
excluding any Defeasance Trust Payment), to which the Holders of the Senior
Subordinated Notes or the Trustee on their behalf would be entitled, but for the
subordination provisions of the Indenture, shall be made by the Company or by
any receiver, trustee in bankruptcy, liquidation trustee, agent or other Person
making such payment or distribution, directly to the holders of the Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to the
trustee or trustees or agent or agents under any agreement or indenture pursuant
to which any of such Senior Indebtedness may have been issued, as their
respective interests may appear, to the extent necessary to pay all such Senior
Indebtedness in full in cash after giving effect to any prior or concurrent
payment, distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by or on
behalf of the Company of principal of, premium, if any, or interest on the
Senior Subordinated Notes, whether pursuant to the terms of the Senior
Subordinated Notes, upon acceleration, pursuant to an Offer to Purchase or
otherwise, shall be made if, at the time of such payment, there exists a default
in the payment of all or any portion of the obligations on any Designated Senior
Indebtedness, whether at maturity, on account of mandatory redemption or
prepayment, acceleration or otherwise, and such default shall not have been
cured or waived or the benefits of this sentence waived by or on behalf of the
holders of such Designated Senior Indebtedness. In addition, during the
continuance of any non-payment event of default with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be immediately
accelerated, and upon receipt by the Trustee of written notice (a "Payment
Blockage Notice") from the holder or holders of such Designated Senior
Indebtedness or the trustee or agent acting on behalf of the holders of such
Designated Senior Indebtedness, then, unless and until such non-payment event of
default has been cured or waived or has ceased to exist or such Designated
Senior Indebtedness has been discharged or repaid in full in cash or the
benefits of these provisions have been waived by the holders of such Designated
Senior Indebtedness, no direct or indirect payment (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment) will be made by or on behalf of the Company of principal of, premium,
if any, or interest on the Senior Subordinated Notes, whether pursuant to the
terms of the Senior Subordinated Notes, upon acceleration, pursuant to an Offer
to Purchase or otherwise, to such Holders, during a period (a "Payment Blockage
Period") commencing on the date of receipt of such notice by the Trustee and
ending 179 days thereafter. Notwithstanding anything in the Indenture or in
Senior Subordinated Notes to the contrary, (x) in no event will a Payment
Blockage
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<PAGE> 66
Period extend beyond 179 days from the date the Payment Blockage Notice in
respect thereof was given, (y) there shall be a period of at least 181
consecutive days in each 360-day period when no Payment Blockage Period is in
effect and (z) not more than one Payment Blockage Period may be commenced with
respect to the Senior Subordinated Notes during any period of 360 consecutive
days. No non-payment event of default that existed or was continuing on the date
of commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period (to the extent the
holder of Designated Senior Indebtedness, or trustee or agent, giving notice
commencing such Payment Blockage Period had knowledge of such existing or
continuing event of default) may be, or be made, the basis for the commencement
of any other Payment Blockage Period by the holder or holders of such Designated
Senior Indebtedness or the trustee or agent acting on behalf of such Designated
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such non-payment event of default has been cured or waived for a period
of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Senior Subordinated Notes by reason of the provisions of the Indenture described
under this "Subordination of the Senior Subordinated Notes" heading will not be
construed as preventing the occurrence of any Event of Default in respect of the
Senior Subordinated Notes. See "Events of Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Senior Subordinated Notes will be paid to the holders of Senior Indebtedness
to the extent necessary to pay the Senior Indebtedness in full in cash, and the
Company may be unable to meet fully or at all its obligations with respect to
the Senior Subordinated Notes.
Subject to the restrictions set forth in the Indenture, in the future the
Company may issue Senior Indebtedness, including borrowings under the Credit
Facility.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Senior Subordinated Notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the Purchase Date (subject to the right of Holders of
record on the relevant Interest Record Date to receive interest due on the
relevant Interest Payment Date), pursuant to the offer described below and the
other procedures set forth in the Indenture:
(a) prior to the earlier to occur of the first public offering of
Voting Equity Interests of Holdings or the Company, the Permitted Holders
ceased to be entitled (by "beneficial ownership" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of Voting Equity Interests, contract or
otherwise) to elect or cause the election of directors of the Company
having a majority of the total voting power of the Board of Directors of
the Company, whether as a result of issuance of securities of the Company,
any merger, consolidation, liquidation or dissolution of the Company, any
direct or indirect transfer of securities by any Permitted Holder or
otherwise (for purposes of this clause (a), the Permitted Holders shall be
deemed to beneficially own any Voting Equity Interests of a corporation
(the "specified corporation") held by any other corporation (the "parent
corporation") so long as one or more of the Permitted Holders beneficially
own (as so defined), directly or indirectly, in the aggregate a majority of
the voting power of the Voting Stock of the parent corporation);
(b) after the first public offering of Voting Equity Interests of
Holdings or the Company, any person or group (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more of
the Permitted Holders, is or becomes the beneficial owner (as defined in
clause (a) above), directly or indirectly, of Voting Equity Interests that
represents more than 50% of the aggregate ordinary voting power of all
classes of the Voting Equity Interests of Holdings or the Company voting
together as a single class, and either (x) the Permitted Holders
beneficially own (as defined in clause (a) above), directly or indirectly,
in the
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aggregate Voting Equity Interests that represents a lesser percentage of
the aggregate ordinary voting power of all classes of the Voting Equity
Interests of Holdings or the Company, as the case may be, voting together
as a single class, than such other person or group and are not entitled (by
voting power, contract or otherwise) to elect directors of Holdings or the
Company having a majority of the total voting power of the board of
directors of Holdings or the Company, as the case may be, or (y) such other
person or group is entitled to elect directors of Holdings or the Company
having a majority of the total voting power of the board of directors of
Holdings or the Company;
(c) after the first public offering of Voting Equity Interests of
Holdings or the Company, during any period of not greater than two
consecutive years beginning after the Issue Date, individuals who at the
beginning of such period constituted the board of directors of Holdings or
the Company, as the case may be (together with any new directors whose
election by such board of directors, or whose nomination for election by
shareholders was approved by the Permitted Holders or by such board of
directors, in each case by a vote of a majority of the directors of
Holdings or the Company, as the case may be, then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved), cease for any reason
to have a majority of the total voting power of the board of directors of
Holdings or the Company, as the case may be; or
(d) any sale, lease, or other transfer (in one transaction or in a
series of related transactions) is made by the Company of all or
substantially all of the consolidated assets of the Company to any Person.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating, among other things:
(1) that a Change of Control has occurred and that such Holder has the right to
require the Company to purchase all or any portion of such Holder's Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of Holders of record on a Interest Record Date
to receive interest on the relevant Interest Payment Date); (2) the
circumstances and relevant facts and financial information regarding such Change
of Control; (3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Notes or any portion thereof purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Subordinated Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations described above by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or Holdings would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions or other recapitalizations, that
would not constitute a Change of Control under the Indenture, but that could
increase the amount of indebtedness outstanding at such time or otherwise affect
the Company's capital structure or credit ratings.
The occurrence of a Change of Control would constitute a default under the
Credit Facility. Future Senior Indebtedness of the Company may contain
prohibitions of certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Senior Subordinated Notes could cause a default under such Senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the
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Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any repurchases require in connection with a Change of Control. The
Company's failure to purchase the Senior Subordinated Notes in connection with a
Change of Control would result in the default under the Indenture.
CERTAIN COVENANTS
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any Subsidiary to, directly or indirectly, Incur any Indebtedness
(including Acquired Indebtedness), except for Permitted Indebtedness; provided,
however, that the Company may Incur Indebtedness if, at the time of and
immediately after giving pro forma effect to such Incurrence of Indebtedness and
the application of the proceeds therefrom, the Consolidated Coverage Ratio would
be greater than 2.0 to 1.0 if incurred prior to the second anniversary of the
Issue Date and 2.25 to 1.0 if incurred thereafter.
The limitations contained in the preceding paragraph will not apply to the
Incurrence of any of the following (collectively, "Permitted Indebtedness"),
each of which shall be given independent effect:
(a) Indebtedness outstanding on the Issue Date, including Indebtedness
under the Notes;
(b) Indebtedness of the Company Incurred under the Credit Facility in
an aggregate principal amount at any one time outstanding not to exceed the
greater of (I) $15 million and (II) the sum of (x) 60% of the book value of
inventory of the Company and its Subsidiaries and (y) 85% of the book value
of the accounts receivable of the Company and its Subsidiaries, in each
case determined in accordance with GAAP;
(c) Indebtedness of any Subsidiary of the Company owed to and held by
the Company or any Wholly Owned Subsidiary, and Indebtedness of the Company
owed to and held by any Wholly Owned Subsidiary that is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the Indenture and the
Senior Subordinated Notes; provided, however, that an Incurrence of
Indebtedness that is not permitted by this clause (c) shall be deemed to
have occurred upon (i) any sale or other disposition of any Indebtedness of
the Company or any Subsidiary of the Company referred to in this clause (c)
to a Person (other than the Company or a Wholly Owned Subsidiary), (ii) any
sale or other disposition of Equity Interests of any Subsidiary which holds
Indebtedness of the Company or another Subsidiary;
(d) Interest Rate Protection Obligations; provided, however, that such
Interest Rate Protection Obligations have been entered into for bona fide
business purposes and not for speculation;
(e) Purchase Money Indebtedness and Capitalized Lease Obligations of
the Company or any Subsidiary of the Company and other Indebtedness of the
Company, in an aggregate principal amount at any one time outstanding not
to exceed the greater of (a) $5 million or (b) 5% of Total Assets;
(f) Indebtedness of the Company under Currency Agreements; provided,
however, (i) that such Currency Agreements have been entered into for bona
fide business purposes and not for speculation and (ii) that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Subsidiaries
outstanding other than as a result of fluctuations in foreign currency
exchange rates or by reason of fees, indemnities and compensation payable
thereunder;
(g) Indebtedness to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness (other than Indebtedness
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Incurred under clauses (b), (c), (d), (e), (f), (h), (i), (j) or (l) of
this covenant); provided, however, that (i) any such refinancing shall not
exceed the sum of the principal amount (or accreted amount (determined in
accordance with GAAP), if less) of the Indebtedness being refinanced, plus
the amount of accrued interest thereon, plus the amount of any reasonably
determined prepayment premium necessary to accomplish such refinancing and
such reasonable fees and expenses incurred in connection therewith, (ii)
Indebtedness representing a refinancing of Indebtedness other than Senior
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced; (iii) Indebtedness that is pari passu with the Notes may
only be refinanced with Indebtedness that is made pari passu with or
subordinate in right of payment to the Notes and Subordinated Indebtedness
may only be refinanced with Subordinated Indebtedness; and (iv)
Indebtedness of the Company may only be refinanced by Indebtedness of the
Company and Indebtedness of a Subsidiary of the Company may only be
refinanced by Indebtedness of Subsidiaries or by the Company;
(h) guarantees by a Subsidiary of the Company of Senior Indebtedness
Incurred by the Company or in respect of letters of credit provided to
support such Indebtedness so long as the Incurrence of such Indebtedness is
otherwise permitted by the terms of the Indenture;
(i) Indebtedness in respect of judgment, appeal, surety, performance
and other like bonds, bankers' acceptances and letters of credit provided
by the Company and its Subsidiaries in the ordinary course of business;
(j) Indebtedness of the Company or any Subsidiary consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments, in connection with the acquisition or disposition of any
business, assets or Subsidiary of the Company permitted under the
Indenture;
(k) Indebtedness of the Company or the Subsidiaries, to the extent the
proceeds thereof are immediately used after the incurrence thereof to
purchase Senior Subordinated Notes tendered in an offer to purchase made as
a result of a Change of Control;
(l) Indebtedness of the Company or the Subsidiaries owed to (including
obligations in respect of letters of credit for the benefit of) any Person
in connection with liability insurance provided by such Person to the
Company or any Subsidiary or pursuant to reimbursement or indemnification
obligations to such Person, in each case incurred in the ordinary course of
business; and
(m) Indebtedness of the Company or the Subsidiaries not to exceed $5
million in aggregate principal amount at any time outstanding, which
Indebtedness may be incurred pursuant to clause (b) above.
Limitation on Senior Subordinated Indebtedness. The Company shall not,
directly or indirectly, Incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Senior Subordinated Notes and subordinate
in right of payment to any other Indebtedness of the Company.
The Company shall not permit any Guarantor to, and no Guarantor shall,
directly or indirectly, Incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Guaranty of such Guarantor and expressly
rank subordinate in right of payment to any Guarantor Senior Indebtedness.
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any Subsidiary of the Company to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any
Equity Interests of the Company or any Subsidiary of the Company or make
any payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any
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Subsidiary of the Company (other than any dividends, distributions and
payments made to the Company or any Wholly Owned Subsidiary of the Company
(and, if such Subsidiary has shareholders other than the Company or another
Subsidiary, to its other shareholders on a pro rata basis or on a basis
that results in the receipt by the Company or a Subsidiary of dividends or
distributions of equal or greater value) and dividends or distributions
payable to any Person solely in Qualified Equity Interests of the Company
or in options, warrants or other rights to purchase Qualified Equity
Interests of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Subsidiary of the Company (other
than any such Equity Interests owned by the Company or any Subsidiary of
the Company); or
(iii) make any Investment in any Person (other than Permitted
Investments)
(any such payment or any other action (other than any exception thereto)
described in (i), (ii) or (iii) referred to as a "Restricted Payment"), unless
(a) no Default or Event of Default shall have occurred and be
continuing at the time or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the Consolidated Coverage Ratio of the first
paragraph of "Limitation on Indebtedness" above; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of (1) 50% of
cumulative Consolidated Net Income determined for the period (taken as one
period) from the beginning of the first fiscal quarter commencing after the
Issue Date and ending on the last day of the most recent fiscal quarter
immediately preceding the date of such Restricted Payment for which
consolidated financial information of the Company is available (or if such
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss), plus (2) 100% of the aggregate net cash proceeds received by the
Company either (x) as capital contributions to the Company after the Issue
Date or (y) from the issue and sale (other than to a Subsidiary of the
Company) of its Qualified Equity Interests after the Issue Date (excluding
the net proceeds from any issuance and sale of Qualified Equity Interests
financed, directly or indirectly, using funds borrowed from the Company or
any Subsidiary of the Company until and to the extent such borrowing is
repaid), plus (3) the principal amount (or accreted amount (determined in
accordance with GAAP), if less) of any Indebtedness of the Company or any
Subsidiary of the Company Incurred after the Issue Date which has been
converted into or exchanged for Qualified Equity Interests of the Company
(minus the amount of any cash or property distributed by the Company or any
Subsidiary of the Company upon such conversion or exchange), plus (4) in
the case of the disposition or repayment of any Investment constituting a
Restricted Payment made after the Issue Date, an amount equal to 100% of
the net cash proceeds thereof (or dividends, distributions or interest
payments received in cash thereon).
The foregoing provisions will not prevent (i) the payment of any dividend
or distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of such
formal notice such payment or redemption would comply with the provisions of the
Indenture; (ii) the purchase, redemption, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the net cash proceeds
of the substantially concurrent issue and sale (other than to a Subsidiary of
the Company) of, Qualified Equity Interests of the Company; provided, however,
that any such net cash proceeds and the value of any Qualified Equity Interests
issued in exchange for such retired Equity Interests are excluded from clause
(c)(2) of the preceding paragraph (and were not included therein at any time);
(iii) the purchase, redemption,
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retirement or other acquisition of Disqualified Equity Interests made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Disqualified Equity Interests; (iv) payments in lieu of fractional shares in
amount not in excess of $250,000 in the aggregate; (v) payments by the Company
to Holdings to pay Federal, state and local taxes to the extent such taxes are
attributable to the Company and its Subsidiaries; (vi) in each case to the
extent such payments by Holdings are attributable to the Company and its
Subsidiaries, payments by the Company to Holding not to exceed an amount
necessary to permit Holdings to (A) make payments in respect to its
indemnification obligations owing to directors, officers or other Persons under
Holdings' charter or by-laws or pursuant to written agreements with any such
Person, (B) make payments in respect of its other operational expenses (other
than taxes) incurred in the ordinary course of business (it being understood
that management fees or other similar fees or arrangements shall not be deemed
as incurred in the ordinary course of business), or (C) make payments in respect
of indemnification obligations and costs and expenses incurred by Holdings in
connection with any offering of Common Stock of Holdings;(vii) the purchase,
redemption or other acquisition for value of Equity Interests of the Company or
Holdings (other than Disqualified Equity Interests) or options on such shares
held by officers or employees or former officers or employees (or their estates
or beneficiaries under their estates) upon the death, disability, retirement or
termination of employment of such current or former officers or employees
pursuant to the terms of an employee benefit plan or any other agreement
pursuant to which such Equity Interests or options were issued or pursuant to a
severance, buy-sell or right of first refusal agreement with such current or
former officer or employee or payments to Holdings to make such purchase,
redemption or other acquisition of such Equity Interests or options; provided,
however, that the aggregate cash consideration paid, or distributions made,
pursuant to this clause (vii) do not in any one fiscal year exceed $500,000; and
(viii) Investments constituting Restricted Payments made as a result of the
receipt of non-cash consideration from any Asset Sale made pursuant to and in
compliance with "-- Disposition of Proceeds of Asset Sales" below; provided
however, that in the case of each of clauses (ii) through (viii), no Default or
Event of Default shall have occurred and be continuing or would arise therefrom.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (vi), (vii) and (viii) of
the immediately preceding paragraph shall be included as Restricted Payments.
The amount of any non-cash Restricted Payment shall be deemed to be equal to the
Fair Market Value thereof at the date of the making of such Restricted Payment.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company shall not, and shall not cause or permit any
Subsidiary of the Company to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or restriction
on the ability of any Subsidiary of the Company to (a) pay dividends or make any
other distributions to the Company or any other Subsidiary of the Company on its
Equity Interests or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Company or any
other Subsidiary of the Company, (b) make loans or advances to, or guarantee any
Indebtedness or other obligations of, or make any Investment in, the Company or
any other Subsidiary of the Company or (c) transfer any of its properties or
assets to the Company or any other Subsidiary of the Company, except for such
encumbrances or restrictions existing under or by reason of (i) the Credit
Facility as in effect on the Issue Date, any other agreement of the Company or
its Subsidiaries outstanding from time to time governing Senior Indebtedness
provided that such encumbrances or restrictions are no more adverse to the
Company than those contained in the Credit Facility as in effect on the Issue
Date, and any other agreement of the Company or its Subsidiaries outstanding on
the Issue Date as in effect on the Issue Date and any amendments, restatements,
renewals, replacements or refinancings thereof; provided, however, that any such
amendment, restatement, renewal, replacement or refinancing is no more
restrictive with respect to such encumbrances or restrictions than those
contained in the agreement being amended, restated, reviewed, replaced or
refinanced; (ii) applicable law; (iii) any instrument governing Indebtedness or
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Equity Interests of an Acquired Person acquired by the Company or any Subsidiary
of the Company as in effect at the time of such acquisition (except to the
extent such Indebtedness was Incurred by such Acquired Person in connection
with, as a result of or in contemplation of such acquisition); provided,
however, that such encumbrances and restrictions are not applicable to the
Company or any Subsidiary of the Company, or the properties or assets of the
Company or any Subsidiary of the Company, other than the Acquired Person; (iv)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices; (v) Purchase Money
Indebtedness for property acquired in the ordinary course of business that only
imposes encumbrances and restrictions on the property so acquired; (vi) any
agreement for the sale or disposition of the Equity Interests or assets of any
Subsidiary of the Company; provided, however, that such encumbrances and
restrictions described in this clause (vi) are only applicable to such
Subsidiary or assets, as applicable, and any such sale or disposition is made in
compliance with "Disposition of Proceeds of Asset Sales" below to the extent
applicable thereto; (vii) refinancing Indebtedness permitted under clause (g) of
the second paragraph of "Limitation on Indebtedness" above; provided, however,
that such encumbrances and restrictions contained in the agreements governing
such Indebtedness are no more restrictive in the aggregate than those contained
in the agreements governing such Indebtedness being refinanced immediately prior
to such refinancing; (viii) security agreements or mortgages securing
Indebtedness of a Subsidiary which are not prohibited by the covenant described
under "-- Limitation on Liens" to the extent such encumbrances or restrictions
restrict the transfer of the property or assets subject to such security
agreements or mortgages; or (ix) the Indenture.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Subsidiary of the Company to, directly or indirectly, Incur any Liens of any
kind against or upon any of their respective properties or assets now owned or
hereafter acquired, or any proceeds therefrom or any income or profits
therefrom, to secure any Indebtedness unless contemporaneously therewith
effective provision is made to secure the Senior Subordinated Notes and all
other amounts due under the Indenture, equally and ratably with such
Indebtedness (or, in the event that such Indebtedness is subordinated in right
of payment to the Senior Subordinated Notes prior to such Indebtedness) with a
Lien on the same properties and assets securing such Indebtedness for so long as
such Indebtedness is secured by such Lien, except for (i) Liens securing Senior
Indebtedness and (ii) Permitted Liens.
Disposition of Proceeds of Asset Sales. The Company shall not, and shall
not cause or permit any Subsidiary of the Company to, directly or indirectly,
make any Asset Sale, unless (i) the Company or such Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of and (ii) at least
75% of such consideration consists of (A) cash or Cash Equivalents or (B)
properties and capital assets that replace the properties and assets that were
the subject of such Asset Sale or in properties and capital assets that will be
used in the business of the Company and its Subsidiaries as existing on the
Issue Date or in businesses reasonably related thereto (as determined in good
faith by the Company's Board of Directors) ("Replacement Assets"), provided that
if the property or assets subject to such Asset Sale were directly owned by the
Company such Replacement Assets also shall be so directly owned. Each of (w) the
amount of any Indebtedness (other than any Subordinated Indebtedness) of the
Company or any Subsidiary of the Company that is actually assumed by the
transferee in such Asset Sale and from which the Company and its Subsidiaries
are fully and unconditionally released, (x) securities received by the Company
or any Subsidiary from the transferee that are immediately converted by the
Company or such Subsidiary into cash or Cash Equivalents, (y) Indebtedness of
any Subsidiary that is no longer a Subsidiary as a result of such Asset Sale, to
the extent that the Company and each other Subsidiary is released from any
guarantee of such Indebtedness in connection with such Asset Sale, and (z)
consideration consisting of Indebtedness of the Company or any Subsidiary, shall
be deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or its Subsidiaries.
