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 March 31, 1999
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 March 31, 1999
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,545 $ 177
Accounts receivable, net 23,645 19,703
Inventories 27,766 27,434
Other current assets 1,788 2,438
--------- ---------
Total current assets 54,744 49,752
--------- ---------
Property, plant and equipment, net 17,970 18,163
Loan financing costs, net 4,248 4,437
Non-compete agreements, net 718 810
Other identifiable intangible assets, net 30,499 30,935
Goodwill, net 22,385 22,493
--------- ---------
Total assets $ 130,564 $ 126,590
========= =========
Liabilities and Stockholder's Equity (Deficiency)
Current Liabilities:
Current portion of long-term debt $ 1,459 $ 1,465
Accounts payable 13,484 10,719
Accrued expenses and other current liabilities 18,713 9,219
--------- ---------
Total current liabilities 33,656 21,403
--------- ---------
Long-term debt, net of current maturities 117,118 118,041
Deferred income taxes 1,113 5,044
Commitments and contingencies -- --
Stockholder's equity (deficiency):
Common Stock 1 1
Additional paid-in capital 26,946 26,946
Accumulated deficit (48,270) (44,845)
--------- ---------
Total stockholder's equity (deficiency) (21,323) (17,898)
--------- ---------
Total liabilities and stockholder's equity (deficiency) $ 130,564 $ 126,590
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Three Months Ended
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net sales $ 43,770 $ 28,056
Cost of sales 33,348 21,352
-------- --------
Gross profit 10,422 6,704
Selling, general and administrative expense 5,256 3,106
Accrued litigation expense 7,600 --
-------- --------
Income (loss) from operations (2,434) 3,598
Interest expense, net 3,018 2,490
-------- --------
Income (loss) before income tax expense (5,452) 1,108
Income tax expense (benefit) (2,027) 443
-------- --------
Net income (loss) $ (3,425) $ 665
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,425) $ 665
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,547 851
Deferred income taxes (2,519) 186
Other 83 113
Changes in assets and liabilities:
Accounts receivable (4,025) (322)
Inventories (332) (813)
Other assets (764) (111)
Accounts payable 2,765 3,321
Accrued expenses and other liabilities 9,494 1,242
-------- --------
Net cash provided by operating activities 2,824 5,132
-------- --------
Cash flows from investing activities:
Capital expenditures (528) (266)
Acquisition of business, net of cash acquired -- (28,306)
-------- --------
Net cash used in investing activities (528) (28,572)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 47,121 31,640
Principal payments on long-term debt (48,049) (17,487)
Financing costs incurred -- (1,035)
Capital contribution from parent company -- 4,096
-------- --------
Net cash provided by (used in) financing activities (928) 17,214
-------- --------
Net increase (decrease) in cash and cash equivalents 1,368 (6,226)
Cash and cash equivalents, beginning of period 177 9,691
-------- --------
Cash and cash equivalents, end of period $ 1,545 $ 3,465
======== ========
Supplemental disclosure of noncash activities:
Acquired business, assets and liabilities:
Tangible assets $ 29,007
Intangible assets 24,506
Liabilities assumed
(25,207)
--------
$ 28,306
========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
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, 1998 included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
16, 1999. 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 air
conditioners, furnaces, water heaters, and cooking appliances for the recreation
vehicle industry, and wall mount air conditioners, ECUs and heat pumps for the
heating, ventilating and air conditioning industry in the United States, Canada
and certain international markets. The recreation vehicle industry is supplied
by its RV Products division and Suburban Manufacturing Company while the
heating, ventilating and air conditioning industry is supplied by the Crispaire
division. Due to the similarities of the economic characteristics, production
processes, customers, distribution methods and regulatory environment of the
company's products, the Company is managed, operated and reported as one
segment.
