<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 333-43335
AIRXCEL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1071795
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 North Saint Francis, Wichita, Kansas 67219
(Address of principal executive offices)
(Zip Code)
(316) 832-3400
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed, since last year)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. YES XX NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
1,000 shares of Common Stock as of September 30, 1998
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,133 $ 9,691
Accounts receivable, net 19,639 8,310
Inventories 22,725 13,129
Other current assets 3,078 3,307
--------- ---------
Total current assets 46,575 34,437
--------- ---------
Property, plant and equipment, net 18,346 8,693
Loan financing costs, net 4,580 3,244
Non-compete agreements, net 947 --
Other identifiable intangible assets, net 31,300 24,553
Goodwill, net 24,208 6,006
--------- ---------
Total assets $ 125,956 $ 76,933
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 1,151 $ 27
Accounts payable 14,163 6,196
Accrued expenses and other current liabilities 11,260 5,028
-- ---------
Total current liabilities 26,574 11,251
--------- ---------
Long-term debt, net of current maturities 111,537 90,328
Deferred income taxes 6,038 363
Commitments and contingencies -- --
Stockholder's equity (deficiency):
Common Stock 1 1
Additional paid-in capital 26,182 22,086
Accumulated deficit (44,376) (47,096)
--------- ---------
Total stockholder's equity (deficiency) (18,193) (25,009)
--------- ---------
Total liabilities and stockholder's equity (deficiency) $ 125,956 $ 76,933
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 44,176 $ 14,947 $114,956 $ 43,907
Cost of sales 33,925 11,792 87,948 33,489
-------- -------- -------- --------
Gross profit 10,251 3,155 27,008 10,418
Selling, general and administrative expense 5,227 930 13,815 3,062
-------- -------- -------- --------
Income from operations 5,024 2,225 13,193 7,356
Interest expense, net 3,211 934 8,787 2,447
-------- -------- -------- --------
Income from continuing operations
before income tax expense 1,813 1,291 4,406 4,909
Income tax expense 648 491 1,686 1,865
-------- -------- -------- --------
Income from continuing operations 1,165 800 2,720 3,044
Loss from discontinued operations, less applicable
income tax benefit -- (2,468) -- (3,875)
-------- -------- -------- --------
Net income $ 1,165 $ (1,668) $ 2,720 $ (831)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,720 $ (831)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,651 1,174
Deferred income taxes 403 --
Provision for bad debt 246 --
Provision for write-downs of inventory 272 --
Loss on sale of fixed assets 359 22
Changes in assets and liabilities:
Accounts receivable (1,883) (966)
Inventories 1,295 1,912
Other assets 336 1,604
Accounts payable 2,981 (263)
Accrued expenses and other liabilities (1,556) 3,902
--------- ---------
Net cash provided by operating activities 8,824 6,554
--------- ---------
Cash flows used in investing activities:
Proceeds from sale of assets 202 --
Capital expenditures (1,470) (938)
Intangible asset expenditures (36) --
Acquisition of business, net of cash acquired (28,306) --
--------- ---------
Net cash used in investing activities (29,610) (938)
--------- ---------
Cash flows from (used in) financing activities:
Proceeds from long-term debt 120,533 44,756
Principal payments on long-term debt (111,200) (50,508)
Financing costs incurred (1,201) --
Capital contribution from parent company 4,096 --
--------- ---------
Net cash provided by (used in) financing activities 12,228 (5,752)
--------- ---------
Net decrease in cash and cash equivalents (8,558) (136)
Cash and cash equivalents, beginning of period 9,691 638
--------- ---------
Cash and cash equivalents, end of period $ 1,133 $ 502
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<S> <C>
Supplemental disclosure of noncash activities:
Acquired business, assets and liabilities:
Accounts receivable $ 9,829
Inventories 8,794
Other current assets 651
Property, plant and equipment, net 9,733
Non-compete agreement, net 1,100
Other identifiable intangible assets, net 7,900
Goodwill 15,506
Accounts payable (4,967)
Accrued expenses and other current liabilities (1,230)
Long-term debt (13,001)
Deferred income taxes (6,009)
--------
Fair value of net assets acquired $ 28,306
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying interim consolidated financial statements have not
been audited but reflect normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position and results of operations and cash flows for the interim periods
presented. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. These interim financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes therein for the fiscal year ended December 31, 1997 included in the
Company's Form S-4 filed with the Securities and Exchange Commission on April 7,
1998. The results of operations for any interim period are not necessarily
indicative of results for the full year or for any quarter.
2. ORGANIZATION AND BUSINESS:
Airxcel, Inc. (the "Company") is a wholly-owned subsidiary of Airxcel
Holdings Corporation (Holdings); formerly known as RV Holdings Corporation. The
Company is a diversified designer, manufacturer and marketer of heating,
ventilation, and air conditioning equipment in the United States, Canada and
certain international markets.