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The Company or such Subsidiary of the Company, as the case may be, may (i)
apply the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof
to reduce Senior Indebtedness or (ii) make an Investment in Replacement Assets.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied as described in clause (i) or (ii) of the immediately preceding
paragraph within the time periods set forth therein (the "Net Proceeds
Utilization Date") (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"),
the Company shall, within 30 days after such Net Proceeds Utilization Date, make
an Offer to Purchase all outstanding Senior Subordinated Notes up to a maximum
principal amount (expressed as a multiple of $1,000) of Notes equal to such
Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Purchase Date; provided, however, that the Offer to Purchase may be deferred
until there are aggregate Unutilized Net Cash Proceeds equal to or in excess of
$5 million, at which time the entire amount of such Unutilized Net Cash
Proceeds, and not just the amount in excess of $5 million, shall be applied as
required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the Senior Subordinated Notes, to the extent the aggregate principal
amount of Senior Subordinated Notes tendered pursuant to such Offer to Purchase
exceeds the Unutilized Net Cash Proceeds to be applied to the repurchase
thereof, such Senior Subordinated Notes shall be purchased pro rata based on the
aggregate principal amount of such Senior Subordinated Notes tendered by each
Holder. To the extent the Unutilized Net Cash Proceeds exceed the aggregate
amount of Senior Subordinated Notes tendered by the Holders of the Senior
Subordinated Notes pursuant to such Offer to Purchase, the Company may retain
and utilize any portion of the Unutilized Net Cash Proceeds not required to be
applied to repurchase Senior Subordinated Notes tendered pursuant to such Offer
for any purpose consistent with the other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Senior
Subordinated Notes, the Company shall comply with any applicable securities laws
and regulations, including any applicable requirements of Section 14(e) of, and
Rule 14e-1 under, the Exchange Act, and any violation of the provisions of the
Indenture relating to such Offer to Purchase occurring as a result of such
compliance shall not be deemed an Event of Default or an event that with the
passing of time or giving of notice, or both, would constitute an Event of
Default.
Each Holder shall be entitled to tender all or any portion of the Senior
Subordinated Notes owned by such Holder pursuant to the Offer to Purchase,
subject to the requirement that any portion of Note tendered must be tendered in
an integral multiple of $1,000 principal amount and subject to any proration
among tendering Holders as described above.
Merger, Sale of Assets, etc. The Indenture will provide that the Company
shall not consolidate with or merge with or into any other entity and the
Company shall not and shall not cause or permit any Subsidiary to, sell, convey,
assign, transfer, lease or otherwise dispose of all or substantially all of the
Company's and its Subsidiaries' properties and assets (determined on a
consolidated basis for the Company and its Subsidiaries) to any entity in a
single transaction or series of related transactions, unless: (i) either (x) the
Company shall be the Surviving Person or (y) the Surviving Person (if other than
the Company) shall be a corporation organized and validly existing under the
laws of the United States of America or any State thereof or the District of
Columbia, and shall, in any such case, expressly assume by a supplemental
indenture, the due and punctual payment of the principal of, premium, if any,
and interest on all the Notes and the performance and observance of every
covenant of the Indenture and the Exchange and Registration Rights Agreement to
be performed or observed on the part of the Company; and (ii) immediately
thereafter, no Default or Event of Default shall have occurred and be
continuing.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Subsidiaries of the
Company the Equity Interests of which constitutes all or substantially all the
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properties and assets of the Company shall be deemed to be the transfer of all
or substantially all the properties and assets of the Company.
Transactions with Affiliates. The Company shall not, and shall not cause
or permit any Subsidiary of the Company to, directly or indirectly, conduct any
business or enter into any transaction (or series of related transactions) with
or for the benefit of any of their respective Affiliates (each an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms which are no
less favorable to the Company or such Subsidiary, as the case may be, than would
be available in a comparable transaction with an unaffiliated third party and
(ii) if such Affiliate Transaction (or series of related Affiliate Transactions)
involves aggregate payments or other consideration having a Fair Market Value in
excess of $1 million, a majority of the disinterested members of the Board of
Directors of the Company shall have approved such Affiliate Transaction and
determined that such Affiliate Transaction complies with the foregoing
provisions. In addition, any Affiliate Transaction involving aggregate payments
or other consideration having a Fair Market Value in excess of $7.5 million will
also require a written opinion from an Independent Financial Advisor stating
that the terms of such Affiliate Transaction are fair, from a financial point of
view, to the Company or its Subsidiaries involved in such Affiliate Transaction,
as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and any Wholly
Owned Subsidiary or between or among Wholly Owned Subsidiaries; (ii) reasonable
fees and compensation paid to and indemnity provided on behalf of, officers,
directors, employees or agents of the Company, Holdings or any Subsidiary of the
Company as determined in good faith by the Company's Board of Directors; (iii)
any transactions undertaken pursuant to any contractual obligations in existence
on the Issue Date (as in effect on the Issue Date); (iv) any Restricted Payments
or Permitted Investments made in compliance with "Limitation on Restricted
Payments" above; (v) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors to employees of the Company or its Subsidiaries who are not
otherwise Affiliates of the Company; and (vi) loans or advances to employees
that are Affiliates of the Company in the ordinary course of business, but in
any event not to exceed $750,000 in the aggregate outstanding at any one time.
Limitation on the Sale or Issuance of Equity Interests of
Subsidiaries. The Company shall not sell any Equity Interest of a Subsidiary of
the Company, and shall not cause or permit any Subsidiary of the Company,
directly or indirectly, to issue or sell any Equity Interests (other than
directors' qualifying shares, to the extent mandated by applicable law), except
to the Company or a Wholly Owned Subsidiary. Notwithstanding the foregoing, the
Company is permitted to sell all the Equity Interest of a Subsidiary of the
Company as long as the Company is in compliance with the terms of the covenant
described under "Disposition of Proceeds of Asset Sales" and, if applicable,
"Merger, Sale of Assets, Etc." above.
Restriction on Transfer of Assets to Subsidiaries. The Indenture will
provide that if the Company transfers or causes to be transferred, in one or a
series of related transactions, assets to any one or more Subsidiaries of the
Company so that, after giving effect to such transfer, either (x) more than 15%
of the Company's consolidated total assets are owned by Subsidiaries of the
Company or (y) more than 15% of the Company's Consolidated EBITDA is derived
from Subsidiaries of the Company, the Company shall cause such Subsidiaries to
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Subsidiaries shall
unconditionally guarantee, on a senior subordinated basis, all the Company's
obligations under the Notes and (ii) deliver to the Trustee an Opinion of
Counsel that such supplemental indenture has been duly executed and delivered by
such Subsidiaries; provided that if no Default or Event of Default shall have
occurred or be continuing, and neither condition (x) or (y) is then met, such
guarantees will automatically, with no action required on behalf of the Company
or its Subsidiaries be released.
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Provision of Financial Information. Following the effectiveness of the
Exchange Offer Registration Statement, whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto,
the Company shall file with the SEC (if permitted by SEC practice and applicable
law and regulations) the annual reports, quarterly reports and other documents
which the Company would have been required to file with the SEC pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if the Company were so
subject, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required so to file such documents if the Company were so subject. The Company
shall also in any event (a) within 15 days of each Required Filing Date (whether
or not permitted or required to be filed with the SEC) (i) transmit (or cause to
be transmitted) by mail to all Holders, as their names and addresses appear in
the Note register, without cost to such Holders, and (ii) file with the Trustee,
copies of the annual reports, quarterly reports and other documents which the
Company is required to file with the SEC pursuant to the preceding sentence, or,
if such filing is not so permitted, information and data of a similar nature,
and (b) if, notwithstanding the preceding sentence, filing such documents by the
Company with the SEC is not permitted by SEC practice or applicable law or
regulations, promptly upon written request supply copies of such documents to
any Holder. In addition, for so long as any Senior Subordinated Notes remain
outstanding and prior to the later of the consummation of the Exchange Offer and
the filing of the Initial Shelf Registration Statement, if required, the Company
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of
Notes, if not obtainable from the SEC, information of the type that would be
filed with the SEC pursuant to the foregoing provisions, upon the request of any
such Holder.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the Indenture: (a) failure to pay principal of (or premium, if
any, on) any Senior Subordinated Note when due (whether or not prohibited by the
provisions of the Indenture described under "Subordination of the Senior
Subordinated Notes" above); (b) failure to pay any interest on any Senior
Subordinated Note when due, continued for 30 days or more (whether or not
prohibited by the provisions of the Indenture described under "Subordination of
the Senior Subordinated Notes" above); (c) default in the payment of principal
of or interest on any Senior Subordinated Note required to be purchased pursuant
to any Offer to Purchase required by the Indenture when due and payable or
failure to pay on the Purchase Date the Purchase Price for any Senior
Subordinated Note validly tendered pursuant to any Offer to Purchase (whether or
not prohibited by the provisions of the Indenture described under "Subordination
of the Senior Subordinated Notes" above); (d) failure to perform or comply with
any of the provisions described under "Certain Covenants -- Merger, Sale of
Assets, etc." above; (e) failure to perform any other covenant, warranty or
agreement of the Company under the Indenture or in the Senior Subordinated
Notes, continued for 30 days or more after written notice to the Company by the
Trustee or Holders of at least 25% in aggregate principal amount of the
outstanding Senior Subordinated Notes; (f) default or defaults under the terms
of one or more instruments evidencing or securing Indebtedness of the Company or
any of its Subsidiaries having an outstanding principal amount of $5.0 million
or more individually or in the aggregate that has resulted in the acceleration
of the payment of such Indebtedness or failure by the Company or any of its
Subsidiaries to pay principal when due at the stated maturity of any such
Indebtedness and such default or defaults shall have continued after any
applicable grace period and shall not have been cured or waived; (g) the
rendering of a final judgment or judgments (not subject to appeal) against the
Company or any of its Subsidiaries in an amount of $5.0 million or more (net of
any amounts covered by reputable and creditworthy insurance companies) which
remains undischarged or unstayed for a period of 60 days after the date on which
the right to appeal has expired; or (h) certain events of bankruptcy, insolvency
or reorganization affecting the Company or any of its Significant Subsidiaries.
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Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of Senior
Subordinated Notes, unless such Holders shall have offered to the Trustee
reasonable indemnity. Subject to such provisions for the indemnification of the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Senior Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on such Trustee.
If an Event of Default with respect to the Senior Subordinated Notes (other
than an Event of Default described in clause (h) of the preceding paragraph)
occurs and is continuing, the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Senior Subordinated Notes, by
notice in writing to the Company may declare the unpaid principal of (and
premium, if any) and accrued interest to the date of acceleration on all the
outstanding Senior Subordinated Notes to be due and payable immediately and,
upon any such declaration, such principal amount (and premium, if any) and
accrued interest, notwithstanding anything contained in the Indenture or the
Senior Subordinated Notes to the contrary, shall become immediately due and
payable. If an Event or Default specified in clause (h) of the preceding
paragraph occurs under the Indenture, the Senior Subordinated Notes will ipso
facto become immediately due and payable without any declaration or other act on
the part of the Trustee or any Holder of the Senior Subordinated Notes.
Any such declaration with respect to the Senior Subordinated Notes may be
rescinded and annulled by the Holders of a majority in aggregate principal
amount of the outstanding Senior Subordinated Notes upon the conditions provided
in the Indenture. For information as to waiver of defaults, see "Modification
and Waiver" below.
The Indenture will provide that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Senior
Subordinated Notes outstanding becomes known to it, give the Holders of the
Senior Subordinated Notes thereof notice of all uncured Defaults or Events of
Default thereunder known to it; provided, however, that, except in the case of a
Default or an Event of Default in payment with respect to the Senior
Subordinated Notes or a Default or Event of Default in complying with "Certain
Covenants -- Merger, Sale of Assets, etc." above, the Trustee shall be protected
in withholding such notice if and so long as a committee of its trust officers
in good faith determines that the withholding of such notice is in the interest
of the Holders of the Senior Subordinated Notes.
No Holder of any Senior Subordinated Note will have any right to institute
any proceeding with respect to the Indenture or for any remedy thereunder,
unless such Holder shall have previously given to the Trustee written notice of
a continuing Event of Default thereunder and unless the Holders of at least 25%
of the aggregate principal amount of the outstanding Senior Subordinated Notes
shall have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding, and the Trustee shall have not have
received from the Holders of a majority in aggregate principal amount of such
outstanding Senior Subordinated Notes a direction inconsistent with such request
and shall have failed to institute such proceeding within 60 days. However, such
limitations do not apply to a suit instituted by a Holder of such a Senior
Subordinated Note for enforcement of payment of the principal of and premium, if
any, or interest on such Senior Subordinated Note on or after the respective due
dates expressed in such Senior Subordinated Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR, MANAGER
AND STOCKHOLDERS
No director, officer, employee, incorporator, manager or stockholder of the
Company or any of its Affiliates, as such, shall have any liability for any
obligations of the Company under the Senior Subordinated Notes or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each holder of Senior Subordinated Notes by accepting a Senior
Subordinated Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Senior Subordinated Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Senior Subordinated Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Senior Subordinated Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Senior Subordinated Notes when such payments are due, (ii) the Company's
obligations with respect to the Senior Subordinated Notes concerning issuing
temporary Senior Subordinated Notes, registration of Senior Subordinated Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Senior Subordinated Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Senior Subordinated
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, United States Government Obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Senior Subordinated Notes on
the stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
Senior Subordinated Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default with respect to
the Indenture resulting from the Incurrence of Indebtedness, all or a portion of
which will be used to defease the Senior Subordinated Notes concurrently with
such Incurrence); (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the Indenture
or any other material agreement or instrument to which the Company or
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any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior Indebtedness,
including, without limitation, those arising under the Indenture and (B)
assuming no intervening bankruptcy of the Company between the date of deposit
and the 91st day following the date of the deposit and that no Holder is an
insider of the Company, after the 91st day following the date of the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and (ix) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the Opinion of Counsel required by clause (ii)
above need not be delivered if all Senior Subordinated Notes not theretofore
delivered to the Trustee for cancellation (x) have become due and payable, (y)
will become due and payable on the maturity date within one year or (z) are to
be called for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company.
GOVERNING LAW
The Indenture and the Senior Subordinated Notes will be governed by the
laws of the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the outstanding Senior Subordinated Notes (including
consents obtained in connection with a tender offer or exchange offer for the
Notes); provided, however, that no such modification or amendment to the
Indenture may, without the consent of the Holder of each Senior Subordinated
Note affected thereby, (a) change the Stated Maturity of the principal of or any
installment of interest on any such Senior Subordinated Note or alter the
optional redemption or repurchase provisions of any such Senior Subordinated
Note or the Indenture in a manner adverse to the Holders of the Senior
Subordinated Notes; (b) reduce the principal amount of (or the premium of) any
such Senior Subordinated Note; (c) reduce the rate of or extend the time for
payment of interest on any such Senior Subordinated Note; (d) change the place
or currency of payment of principal of (or premium) or interest on any such
Senior Subordinated Note; (e) modify any provisions of the Indenture relating to
the waiver of past defaults (other than to add sections of the Indenture or the
Senior Subordinated Notes subject thereto) or the right of the Holders of Senior
Subordinated Notes to institute suit for the enforcement of any payment on or
with respect to any such Senior Subordinated Note or the modification and
amendment provisions of the Indenture and the Senior Subordinated Notes (other
than to add sections of the Indenture or the Senior Subordinated Notes which may
not be modified, amended, supplemented or waived without the consent of each
Holder affected); (f) reduce the percentage of the principal amount of
outstanding Senior Subordinated Notes necessary for amendment to or waiver of
compliance with any provision of the Indenture or the Senior Subordinated Notes
or for waiver of any Default in respect thereof; (g) waive a Default in the
payment of principal of, interest on, or redemption payment with respect to, the
Senior Subordinated Notes (except a rescission of acceleration of the Senior
Subordinated Notes by the Holders thereof as provided in the Indenture and a
waiver of the payment default that resulted from such acceleration); (h) modify
the ranking or priority of any Senior Subordinated Note or the Guaranty in
respect of any Guarantor or modify the definition of Senior Indebtedness or
Guarantor Senior Indebtedness or
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amend or modify the subordination provisions of the Indenture in any manner
adverse to the Holders of the Senior Subordinated Notes; (i) release any
Guarantor from any of its obligations under its Guaranty or the Indenture
otherwise than in accordance with the Indenture or (j) modify the provisions of
any covenant (or the related definitions) in the Indenture requiring the Company
to make an Offer to Purchase in a manner materially adverse to the Holders of
Senior Subordinated Notes affected thereby otherwise than in accordance with the
Indenture.
The Holders of a majority in aggregate principal amount of the outstanding
Senior Subordinated Notes, on behalf of all Holders of Senior Subordinated
Notes, may waive compliance by the Company with certain restrictive provisions
of the Indenture. Subject to certain rights of the Trustee, as provided in the
Indenture, the Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes, on behalf of all Holders, may waive any past default under
the Indenture (including any such waiver obtained in connection with a tender
offer or exchange offer for the Notes), except a default in the payment of
principal, premium or interest or a default arising from failure to purchase any
Senior Subordinated Notes tendered pursuant to an Offer to Purchase, or a
default in respect of a provision that under the Indenture cannot be modified or
amended without the consent of the Holder of each Senior Subordinated Note that
is affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or any other obligor upon the Senior
Subordinated Notes, to obtain payment of claims in certain cases or to realize
on certain property received by it in respect of any such claim as security or
otherwise. The Trustee is permitted to engage in other transactions with the
Company or an Affiliate of the Company; provided, however, that if it acquires
any conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time such
Person becomes a Subsidiary of the Company or is merged or consolidated with or
into the Company or any Subsidiary of the Company.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Subsidiary of the
Company to any other Person, or any acquisition or purchase of Equity Interests
of any other Person by the Company or any Subsidiary of the Company, in either
case pursuant to which such Person shall become a Subsidiary of the Company or
shall be consolidated with or merged into the Company or any Subsidiary of the
Company or (ii) any acquisition by the Company or any Subsidiary of the Company
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
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"Additional Interest" has the meaning provided in Section 4(a) of the
Registration Rights Agreement.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company in one transaction or a series of related
transactions, of (i) any Equity Interest of any Subsidiary of the Company (other
than directors' qualifying shares, to the extent mandated by applicable law);
(ii) any assets of the Company or any Subsidiary of the Company which constitute
substantially all of an operating unit or line of business of the Company or any
Subsidiary of the Company; or (iii) any other property or asset of the Company
or any Subsidiary of the Company outside of the ordinary course of business
(including the receipt of proceeds paid on account of the loss of or damage to
any property or asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings). For the purposes of this
definition, the term "Asset Sale" shall not include (a) any transaction
consummated in compliance with "Certain Covenants -- Merger, Sale of Assets,
etc." above and the creation of any Lien not prohibited by "Certain
Covenants -- Limitation on Liens" above; (b) sales of property or equipment that
has become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of the Company or any Subsidiary of the Company, as
the case may be; and (c) any transaction consummated in compliance with "Certain
Covenants -- Limitation on Restricted Payments" above. In addition, solely for
purposes of "Certain Covenants -- Disposition of Proceeds of Asset Sales" above,
any sale, conveyance, transfer, lease or other disposition of any property or
asset, whether in one transaction or a series of related transactions, involving
assets with a Fair Market Value not in excess of $500,000 in any fiscal year,
shall be deemed not to be an Asset Sale.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the present value (discounted according
to GAAP at the cost of indebtedness implied in the lease) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale and Lease-Back Transaction (including any period for
which such lease has been extended).
"Board of Directors" means the Board of Directors of Holdings, the Company,
any Guarantor or Person, as the case may be, or any authorized committee of such
Board of Directors.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof or any state government having maturities of not more
than one year from the date of acquisition; (c) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $250 million; (d) repurchase obligations with a
term of not more than seven days for underlying
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securities of the types described in clauses (b) and (c) above entered into with
any financial institution meeting the qualifications specified in clause (c)
above; (e) commercial paper rated P-1, A-1 or the equivalent thereof by Moody's
Investors Service, Inc. or Standard & Poor's Corporation, respectively, and in
each case maturing within one year after the date of acquisition; (f)
Investments in mutual funds which invest substantially all of their assets in
securities of the types described in clauses (a) through (e) above and (g) in
the case of any Subsidiary of the Company whose jurisdiction of incorporation is
not the United States or any state thereof or the District of Columbia,
Investments: (i) in direct obligations of the sovereign nation (or any agency
thereof) in which such foreign Subsidiary is organized and is conducting
business or in obligations fully and unconditionally guaranteed by such
sovereign nation (or any agency thereof) or (ii) of the type and maturity
described in clauses (a) and (b) above of foreign obligors, which Investment or
obligors (or the parents of such obligors) have ratings described in such
clauses or equivalent ratings from comparable foreign rating agencies.
"Citicorp" means Citicorp, a Delaware corporation.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination (the "Four Quarter Period") to (ii) Consolidated Net
Interest Expense for such Four Quarter Period; provided, however, that (1) if
the Company or any Subsidiary of the Company has incurred any Indebtedness since
the beginning of such Four Quarter Period that remains outstanding on such date
of determination or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, Consolidated
EBITDA and Consolidated Net Interest Expense for such Four Quarter Period shall
be calculated after giving effect on a pro forma basis to such Indebtedness and
the application of the proceeds thereof as if such Indebtedness had been
Incurred on the first day of such Four Quarter Period and the discharge of any
other Indebtedness repaid, repurchased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on the first day of
such Four Quarter Period, (2) if since the beginning of such Four Quarter Period
the Company or any Subsidiary of the Company shall have made any Asset Sale, the
Consolidated EBITDA for such Four Quarter Period shall be reduced by an amount
equal to the Consolidated EBITDA (if positive) directly attributable to the
assets that are the subject of such Asset Sale for such Four Quarter Period or
increased by an amount equal to the Consolidated EBITDA (if negative) directly
attributable thereto for such Four Quarter Period and Consolidated Net Interest
Expense for such Four Quarter Period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Subsidiary of the Company repaid, repurchased or otherwise
discharged with respect to the Company and its continuing Subsidiaries in
connection with such Asset Sale for such Four Quarter Period (or, if the Equity
Interests of any Subsidiary of the Company are sold, the Consolidated Net
Interest Expense for such Four Quarter Period directly attributable to the
Indebtedness of such Subsidiary to the extent the Company and its continuing
Subsidiaries are no longer liable for such Indebtedness after such sale), (3) if
since the beginning of such Four Quarter Period the Company or any Subsidiary of
the Company (by merger or otherwise) shall have made an Investment in any
Subsidiary of the Company (or any Person that becomes a Subsidiary of the
Company) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, Consolidated EBITDA and Consolidated Net Interest Expense for such
Four Quarter Period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such Four Quarter Period and (4) if
since the beginning of such Four Quarter Period any Person (that subsequently
became a Subsidiary or was merged with or into the Company or any Subsidiary of
the Company since the beginning of such Four Quarter Period) shall have made any
Asset Sale or any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (2) or (3) above if made by the Company or a
Subsidiary of the Company during such Four
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Quarter Period, Consolidated EBITDA and Consolidated Net Interest Expense for
such Four Quarter Period shall be calculated after giving pro forma effect
thereto as if such Asset Sale, Investment or acquisition of assets occurred on,
with respect to any Investment or acquisition, the first day of such Four
Quarter Period and, with respect to any Asset Sale, the day prior to the first
day of such Four Quarter Period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Net Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in accordance with Regulation S-X under the
Securities Act as in effect on the date of such calculation. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any agreement under which Interest Rate Protection
Obligations are outstanding applicable to such Indebtedness if such agreement
under which such Interest Rate Protection Obligations are outstanding has a
remaining term as at the date of determination in excess of 12 months);
provided, however, that the Consolidated Net Interest Expense of the Company
attributable to interest on any Indebtedness Incurred under a revolving credit
facility computed on a pro forma basis shall be computed based upon the average
daily balance of such Indebtedness during the Four Quarter Period.
"Consolidated EBITDA" means, for any period, the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) Consolidated Income Tax Expense for such period;
(ii) Consolidated Interest Expense for such period; and (iii) Consolidated
Non-cash Charges for such period less all non-cash items increasing Consolidated
Net Income for such period.
"Consolidated Income Tax Expense" means, with respect to the Company for
any period, the provision for Federal, state, local and foreign income taxes
payable by the Company and its Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (e) all capitalized interest and (f) interest on Indebtedness of
another Person that is guaranteed by the Company or any Subsidiary of the
Company actually paid by the Company or any Subsidiary of the Company, and (ii)
the interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and its Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income (loss)
of any Person if such person is not a Subsidiary of the Company, except the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income; (ii) any net income (loss)
of any person acquired by the Company or a Subsidiary of the Company in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income (but not loss) of any Subsidiary of the
Company if such Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Subsidiary,
directly or indirectly, to the Company to the extent of such restrictions; (iv)
any gain or loss realized upon the sale or other disposition of any asset of the
Company or its Subsidiaries (including pursuant to any sale/leaseback
transaction) outside of the ordinary course of business including, without
limitation, on or with respect to Investments (and excluding dividends,
distributions or interest thereon);
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(v) any extraordinary gain or loss; (vi) the cumulative effect of a change in
accounting principles after the Issue Date; and (vii) any restoration to income
of any contingency reserve of an extraordinary, non-recurring or unusual nature,
except to the extent that provision for such reserve was made out of
Consolidated Net Income accrued at any time following the Issue Date.
"Consolidated Net Interest Expense" means, with respect to the Company for
any period, Consolidated Interest Expense for such period reduced by the sum of
(x) consolidated interest income of the Company and its Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP and (y) the
amortization of any premiums, fees and other similar expenses incurred in
connection with any financings or any other permitted Incurrence of Indebtedness
for such period to the extent included in Consolidated Interest Expense for such
period.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period the sum of (A) depreciation, (B) amortization and (C) other non-cash
expenses of such Person and its Subsidiaries reducing Consolidated Net Income of
such Person and its Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP (excluding, for purposes of clause (C) only, such
charges which require an accrual of or a reserve for cash charges for any future
period.)
"Credit Facility" means the Credit Facility, dated as of November 10, 1997,
between the Company, the lenders named therein, and The Chase Manhattan Bank, as
Administrative Agent, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor, whether by or with
the same or any other lender, creditor, group of lenders or group of creditors,
and including related notes, guarantee and note agreements and other instruments
and agreements executed in connection therewith.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Subsidiary of the Company against fluctuations in currency
values.
"CVC" means Citicorp Venture Capital, Ltd., a New York corporation.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Depository" means, with respect to the Notes issued in the form of one or
more Global Securities, The Depository Trust Company or another Person
designated as Depository by the Company, which must be a clearing agency under
the Exchange Act.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the Credit Facility and (b) any other Senior Indebtedness which, at the
time of determination, has an aggregate principal amount outstanding, together
with any commitments to lend additional amounts, of at least $15 million, if the
instrument governing such Senior Indebtedness expressly states that such
Indebtedness is "Designated Senior Indebtedness" for purposes of the Indenture.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the earlier
of the maturity date of the Notes or the date on which no Notes remain
outstanding.
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"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset shall be determined conclusively by the Board of
Directors of the Company acting in good faith, and shall be evidenced by
resolutions of the Board of Directors of the Company.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. The term "guarantee" used as
a verb has a corresponding meaning.
"Guarantor" means each Subsidiary, formed, created or acquired after the
Issue Date, required to be a Guarantor pursuant to "Certain
Covenants -- Restriction on Transfer of Assets to Subsidiaries" above.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at
any date, (a) all Interest Rate Protection Obligations of such Guarantor; (b)
all Obligations of such Guarantor under stand-by letters of credit; and (c) all
other Indebtedness of such Guarantor for borrowed money, including principal,
premium, if any, and interest (including Post-Petition Interest) on such
Indebtedness unless the instrument under which such Indebtedness of such
Guarantor for money borrowed is Incurred expressly provides that such
Indebtedness for money borrowed is not senior or superior in right of payment to
such Guarantor's Guaranty, and all renewals, extensions, modifications,
amendments or refinancings thereof. Notwithstanding the foregoing, Guarantor
Senior Indebtedness shall not include (a) to the extent that it may constitute
Indebtedness, any Obligation for Federal, state, local or other taxes; (b) any
Indebtedness between or among such Guarantor and any Subsidiary of the Company;
(c) to the extent that it may constitute Indebtedness, any Obligation in respect
of any trade payable Incurred for the purchase of goods or materials, or for
services obtained, in the ordinary course of business; (d) that portion of any
Indebtedness that is Incurred in violation of the Indenture; provided, however,
that such Indebtedness shall be deemed not to have been Incurred in violation of
the Indenture for purposes of this clause (d) if the holder(s) of such
Indebtedness or their representative or the Company shall have furnished to the
Trustee an opinion of independent legal counsel unqualified in all material
respects, addressed to the Trustee (which legal counsel may, as to matters of
fact, rely upon an Officers' Certificate of the Company) to the effect that the
Incurrence of such Indebtedness does not violate the provisions of this
Indenture; (e) Indebtedness evidenced by such Guarantor's Guaranty; (f)
Indebtedness of such Guarantor that is expressly subordinate or junior in right
of payment to any other Indebtedness of such
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Guarantor; (g) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capitalized Lease Obligations) or management
agreements; (h) any obligation that by operation of law is subordinate to any
general unsecured obligations of such Guarantor; and (i) any existing
indebtedness.
"Holders" means the registered holders of the Notes.
"Holdings" means Airxcel Holdings Corporation, a Delaware corporation.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of any Acquired Person or any of its
Subsidiaries existing at the time such Acquired Person becomes a Subsidiary of
the Company (or is merged into or consolidated with the Company or any
Subsidiary of the Company), whether or not such Indebtedness was Incurred in
connection with, as a result of, or in contemplation of, such Acquired Person
becoming a Subsidiary of the Company (or being merged into or consolidated with
the Company or any Subsidiary), shall be deemed Incurred at the time any such
Acquired Person becomes a Subsidiary or merges into or consolidates with the
Company or any Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed; (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable incurred in the
ordinary course of business and payable in accordance with industry practices,
or other accrued liabilities arising in the ordinary course of business); (e)
every Capital Lease Obligation of such Person; (f) every net obligation under
Interest Rate Protection Obligations or similar agreements or Currency
Agreements of such Person; (g) Attributable Indebtedness; (h) every obligation
of the type referred to in clauses (a) through (g) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable for, directly or indirectly, as
obligor, guarantor or otherwise; and (i) any and all deferrals, renewals,
extensions and refundings of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a) through
(h) above. Indebtedness (i) shall not be calculated taking into account any cash
and Cash Equivalents held by such Person; (ii) shall not include obligations of
any Person (x) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business, provided that such
obligations are extinguished within two Business Days of their incurrence, (y)
resulting from the endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past business practices and (z)
under stand-by letters of credit to the extent collateralized by cash or Cash
Equivalents; (iii) which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
deemed to be Incurred or outstanding in an amount equal to the accreted value
thereof at the date of determination; and (iv) shall not include obligations
under performance bonds, performance guarantees, surety bonds and appeal bonds,
letters of credit or similar obligations, incurred in the ordinary course of
business.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal, investment banking firm or consultant which, in the judgment of the
Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
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"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"interest" means, with respect to the Senior Subordinated Notes, the sum of
any cash interest and any Additional Interest on the Senior Subordinated Notes.
"Interest Payment Date" means each semiannual interest payment date on May
15 and November 15 of each year commencing May 15, 1998.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Interest Record Date" for the interest payable on any Interest Payment
Date (except a date for payment of defaulted interest) means May 1 or November 1
(whether or not a Business Day), as the case may be, immediately preceding such
Interest Payment Date.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guarantee or other extension of credit or capital contribution to
(by means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. For
purposes of the "Limitation on Restricted Payments" covenant above, the amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment; reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided, however, that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce the amount of
any Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Consolidated Net Income. In determining the
amount of any Investment involving a transfer of any property or asset other
than cash, such property shall be valued at its fair market value at the time of
such transfer, as determined in good faith by the Board of Directors (or
comparable body) of the Person making such transfer.
"Issue Date" means the original issue date of the Notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Management Investors" means Melvin L. Adams, Gregory G. Guinn, Paul
Mechler, Richard L. Schreck, T. K. Sellers, Jr., David L. Shuford, Lonnie L.
Snook and George D. Wyers.
"Maturity Date" means the date, which is set forth on the face of the
Senior Subordinated Notes, on which the Senior Subordinated Notes will mature.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Company or any Subsidiary of the Company in
respect of any Asset Sale, including all cash or Cash Equivalents received upon
any sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of (a) the direct costs relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale;
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(d) amounts deemed, in good faith, appropriate by the Board of Directors of the
Company to be provided as a reserve, in accordance with GAAP, against any
liabilities associated with such assets which are the subject of such Asset
Sale; including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale (provided that
the amount of any such reserves shall be deemed to constitute Net Cash Proceeds
at the time such reserves shall have been released or are not otherwise required
to be retained as a reserve); and (e) with respect to Asset Sales by
Subsidiaries, the portion of such cash payments attributable to Persons holding
a minority interest in such Subsidiary.
"Net Proceeds Utilization Date" has the meaning set forth in the second
paragraph under "Certain Covenants Disposition of Proceeds of Asset Sales"
above.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Company by first-class mail, postage prepaid, to each holder at
his address appearing in the register for the Senior Subordinated Notes on the
date of the Offer offering to purchase up to the principal amount of Senior
Subordinated Notes specified in such Offer at the purchase price specified in
such Offer (as determined pursuant to the Indenture). Unless otherwise required
by applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase, which shall be not less than 20 Business Days
nor more than 60 days after the date of such Offer, and a settlement date (the
"Purchase Date") for purchase of Senior Subordinated Notes to occur no later
than five Business Days after the Expiration Date. The Company shall notify the
Trustee at least 5 Business Days (or such shorter period as is acceptable to the
Trustee) prior to the mailing of the Offer of the Company's obligation to make
an Offer to Purchase, and the Offer shall be mailed by the Company or, at the
Company's request, by the Trustee in the name and at the expense of the Company.
The Offer shall contain all the information required by applicable law to be
included therein. The Offer shall contain all instructions and materials
necessary to enable such Holders to tender Senior Subordinated Notes pursuant to
the Offer to Purchase. The Offer shall also state: (1) the Section of the
Indenture pursuant to which the Offer to Purchase is being made; (2) the
Expiration Date and the Purchase Date; (3) the aggregate principal amount of the
outstanding Senior Subordinated Notes offered to be purchased by the Company
pursuant to the Offer to Purchase (including, if less than 100%, the manner by
which such amount has been determined pursuant to the Section of the Indenture
requiring the Offer to Purchase) (the "Purchase Amount"); (4) the purchase price
to be paid by the Company for each $1,000 aggregate principal amount of Senior
Subordinated Notes accepted for payment (as specified pursuant to the Indenture)
(the "Purchase Price"); (5) that the Holder may tender all or any portion of the
Senior Subordinated Notes registered in the name of such Holder and that any
portion of a Note tendered must be tendered in an integral multiple of $1,000
principal amount; (6) the place or places where Senior Subordinated Notes are to
be surrendered for tender pursuant to the Offer to Purchase; (7) that interest
on any Senior Subordinated Note not tendered or tendered but not purchased by
the Company pursuant to the Offer to Purchase will continue to accrue; (8) that
on the Purchase Date the Purchase Price will become due and payable upon each
Senior Subordinated Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date; (9) that each Holder electing to tender all or any portion of a
Senior Subordinated Note pursuant to the Offer to Purchase will be required to
surrender such Senior Subordinated Note at the place or places specified in the
Offer prior to the close of business on the Expiration Date (such Senior
Subordinated Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing); (10) that
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Holders will be entitled to withdraw all or any portion of Senior Subordinated
Notes tendered if the Company (or its Paying Agent) receives, not later than the
close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Senior Subordinated Note the Holder tendered, the certificate
number of the Senior Subordinated Note the Holder tendered and a statement that
such Holder is withdrawing all or a portion of his tender; (11) that (a) if
Senior Subordinated Notes in an aggregate principal amount less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to
Purchase, the Company shall purchase all such Senior Subordinated Notes and (b)
if Senior Subordinated Notes in an aggregate principal amount in excess of the
Purchase Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, the Company shall purchase Senior Subordinated Notes having an
aggregate principal amount equal to the Purchase Amount on a pro rata basis
(with such adjustments as may be deemed appropriate so that only Senior
Subordinated Notes in denominations of $1,000 principal amount or integral
multiples thereof shall be purchased); and (12) that in the case of any Holder
whose Senior Subordinated Note is purchased only in part, the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Senior Subordinated Note without service charge, a new Senior Subordinated Note
or Senior Subordinated Notes, of any authorized denomination as requested by
such Holder, in an aggregate principal amount equal to and in exchange for the
unpurchased portion of the Senior Subordinated Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"Officer" means the Chairman, any Vice Chairman, the President, any Vice
President, the Chief Financial Officer, the Treasurer or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer of Assistant Secretary of the Company
complying with certain provisions of the Indenture.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Holder" means (i) CVC and its Affiliates; (ii) the Management
Investors; and (iii) their respective Permitted Transferees.
"Permitted Indebtedness" has the meaning set forth in the second paragraph
of "Certain Covenants-Limitation on Indebtedness" above.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Protection Obligations and Currency Agreements; (d) Investments received in
connection with the bankruptcy or reorganization of suppliers and customers and
in settlement of delinquent obligations of, and other disputes with, customers
and suppliers, in each case arising in the ordinary course of business; (e)
Investments in the Company or a Subsidiary of the Company and Investments in a
Person that, as a result of or in connection with such Investment, is merged
with or into or consolidated with the Company or a Subsidiary; (f) Investments
paid for in Common Stock of the Company; (g) loans or advances to officers or
employees of the Company and its Subsidiaries in the ordinary course of business
for bona fide business purposes of the Company and its Subsidiaries (including
travel and moving expenses) not in excess of $500,000 in the aggregate at any
one time outstanding and (h) other Investments that do not exceed $5 million in
the aggregate at any one time.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or (ii)
debt securities expressly subordinated in right of payment to all Senior
Indebtedness or Guarantor Senior Indebtedness, as the case may be, that may at
the time be outstanding, to substantially the same extent as, or to a greater
extent than,
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the Senior Subordinated Notes or the Guaranties, as the case may be, are
subordinated as provided in the Indenture, in any event pursuant to a court
order so providing and as to which (a) the rate of interest on such securities
shall not exceed the effective rate of interest on the Senior Subordinated Notes
on the date of the Indenture, (b) such securities shall not be entitled to the
benefits of covenants or defaults materially more beneficial to the holders of
such securities than those in effect with respect to the Senior Subordinated
Notes on the date of the Indenture and (c) such securities shall not provide for
amortization (including sinking fund and mandatory prepayment provisions)
commencing prior to the date six months following the final scheduled maturity
date of the Senior Indebtedness or Guarantor Senior Indebtedness, as the case
may be, (as modified by the plan of reorganization of readjustment pursuant to
which such securities are issued).
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided, however, that such Liens were in existence
prior to such merger or consolidation and were not incurred in contemplation of
such merger or consolidation and do not secure any property or assets of the
Company or any Subsidiary of the Company other than the property or assets
subject to the Liens prior to such merger or consolidation; (b) Liens imposed by
law such as carriers', warehousemen's and mechanics' Liens and other similar
Liens arising in the ordinary course of business which secure payment of
obligations not more than 30 days past due or which are being contested in good
faith and by appropriate proceedings; (c) Liens existing on the Issue Date and
Liens in favor of the lenders under the Credit Facility; (d) Liens securing only
the Notes; (e) Liens in favor of the Company or any Subsidiary of the Company;
(f) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; provided, however,
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (g) easements, reservation
of rights of way, restrictions and other similar easements, licenses,
restrictions on the use of properties, or minor imperfections of title that in
the aggregate are not material in amount and do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of the Company and its Subsidiaries; (h) Liens resulting
from the deposit of cash or notes in connection with contracts, tenders or
expropriation proceedings, or to secure workers' compensation, surety or appeal
bonds, costs of litigation when required by law and public and statutory
obligations or obligations under franchise arrangements entered into in the
ordinary course of business; (i) Liens securing Indebtedness consisting of
Capitalized Lease Obligations, Purchase Money Indebtedness, mortgage financings,
industrial revenue bonds or other monetary obligations, in each case incurred
solely for the purpose of financing all or any part of the purchase price or
cost of construction or installation of assets used in the business of the
Company or its Subsidiaries, or repairs, additions or improvements to such
assets, provided, however, that (I) such Liens secure Indebtedness in an amount
not in excess of the original purchase price or the original cost of any such
assets or repair, addition or improvements thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness), (II) such Liens do not extend to any other assets of the Company
or its Subsidiaries (and, in the case of repair, addition or improvements to any
such assets, such Lien extends only to the assets (and improvements thereto or
thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "Certain Covenants-Limitation on Indebtedness"
above and (IV) such Liens attach within 90 days of such purchase, construction,
installation, repair, addition or improvement; and (j) Liens to secure any
refinancings, renewals, extensions, modifications or replacements (collectively,
"refinancings") (or successive refinancings), in whole or in part, of any
Indebtedness secured by Liens referred to in the clauses above so long as such
Lien does not extend to any other property (other than improvements thereto).
"Permitted Transferee" means (a) with respect to CVC (i) Citicorp, any
direct or indirect wholly owned subsidiary of Citicorp, and any officer,
director or employee of CVC, Citicorp or any wholly owned subsidiary of
Citicorp, (ii) any spouse or lineal descendent (including by adoption
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and stepchildren) of the officers, directors and employees to, in clause (a)(i)
above or (iii) any trust, corporation or partnership 100% in interest of the
beneficiaries, stockholders or partners of which consists of one or more of the
persons described in clause (a)(i) or (ii) above and (b) with respect to any
officer or employee of Holdings or the Company or a subsidiary of the Company
(i) any spouse or lineal descendent (including by adoption and stepchildren) of
such officer or employee and (ii) any trust, corporation or partnership 100% in
interest of the beneficiaries, stockholders or partners of which consists of
such officer or employee or any of the persons described in clause (b)(i) above
or any combination thereof.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing such Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"Principal" of a debt security means the principal of the security plus,
when appropriate, the premium, if any, on the security.
"Public Equity Offering" means, with respect to the Company, an
underwritten public offering of Qualified Equity Interests of the Company or
Holdings pursuant to an effective registration statement filed under the
Securities Act (excluding registration statements filed on Form S-8); provided,
however, that if any such offering is the Offering of Qualified Equity Interests
of Holdings, only the net proceeds that are contributed to the Company shall be
taken into consideration for purposes of this definition.
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Subsidiary of the Company Incurred for the purpose of financing in the ordinary
course of business all or any part of the purchase price or the cost of
construction or improvement of any property related to the business of the
Company (including Equity Interests and the assets of an ongoing business);
provided, however, that the aggregate principal amount of such Indebtedness does
not exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof as
of the date of refinancing.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Redemption Date" when used with respect to any Senior Subordinated Note to
be redeemed, means the date fixed for such redemption pursuant to the Indenture.
"Replacement Assets" has the meaning set forth in the first paragraph under
"Certain Covenants -- Disposition of Proceeds of Asset Sales" above.