On April 3, 1998, Holdings issued additional detachable stock warrants
to purchase 229,663 shares of Class B Common Stock of Holdings at $.01 per share
at any time on or before April 30, 2008. 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 purchase price of the warrants was
$764,776.
On March 17, 1998, the Company completed the acquisition of 100% of the
outstanding common stock of KODA Enterprises Group, Inc. (KODA), a designer and
manufacturer of heating, water heating and cooking appliances for the recreation
vehicle industry and other specialty products for the heating, ventilating and
air conditioning industry. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the underlying assets and
liabilities based on their respective fair values. The consolidated financial
statements include the accounts and results of operations since that date.
On November 10, 1997, the Company completed the acquisition of
Crispaire Corporation (Crispaire), a designer, manufacturer and marketer of air
conditioning units and heat pump water heaters. 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. The
financial statements include the accounts and results of operations since that
date.
The following reflects the operating results of the Company for the
three months and the nine months ended September 30, 1998 and 1997 assuming the
acquisitions occurred as of the beginning of 1997 for the Crispaire acquisition
and as of the beginning of 1998 for the KODA acquisition:
6
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Pro Forma Operating Results
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 44,176 $ 37,228 $124,887 $106,291
Income before extraordinary item 1,813 1,033 4,201 3,205
Net income 1,165 (1,168) 2,258 169
</TABLE>
The pro forma results of operations are not necessarily indicative of
the actual results that would have been obtained had the acquisitions been made
at the beginning of the respective periods, or the results which may occur in
the future.
3. INVENTORIES:
Inventories, excluding that associated with discontinued operations
consists of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw Materials $11,968 $ 6,078
Work-in-process 2,806 1,057
Finished goods 7,951 5,994
------- -------
$22,725 $13,129
======= =======
</TABLE>
4. DEBT:
On March 17, 1998, the bank amended and restated the Company's Credit
Facility to provide for borrowings in an aggregate principal amount of up to
$38,000,000.
5. INCOME TAXES:
Total taxes differ from the statutory rate due primarily to state
income taxes.
6. CONTINGENCY:
During September 1997, the Company made a decision to upgrade certain
air conditioning units which were sold in previous years. In 1997 the Company's
cost to complete the upgrade was estimated and accrued at $500,000. At September
30, 1998 the remaining accrued liability was $139,000.
7. 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 even if this matter were
determined adversely to the Company, the resolution of this matter will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity.
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8. DERIVATIVES:
The Company entered into a three year interest rate cap agreement on
April 7, 1998 to reduce the impact of its floating rate debt. The agreement,
based on a notional principal amount of $10 million, entitles the Company to
receive payments on the last day of each quarter if the floating Libor rate
exceeds the rate of 7.69% stated in the agreement. The payment amount is
calculated at the actual Libor rate compared to the stated rate applied to the
principal amount. During the three months ended September 30, 1998 the floating
Libor rate did not exceed the stated interest rate.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales. Net sales increased 196.6% from $14.9 million to $44.2 million
in the quarter ended September 30, 1998 as compared to the corresponding quarter
of 1997. For the nine months ended September 30, 1998 net sales increased 162.0%
from $43.9 million to $115.0 million in the same nine months of 1997. Net sales
increased primarily due to the $12.5 million and $13.8 million of additional
sales in the quarter and $34.5 million and $29.3 million for the nine months
related to the acquisition of Crispaire on November 10, 1997 and KODA on March
17, 1998, respectively. In addition, the volume of OEM and after market sales
increased in comparison to the nine months ended September 30, 1997, which the
Company believes was the result of dealer inventory adjustments in 1997, growth
in the RV industry and sustained hot weather beginning early in the second
quarter of 1998.
Gross Profit. Gross profit increased 221.9% from $3.2 million (21% of net
sales) to $10.3 million (23% of net sales) in the quarter ended September 30,
1998 as compared to the corresponding quarter of 1997. For the nine months ended
September 30, 1998 gross profit increased 159.6% from $10.4 million (24% of net
sales) to $27.0 million (23% of net sales) in the comparable nine months of
1997. The increase was principally due to the respective acquisitions of
Crispaire and KODA which generated gross margins of $2.5 million and $3.1
million, respectively for the quarter ended September 30, 1998 and $7.4 million
and $6.4 million, respectively for the nine months ended September 30, 1998. The
remainder is attributable to the increased volume of OEM and aftermarket sales.
The decrease in gross profit percentage was due to a shift in product mix.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense increased 477.8% from $0.9 million in 1997 (6% of net sales) to $5.2
million in 1998 (12% of net sales) for the quarter and 345.2% from $3.1 million
(7% of net sales) to $13.8 million (12% of net sales), primarily due to
amortization and depreciation expenses of Crispaire and KODA, increased
management bonus expense as a result of the increased sales volume and increased
engineering capabilities to accommodate new projects for 1998 and 1999.