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"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal Property, which property has been or is to be sold or
transferred by the Company or such Subsidiary to such Person in contemplation of
such leasing.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Senior Indebtedness" means, at any date, (a) all Obligations of the
Company under the Credit Facility; (b) all Interest Rate Protection Obligations
of the Company and all Obligations of the Company under Currency Agreements; (c)
all Obligations of the Company under stand-by letters of credit; and (d) all
other Indebtedness of the Company, including principal, premium, if any, and
interest (including Post-Petition Interest) on such Indebtedness, unless the
instrument under which such Indebtedness of the Company is Incurred expressly
provides that such Indebtedness for money borrowed is not senior or superior in
right of payment to the Senior Subordinated Notes, and all renewals, extensions,
modifications, amendments or refinancings thereof. Notwithstanding the
foregoing, Senior Indebtedness shall not include (a) to the extent that it may
constitute Indebtedness, any Obligation for Federal, state, local or other
taxes; (b) any Indebtedness among or between the Company and any Subsidiary of
the Company or any Affiliate of the Company or any of such Affiliate's
Subsidiaries; (c) to the extent that it may constitute Indebtedness, any
Obligation in respect of any trade payable Incurred for the purchase of goods or
materials, or for services obtained, in the ordinary course of business; (d)
that portion of any Indebtedness that is Incurred in violation of the Indenture;
(e) Indebtedness evidenced by the Senior Subordinated Notes; (f) Indebtedness of
the Company that is expressly subordinate or junior in right of payment to any
other Indebtedness of the Company; (g) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capitalized Lease
Obligations) or management agreements; and (h) any obligation that by operation
of law is subordinate to any general unsecured obligations of the Company. No
Indebtedness shall be deemed to be subordinated to other Indebtedness solely
because such other Indebtedness is secured.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.
"Stated Maturity" means, when used with respect to any Senior Subordinated
Note or any installment of interest thereon, the date specified in such Senior
Subordinated Note as the fixed date on which the principal of such Senior
Subordinated Note or such installment of interest is due and payable.
"Subordinated Indebtedness" means, with respect to the Company or any
Guarantor, any Indebtedness of the Company or such Guarantor, as the case may
be, which is expressly subordinated in right of payment to the Senior
Subordinated Notes or such Guarantor's Guaranty, as the case may be.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Total Assets" means, at any date of determination, the total consolidated
assets of the Company and its Subsidiaries, as determined in accordance with
GAAP.
"United States Government Obligations" means direct non-callable
obligations of the United States of America for the payment of which the full
faith and credit of the United States is pledged.
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"Unutilized Net Cash Proceeds" has the meaning set forth in the third
paragraph under "Certain Covenants Disposition of Proceeds of Asset Sales"
above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Subsidiary" means any Subsidiary of the Company all of the
outstanding Voting Equity Interests (other than directors" qualifying shares) of
which are owned, directly or indirectly, by the Company.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were originally sold by the Company on November 10, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. As a condition to the Purchase Agreement, the Company
entered into the Exchange and Registration Rights Agreement with the Initial
Purchaser pursuant to which the Company has agreed to: (i) file with the
Commission on or prior to 45 days after the date of issuance of the Notes (the
"Issue Date") a registration statement on Form S-1 or Form S-4, if the use of
such form is then available (the "Exchange Offer Registration Statement")
relating to a registered exchange offer (the "Exchange Offer") for the Notes
under the Securities Act and (ii) use its reasonable best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the holders of Transfer Restricted Securities (as defined
below) who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their Transfer
Restricted Securities for the Exchange Notes that are identical in all material
respects to the Notes (except that the Exchange Notes will not contain terms
with respect to transfer restrictions) and that would be registered under the
Securities Act. The Company will keep the Exchange Offer open for not less than
30 days (or longer, if required by applicable law) after the date on which
notice of the Exchange Offer is mailed to the holders of the Notes. For each
Note surrendered to the Company pursuant to the Exchange Offer, the holder of
such Note will receive an Exchange Note having a principal amount equal to that
of the surrendered Note. Interest on each Exchange Note will accrue from the
date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Company believes that the
Exchange Notes would in general be freely tradeable after the Exchange Offer
without further registration under the Securities Act. However, any purchaser of
Notes who is an "affiliate" of the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) will not
be able to rely on the interpretation of the staff of the Commission, (ii) will
not be able to tender its Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Notes, unless such sale or transfer
is made pursuant to an exemption from such requirements.
If (i) because of any change in law or applicable interpretations thereof
by the staff of the Commission, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Securities validly tendered
pursuant to the Exchange Offer are not exchanged for Exchange Securities within
195 days after the Issue Date, (iii) any Initial Purchaser so requests with
respect to Notes not eligible to be exchanged for Exchange Notes in the Exchange
Offer, (iv) any applicable law or interpretations do not permit any holder of
Notes to participate in the Exchange Offer, (v) any holder of Notes that
participates in the Exchange Offer does not receive freely transferable Exchange
Notes in exchange for tendered Notes, or (vi) the Company so elects, then the
Company will file with the Commission a shelf registration statement (the "Shelf
Registration Statement") to cover resales of Transfer Restricted Securities by
such holders who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note until (i) the
date on which such Note has been exchanged for a freely transferable Exchange
Note in the Exchange Offer; (ii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such
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Note is distributed to the public pursuant to Rule 144 under the Securities Act
or is salable pursuant to Rule 144(k) under the Securities Act.
The Company will use its reasonable best efforts to have the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement
(each, a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the Commission, the Company will commence
the Exchange Offer and will use its reasonable best efforts to consummate the
Exchange Offer as promptly as practicable, but in any event prior to 195 days
after the Issue Date. If applicable, the Company will use its reasonable best
efforts to keep the Shelf Registration Statement effective for a period of two
years after the Issue Date.
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 45 days after the Issue Date; (ii) the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
is not declared effective within 150 days after the Issue Date; (iii) the
Exchange Offer is not consummated on or prior to 195 days after the Issue Date
or (iv) the Shelf Registration Statement is filed and declared effective within
150 days after the Issue Date but shall thereafter cease to be effective (at any
time that the Company is obligated to maintain the effectiveness thereof)
without being succeeded within 30 days by an additional Registration Statement
filed and declared effective (each such event referred to in clauses (i) through
(iv), a "Registration Default"), the Company will be obligated to pay liquidated
damages to each holder of Transfer Restricted Securities, during the period of
one or more such Registration Defaults, in an amount equal to $0.192 per week
per $1,000 principal amount of the Notes constituting Transfer Restricted
Securities held by such holder until the applicable Registration Statement is
filed, the Exchange Offer Registration Statement is declared effective and the
Exchange Offer is consummated or the Shelf Registration Statement is declared
effective or again becomes effective, as the case may be. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
Notes on semi-annual payment dates which correspond to interest payment dates
for the Notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
The Company (i) shall make available for a period of 180 days after the
consummation of the Exchange Offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale of any
such Exchange Notes and (ii) shall pay all expenses incident to the Exchange
Offer (including the expense of one counsel to the holders of the Notes) and
will indemnify certain holders of the Notes (including any broker-dealer)
against certain liabilities, including liabilities under the Securities Act. A
broker-dealer which delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act and will be bound by the provisions of the Exchange and
Registration Rights Agreement (including certain indemnification rights and
obligations).
Each holder of Notes who wishes to exchange such Notes for Exchange Notes
in the Exchange Offer will be required to make representations in the Letter of
Transmittal that (i) any Exchange Notes to be received by it will be acquired in
the ordinary course of its business; (ii) it has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes and
(iii) it is not an "affiliate" (as defined in Rule 405 under the Securities Act)
of the Company, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. The Commission has taken the position and the Company
believes that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Notes) with the prospectus
contained in the Exchange Offer Registration Statement. Under the Exchange and
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer Registration
Statement in connection with the resale of such Exchange Notes.
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If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Notes that were acquired as a result
of market-making activities or other trading activities (an "Exchanging
Dealer"), it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes.
Holders of the Notes will be required to make certain representations to
the Company (as described above) in order to participate in the Exchange Offer
and will be required to deliver information to be used in connection with the
Shelf Registration Statement in order to have their Notes included in the Shelf
Registration Statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells Notes pursuant
to the Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
For so long as the Notes are outstanding, the Company will continue to
provide to holders of the Notes and to prospective purchasers of the Notes the
information required by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the Exchange and Registration Rights Agreement
contains a discussion of all material elements thereof, but does not purport to
be complete and is qualified in its entirety by reference to all provisions of
the Exchange and Registration Rights Agreement. The Company will provide a copy
of the Exchange and Registration Rights Agreement to prospective purchasers of
Notes identified to the Company by an Initial Purchaser upon request.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes bear a Series B designation and
a different CUSIP Number from the Notes, (ii) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the Exchange Notes will not be
entitled to certain rights under the Exchange and Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Notes in certain circumstances relating to the timing of the Exchange Offer, all
of which rights will terminate when the Exchange Offer is terminated. The
Exchange Notes will evidence the same debt as the Notes and will be entitled to
the benefits of the Indenture.
As of the date of this Prospectus, $90,000,000 aggregate principal amount
of Notes were outstanding. The Company has fixed the close of business on April
7, 1998 as the record date for the Exchange Offer for purposes of determining
the persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
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The Company shall be deemed to have accepted validly tendered Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on May
13, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Notwithstanding the foregoing, the
Company will not extend the Expiration Date beyond May 20, 1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the Exchange Notes. Such
interest will be paid with the first interest payment on the Exchange Notes on
May 15, 1998. Interest on the Notes accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each May 15 and
November 15, commencing on May 15, 1998.
PROCEDURES FOR TENDERING
Only a holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. To be tendered effectively, the Notes, Letter of
Transmittal and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes may
be
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made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange Agent
prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE
HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Notes listed therein, such Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Notes at the book-entry transfer facility, The Depository Trust Company (the
"Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange
Offer, and subject to the establishment thereof, any financial institution that
is a participant in the Book-Entry Transfer Facility's system may make
book-entry delivery of Notes by causing such Book-Entry Transfer Facility to
transfer such Notes into the Exchange Agent's account with respect to the Notes
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery
94
<PAGE> 98
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
The Depositary and DTC have confirmed that the Exchange Offer is eligible
for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Notes to the Depositary in accordance with DTC's ATOP
procedures for transfer. DTC will then send an Agent's Message to the
Depositary.
The term "Agent's Message" means a message transmitted by DTC, received by
the Depositary and forming part of the confirmation of a book-entry transfer,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering Notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that Pen-Tab may enforce such agreement
against such participant. In the case of an Agent's Message relating to
guaranteed delivery, the term means a message transmitted by DTC and received by
the Depositary, which states that DTC has received an express acknowledgment
from the participant in DTC tendering Notes that such participant has received
and agrees to be bound by the Notice of Guaranteed Delivery.
Notwithstanding the foregoing, in order to validly tender in the Exchange
Offer with respect to Securities transferred pursuant to ATOP, a DTC participant
using ATOP must also properly complete and duly execute the applicable Letter of
Transmittal and deliver it to the Depositary. Pursuant to authority granted by
DTC, any DTC participant which has Notes credited to its DTC account at any time
(and thereby held of record by DTC's nominee) may directly provide a tender as
though it were the registered holder by so completing, executing and delivering
the applicable Letter of Transmittal to the Depositary. DELIVERY OF DOCUMENTS TO
DTC DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right in its sole discretion to waive any defects, irregularities
or conditions of tender as to particular Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Notes must
be cured within such time as the Company shall determine. Although the Company
intends, to notify holders of defects or irregularities with respect to tenders
of Notes, neither the Company, the Exchange Agent nor any other person shall
incur any liability for failure to give such notification. Tenders of Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the
95
<PAGE> 99
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent upon five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Notes in the Exchange Offer, a telegram, telex, letter or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes, or, in the case of Notes transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Notes register the transfer of such Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Notes are to
be registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Notes so withdrawn are validly retendered. Any
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
96
<PAGE> 100
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Notes and return all
tendered Notes to the tendering holders, (ii) extend the Exchange Offer and
retain all Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders to withdraw such Notes (see
"-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Notes which have
not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036-1532
Delivery to an address other than as set forth above will not constitute a
valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
97
<PAGE> 101
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALES OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with person to participate, in the distribution
of the Exchange Notes, will be allowed to resell the Exchange Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale
98
<PAGE> 102
of the Exchange Notes and cannot rely on those no-action letters. As indicated
above, each Participating Broker-Dealer that receives an Exchange Note for its
own account in exchange for Notes must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of special counsel
described below) is based upon current provisions of the Internal Revenue Code
of 1986, as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
Kirkland & Ellis, special counsel to the Company, has advised the Company
that in its opinion, the exchange of the Notes for Exchange Notes pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the Exchange Notes will not be considered to differ materially
in kind or extent from the Notes. Rather, the Exchange Notes received by a
holder will be treated as a continuation of the Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to holders
exchanging Notes for Exchange Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1998, all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Exchange Notes. Any Participating Broker-Dealer that resells the
Exchange Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Notes
99
<PAGE> 103
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Exchange Notes
offered hereby will be passed upon for the Company by Kirkland & Ellis, New
York, New York.
EXPERTS
The balance sheets of Airxcel, Inc., (formerly known as Recreational
Vehicle Products, Inc.) as of December 31, 1996 and 1997 and the statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, included in this Prospectus and
Exchange Offer Registration, have been included herein in reliance on the report
of Coopers & Lybrand, L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The balance sheet of Crispaire Corporation as of October 31, 1997 and the
statements of operations, changes in stockholders' equity and cash flows for the
year then ended, included in this Prospectus and Exchange Offer Registration,
have been included herein in reliance on the report of Coopers & Lybrand,
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
The balance sheets of Crispaire Corporation as of October 31, 1995 and 1996
and the statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended October 31, 1996, included in
this Prospectus and Exchange Offer Registration, have been included herein in
reliance on the report of Maudlin & Jenkins, LLC, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of KODA Enterprises Group, Inc. as of April
30, 1996 and 1997 and the consolidated statements of operations and cash flows
for each of the three years in the period ended April 30, 1997 included in this
Prospectus and Exchange Offer Registration, have been audited by Arthur Andersen
LLP, independent accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
100
<PAGE> 104
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AIRXCEL PAGE
- ------- ----
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-2
Balance Sheets as of December 31, 1996, and 1997............ F-3
Statements of Operations for the years ended December 31,
1995, 1996, and 1997...................................... F-4
Statements of Changes in Stockholder's Equity (Deficiency)
for the years ended December 31, 1995, 1996, and 1997..... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996, and 1997...................................... F-6
Notes to Financial Statements............................... F-8
CRISPAIRE
- ----------
Report of Mauldin & Jenkins, LLC, Independent Accountants... F-20
Balance Sheets as of October 31, 1995 and 1996.............. F-21
Statements of Income for the years ended October 31, 1994,
1995 and 1996............................................. F-22
Statements of Stockholders' Equity for the years ended
October 31, 1994, 1995 and 1996........................... F-23
Statements of Cash Flows for the years ended October 31,
1994, 1995 and 1996....................................... F-24
Notes to Financial Statements............................... F-25
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-30
Balance Sheet as of October 31, 1997........................ F-31
Statement of Operations for the year ended October 31,
1997...................................................... F-32
Statement of Changes in Stockholders' Equity for the year
ended October 31, 1997.................................... F-33
Statement of Cash Flows for the year ended October 31,
1997...................................................... F-34
Notes to Financial Statements............................... F-35
KODA
Report of Arthur Andersen LLP, Independent Accountants...... F-39
Balance Sheets as of April 30, 1996, 1997 and December 31,
1997 (unaudited).......................................... F-40
Statements of Operations for the years ended April 30, 1995,
1996, 1997, and for the eight months ended December 31,
1996 and 1997 (unaudited)................................. F-41
Statements of Cash Flows for the years ended April 30, 1995,
1996, 1997, and for the eight months ended December 31,
1996 and 1997 (unaudited)................................. F-42
Notes to Financial Statements............................... F-43
</TABLE>
F-1
<PAGE> 105
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
Airxcel, Inc.
We have audited the accompanying balance sheets of Airxcel, Inc. (formerly
known as Recreational Vehicle Products, Inc.) as of December 31, 1996 and 1997,
and the related statements of operations, changes in stockholder's equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 1997. 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 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 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 Airxcel, Inc. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Kansas City, Missouri
January 30, 1998
F-2
<PAGE> 106
AIRXCEL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 226,431 $ 9,691,097
Accounts receivable, net of allowances for doubtful
accounts of $20,000 and $39,846, respectively.......... 3,693,910 8,309,674
Inventory................................................. 6,421,396 13,128,909
Prepaid expenses.......................................... 90,372 127,816
Income taxes receivable................................... 1,209,263 175,545
Deferred income taxes..................................... 427,035 3,004,385
Net assets of discontinued operations held for sale....... 6,421,293 --
------------ ------------
Total current assets.............................. 18,489,700 34,437,426
------------ ------------
Property, plant and equipment, net.......................... 3,058,227 8,692,566
Computer software, net...................................... 30,365 19,890
Intangible assets, net...................................... 1,586,163 30,538,783
Loan financing costs, net................................... 1,583,674 3,244,533
------------ ------------
Total assets...................................... $ 24,748,129 $ 76,933,198
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt......................... $ 7,933,087 $ 27,346
Accounts payable.......................................... 2,746,016 6,196,438
Warranty reserve.......................................... 488,000 1,052,000
Accrued vacation expense.................................. 324,863 342,624
Accrued interest.......................................... 963,259 1,430,000
Upgrade reserve........................................... -- 500,000
Other accrued expenses.................................... 402,105 1,236,278
Net liabilities of discontinued operations................ -- 466,424
------------ ------------
Total current liabilities......................... 12,857,330 11,251,110
Long-term debt, less current portion........................ 40,346,854 90,328,328
Deferred income taxes....................................... 245,068 362,890
------------ ------------
Total liabilities................................. 53,449,252 101,942,328
------------ ------------
Commitments and contingencies (see Notes 1, 10 and 15)...... -- --
Stockholder's equity (deficiency):
Common stock, par value $1; authorized 1,000 shares; 1,000
shares issued and outstanding.......................... 1,000 1,000
Additional paid-in capital................................ 13,846,332 22,085,967
Accumulated deficit....................................... (42,548,455) (47,096,097)
------------ ------------
Total stockholder's equity (deficiency)........... (28,701,123) (25,009,130)
------------ ------------
Total liabilities and stockholder's equity
(deficiency).................................... $ 24,748,129 $ 76,933,198
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 107
AIRXCEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................... $55,787,855 $58,168,823 $58,322,540
Cost of goods sold.................................. 42,256,789 43,802,980 44,731,499
----------- ----------- -----------
Gross profit................................... 13,531,066 14,365,843 13,591,041
----------- ----------- -----------
Operating expenses:
Selling, general and administrative............... 8,626,877 4,558,164 4,222,843
Amortization of intangible assets and computer
software....................................... 2,331,766 1,421,368 638,910
----------- ----------- -----------
Total operating expenses....................... 10,958,643 5,979,532 4,861,753
----------- ----------- -----------
Income from operations......................... 2,572,423 8,386,311 8,729,288
Interest expense.................................... 1,096,646 2,273,318 4,618,981
Other expense, net.................................. 92,291 145,089 22,950
----------- ----------- -----------
Income from continuing operations before income
tax expense and extraordinary item........... 1,383,486 5,967,904 4,087,357
Income tax expense.................................. 831,448 2,411,275 1,553,196
----------- ----------- -----------
Income from continuing operations before
extraordinary item........................... 552,038 3,556,629 2,534,161
Discontinued operations:
Loss from operations of Faulkner Manufacturing,
less applicable income tax benefit of $603,000,
$1,446,638 and $1,152,567, respectively........ 960,257 2,299,189 1,880,340
Loss on disposal of Faulkner Manufacturing
including provision of $1,000,000 for operating
losses during phase-out period, less applicable
income tax benefit of $2,079,200............... -- -- 3,570,800
----------- ----------- -----------
Income (loss) before extraordinary item........ (408,219) 1,257,440 (2,916,979)
Extraordinary losses on early extinguishments of
debt, less applicable income tax benefits of
$28,000, $115,000 and $641,558, respectively...... 44,880 183,821 1,630,663
----------- ----------- -----------
Net income (loss).............................. $ (453,099) $ 1,073,619 $(4,547,642)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 108
AIRXCEL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL EQUITY
------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995.......... 1,000 1,000 9,437,203 (5,719,787) 3,718,416
Dividends paid................... -- -- -- (4,151,790) (4,151,790)
Return of capital................ -- -- (4,355,069) -- (4,355,069)
Common stock options............. -- -- 122,946 -- 122,946
Tax benefit from common stock
options....................... -- -- 863,448 -- 863,448
Net loss......................... -- -- -- (453,099) (453,099)
----- ------ ----------- ------------ ------------
Balances, December 31, 1995........ 1,000 1,000 6,068,528 (10,324,676) (4,255,148)
Common stock options............. -- -- 457,744 -- 457,744
Dividends paid................... -- -- -- (33,297,398) (33,297,398)
Capital contribution............. -- -- 7,320,060 -- 7,320,060
Net income....................... -- -- -- 1,073,619 1,073,619
----- ------ ----------- ------------ ------------
Balances, December 31, 1996........ 1,000 1,000 13,846,332 (42,548,455) (28,701,123)
Capital contribution............. -- -- 8,239,635 -- 8,239,635
Net loss......................... -- -- -- (4,547,642) (4,547,642)
----- ------ ----------- ------------ ------------
Balances, December 31, 1997........ 1,000 $1,000 $22,085,967 $(47,096,097) $(25,009,130)
===== ====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 109
AIRXCEL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (453,099) $ 1,073,619 $ (4,547,642)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 741,863 736,291 726,343
Amortization of intangible assets and computer
software............................................. 2,578,940 1,594,384 739,252
Amortization of financing costs........................ 12,840 103,657 330,158
Provision for bad debts................................ -- -- 19,846
Provision for writedowns of inventory.................. 40,000 307,000 --
Provision for loss on disposal of discontinued
operations........................................... -- -- 5,650,000
Deferred income taxes.................................. 838,534 142,849 (2,205,766)
Benefit of state income tax NOL carryforward........... (225,000) -- --
Stock option compensation.............................. 122,946 457,744 --
Gain (loss) on sale of fixed assets.................... (6,067) (8,623) 21,534
Extraordinary losses on early extinguishments of
debt................................................. 44,880 183,821 1,630,663
Changes in assets and liabilities:
Accounts receivable.................................. (2,027,786) 602,216 (1,766,312)
Inventory............................................ 467,954 (1,346,929) 861,709
Prepaid expenses..................................... (92,924) 119,627 17,189
Income taxes receivable/payable...................... (1,567,702) 1,200,201 1,033,718
Accounts payable..................................... 902,156 (1,905,061) 952,402
Accrued expenses..................................... (521,030) 988,093 233,780
------------ ------------ ------------
Net cash provided by operating activities......... 856,505 4,248,889 7,229,498
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets............................. 28,003 24,306 2,274
Capital expenditures..................................... (355,990) (458,549) (716,228)
Payment for purchase of Carter Shades, Inc. net of cash
received of $11,402.................................... (854,983) -- --
Payment for purchase of Crispaire net assets............. -- -- (43,369,380)
------------ ------------ ------------
Net cash used in investing activities............. (1,182,970) (434,243) (44,083,334)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term obligations...................... 38,488,000 87,135,243 90,108,904
Principal payments on long-term debt..................... (29,245,500) (63,695,348) (48,527,705)
Financing costs incurred................................. (182,500) (1,672,106) (3,502,332)
Capital contribution from parent company (return of
capital)............................................... (4,355,069) 7,320,060 8,239,635
Dividends paid........................................... (4,151,790) (33,297,398) --
------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... 553,141 (4,209,549) 46,318,502
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 226,676 (394,903) 9,464,666
Cash and cash equivalents, beginning of period............. 394,658 621,334 226,431
------------ ------------ ------------
Cash and cash equivalents, end of period................... $ 621,334 $ 226,431 $ 9,691,097
============ ============ ============
</TABLE>
F-6
<PAGE> 110
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest............................................... $ 1,413,046 $ 2,039,514 $ 6,419,458
Income taxes, net...................................... 1,029,600 (493,413) 1,233,629
Supplemental disclosure of noncash investing and financing
activities:
Tax benefit from stock options........................... 863,448 -- --
Land acquired with debt, net of cash payment of
$337,838............................................... -- -- 375,186
The Company purchased certain assets and liabilities of
Carter Shades, Inc., for $866,385. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired.......................... $ 1,382,065
Less cash paid......................................... (866,385)
------------
Liabilities assumed............................... $ 515,680
============
Airxcel, Inc. purchased certain assets and liabilities of
Crispaire Corporation for $43,369,380 as follows:
Tangible assets.......................................... $ 17,916,072
Liabilities assumed...................................... (4,092,233)
Intangible assets........................................ 29,545,541
------------
Fair value of assets acquired..................... $ 43,369,380
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 111
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Airxcel, Inc., formerly known as Recreation Vehicle Products, Inc. (the
Company) is engaged in designing, manufacturing and marketing recreation vehicle
air conditioning equipment in the United States, Canada and certain
international markets. As described in Note 9, on November 10, 1997, the Company
acquired substantially all of the net assets, properties and rights and assumed
certain related liabilities of Crispaire Corporation ("Crispaire") which
designs, manufactures and markets air conditioning units and heat pump water
heaters. Crispaire markets its products to companies involved in modular
construction, telecommunications and other utilities located throughout the
United States and selected foreign markets. The Crispaire acquisition was
accounted for as a purchase and, accordingly, the financial statements include
the accounts and results of operations of Crispaire since November 10, 1997.
The Company is a wholly-owned subsidiary of Airxcel Holdings Corporation,
formerly known as RV Holdings Corporation (Holdings). The Company is the only
subsidiary of Holdings and Holdings has no operating activities and Holdings has
no material assets other than its investment in the Company. Accordingly,
Holdings is dependent upon the Company for any cash requirements. However,
Holdings does have 300,128 and 341,929 shares of $.01 par value common stock and
7,984,615 and 8,984,615 shares of $1 par value Series A and Series B
exchangeable preferred stock outstanding as of December 31, 1996 and 1997,
respectively. The Preferred stock which is exchangeable at the stockholders'
option for junior subordinated notes issued by Holdings, is also subject to
mandatory redemption by Holdings on August 31, 2006 for an amount equal to the
original proceeds from sale of the stock plus accrued but unpaid dividends which
accrue at 14 percent annually. Total proceeds plus accrued and unpaid dividends
were $8,360,846 and $10,657,263 as of December 31, 1996 and 1997, respectively.
All proceeds generated from the sale of such common and preferred shares have
been contributed to the Company. However, the Company is not required to fund
the mandatory redemption of these preferred shares. During 1996, Holdings also
issued $4,015,385 of junior subordinated notes to the parent company of a major
stockholder in exchange for cash. All proceeds from the issuance of these notes
have been contributed to the Company. These notes, which are due in August,
2006, bear interest at 14% payable semiannually in the form of additional junior
subordinated notes or cash at the election of Holdings. Such notes, plus accrued
interest totaled $4,219,947 and $4,826,419 as of December 31, 1996 and 1997,
respectively. As part of the November 10, 1997, Airxcel acquisition of
Crispaire, Holdings issued $5,304,000 of junior subordinated notes (the "PIK
Notes") to Crispaire. The PIK Notes and $3.1 million of cash received by
Holdings through the sale of its common and purchase of stock to the management
of Crispaire, was contributed by Holdings to the Company. The PIK notes, which
are due in November, 2008, bear interest at 11.4% payable annually in the form
of additional junior subordinated notes or cash at the election of Holdings.
Such notes, plus accrued interest, totaled $5,391,345 as of December 31, 1997.
All of the notes described above are uncollateralized and are not guaranteed by
the Company. Although, Holdings is entirely dependent upon the Company to
service its note obligations and the mandatory redemption provisions of the
Preferred Stock, the Company has no cash requirement to fund Holdings until at
least 2006 based upon the stated intent of Holdings' management to elect to make
interest payments due on all such notes in the form of additional junior
subordinated notes.
During October 1997, the Company's board of directors adopted a formal plan
to dispose of its awning business (see Note 8 and Note 13).
On August 22, 1996 (the "closing date"), RV Products Holding Corporation
and Subsidiary consummated exchange offers and adopted amendments to its
Restated Certificate of Incorporation pursuant to which the outstanding debt and
common stock were restructured (the "Recapitali-
F-8
<PAGE> 112
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
zation"). The objective of the Recapitalization was to refinance existing
indebtedness and pay fees and expenses associated with the Recapitalization.
The significant components of the Recapitalization on the Company are as
follows:
- The Company issued new debt with interest rates ranging from 9.75% to
12.0% as of December 31, 1996 as follows:
<TABLE>
<S> <C>
Revolver.............................................. $ 7,222,177
Term loan A........................................... 12,750,000
Term loan B........................................... 15,250,000
Senior subordinate note............................... 14,000,000
-----------
Total....................................... $49,222,177
===========
</TABLE>
The senior subordinate note was issued with detachable stock warrants to
purchase 65,882 shares of Class B Common Stock of Holdings at $.02 per share at
any time on or before August 22, 2006. The exercise price is subject to
adjustment from time to time in order to prevent dilution of the rights granted
under the warrants. The holders of these warrants are entitled to receive
dividend payments as if the warrants were exercised immediately prior to the
date of record for such dividends. The estimated fair value of the warrants at
the date of issuance has been recognized as a reduction of the note payable (as
debt discount) in the amount of $218,194 with the offset to additional paid-in
capital.
The total proceeds from the debt were used to pay $1.7 million in financing
costs relating to the recapitalization and to repay $21.3 million of existing
debt. The repayment of debt was accounted for as an early extinguishment of debt
whereby the Company recognized a charge of $183,821 as an extraordinary loss,
net of tax. The remaining proceeds of the new debt, amounting to $26.2 million,
were distributed as part of a $33.3 million dividend to Holdings that was used
by Holdings to retire all remaining shares of Common Stock outstanding at that
time.
2. SIGNIFICANT ACCOUNTING POLICIES:
a. Management's Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect 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 those estimates.
b. Revenue Recognition: Revenue and related direct expenses are recognized
when the merchandised is shipped. Other operating expenses are recognized as
incurred.
c. Cash and cash equivalents: The Company classifies as cash and cash
equivalents amounts on deposit in banks and cash invested temporarily in various
instruments with maturities of three months or less at time of purchase.
d. Inventories: Inventories are stated at the lower of cost or market.
Costs are based on standards which approximate the first-in, first-out (FIFO)
method.
e. Property, Plant and Equipment: Property, plant and equipment are
recorded at cost and depreciated on a straight-line basis over their estimated
useful lives as follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements.................. 15-45 years
Furniture and fixtures................................ 4-10 years
Machinery and equipment............................... 3-15 years
</TABLE>
F-9
<PAGE> 113
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for repairs and maintenance are charged to operations as
incurred. The cost of an asset and the related accumulated depreciation is
removed from the appropriate accounts upon sale of the asset. The resulting gain
or loss from the sale is included in operations.
f. Computer Software: All computer software acquisition and development
costs, including applicable internal labor, are capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. The cost of
capitalized software is amortized over its estimated useful lives (generally 5
years). Accumulated amortization as of December 31, 1995, 1996 and 1997 was
$548,600, $624,458 and $634,933, respectively. Amortization for the years ended
December 31, 1995, 1996 and 1997 was $127,386, $75,858 and $10,475,
respectively.
g. Intangible Assets: Intangible assets, excluding those associated with
discontinued operations (see Note 13), are amortized on a straight-line basis
over their estimated economic lives as follows:
<TABLE>
<CAPTION>
AMORTIZATION DECEMBER 31, DECEMBER 31,
PERIOD 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Non-compete agreement............................. 5 years $ -- $ --
Trademarks and contract........................... 1-50 years 6,777,624 13,457,624
Patents........................................... 5 years -- 3,000,000
Assembled work force.............................. 10 years -- 1,000,000
Customer base..................................... 20 years -- 7,500,000
Goodwill.......................................... 40 years -- 6,032,000
---------- -----------
6,777,624 30,989,630
Less accumulated amortization..................... 5,191,461 450,847
---------- -----------
$1,586,163 $30,538,783
========== ===========
</TABLE>
h. Loan Financing Costs: Loan financing costs are amortized using the
effective yield method over the contracted terms of the related debt.
i. Income Taxes: The Company and its parent file a consolidated federal
income tax return. Deferred income taxes are recorded to reflect the tax
consequences in future years of operating loss carryforwards and temporary
differences between the tax basis of assets and liabilities and their financial
reporting amounts using enacted tax rates for the years in which these items are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
j. Allocation of Interest to Discontinued Operations: Interest expense is
allocated to discontinued operations based on the ratio of net assets of the
discontinued operations to the sum of total net assets of the Company plus debt.
k. Fair Value of Financial Instruments: The stated values of financial
instruments as of December 31, 1995, 1996 and 1997 approximate fair market
value. Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair values of existing debt.
l. Recently Issued Accounting Standards: Effective at year-end 1998, the
Company will adopt Statement of Financial Accounting Standards No. 131 (SFAS No.
131), "Disclosure About Segments of an Enterprise and Related Information,"
which requires disclosure of segment data in a manner consistent with that used
by an enterprise for internal management reporting and decision
F-10
<PAGE> 114
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
making. The Company's management believes that it will report separate segment
information for its Airxcel, Crispaire and Koda (see Note 14) operations in
accordance with SFAS No. 131.
m. Derivatives: The Company uses derivative financial instruments to
manage commodity market volatility. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company is not a
party to leveraged derivatives. Realized and unrealized gains and losses are
deferred until the underlying transactions are realized. These gains and losses
generally are recognized as an adjustment to cost of goods. Cash flows
attributable to these financial instruments are included with the cash flows of
the associated hedged items.
3. SUMMARY BALANCE SHEET DATA:
Inventory, excluding that associated with discontinued operations (see Note
13), consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Raw materials................................. $1,868,183 $ 6,078,233
Work-in-process............................... 368,740 1,056,797
Finished goods................................ 4,184,473 5,993,879
---------- -----------
$6,421,396 $13,128,909
========== ===========
</TABLE>
Property, plant and equipment, excluding that associated with discontinued
operations (see Note 13), consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Land and land improvements................... $ 17,358 $ 753,482
Buildings and building improvements.......... 1,477,008 2,845,446
Machinery and equipment...................... 4,149,915 7,730,872
Furniture and fixtures....................... 580,838 782,739
Construction in process...................... 35,465 261,840
----------- -----------
6,260,584 12,374,379
Less accumulated depreciation................ (3,202,357) (3,681,813)
----------- -----------
Net................................ $ 3,058,227 $ 8,692,566
=========== ===========
</TABLE>
F-11
<PAGE> 115
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
On November 5, 1997, the Company issued $90,000,000 of 11% senior
subordinated debt. Substantially all of the proceeds were used by the Company to
finance its acquisition of substantially all of the net assets of the Crispaire
Corporation (see Note 9), to repay certain indebtedness and to pay financing
costs associated with the offering.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Senior subordinated notes, with interest at 11% payable
semiannually on May 15 and November 15, commencing on May
15, 1998. The Company may redeem the notes, in whole or in
part, at any time on or after November 15, 2002, at
redemption prices ranging from 100 to 105.5% of the
principal being paid based on the redemption periods
defined in the agreement. The aforementioned notes are
uncollateralized and contain, among other things, certain
financial covenants and restrictive provisions pertaining
to the use of funds, payment of dividends and ability to
incur obligations. The senior subordinated notes are
subject to an Exchange and Registration Rights Agreement
whereby Airxcel is required to file a Registration
Statement (and a Shelf-Registration Statement at the
Company's election) with the Securities and Exchange
Commission. .............................................. $ -- $90,000,000
Note payable to bank under a $14,000,000 revolving line of
credit that was repaid through the debt offering on
November 5, 1997.......................................... 6,495,587 --
Note payable (tranche A) to bank under a $12,750,000 term
loan that was repaid through the debt offering on November
5, 1997................................................... 12,750,000 --
Note payable (tranche B) to bank under a $15,250,000 term
loan that was repaid through the debt offering on November
5, 1997................................................... 15,250,000 --
Senior subordinated note payable that was repaid through the
debt offering on November 5, 1997......................... 13,784,354 --
Note payable to individual for land purchase, 7.6%, due in
monthly principal and interest payments of $4,479 through
April 1, 2007, collateralized by the land................. -- 355,674
----------- -----------
48,279,941 90,355,674
Current portion of long term debt........................... (7,933,087) (27,346)
----------- -----------
$40,346,854 $90,328,328
=========== ===========
</TABLE>
F-12
<PAGE> 116
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt, including minimum required reductions in the
revolving line of credit commitments based on balances outstanding at December
31, 1997 for each of the five succeeding years are as follows:
<TABLE>
<S> <C>
1998.................................................. $ 27,346
1999.................................................. 29,509
2000.................................................. 31,845
2001.................................................. 34,364
2002.................................................. 37,084
Thereafter............................................ 90,195,526
-----------
$90,355,674
===========
</TABLE>
The Company has an unused $15,000,000 revolving note as of December 31,
1997. The aggregate principal amount of revolving credit loans is limited to the
lesser of the $15 million revolving credit commitment or 85% of eligible
receivables (as defined in the credit agreement) plus the lesser of $7.5 million
or 60% of eligible inventory (as defined in the credit agreement) plus cash and
cash equivalents. The revolver will mature on October 31, 2002, bears interest
at prime (8.50% at December 31, 1997) plus 1.0% or a LIBOR base rate plus 2.5%
(type of rate based on election of the Company), payable quarterly and is
collateralized by accounts receivable, equipment, general intangibles,
inventory, and investment property. The aforementioned note contains, among
other terms, certain financial covenants and restrictive provisions pertaining
to the use of funds, payment of dividends and ability to incur obligations.
5. STOCK OPTION PLANS:
On May 1, 1991, Holdings granted options to three employees of the Company
to purchase 25,098 shares of common stock at $.01 per share. During 1995, all
25,098 options were exercised.
In addition, Holdings adopted a Performance Stock Option Plan and granted
stock options to several employees of the Company to purchase 120,000 shares of
common stock at $.01 per share. The stock options expire at the earlier of 20
years from date of grant or the date the employee ceases to be an employee of
the Company. In 1995, 118,400 of these options were exercised under this Plan.
In 1994, Holdings adopted its second Performance Stock Option Plan (the
1994 Option Plan) and granted stock options to several employees of the Company
to purchase 30,500 shares of common stock at $12.92 per share. These stock
options may be exercised beginning December 31, 1996 or earlier if there is a
change in control of Holdings, as defined by the plan agreement, and will expire
at the earlier of 20 years from date of grant or the date the employee ceases to
be an employee of the Company.
The options granted under the 1994 Option Plan vested based on the Company
achieving certain earnings and debt reduction goals during 1994, 1995, and 1996
as set forth in the plan agreement. Compensation expense is being charged to
operations over the vesting period of three years for the difference between the
estimated fair value of the stock options and the option exercise price of
$12.92 per share. Compensation expense of $122,946 and $457,744 was recorded
during the years ended December 31, 1995 and 1996, respectively. During 1996,
all 30,500 shares were exercised as part of the Recapitalization.
As part of the Recapitalization, Holdings adopted a new Stock Option Plan
and granted stock options to key employees and/or directors of the Company to
purchase up to 75,032 shares of
F-13
<PAGE> 117
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Class A Common Stock of Holdings at $1 per share. The stock options may be
exercised after the "trigger date", and will expire at the earlier of 10 years
from date of grant or the date the employee ceases to be an employee of the
company. As defined in the 1996 Stock Option Plan, the "trigger date" is the
date on which the majority shareholder has disposed of all the securities (i.e.
common stock, preferred stock and notes purchased by the majority shareholder)
for cash and/or marketable securities. The number of stock options that may be
exercised is based on the estimated annual interest rate of return as of the
trigger date as set forth in the plan agreement. No compensation expense
relating to this stock option plan will be recorded until the trigger date.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company has chosen
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options granted to the Company's employees is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
If the Company had elected to recognize compensation expense for options granted
in 1996 based on the fair value of the options granted at the date of grant as
prescribed by SFAS No. 123, the Company's net income (loss) would not have been
materially different from that reported.
6. INCOME TAXES:
The significant components of the net deferred income tax asset (liability)
recognized in the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Accrued warranty............................................ $ 185,000 $ 216,000
Accrued vacation............................................ 97,000 86,000
Accrued self-insurance...................................... 36,000 53,000
Provision for discontinued operations....................... -- 2,079,200
Accrued reserves and liabilities............................ 28,000 200,000
Depreciation................................................ (334,000) (418,000)
State income tax net operating loss carryforwards,
expiring in 2010.......................................... 180,000 187,000
AMT credits................................................. -- 162,000
Other....................................................... (10,033) 76,295
--------- ----------
181,967 2,641,495
Less current deferred income tax............................ 427,035 3,004,385
--------- ----------
Total noncurrent deferred income tax........................ $(245,068) $ (362,890)
========= ==========
</TABLE>
F-14
<PAGE> 118
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense before discontinued operations and
extraordinary item are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current........................................... $ 222,916 $2,026,491 $1,933,524
Deferred.......................................... 833,532 384,784 (380,328)
Benefit of state income tax net operating loss
carryforwards................................... (225,000) -- --
--------- ---------- ----------
Total income tax expense before discontinued
operations and extraordinary item............ $ 831,448 $2,411,275 $1,553,196
========= ========== ==========
</TABLE>
Total income tax expense before discontinued operations and extraordinary
item differed from the amounts computed by applying the federal statutory rate
to pretax income as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income tax expense before discontinued
operations and extraordinary item computed by
applying the federal statutory rate........... $ 484,220 $2,088,766 $1,430,575
Adjustment to prior year expense................ 284,773 143,000 (83,234)
State income taxes, net of federal income tax
benefit....................................... 56,000 181,000 156,000
Effect of graduated rates....................... (4,939) (55,645) (34,000)
Other........................................... 11,394 54,154 83,855
--------- ---------- ----------
Total income tax expense before discontinued
operations and extraordinary item.......... $ 831,448 $2,411,275 $1,553,196
========= ========== ==========
</TABLE>
Net deferred income tax assets are recognized based on the expected timing
of the reversal of taxable temporary differences and future taxable income of
the Company.
7. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT:
In 1995, the Company amended its credit agreement associated with its two
revolving lines of credit and retired its senior subordinated notes payable. The
related unamortized loan financing costs of $72,880 was recorded as an
extraordinary loss on early extinguishment of debt of $44,880 (net of income tax
benefit of $28,000).
As stated in Note 1, the Company extinguished $21.3 million of debt as part
of the August 22, 1996 Recapitalization. The related unamortized loan financing
costs of $167,275 and the prepayment penalty of $131,546 were recorded as an
extraordinary loss on early extinguishment of debt of $183,821 (net of a
$115,000 income tax benefit).
In 1997, the Company extinguished $48.3M of debt as part of the November 5,
1997 debt offering (see Note 4). The related unamortized loan financing costs of
$1,712,221 and prepayment penalty of $560,000 were recorded as an extraordinary
loss on early extinguishment of debt of $1,630,663 (net of a $641,558 income tax
benefit).
8. ACQUISITION OF CARTER SHADES, INC.:
In 1995, the Company acquired Carter Shades, Inc., which is engaged in
manufacturing and selling awnings for recreational vehicles and included the
results of operations of its newly acquired
F-15
<PAGE> 119
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary in the Company's statement of operations from the date of
acquisition. The Company acquired Carter Shades, Inc. for $866,385 and accounted
for the transaction as a purchase. During 1997, the Company's Board of Directors
adopted a plan to discontinue the awning business. The discontinued operations
of the Faulkner operating division described in Note 13 include Carter Shades,
Inc.