Interest expense. Interest expense increased from $0.9 million to $3.2
million in the quarter ended September 30, 1998 as compared to the corresponding
quarter of 1997. For the nine months ended September 30, 1998 interest expense
increased from $2.4 million to $8.8 million. These increases resulted from the
issuance of $90 million of senior subordinated debt in November 1997 and the
issuance of $27.0 million of additional bank debt on March 17, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the nine (9) months ended September 30, 1998, the Company generated
$8,824,000 in net cash flow from operating activities compared to $6,554,000 for
the comparable period in 1997, primarily as a result of increased profits,
decreased inventories and increases in accounts payable from vendors offset by
increases in accounts receivable. Capital expenditures totaled $1,470,000 for
the nine months ended September 30, 1998, compared to $938,000 for the same
period in 1997 due to normal capital expenditures.
9
<PAGE> 10
During the nine (9) months ended September 30, 1998, the Company acquired
KODA. The Company paid the KODA purchase price with borrowings under its
revolving line of credit, proceeds from long-term debt and a capital
contribution from the Company's parent. Subsequent to the acquisition, long-term
debt assumed in the KODA acquisition of $12,586,000 was repaid.
The Company believes that its existing cash and cash equivalents, revolving
line of credit and cash generated from operations will be sufficient to satisfy
the Company's cash requirements for the foreseeable future.
YEAR 2000 UPDATE
The Plan:
The Company is in the process of implementing a Year 2000 Project
("Project"). The Project is divided into three major sections -- applications
software, third parties (External Agents), and manufacturing facilities. The
phases common to all three sections are: (1) inventorying Year 2000 items; (2)
assessing the Year 2000 compliance of existing systems; (3) repairing or
replacing items that are determined not to be Year 2000 compliant; (4) testing
of systems repaired or replaced; and (5) designing and implementing a
contingency plan.
The applications software section includes the conversion or replacement of
software that is not Year 2000 compliant. The inventorying, assessment and
replacement phases of this section are complete at September 30, 1998. The
testing phase of this section is scheduled to begin in the fourth quarter of
1998 and be completed by the second quarter 1999. Contingency planning is
scheduled to begin in the second quarter of 1999.
The External Agents section includes identifying critical suppliers and
communicating with them about their plans and progress in addressing the Year
2000 problem. We are asking vendors, service suppliers, communications providers
and financial institutions whose systems failures potentially could have a
significant impact on our operations to verify their Year 2000 readiness.
Approximately 37% of the External Agents have responded to our request.
Responses will be evaluated in the fourth quarter of 1998 and a contingency plan
developed by the second quarter of 1999.
Review of the manufacturing facilities has been completed ahead of
schedule. Verification of Year 2000 readiness has been received on all equipment
using any form of computer controls.
Costs:
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the company's financial position.
The estimated total cost of the Project is approximately $450,000. The total
amount expended through September 30, 1998 was $353,000.
Risks:
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The year 2000 Project is expected
to significantly reduce
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<PAGE> 11
the company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
External Agents. The company believes that, with the implementation of new
business systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
CERTAIN IMPORTANT FACTORS
Except for the historical financial information contained herein, this Form
10-Q contains certain forward-looking statements. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", or "continue", the negative or other variations thereof, or
comparable terminology, are intended forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors,
including possible changes in economic conditions, prevailing interest rates or
gasoline prices, or the occurrence of unusually severe weather conditions, that
can affect both the purchase and usage of recreational vehicles, which, in turn,
affects purchases by consumers of the products that the Company sells.
11
<PAGE> 12
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 even if this
matter were determined adversely to the Company, the resolution of this matter
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Airxcel, Inc.
11-11-98 /s/ Melvin L. Adams
- ------------------------------- --------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
11-11-98 /s/ Richard L. Schreck
- ------------------------------- --------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,133,000
<SECURITIES> 0
<RECEIVABLES> 19,639,000
<ALLOWANCES> 367,000
<INVENTORY> 22,725,000
<CURRENT-ASSETS> 46,575,000
<PP&E> 18,346,000
<DEPRECIATION> 5,150,000
<TOTAL-ASSETS> 125,956,000
<CURRENT-LIABILITIES> 26,574,000
<BONDS> 111,537,000
0
0
<COMMON> 1,000
<OTHER-SE> 26,182,000
<TOTAL-LIABILITY-AND-EQUITY> 125,956,000
<SALES> 44,176,000
<TOTAL-REVENUES> 44,176,000
<CGS> 33,925,000
<TOTAL-COSTS> 33,925,000
<OTHER-EXPENSES> 5,227,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,211,000
<INCOME-PRETAX> 1,813,000
<INCOME-TAX> 648,000
<INCOME-CONTINUING> 1,165,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,165,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