9. ACQUISITION OF CRISPAIRE CORPORATION:
On November 10, 1997, the Company completed the acquisition of the business
of Crispaire Corporation, a designer, manufacturer and marketer of air
conditioning units and heat pump water heaters. Pursuant to the purchase
agreement, the Company acquired certain assets and liabilities of the Crispaire
Corporation for a total purchase price of approximately $43.4 million. The
acquisition was funded with a portion of the cash proceeds from the $90.0
million senior subordinated note (see Note 4), issuance of $5.3 million of
junior subordinated notes by Holdings and the sale of $2.05 million of common
stock and $1.0 million of preferred stock by Holdings. The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated to
the underlying assets and liabilities based on their respective fair values at
the date of the acquisition. (See Note 2(g))
The following reflects the operating results of the Company for the years
ended December 31, 1997 and 1996 assuming the acquisitions occurred as of the
beginning of each of the respective periods:
PRO FORMA OPERATING RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net sales................................................ $92,062,000 $93,469,000
Loss before extraordinary item........................... (3,691,000) (1,861,000)
Net loss................................................. (5,322,000) (2,045,000)
</TABLE>
The pro forma results of operations are not necessarily indicative of the
actual results that would have been obtained had the acquisition been made at
the beginning of the respective periods, or the results which may occur in the
future.
10. COMMITMENTS:
The Company leases buildings and machinery and equipment which are
accounted for as operating leases. Total rental expense was $525,950, $407,002
and $448,301 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancellable leases as of December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $282,685
1999........................................................ 237,114
2000........................................................ 121,509
2001........................................................ 3,387
--------
$644,695
========
</TABLE>
F-16
<PAGE> 120
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As part of the Crispaire acquisition, the Company entered into certain
management and employment agreements. Compensation expense related to these
agreements was $51,124 for year ended December 31, 1997. Under the agreements,
future management fees are as follows:
<TABLE>
<S> <C>
1998........................................................ $353,935
1999........................................................ 353,935
2000........................................................ 294,946
</TABLE>
11. BENEFIT PLAN:
Substantially all employees of the Company and Crispaire are eligible to
participate in the 401(k) plans offered by each company. Subject to certain
conditions, the Company and Crispaire may match up to 30% and 25% of the
employees' contributions, respectively, up to a maximum of 6% of the employees'
annual salary. In addition, the Company and Crispaire can make an additional
contribution determined at the discretion of the Company's Board of Directors.
The Company's contribution to its plan for the years ended December 31, 1995,
1996 and 1997, and Crispaire's 1997 contribution to its plan, totaled $207,657,
$262,553 and $260,744, respectively.
12. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK:
The Company's ten largest customers accounted for approximately 80%, 93%
and 85% of sales for the years ended December 31, 1995, 1996 and 1997,
respectively, and approximately 76%, 85% and 33% of accounts receivable at
December 31, 1995, 1996 and 1997, respectively. The credit risk on trade
receivables is controlled through credit approvals, limits and monitoring
procedures. Sales to customers in excess of 10% of consolidated net revenues are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31
CUSTOMER 1995 1996 1997
-------- ------------ ------------ ------------
<S> <C> <C> <C>
A........................................... $ -- $22,465,434 $15,553,142
B........................................... 17,017,302 18,979,863 18,985,456
C........................................... 11,121,645 -- --
D........................................... 7,956,757 8,377,324 7,110,347
</TABLE>
The Company maintains its cash accounts primarily with major financial
institutions, and had bank balances at December 31, 1997 that exceeded FDIC
insurance limits by $9,458,560.
13. DISCONTINUED OPERATIONS:
During September 1997, the Company adopted a plan to discontinue its
Faulkner manufacturing division and plans to liquidate the assets and settle the
liabilities and anticipates that the business will be disposed of by June 30,
1998. Accordingly, Faulkner is reported as a discontinued operation for the
years ended December 31, 1995, 1996 and 1997.
Net sales from Faulkner were $9,894,703, $12,003,155 and $7,964,029 for the
years ended December 31, 1995, 1996 and 1997, respectively. Interest expense
allocated to discontinued operations was $329,240, $1,012,686 and $1,493,989 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-17
<PAGE> 121
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net assets (liabilities) of the discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Accounts receivable, net................................ $ 960,796 $ 700,881
Inventory............................................... 4,142,874 789,925
Other current assets.................................... 358,270 34,551
---------- ----------
Total current assets.......................... 5,461,940 1,525,357
Property, plant and equipment, net...................... 892,290 243,213
Intangible assets, net.................................. 1,223,856 --
---------- ----------
Total assets.................................. 7,578,086 1,768,570
LIABILITIES
Account payable......................................... 288,475 303,385
Other accrued expenses.................................. 801,202 1,931,609
---------- ----------
Total current liabilities..................... 1,089,677 2,234,994
Other noncurrent liabilities............................ 67,116 --
---------- ----------
Total liabilities............................. 1,156,793 2,234,994
---------- ----------
Net assets (liabilities) held for sale.................. $6,421,293 $ (466,424)
========== ==========
</TABLE>
Components of the $5.65 million loss on disposal of Faulkner are as
follows:
<TABLE>
<S> <C>
Reduction in carrying value of inventories................ $2,400,000
Write-off of intangible assets............................ 1,100,000
Accrued holding period loss............................... 1,000,000
Reduction in carrying value of property, plant and
equipment.............................................. 450,000
Accrued employee severance costs.......................... 150,000
Accrued sales returns..................................... 250,000
Other accrued expenses.................................... 300,000
----------
$5,650,000
==========
</TABLE>
14. ACQUISITION OF SUBURBAN MANUFACTURING CORPORATION:
During December 1997 Holdings entered into a letter of intent to acquire,
subject to obtaining financing, the business of Suburban Manufacturing
Corporation ("Suburban") by purchasing 100% of the capital stock of the parent.
KODA Enterprises Group, Inc. ("KODA"), and repaying certain KODA obligations for
approximately $36 million. Suburban is engaged in the manufacture and sale of
specialty products consisting of gas heating to the recreational vehicle
industry as well as other heating and cooling equipment.
15. CONTINGENCY:
During September 1997, the Company made a decision to upgrade certain air
conditioning units which were sold in previous years. The range of estimated
costs to complete the upgrade is $500,000 to $2,400,000. Management has an
agreement with the vendor that supplied the component to be upgraded and the
vendor will bear a substantial portion of these costs. The Company's portion of
the costs to complete the upgrade is estimated to be $500,000 and, accordingly,
it has recorded a charge to cost of goods sold for this amount for the year
ended December 31, 1997.
F-18
<PAGE> 122
AIRXCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. LITIGATION:
The Company is a defendant in a lawsuit seeking monetary damages in an
unspecified amount for an alleged patent, trademark and trade dress infringement
by Crispaire. Management of the Company believes that the ultimate resolution of
this matter will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
17. DERIVATIVES:
The Company uses noncancelable contracts and forward contracts in its
purchasing cycle. These instruments are all used to purchase copper and aluminum
for the Company's internal needs, and to manage purchase prices and inventory
values. All such contracts have determinable market values. Unrealized gains and
losses are deferred until the copper and aluminum costs flow through cost of
goods sold. The net gains and losses recorded are immaterial. At December 31,
1996 and 1997, the aggregate fair value of the Company's copper and aluminum
position was $1.7 million and $6.7 million, respectively.
The Company has contractual agreements to purchase certain quantities of
copper and aluminum from two suppliers at specified amounts as follows:
<TABLE>
<CAPTION>
CONTRACT CONTRACTED TOTAL
CONTRACT QUANTITY PRICE PER CONTRACTED
PERIOD (IN POUNDS) POUND PURCHASE PRICE
------------------ ----------- ---------- --------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Copper 1/1/97 -- 12/31/97 707,000 $ 1.03 $ 728,210
Aluminum 1/1/97 -- 12/31/97 723,000 1.22 882,060
----------
Total $1,610,270
----------
As of December 31, 1997:
Copper 1/1/98 -- 12/31/98 100,000 0.975 97,500
1/1/98 -- 12/31/98 825,000 1.01 833,250
1/1/98 -- 12/31/98 600,000 0.99 594,000
Aluminum 1/1/98 -- 12/31/98 840,000 1.23 1,033,200
1/1/98 -- 12/31/98 575,000 1.26 724,500
Copper 1/1/99 -- 12/31/99 825,000 0.95 783,750
1/1/99 -- 12/31/99 675,000 0.94 634,500
Aluminum 1/1/99 -- 12/31/99 840,000 1.22 1,024,800
----------
Total $5,725,500
----------
</TABLE>
F-19
<PAGE> 123
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Crispaire Corporation
Cordele, Georgia
We have audited the accompanying balance sheets of Crispaire Corporation as
of October 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended October 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 audits.
We conducted our audits 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 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 Crispaire Corporation as of
October 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1996, in conformity
with generally accepted accounting principles.
Mauldin & Jenkins, LLC
Albany, Georgia
December 4, 1996, except for Notes 11 and 12
as to which the date is October 16, 1997
F-20
<PAGE> 124
CRISPAIRE CORPORATION
BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS ----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 63,140 $ 9,268
Trade accounts receivable, less allowance for doubtful
accounts of $132,252 and $165,373, respectively........ 5,489,706 3,606,239
Inventories............................................... 5,954,364 5,627,858
Prepaid expenses.......................................... 43,523 55,046
----------- -----------
Total current assets.............................. 11,550,733 9,298,411
----------- -----------
Other investments, at cost.................................. 33,952 32,201
----------- -----------
Property, plant and equipment
Land...................................................... 18,000 18,000
Buildings and improvements................................ 1,016,441 816,840
Machinery and equipment................................... 2,160,456 858,092
Furniture and fixtures.................................... 246,688 196,853
Construction and equipment installations in progress...... -- 180,861
----------- -----------
3,441,585 2,070,646
Less accumulated depreciation............................. 1,109,153 902,068
----------- -----------
2,332,432 1,168,578
----------- -----------
Other assets................................................ 189,136 148,142
----------- -----------
$14,106,253 $10,647,332
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable............................................. $ -- $ 618,349
Current maturities of long-term debt...................... 771,591 162,600
Excess of outstanding checks over bank balance............ 127,331 315,320
Accounts payable.......................................... 2,295,418 1,859,426
Accrued bonuses........................................... 1,295,753 844,920
Warranty reserve.......................................... 390,000 310,000
Other current liabilities................................. 457,659 387,199
----------- -----------
Total current liabilities......................... 5,337,752 4,497,814
----------- -----------
Long-term debt, less current maturities..................... 470,588 432,200
----------- -----------
Stockholders' Equity
Common stock, par value $1 per share, authorized 250,000
shares; issued 190,588 shares.......................... 190,588 190,588
Additional paid-in capital................................ 6,003,815 5,775,866
Less deferred compensation for nonvested stock............ (271,614) (526,359)
----------- -----------
5,922,789 5,440,095
Retained earnings......................................... 3,681,470 1,583,569
----------- -----------
9,604,259 7,023,664
Less cost of common shares acquired for the treasury,
44,958 shares.......................................... (1,306,346) (1,306,346)
----------- -----------
8,297,913 5,717,318
----------- -----------
$14,106,253 $10,647,332
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE> 125
CRISPAIRE CORPORATION
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales....................................... $34,138,581 $27,304,265 $24,151,596
Cost of sales................................... 24,758,248 20,104,240 18,142,826
----------- ----------- -----------
Gross profit............................... 9,380,333 7,200,025 6,008,770
----------- ----------- -----------
Other operating income, net..................... 64,190 22,112 63,683
----------- ----------- -----------
Operating expenses
Engineering, including research and
development costs of $231,692, $188,177 and
$63,529, respectively...................... 877,737 752,323 536,844
Selling....................................... 1,684,987 1,373,503 1,126,680
General and administrative.................... 3,444,005 2,715,585 2,178,815
Provision for doubtful accounts............... -- -- 241,275
----------- ----------- -----------
6,006,729 4,841,411 4,083,614
----------- ----------- -----------
Income from operations..................... 3,437,794 2,380,726 1,988,839
----------- ----------- -----------
Nonoperating expense
Interest expense, net......................... 145,727 93,458 159,628
----------- ----------- -----------
Net income................................. $ 3,292,067 $ 2,287,268 $ 1,829,211
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE> 126
CRISPAIRE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
ADDITIONAL FOR RETAINED
COMMON PAID-IN NONVESTED EARNINGS TREASURY
STOCK CAPITAL STOCK (DEFICIT) STOCK
-------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 31,
1993.................... $190,588 $5,645,243 $(698,161) $ (721,137) $(1,283,696)
Net income.............. -- -- -- 1,829,211 --
Purchase of 1,700 shares
of common stock for
the treasury......... -- -- -- -- (45,900)
Dividends paid.......... -- -- -- (185,382) --
-------- ---------- --------- ----------- -----------
Balance, October 31,
1994.................... 190,588 5,645,243 (698,161) 922,692 (1,329,596)
Net income.............. -- -- -- 2,287,268 --
Sale of 800 shares of
treasury stock....... -- 14,134 -- -- 23,250
Vesting of 6,363 shares
of common stock under
terms of deferred
compensation stock
agreement............ -- 116,489 171,802 -- --
Dividends paid.......... -- -- -- (1,626,391) --
-------- ---------- --------- ----------- -----------
Balance, October 31,
1995.................... 190,588 5,775,866 (526,359) 1,563,569 (1,306,346)
Net income.............. -- -- -- 3,292,067 --
Vesting of 9,435 shares
of common stock under
terms of deferred
compensation stock
agreement............ -- 227,949 254,745 -- --
Dividends paid.......... -- -- -- (1,194,166) --
-------- ---------- --------- ----------- -----------
Balance, October 31,
1996.................... $190,588 $6,003,815 $(271,614) $ 3,681,470 $(1,306,346)
======== ========== ========= =========== ===========
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE> 127
CRISPAIRE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers......................... $ 32,070,270 $ 27,111,379 $ 23,947,286
Cash paid to suppliers and employees................. (29,516,957) (25,531,491) (20,844,650)
Other operating cash receipts........................ 266,630 162,231 199,303
Interest paid........................................ (149,432) (95,881) (162,343)
------------ ------------ ------------
Net cash provided by operating activities.......... 2,670,511 1,646,238 3,139,596
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................... (1,418,793) (393,379) (564,506)
Proceeds from sale of property and equipment......... 10,035 10,250 --
Increase in investment............................... (1,751) (20,634) (11,567)
Increase in other asset, tax deposit................. (40,584) (107,807) (40,335)
------------ ------------ ------------
Net cash used in investing activities.............. (1,451,503) (511,570) (515,408)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit
agreements......................................... (618,349) 618,349 (2,537,189)
Proceeds from long-term borrowings................... 1,732,661 -- 400,000
Principal payments on long-term borrowings........... (1,085,282) (152,600) (192,159)
Proceeds from the sale of treasury stock............. -- 37,384 --
Purchase of common stock for the treasury............ -- -- (45,900)
Cash dividends paid.................................. (1,194,166) (1,626,391) (185,382)
------------ ------------ ------------
Net cash used in financing activities.............. (1,165,136) (1,133,258) (2,560,610)
------------ ------------ ------------
Net increase (decrease) in cash........................ 53,872 1,410 (37,422)
Cash:
Beginning............................................ 9,268 7,858 45,280
------------ ------------ ------------
Ending............................................... $ 63,140 $ 9,268 $ 7,858
============ ============ ============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income........................................... $ 3,292,067 $ 2,287,268 $ 1,829,211
Noncash expenses included in net income:
Depreciation....................................... 231,013 184,216 156,365
Amortization....................................... -- 6,150 4,836
Provision for doubtful accounts.................... -- -- 241,275
Loss on disposal of machinery and equipment........ 13,891 11,546 2,033
Changes in assets and liabilities:
Increase in trade receivables.................... (1,883,467) (68,335) (70,723)
Increase in inventories.......................... (326,506) (1,261,463) (775,745)
Increase (decrease) in excess of outstanding
checks over bank balance...................... (187,989) 19,222 296,098
Increase in accounts payable and accrued
expenses...................................... 1,519,979 466,789 1,442,618
Other prepaids and deferrals, net................ 11,523 845 13,628
------------ ------------ ------------
Net cash provided by operating activities..... $ 2,670,511 $ 1,646,238 $ 3,139,596
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Vesting of common stock under terms of deferred
compensation stock agreement of 9,435 shares and
6,363 shares, respectively......................... $ 482,694 $ 288,291 $ --
============ ============ ============
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE> 128
CRISPAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Crispaire Corporation (the "Company") designs, manufactures and markets air
conditioning units and heat pump water heaters. The Company's manufacturing
facilities are located in Cordele and Atlanta, Georgia. The Company markets its
products to companies involved in modular construction, telecommunications and
other utilities located throughout the continental United States and selected
foreign markets.
Basis of presentation
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within their industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
The principles which significantly affect the determination of financial
position, results of operations and cash flows are summarized below.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and in banks as well as highly liquid investments and repurchase
agreements, which are convertible to a known amount of cash and carry an
insignificant risk in change in value.
The Company maintains deposits in banks which, at times, may exceed FDIC
insured limits. The Company has not experienced any losses in such accounts.
Inventories
Inventories are stated at the lower of standard cost (which includes
material, labor and manufacturing overhead) or market. Cost is determined by the
first-in, first-out (FIFO) method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Expenditures for repairs
and maintenance are charged to expense as incurred, and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
disposition, cost and accumulated depreciation are eliminated from the related
accounts and any gain or loss is reflected in other income or expense. The
Company provides depreciation using the straight-line method over the estimated
useful lives of the assets.
Revenue recognition
Revenue from the sale of products is recorded at the time of passage of
title, generally when the products are shipped.
Fair value of financial instruments
Financial Accounting Standards Board Statement No. 107, "Disclosure About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which is practicable to estimate that value.
F-25
<PAGE> 129
CRISPAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Carrying amounts approximated fair values for the following instruments:
<TABLE>
<S> <C>
Cash and cash items Notes payable
Trade accounts receivable Long-term debt
Other investments Accounts payable
</TABLE>
The fair value of patents owned by the Company, which are fully amortized,
has not been determined.
For other financial instruments, the determination of a fair value was not
practical for disclosures as they do not represent a significant value to the
Company and any differences from the carrying value of these instruments would
also be insignificant.
NOTE 2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts for the years ended October
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year..................... $165,373 $167,500 $ 190,000
Provision for doubtful accounts.............. -- -- 241,275
Accounts charged off, net of recoveries...... (33,121) (2,127) (263,775)
-------- -------- ---------
Balance, end of year........................... $132,252 $165,373 $ 167,500
======== ======== =========
</TABLE>
NOTE 3. INVENTORIES
Inventories at October 31, 1996 and 1995 were composed of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Component parts and subassemblies......................... $4,677,898 $3,812,188
Work-in-process........................................... 240,757 172,717
Finished units............................................ 1,035,709 1,642,953
---------- ----------
$5,954,364 $5,627,858
========== ==========
</TABLE>
NOTE 4. NOTES PAYABLE
Notes payable at October 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
$5,000,000 ($4,000,000 in 1995) line of credit to
NationsBank........................................ $ -- $618,349
======== ========
</TABLE>
The line of credit is secured by accounts receivable, inventories,
equipment and real estate and is guaranteed by certain officers and stockholders
of the Company. Terms of the loan agreement provide that the Company may borrow
against eligible inventory and receivables based on formulas in the agreement.
Maximum borrowings against inventories are further limited to $2,000,000.
The loan agreement also requires that the Company meet certain specific
financial covenants. The Company is in compliance with all such covenants at
October 31, 1996.
Interest on borrowings is due monthly at a variable rate (7.15% and 8.75%
at October 31, 1996 and 1995, respectively), while principal is due on demand.
F-26
<PAGE> 130
CRISPAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
All interest incurred during the years ended October 31, 1996, 1995 and
1994 was expensed.
NOTE 5. PLEDGED ASSETS AND LONG-TERM DEBT
At October 31, 1996 and 1995, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
NationsBank, variable rate (7.56% at October 31, 1996) note
payable, due in monthly installments of $29,412 plus
interest through March 1999, collateralized by trade
accounts receivable, inventories, equipment and real
estate and guaranteed by certain stockholders of the
Company. Subject to the terms of the loan agreement
discussed in Note 4. .................................... $ 823,529 $ --
NationsBank, 7.15% note payable, due in monthly
installments of $13,550 plus interest through November
1996, final installment of all unpaid principal and
interest, due December 1996, collateralized by accounts
receivable, inventories, equipment and real estate and
guaranteed by certain stockholders of the Company.
Subject to the terms of the loan agreement discussed in
Note 4. ................................................. 418,650 594,800
---------- --------
1,242,179 594,800
Less current portion....................................... 771,591 162,600
---------- --------
Long-term portion.......................................... $ 470,588 $432,200
========== ========
</TABLE>
Aggregate maturities required on long-term debt at October 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997........................................................ $ 771,591
1998........................................................ 352,941
1999........................................................ 117,647
----------
Total............................................. $1,242,179
==========
</TABLE>
NOTE 6. INCOME TAX MATTERS
For the years ended October 31, 1996, 1995 and 1994, the Company, with the
consent of the stockholders, has elected to be taxed under sections of Federal
and Georgia income tax law, which provides that, in lieu of corporation income
taxes, the stockholders separately account for their pro rata shares of the
Company's items of income, deduction, loss and credits. As a result of this
election, no income tax liability or expense has been recorded.
The Company, with the consent of its stockholders, has elected to retain
its fiscal year ending October 31, rather than an otherwise required December 31
year end, in accordance with Section 444 of the Internal Revenue Code. To do so
requires a deposit to be placed with the Internal Revenue Service which cannot
be refunded unless the election is terminated. For the year ended October 31,
1996, the Company has the required payment of $189,136 on deposit with the
Internal Revenue Service.
NOTE 7. PROFIT-SHARING PLAN
The Company has a defined contribution plan (the "plan") which adheres to
the provisions of Internal Revenue Code Section 401(k). All full-time employees,
once they have reached age 21 and have completed one full year of service, are
eligible to participate. Under the provisions of the plan, the Company must make
contributions based on a percentage of employee contributions. The
F-27
<PAGE> 131
CRISPAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
amounts charged to operations by the Company were $37,188, $30,147 and $30,536
for the years ended October 31, 1996, 1995 and 1994, respectively.
NOTE 8. LEASES
The Company has entered into leases for a warehouse and various equipment
under noncancelable leases. Future minimum payments for all noncancelable
operating leases with initial or remaining terms of one year or more are
summarized as follows:
<TABLE>
<S> <C>
Years Ending October 31,
1997...................................................... $158,209
1998...................................................... 154,909
1999...................................................... 141,645
2000...................................................... 116,091
2001...................................................... 4,431
--------
$575,285
========
</TABLE>
Rental expense for operating leases for the years ended October 31, 1996,
1995 and 1994 was $243,535, $174,193 and $136,595, respectively.
NOTE 9. EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION STOCK AGREEMENT
The Company has entered into an employment contract with its president. The
contract establishes his base salary and benefits and provides for a cash bonus
to be paid based on a formula contained in the agreement. The bonus was
$501,863, $247,581 and $155,235 for the years ended October 31, 1996, 1995 and
1994, respectively. The agreement expires December 31, 1997.
The Company has also entered into a deferred compensation stock agreement
with its president. In accordance with the terms of the agreement, 30,000 shares
of the Company's common stock was issued to the president. The issued stock has
been restricted by the agreement and, while the president has all cash dividend
and voting rights with respect to the stock, his ownership interest in the stock
was not vested at the time of issuance.
Each fiscal year a bonus is computed based on a formula contained in the
agreement. Subsequent to October 31 of each year, the president will vest in a
portion of the restricted stock based on the accrued bonus and a stock valuation
formula contained in the agreement. Shares not vested at the termination of
employment or at the expiration of the agreement shall be canceled and returned
to the Company and the president shall have no further rights or interest with
respect to those shares.
The agreement contains provisions concerning the Company's acquisition of
the vested stock at the termination of employment. The agreement also provides
the president an option to purchase an additional 20,000 shares of the Company's
stock at a price based on a valuation formula contained in the agreement. This
option expires at the termination of employment or the expiration of the
agreement.
The deferred compensation stock agreement expires October 31, 1997. The
bonus accrued and expensed in accordance with this agreement for the years ended
October 31, 1996, 1995 and 1994 totaled $659,010, $482,694 and $288,291,
respectively.
The total bonus accrual included in accrued expenses and general and
administrative expenses for both of the above agreements totaled $1,160,873,
$730,275 and $443,526 at October 31, 1996, 1995 and 1994, respectively.
F-28
<PAGE> 132
CRISPAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
During the year ended October 31, 1996, the president vested in 9,435
shares of the restricted common stock based on the October 31, 1995 bonus
accrual and the stock valuation formula.
NOTE 10. CONCENTRATIONS OF SALES
Approximately 61%, 61% and 59% of the Company's sales for the years ended
October 31, 1996, 1995 and 1994 were concentrated within the telecommunications
industry. The Company grants credit to distributors throughout the world and
generally does not require collateral to secure the accounts receivable. The
company's credit is concentrated within the telecommunications industry
accounting for 53% and 55% of accounts receivable as of October 31, 1996 and
1995, respectively.
NOTE 11. SUBSEQUENT EVENTS
On August 27, 1997, the Company executed a letter of intent with Recreation
Vehicle Products, Inc. ("RVP"), a manufacturer of air conditioning equipment for
recreational vehicles located in Wichita, Kansas, whereby RVP would acquire
substantially all of the assets and assume certain liabilities of the Company.
NOTE 12. LITIGATION
The Company is a defendant in a lawsuit wherein substantial amounts are
claimed. In the opinion of the Company's legal counsel, this suit is without
substantial merit and should not result in a judgment which would have a
material adverse effect on the Company's financial statements.
F-29
<PAGE> 133
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Airxcel, Inc.
We have audited the accompanying balance sheet of Crispaire Corporation,
Inc. as of October 31, 1997, and the related statements of operations, changes
in stockholders' equity and cash flows for the year 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 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.
As discussed in Note 11 to the financial statements on November 10, 1997,
substantially all operating assets and liabilities of the Company were acquired
by Airxcel, Inc. pursuant to a purchase agreement.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crispaire Corporation, Inc.
as of October 31, 1997 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
Atlanta, Georgia
March 2, 1998
F-30
<PAGE> 134
CRISPAIRE CORPORATION, INC.
BALANCE SHEET
OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 67,518
Trade accounts receivable, less allowance for doubtful
accounts of $323,973................................... 6,770,967
Inventories............................................... 6,335,436
Prepaid expenses.......................................... 85,744
Other current assets...................................... 265,181
-----------
Total current assets.............................. 13,524,846
Property, plant and equipment, net of depreciation of
$1,381,435................................................ 2,556,019
-----------
Total assets...................................... $16,080,865
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 352,941
Accounts payable.......................................... 3,122,595
Accrued expenses.......................................... 1,981,440
Bank overdrafts........................................... 257,084
-----------
Total current liabilities......................... 5,714,060
-----------
Long-term debt, less current maturities..................... 117,647
-----------
Total liabilities................................. 5,831,707
-----------
Commitments and contingencies (see Notes 7 and 12)
Stockholders' equity:
Common stock, par value $1 per share; 250,000 shares
authorized; 190,588 shares issued...................... 190,588
Additional paid-in capital................................ 6,391,211
Retained earnings......................................... 5,774,727
Less cost of common shares acquired for the treasury
55,571 shares.......................................... (2,107,368)
-----------
Total stockholders' equity........................ 10,249,158
-----------
Total liabilities and stockholders' equity........ $16,080,865
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 135
CRISPAIRE CORPORATION, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Net sales................................................... $39,114,185
Cost of goods sold.......................................... 28,160,508
-----------
Gross profit........................................... 10,953,677
Operating expenses:
Selling................................................... 1,954,388
General and administrative................................ 3,902,925
Engineering............................................... 932,177
Research and development.................................. 178,573
-----------
Income from operations................................. 3,985,614
Interest expense............................................ 124,616
-----------
Net income............................................. $ 3,860,998
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 136
CRISPAIRE CORPORATION, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ DEFERRED
PAR ADDITIONAL COMPENSATION TOTAL
VALUE PAID-IN FOR NONVESTED RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS STOCK EQUITY
------- -------- ---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31,
1996...................... 190,588 $190,588 $6,003,815 $(271,614) $ 3,681,470 $(1,306,346) $ 8,297,913
Repurchase of 10,663
shares of common stock
for treasury............ (801,022) (801,022)
Payment of cash
dividends............... (1,767,741) (1,767,741)
Vesting of 10,052 shares
of common stock under
terms of deferred
compensation stock
agreement............... 387,396 271,614 659,010
Net income................ 3,860,998 3,860,998
------- -------- ---------- --------- ----------- ----------- -----------
Balance at October 31,
1997...................... 190,588 $190,588 $6,391,211 $ -- $ 5,774,727 $(2,107,368) $10,249,158
======= ======== ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 137
CRISPAIRE CORPORATION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 3,860,998
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 280,016
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,281,261)
Inventories.......................................... (381,072)
Other assets......................................... (76,045)
Prepaid expenses..................................... (8,269)
Accounts payable..................................... 827,177
Accrued expenses..................................... 497,038
-----------
Net cash provided by operating activities......... 3,718,582
-----------
Cash flows from investing activities:
Capital expenditures...................................... (503,603)
-----------
Net cash used in investing activities............. (503,603)
-----------
Cash flows from financing activities:
Payment of long-term debt................................. (771,591)
Dividends paid............................................ (1,767,741)
Change in bank overdrafts................................. 129,753
Repurchase of treasury stock.............................. (801,022)
-----------
Net cash used in financing activities............. (3,210,601)
-----------
Net increase in cash and equivalents........................ 4,378
Cash and equivalents at beginning of period................. 63,140
-----------
Cash and equivalents at end of period....................... $ 67,518
===========
Supplemental noncash investing and financing activities:
Vesting of 10,052 shares of common stock under terms of
deferred compensation stock agreement.................. $ 659,010
===========
Supplement disclosure of cash flow information:
Cash paid for:
Interest............................................... $ 124,062
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 138
CRISPAIRE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is involved in the manufacturing and sale of air conditioning
units and heat pump water heaters. Sales are primarily to companies involved in
modular construction, telecommunications, and other utilities located throughout
the United States and selected foreign markets. On November 10, 1997,
substantially all operating assets and liabilities of the Company were acquired
by Airxcel, Inc. pursuant to a purchase agreement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 those estimates.
REVENUE RECOGNITION
Sales are recorded at the time products are shipped to customers.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
CASH AND EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 7-40
Machinery and equipment..................................... 3-40
Furniture and fixtures...................................... 5-7
</TABLE>
Gains and losses related to retirements or other disposals are included in
the statement of operations. Maintenance and repairs are charged to expense as
incurred; renewals and betterments are capitalized.
2. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<S> <C>
Raw materials and sub-assemblies............................ $3,924,413
Work-in-process............................................. 121,731
Finished goods.............................................. 2,289,292
----------
$6,335,436
==========
</TABLE>
F-35
<PAGE> 139
CRISPAIRE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
<TABLE>
<S> <C>
Land........................................................ $ 18,000
Buildings and Improvements.................................. 1,138,934
Machinery and equipment..................................... 2,478,202
Furniture and fixtures...................................... 302,318
-----------
3,937,454
Less: accumulated depreciation.............................. (1,381,435)
-----------
$ 2,556,019
===========
</TABLE>
4. ACCRUED EXPENSES:
Accrued expenses consisted of the following:
<TABLE>
<S> <C>
Warranties.................................................. $ 490,000
Payroll..................................................... 124,184
Commissions................................................. 126,612
Bonus....................................................... 664,234
Vacation.................................................... 118,912
Miscellaneous............................................... 457,498
----------
$1,981,440
==========
</TABLE>
5. NOTE PAYABLE AND LONG-TERM DEBT:
At October 31, 1997, the Company had a $5 million line of credit available
through NationsBank (the "loan agreement"). At October 31, 1997, the Company had
no amounts outstanding with respect to this line of credit. The line of credit
was collateralized by accounts receivable, inventories, equipment and real
estate and was guaranteed by certain officers and stockholders of the Company.
Terms of the loan agreement provided that the Company could borrow against
eligible inventories and accounts receivable, as defined. Maximum borrowings
against inventories were further limited to $2,000,000. Interest on borrowings
was due monthly at a variable rate (7.41% at October 31, 1997), while any
principal was due on March 31, 1998.
The loan agreement also requires that the Company meet certain specific
financial covenants.
At October 31, 1997, the Company had long-term debt consisting of a
variable rate (7.56% at October 31, 1997) note payable to NationsBank, due in
monthly installments of $29,412 plus interest through March 1999. The note was
collateralized by accounts receivable, inventories, equipment and real estate
and was guaranteed by certain officers and stockholders of the Company. The
total principal balance outstanding on the note at October 31, 1997 was
$470,588, consisting of a current portion of $352,941 and a long-term portion of
$117,647.
Subsequent to October 31, 1997, the line of credit was terminated and the
note payable was paid in full pursuant to the purchase agreement discussed in
Note 11 to the financial statements.
6. INCOME TAXES:
For the year ended October 31, 1997, the Company, with the consent of its
stockholders, elected to be taxed under sections of Federal and Georgia income
tax law, which provide that, in lieu
F-36
<PAGE> 140
CRISPAIRE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of corporation income taxes, the stockholders separately account for their pro
rata shares of the Company's items of income, deduction, loss and credits. As a
result of this election, no income tax liability or expense was recorded.
The Company, with the consent of its stockholders, elected to retain its
fiscal year ending October 31, rather than an otherwise required December 31
year end, in accordance with Section 444 of the Internal Revenue Code. To do so
required a deposit to be placed with the Internal Revenue Service which cannot
be refunded unless the election is terminated. For the year ended October 31,
1997, the Company had the required payment of $265,181 on deposit with the
Internal Revenue Service.
The stockholders of the Company intend to terminate this election during
fiscal 1998.
7. LEASES:
The Company leases a warehouse and various equipment under noncancelable
operating leases with periods ranging from three to five years. The total
minimum rental commitment at October 31, 1997, under these leases was as
follows:
<TABLE>
<S> <C>
1998........................................................ $154,909
1999........................................................ 141,645
2000........................................................ 116,091
2001........................................................ 4,431
2002........................................................ --
--------
$417,076
========
</TABLE>
The total rental expense including short-term rentals recorded in the
statement of operations was $247,524 for the year ended October 31, 1997.
8. BENEFIT PLAN:
The Company has a 401(k) defined contribution plan (the "plan"). All
full-time employees, once they have reached age 21 and have completed one year
of service, are eligible to participate. Under the provisions of the plan, the
Company must make contributions based on a percentage of employee contributions.
The amount of Company contributions charged to operations was $39,628 for the
year ended October 31, 1997.
9. EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION STOCK AGREEMENT:
The Company had an employment contract with its president that established
the president's base salary and benefits and provided for a cash bonus based on
a formula contained in the agreement. The bonus was $487,000 for the year ended
October 31, 1997.
The Company also had a deferred compensation stock agreement with its
president under which 30,000 restricted shares of the Company's common stock
were issued to the president. Each fiscal year since the issuance, the president
vested in a portion of the restricted stock based on a stock valuation formula
contained in the agreement. During the year ended October 31, 1997, the
president vested in 10,052 shares of the restricted common stock resulting in
all shares being fully vested.
F-37
<PAGE> 141
CRISPAIRE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. FAIR VALUE 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, accounts receivable, and accounts
payable -- The carrying amount is a reasonable estimate of the fair value
because of the short maturity of these instruments.
- Long-term debt -- Because the note payable was primarily a variable rate
loan, the carrying amount was a reasonable estimate of fair value.
11. SUBSEQUENT EVENT:
On November 10, 1997, substantially all operating assets and liabilities of
the Company were acquired by Airxcel, Inc. for $43.4 million pursuant to a
purchase agreement. The Company's line of credit and term loan were paid in full
and terminated, and were not assumed by Airxcel. In conjunction with the
transaction, certain officers of the Company entered into employment agreements
with Airxcel.
12. LITIGATION:
The Company is a defendant in a lawsuit seeking monetary damages in an
unspecified amount for an alleged patent, trademark and trade dress infringement
by Crispaire. Management of the Company believes that the ultimate resolution of
this matter will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
F-38
<PAGE> 142
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KODA Enterprises Group, Inc.
We have audited the accompanying consolidated balance sheets of KODA
Enterprises Group, Inc. (a Delaware corporation) and subsidiaries as of April
30, 1996 and 1997, and the related consolidated statements of operations and
cash flows for each of the three years in the period ended April 30, 1997. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KODA
Enterprises Group, Inc. and subsidiaries as of April 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
Boston, Massachusetts Arthur Andersen LLP
February 3, 1998
F-39
<PAGE> 143
KODA ENTERPRISES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,110,648 $ 97,319 $ 644,748
Marketable securities............................... 1,826,327 3,964,008 2,335,689
Accounts receivable, net (Note 3)................... 4,771,427 5,068,902 5,031,936
Notes receivable -- related parties (Note 4)........ 840,000 840,000 1,864,800
Due from Affiliate, net............................. -- 23,979 208,469
Inventories (Note 5)................................ 6,171,061 8,621,463 9,104,395
Deferred tax and other current assets (Note 2)...... 412,511 405,162 383,262
----------- ----------- -----------
Total current assets...................... 17,131,974 19,020,833 19,573,299
Property, plant and equipment, net (Note 6)......... 2,712,436 3,164,747 3,660,387
Intangible assets, net (Note 7)..................... 4,486,349 4,207,437 4,021,728
Notes receivable -- related parties (Note 4)........ 2,334,634 2,373,746 2,649,480
Other assets........................................ 1,098,330 1,278,988 1,378,200
----------- ----------- -----------
$27,763,723 $30,045,751 $31,283,094
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 8)........ 1,856,515 1,970,267 1,481,713
Accounts payable.................................. 3,873,418 4,180,282 4,362,817
Accrued liabilities (Note 9)...................... 2,102,354 2,185,533 1,272,155
Due to Affiliate, net............................. 112,993 -- --
----------- ----------- -----------
Total current liabilities................. 7,945,280 8,336,082 7,116,685
Long-term debt, less current portion (Note 8)....... 9,384,202 10,377,540 11,935,249
Deferred tax liability (Note 12).................... 375,731 369,026 369,026
Other long-term liabilities (Note 15)............... 454,951 589,390 658,258
Commitments and contingencies (Notes 14 and 15)..... -- -- --
Stockholder's equity:
Common stock ($1 par, 1,000 shares authorized, 100
shares issued and outstanding)................. 100 100 100
Additional paid-in capital........................ 8,817,620 8,817,620 8,817,620
Retained earnings................................. 785,839 1,555,993 2,386,156
----------- ----------- -----------
Total stockholder's equity................ 9,603,559 10,373,713 11,203,876
----------- ----------- -----------
Total liabilities and stockholder's
equity.................................. $27,763,723 $30,045,751 $31,283,094
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 144
KODA ENTERPRISES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS EIGHT MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
APRIL 30, APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales..................... $40,168,174 $37,696,702 $42,222,952 $27,711,811 $28,953,787
Cost of goods sold........ 31,450,322 28,965,076 32,477,060 20,842,595 22,261,962
----------- ----------- ----------- ----------- -----------
Gross profit.... 8,717,852 8,731,626 9,745,892 6,869,216 6,691,825
Selling, general and
administrative
expenses................ 6,782,323 7,165,508 8,148,863 5,315,460 5,423,836
----------- ----------- ----------- ----------- -----------
Operating
profit........ 1,935,529 1,566,118 1,597,029 1,553,756 1,267,989
Other income (expense):
Interest expense,
net................ (905,815) (935,394) (1,046,425) (704,558) (817,227)
Other, net........... 747,982 30,589 292,351 188,257 379,961
----------- ----------- ----------- ----------- -----------
Income before
income
taxes......... 1,777,696 661,313 842,955 1,037,455 830,723
Income tax (benefit)
expense (Note 12)....... (32,993) 456,135 72,802 512,000 560
----------- ----------- ----------- ----------- -----------
Net income...... $ 1,810,689 $ 205,178 $ 770,153 $ 525,455 $ 830,163
=========== =========== =========== =========== ===========
Retained earnings,
beginning of period..... $(1,230,028) $ 580,661 $ 785,839 $ 785,839 $ 1,555,993
=========== =========== =========== =========== ===========
Retained earnings,
end of period........... $ 580,661 $ 785,839 $ 1,555,993 $ 1,311,294 $ 2,386,156
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 145
KODA ENTERPRISES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ---------------------------
APRIL 30, APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 1,810,689 $ 205,178 $ 770,153 $ 525,455 $ 830,163
Adjustments used to reconcile net
income to net cash provided (used)
by operating activities:
Depreciation and amortization....... 1,044,193 1,003,163 941,206 551,380 665,472
Provision for doubtful accounts..... (8,157) 57,627 50,000 -- --
Gain on sale of assets.............. (643) (2,101) (6,488) -- (196,014)
Deferred income taxes............... (103,811) 294,692 26,107 (14,169) --
(Increase) decrease in accounts
receivable........................ (348,870) (369,336) (294,548) 471,524 68,380
(Increase) decrease in
inventories....................... (1,185,081) 2,380,493 (2,450,402) (2,040,706) (482,932)
Decrease (increase) in prepaid
expenses and other................ (196,838) (329,147) 307,482 90,812 20,491
(Increase) decrease in due from
affiliates, net................... -- -- -- (601,560) (184,494)
Increase (decrease) in accounts
payable........................... (535,125) 390,746 240,497 (467,626) 182,535
Increase (decrease) in accrued
liabilities....................... 395,041 (157,076) 83,179 8,396 (913,378)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities......... 871,398 3,474,239 (332,814) (1,476,494) (9,777)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and
equipment........................... (598,661) (854,534) (696,767) (340,915) (975,404)
Proceeds from sale of assets.......... 2,550 2,101 13,804 -- 196,014
(Increase) decrease in intangible and
other assets........................ (569,497) (66,173) (369,632) 200,641 (30,344)
(Increase) decrease in marketable
securities.......................... (351,542) (1,303,783) (2,137,681) (1,590,143) 1,628,319
(Increase) decrease in notes
receivable -- related parties....... 441,000 205,000 (17,000) (22,000) (1,330,534)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities................... (1,076,150) (2,017,389) (3,207,276) (1,752,417) (511,949)
Cash flows from financing activities:
Net increase (decrease) in revolving
line of credit...................... 1,650,338 (4,374,675) 1,892,889 1,536,710 1,892,890
Proceeds from issuance of long-term
debt................................ 200,000 6,596,137 190,391 -- --
Payments of long-term debt............ (1,710,245) (1,294,687) (1,690,961) (517,322) (823,735)
Net increase in other liabilities..... -- 454,951 134,440 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities................... 140,093 1,381,726 526,759 1,019,388 1,069,155
Net (decrease) increase in cash
and cash equivalents......... (64,659) 2,838,576 (3,013,331) (2,209,523) 547,429
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at beginning
of period............................. 331,731 272,072 3,110,648 3,110,648 97,319
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period................................ $ 267,072 $ 3,110,648 $ 97,317 $ 901,125 $ 644,748
=========== =========== =========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................. $ 1,065,163 $ 1,012,308 $ 1,243,774 $ 817,041 $ 1,001,372
Income taxes.......................... 63,358 54,141 238,943 30,000 612,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 146
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) ORGANIZATION
KODA Enterprises Group, Inc. ("KODA" or the "Company") is a holding company
which, through its ultimate subsidiary Suburban Manufacturing Company, is
engaged in the manufacture and sale of specialty products consisting of gas
heating to the recreational vehicle industry, both in the United States and
Canada. The Company also sells other heating and cooling equipment.
On December 23, 1997, the Company executed an agreement in principal to
sell the Company to Airxcel Holdings, Inc. for approximately $36 million.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- These consolidated financial statements
include the accounts of the Company, its subsidiary KODA Industries of
Tennessee, Inc. and its ultimate subsidiary Suburban Manufacturing Company. All
material intercompany transactions and balances have been eliminated in
consolidation. Prior to completing the transaction discussed in Note 1, the
Company expects to divest its ownership in J.T. Nelson Company, Inc. and
T.E.H.S. LLC d/b/a Monson/Shurtleff Industrial ("MSI"). Both of these entities
are expected to be transferred to an entity owned 100% by the sole stockholder
of KODA. These consolidated financial statements present the financial position,
results of operations and cash flows of the Company as if the spin-offs
discussed above occurred prior to all periods presented.
Interim Financial Statements -- The accompanying consolidated financial
statements as of December 31, 1997 and for the eight-month periods ended
December 31, 1996 and December 31, 1997 are unaudited, but in the opinion of
management, include all adjustments consisting of normal recurring adjustments
necessary for a fair presentation of results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted although the Company believes that the disclosures included are adequate
to make the information presented not misleading. Results for the eight months
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for the year ending April 30, 1998.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method. Work in process and
finished goods consist of materials, labor and manufacturing overhead.
Marketable Securities -- Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The Company's marketable securities consist primarily of equity
securities and mutual fund investments and are stated at cost, which
approximates market.
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost. For financial reporting purposes, depreciation is computed principally
using the straight-line method over the estimated useful lives of the assets.
The cost for maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
Intangible Assets -- Intangible assets are stated at cost and are amortized
over their estimated useful lives. The Company continually evaluates whether
events or circumstances have occurred
F-43
<PAGE> 147
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that may warrant revision of the remaining useful lives of intangibles or which
would indicate the remaining balances may not be recoverable in accordance with
SFAS No. 121.
Income Taxes -- The Company's income taxes are accounted for under the
method prescribed by SFAS No. 109, Accounting for Income Taxes. This method
requires that deferred tax assets and liabilities be recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
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. Under SFAS No. 109, the
effect on the deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Investments -- The Company accounts for certain minority investments in
limited partnerships and limited liability companies on the cost basis of
accounting. The aggregate fair market value of these investments approximates
cost.
Revenue Recognition -- The Company recognizes revenue when shipments are
made. In addition, the Company grants credit to its customers on defined payment
terms based on their credit worthiness and generally does not secure collateral.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments -- SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, requires that the Company disclose estimates of
the fair value of all classes of financial instruments. The carrying amounts
reported on the accompanying balance sheets for cash, marketable securities,
accounts receivable, notes receivable and accounts payable approximate fair
value due to the short-term nature of these instruments. Based on current market
conditions, management believes that the carrying value of its debt approximates
fair value at April 30, 1996 and 1997.
Impairment of Long Lived Assets -- During 1995, the Financial Accounting
Standards Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of, effective for fiscal years
beginning after December 15, 1995, which requires the determination of whether
an impairment has occurred based on undiscounted cash flows. If it is determined
that an impairment has occurred, the impaired asset must be written down to fair
value less the cost to sell. While SFAS No. 121 specifically applies to the
Company's long-lived property, equipment and intangibles, its adoption or
subsequent following of the provision has not had a material impact on the
accompanying financial statements.
F-44
<PAGE> 148
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Trade............................................... $4,870,501 $4,178,999
Employees/Officer/Shareholders...................... 56,034 602,573
Interest............................................ 136,416 189,344
Other............................................... 6,331 197,986
---------- ----------
5,069,282 5,168,902
Less -- allowance for doubtful accounts............. (297,855) (100,000)
---------- ----------
$4,771,427 $5,068,902
========== ==========
</TABLE>
(4) NOTES RECEIVABLE -- RELATED PARTIES
The Company has a note receivable from KODA Industries of Kentucky. No
interest is charged on this note. The Company has a note receivable from HMK
Enterprises, Inc., a related party, which bears interest at 9 percent. Also, the
sole stockholder of KODA has issued demand and promissory notes to KODA
aggregating $2,410,000. As of April 30, 1996, April 30, 1997 and December 31,
1997, $874,044, $913,156 and $913,156 remains outstanding. These notes bear
interest at the rate of 6 to 6.5 percent. Notes receivable -- related parties
are classified as follows:
<TABLE>
<CAPTION>
APRIL 30, 1996
----------------------------------
CURRENT LONG-TERM TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
KODA Industries of Kentucky...................... $ -- $1,875,924 $1,875,924
Officer -- Suburban.............................. -- 75,000 75,000
HMK Enterprises, Inc............................. -- 349,666 349,666
Sole stockholder................................. 840,000 34,044 874,044
-------- ---------- ----------
$840,000 $2,334,634 $3,174,634
======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1997
----------------------------------
CURRENT LONG-TERM TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
KODA Industries of Kentucky...................... $ -- $1,875,924 $1,875,924
Officer -- Suburban.............................. -- 75,000 75,000
HMK Enterprises, Inc............................. -- 349,666 349,666
Sole stockholder................................. 840,000 73,156 913,156
-------- ---------- ----------
$840,000 $2,373,746 $3,213,746
======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
CURRENT LONG-TERM TOTAL
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
KODA Industries of Kentucky.................... $ -- $1,836,812 $1,836,812
Officer -- Suburban............................ -- 75,000 75,000
HMK Enterprises, Inc........................... -- 664,512 664,512
Various........................................ 24,800 -- 24,800
KODA Enterprises Group, LLC.................... 1,000,000 -- 1,000,000
Sole stockholder............................... 840,000 73,156 913,156
---------- ---------- ----------
$1,864,800 $2,649,480 $4,514,280
========== ========== ==========
</TABLE>
F-45
<PAGE> 149
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KODA Industries of Kentucky, Inc. was the intermediate holding company
owning 100% of J.T. Nelson Co. Inc. This entity was owned 98% by KODA
Enterprises Group, Inc. prior to the spin off of the Company to the Company's
shareholder.
HMK Enterprises, Inc. is a strategic investment and management company
founded in 1978 that acquires companies and provides them with management
expertise in reaching their performance potential. The sole shareholder of KODA
Enterprises Group, Inc. is a shareholder of HMK Enterprises, Inc.
KODA Enterprises Group, LLC is owned 95% by the sole shareholder of KODA
Enterprises Group, Inc. KODA Enterprises Group LLC is a holding company for a
subsidiary that is a manufacturer and installer of air conditioning and heating
units primarily to the van conversion industry.
All of the above related party receivables and the additional amounts
disclosed in footnote 4 will be repaid prior to the sale of the Company to
Airxseel Holdings, Inc.
(5) INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Raw materials..................................... $2,278,847 $2,865,556
Work-in-process................................... 1,407,214 1,176,040
Finished goods.................................... 2,680,556 4,775,423
---------- ----------
$6,366,617 $8,817,019
========== ==========
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
APRIL 30, LIVES
-------------------------- ----------------
1996 1997
----------- -----------
<S> <C> <C> <C>
Land.................................. $ 76,898 $ 76,898
Buildings............................. 1,455,584 1,503,824 20 to 40 years
Machinery and equipment............... 4,664,931 4,848,862 5 to 10 years
Dies and patterns..................... 4,791,654 4,841,861 5 to 8 years
Furniture and fixtures................ 725,225 818,303 3 to 8 years
Automotive equipment.................. 368,521 348,450 4 to 5 years
Construction in progress.............. 10,000 288,496
Equipment capital lease............... 0 359,137
----------- -----------
12,092,813 13,085,831
Less accumulated depreciation and
amortization........................ (9,380,377) (9,921,084)
----------- -----------
$ 2,712,436 $ 3,164,747
=========== ===========
</TABLE>
Depreciation of property, plant and equipment charged to operations during
the years ended April 30, 1997, 1996 and 1995 and the eight months ended
December 31, 1997 and 1996 was $662,644, $599,051, $632,873, $479,764 and
$365,672, respectively.
F-46
<PAGE> 150
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included above in machinery and equipment is property under capital leases:
<TABLE>
<CAPTION>
APRIL 30, 1997
--------------
<S> <C>
Office equipment............................................ $359,137
Less -- accumulated amortization............................ (25,653)
--------
$333,484
========
</TABLE>
(7) INTANGIBLE ASSETS
The components of intangible assets are as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------- PERIOD OF
1996 1997 AMORTIZATION
----------- ----------- -----------------
<S> <C> <C> <C>
Non-compete agreements............. $ 779,000 $ 779,000 5 to 7 years
Customer lists and contracts....... 1,568,338 1,568,338 11 to 40 years
Patents and trade names............ 200,000 200,000 11 to 40 years
Excess of cost over net assets
acquired......................... 2,915,315 2,915,315 5.5 to 40 years
Acquired supply and other
agreements....................... 2,733,000 2,733,000 3 to 5 years
Engineering drawings............... 78,000 78,000 10 to 11 years
----------- -----------
8,273,653 8,273,653
Less -- accumulated amortization... (3,787,304) (4,066,216)
----------- -----------
$ 4,486,349 $ 4,207,437
=========== ===========
</TABLE>
Amortization of intangibles charged to operations during the years ended
April 30, 1997, 1996 and 1995 and the eight months ended December 31, 1997 and
1996 was $278,562, $404,112, $412,753, $185,708 and $185,708, respectively.
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
(a) Bank term notes.................................... $8,428,571.. $ 7,178,572
(b) Revolving line of credit........................... 2,171,558 4,064,448
(c) Subordinated seller note........................... 513,334 513,334
(d) Capital leases (Note 13)........................... 0 344,720
(e) Other.............................................. 127,254 246,733
Less -- current portion........................... (1,856,515) (1,970,267)
----------- -----------
$ 9,384,202 $10,377,540
=========== ===========
</TABLE>
- ---------------
(a) Bank term notes at rates ranging from prime plus .75 percent to prime plus
2.5 percent LIBOR plus 3.25 to 3.75 percent, or a fixed rate of 12.5
percent, secured by substantially all assets of the operating company,
payable through May 2003. The prime and LIBOR rates at April 30, 1997 were
8.5 percent and 5.6875 percent, respectively.
(b) Revolving line of credit providing up to $20,500,000 in borrowings, bearing
interest at rates from prime plus .75 percent to prime plus 1.0 percent or
LIBOR plus 3.25 percent, due between April 1998 and February 1999, secured
by substantially all assets of the operating company.
F-47
<PAGE> 151
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Subordinated note financed the purchase of a product line and is secured by
substantially all the assets of the Company, subject to an intercreditor
agreement with a bank.
(d) Various capital leases payable through fiscal 2000.
(e) Bank, government and trade notes, bearing interest at a fixed rate of 9.25
to 10.5 percent, payable through 2003, secured by certain real and personal
property.
The terms of the loan agreements applicable to the revolving line of credit
and bank term notes include requirements of the operating company to maintain
certain levels of earnings before interest, taxes, depreciation and amortization
(EBITDA) and certain other financial ratios; to restrict the ability to incur
additional indebtedness; to pay cash dividends or make certain other restricted
payments; to incur capital expenditures in excess of certain amounts; to sell
fixed assets; and to achieve certain cash flows. Substantially all of the
operating company assets are secured by debt agreements.
The Company is in compliance with or has received waivers for all covenants
through April 30, 1997. However, at April 30, 1997, Suburban was not in
compliance with respect to the payment of the subordinated note. On August 20,
1997, a judgment was awarded to the party holding the disputed subordinated
note. The court awarded the plaintiff principal, interest and attorney's fees
aggregating to approximately $770,000, resulting in a charge to operations in
fiscal 1998 of approximately $100,000.
Aggregate maturities of long-term debt for the next five years and
thereafter are as follows: 1998 - $1,970,267; 1999 - $5,524,646;
2000 - $1,450,520; 2001 - $1,350,456; 2002 - $1,296,416; and
thereafter - $755,502.
(9) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Compensation...................................... $ 784,107 $ 990,200
Insurance......................................... 446,375 394,868
Taxes, other than income taxes.................... 80,370 110,505
Employee benefits................................. 214,063 180,938
Interest.......................................... 173,862 164,024
Pension........................................... 159,778 94,942
Other............................................. 243,799 250,056
---------- ----------
$2,102,354 $2,185,533
========== ==========
</TABLE>
(10) EMPLOYEE BENEFIT PLANS
Suburban sponsors two contributory defined benefit pension plans, the
Suburban Manufacturing Company Retirement Plan and the Suburban Manufacturing
Company Retirement Plan for Bargaining Employees, which cover substantially all
Suburban Manufacturing Company employees meeting certain eligibility
requirements. Assets of the plans consist of various marketable securities and
investments in bond funds. The Company's funding policy is to contribute amounts
that are sufficient, when added to participants' contributions, to fund the
retirement benefits of all participants in accordance with the requirements of
the Internal Revenue Code.
F-48
<PAGE> 152
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for fiscal 1996 and 1997 included the following components
(in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Service cost................................................ $ 188 $ 236
Interest cost on projected benefit obligation............... 183 220
Actual return on plan assets................................ (254) (366)
Net amortization and deferral............................... 22 93
----- -----
Net pension expense......................................... $ 139 $ 183
===== =====
</TABLE>
The following table sets forth the funded status of the plans as of April
30, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation................................. $1,888 $2,170
Nonvested benefit obligation.............................. 88 125
------ ------
Accumulated benefit obligation.............................. $1,976 $2,295
====== ======
Projected benefit obligation................................ $2,703 $3,133
Plan assets at fair value................................... 2,334 2,912
------ ------
Projected benefit obligation in excess of plan assets at
fair value................................................ (369) (221)
Unrecognized net loss....................................... 273 160
Unrecognized prior service cost............................. (36) (32)
Unrecognized transition liability........................... (29) (25)
------ ------
Net pension liability recognized on the balance sheet....... $ (161) $ (118)
====== ======
</TABLE>
The following assumptions were used to measure the net periodic pension
income and the projected benefit obligation:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Discount rate used to determine the projected benefit
obligation................................................ 8.0% 8.0%
Rate of increase in future compensation levels used to
determine the projected benefit obligation................ 4.5% 4.5%
Expected long-term rate of return on plan assets used to
determine net periodic pension income..................... 8.5% 8.5%
</TABLE>
The Company's subsidiary maintains a defined contribution savings plans
covering substantially all employees. Employees may contribute up to 15 percent
of their compensation not to exceed the maximum allowed by the Internal Revenue
Service as a before-tax deduction. The Company matches various percentages of
employees' contributions. Contributions by the Company under this plan amounted
to $66,000, $56,000 and $58,000 in 1997, 1996, and 1995 respectively.
F-49
<PAGE> 153
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) RELATED PARTY TRANSACTIONS
The Company had numerous transactions with HMK, a company in which the sole
stockholder of KODA has a minority interest. The following related party
transactions or balances with HMK are included in these consolidated financial
statements:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Interest receivable............................... $ 2,586 $ 5,114
Interest income................................... 32,780 31,220
Consulting fees to HMK shareholders............... 105,000 105,000
Consulting fees payable........................... 8,500 8,500
Management fee expense............................ 148,800 149,800
Insurance expense................................. 1,226,000 1,189,000
</TABLE>
The Company participates in an insurance program with other affiliated
companies for which it paid $1,430,000, $1,226,000 and $1,189,000 in 1995, 1996,
and 1997, respectively. Management believes insurance rates are substantially
the same as what could be obtained by the Company independently on an
arm's-length basis.
(12) INCOME TAXES
The consolidated group files a consolidated income tax return comprised of
KODA Enterprises Group, Inc. and its subsidiaries.
Income tax (benefit) expense attributed to pre-tax income consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended April 30, 1995:
U.S. federal...................................... 71 (156) (85)
State and local................................... 109 (57) 52
Year ended April 30, 1996:
U.S. federal...................................... 161 230 391
State and local................................... 125 (60) 65
Year ended April 30, 1997:
U.S. federal...................................... (62) 26 (36)
State and local................................... 166 (57) 109
</TABLE>
Total income tax (benefit) expense differed from the amount computed by
applying the U.S. federal income tax rate of 34 percent to income before income
taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1995 1996 1997
----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense............................. $ 604 $225 $ 287
Increase (reduction) in income taxes results from:
State income tax, net of federal income tax benefit....... 34 43 72
Other..................................................... 37 221 (53)
Decrease in valuation allowance........................... (706) (33) (233)
----- ---- -----
$ (33) $456 $ 73
===== ==== =====
</TABLE>
F-50
<PAGE> 154
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at April 30, 1996
and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
------ -----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... $ 116 $ 39
Inventories, principally due to additional costs
inventoried for tax purposes........................... 145 166
Accrued wages for financial reporting purposes............ 86 90
Warranty reserve for financial reporting purposes......... 29 49
Stock appreciation rights for financial reporting
purposes............................................... 177 230
Federal net operating loss carryforward................... 466 161
Investment tax credit carryforward........................ 60 60
AMT credit carryforward................................... 53 72
------ -----
Total deferred tax assets......................... 1,132 867
Less valuation allowance.......................... (756) (524)
------ -----
Deferred tax assets............................... 376 343
Deferred tax liabilities:
Property, plant and equipment, principally due to
difference in depreciation and capitalized interest.... 336 327
Intangible assets, principally due to differences in
amortization methods................................... 40 42
------ -----
Total deferred tax liabilities.................... 376 369
------ -----
Net deferred tax asset (liability)................ $ -- $ (26)
====== =====
</TABLE>
Deferred income taxes include the impact of net operating loss
carryforwards. Realization of these assets is contingent of future taxable
earnings. The net change in the total valuation allowance was a decrease of
$706,000, $33,000 and $233,000 for the years ended April 30, 1995, 1996, and
1997, respectively. Management considers it more likely than not that the
benefits of these assets will ultimately be realized.
At April 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $473,000, subject to review by
taxing authorities, which are available to offset future taxable income through
2010.
At April 30, 1997, the Company has an alternative minimum tax credit
carryforward of $212,000, which is available to offset future income tax
liabilities. The credit may be used to the extent that the Company's regular tax
liability exceeds its alternative minimum tax liability. The credit may be
carried forward indefinitely.
KODA has investment tax credit carryforwards approximating $60,000 for U.S.
tax and financial reporting purposes available to reduce future federal income
taxes payable. These carryforwards begin to expire in 1998 and continue through
2000. These credits are subject to additional utilization limitations, as they
arose during separate return years.
(13) LEASES
The Company leases certain office equipment and vehicles used in the
operation of its business under leases that expire in various years through
2005. Rental payments include amounts for
F-51
<PAGE> 155
KODA ENTERPRISES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating expenses and taxes in excess of base-year values established within
the leases. Rental expense for all operating leases amounted to approximately
$84,893, $95,439 and $102,587 for the years ended April 30, 1995, 1996 and 1997,
respectively.
The following is a schedule by years of the present value of future minimum
capital lease payments and future minimum rental payments required under
noncancelable operating leases as of April 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING APRIL 30, LEASES LEASES
--------------------- -------- ---------
<S> <C> <C>
1998...................................................... $138,287 $ 71,096
1999...................................................... 138,287 24,991
2000...................................................... 123,871 13,138
2001...................................................... 0 491
2002...................................................... 0 0
Thereafter................................................ 0 0
-------- --------
Total minimum lease payments required..................... $400,445 $109,716
========
Less -- amount representing interest........................ 55,725
Present value of net minimum capital lease payments......... 344,720
Less -- current installments of obligations under capital
leases.................................................... 119,712
--------
Obligations under capital leases, excluding current
installments.............................................. $225,008
========
</TABLE>
(14) CONTINGENCIES
The Company's operating company is a defendant in various product liability
lawsuits and claims. In the opinion of management and legal counsel, these suits
and claims should not result in final judgments or settlements which, in the
aggregate, would have a material adverse effect on the consolidated financial
position or consolidated results of operations of the Company.
(15) STOCK APPRECIATION RIGHTS
KODA Industries of Tennessee, Inc. has issued stock appreciation rights
(SARs) to certain management employees. The formula price is calculated using
the difference of the exercise book value and the initial book value as stated
in the individual SAR agreements. The difference is divided by the total number
of shares of all classes of KODA Industries of Tennessee, Inc. outstanding on
the exercise date plus that individual's total SARs granted. The SARs are
subject to automatic vesting and may be automatically exercised in connection
with certain significant corporate events. The Company has recorded obligations
of $589,390, $454,951 and $658,258 at April 30, 1996, 1997 and December 31,
1997, respectively. Compensation expense, included in selling, general and
administrative expenses, has been recorded by the Company in the amounts of
$454,951 and $134,439 for the years ended April 30, 1996 and 1997, respectively.
In the period ended December 31, 1997, $68,868 in compensation expense has been
recorded.
F-52
<PAGE> 156
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
<TABLE>
<CAPTION>
- --------------------------------------------
TABLE OF CONTENTS
<S> <C>
Summary................................ 1
Risk Factors........................... 13
The Transactions....................... 18
Use of Proceeds........................ 19
Capitalization......................... 20
Selected Financial and Other Data...... 21
Unaudited Pro Forma Financial
Information.......................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 31
Industry............................... 42
The Business........................... 45
Management............................. 55
Security Ownership..................... 58
Description of the Revolving Credit
Facility............................. 59
Description of Exchange Notes.......... 60
The Exchange Offer..................... 90
Certain Federal Income Tax
Consequences......................... 99
Plan of Distribution................... 99
Legal Matters.......................... 100
Experts................................ 100
Index to Financial Statements.......... F-1
</TABLE>
PROSPECTUS
AIRXCEL, INC.
[AIRXCEL INC. LOGO]
OFFER TO EXCHANGE ITS
11% SERIES B SENIOR
SUBORDINATED NOTES
DUE 2007 FOR ANY AND
ALL OF ITS OUTSTANDING
SERIES A SENIOR
SUBORDINATED NOTES
DUE 2007
APRIL 7, 1998