On March 17, 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Suburban Manufacturing Company, formerly KODA
Enterprises Group, Inc. (Suburban), 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 condensed consolidated 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 ended March 31, 1998 assuming the acquisition occurred as of the
beginning of 1998:
Pro Forma Operating Results
(in thousands)
(Unaudited)
March 31, 1998
--------------
Net sales $37,987
Income before extraordinary item 900
Net income 200
<PAGE>
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. Reclassifications:
Effective October 1, 1998 the Company elected to classify design and
engineering expenses as a cost of sale. Prior to October 1, 1998, design and
engineering expenses were included in selling, general and administrative
expense. The Company has reclassified such expenses for the three month period
ended March 31, 1998 to match the classification for the three month period
ended March 31, 1999.
4. Inventories:
Inventories, excluding that associated with discontinued operations
consists of the following:
March 31, 1999 December 31, 1998
Raw Materials $12,131 $13,821
Work-in-process 2,716 2,787
Finished goods 12,919 10,826
------- -------
$27,766 $27,434
======= =======
5. 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. The Credit Facility requires the Company to maintain compliance
with various financial ratios including interest coverage ratio, leverage ratio,
minimum EBITDA, and debt service ratio. The Company obtained an amendment from
the bank to waive any existing Default or Event of Default that arose as a
result of exceeding the maximum leverage ratio during the quarter ending March
31, 1999.
6. Income Taxes:
Total taxes differ from the statutory rate due primarily to state income
taxes.
7. 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 $600,000. At March 31,
1999, the remaining accrued liability was $198,000.
8. Litigation:
On April 15, 1999, the jury in a case involving patent, trademark and trade
dress infringement, Bard Manufacturing Company et al. v. Crispaire Corporation,
No. 3:95-CV-7103 (N.D. Ohio 1998) awarded damages against Crispaire for patent
infringement in an amount of $9,000,000. Crispaire intends to move for
reconsideration of the judgment, and, in the alternative, a new trial. If
unsuccessful in the district court Crispaire will appeal. Pending these appeals,
which may not be
<PAGE>
finally decided for an estimated nine to twenty-four months, Crispaire will seek
a stay of execution of the judgment for damages and, if required, will post a
bond to secure such a stay. Management of the Company believes that the current
damages award was the result of legal and factual errors both by the judge and
jury and that the ultimate result of its appeals process will be either a
reversal or a significant reduction in its liability. The Company does not
believe that the eventual resolution of the Bard Manufacturing litigation will
have a material adverse effect on the Company's financial position, results of
operations or liquidity although, given the inherent risks of litigation, there
can be no assurances in that regard.
The Company is a party to various other 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 position, results of operations or liquidity of the
Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Month Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net sales. Net sales increased 55.9% from $28.1 million in 1998 to $43.8
million in 1999. Net sales increased primarily due to the $12.0 million of
additional sales related to Suburban which was acquired on March 17, 1998. In
addition, the volume of OEM and after market sales increased in comparison to
1998, which the Company believes was the result of growth in the RV industry.
Gross Profit. Gross profit increased 55.2% from $6.7 million (24% of net
sales) in 1998 to $10.4 million (24% of net sales) in 1999. The increase was
principally due to the acquisition of Suburban which generated gross margins of
$2.5 million (24% of net sales). The remainder is attributable to the increased
volume of OEM and aftermarket sales.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense increased 71.0% from $3.1 million in 1998 (11% of net sales) to $5.3
million in 1999 (12% of net sales), primarily due to $1.6 million of expenses
relating to the acquisition of Suburban, increased sales commissions as a result
of increased sales, and advertising expenses accelerated into the three months
ended March 31, 1999.
Accrued litigation expense. Accrued litigation expense increased due to the
litigation discussed in Note 8 of the notes to the condensed consolidated
financial statements.
Interest expense. Interest expense increased from $2.5 million in 1998 to
$3.0 million in 1999. This increase resulted primarily from the borrowing of
$27.0 million of additional bank debt on March 17, 1998.
Liquidity and Capital Resources
For the three (3) months ended March 31, 1999, the Company generated
$2,824,000 in net cash flow from operating activities compared to $5,132,000 for
the comparable period in 1998, primarily as a result of decreased profits,
decreased deferred taxes and increases in accounts receivable offset by an
increase in accrued expenses and other liabilities. Capital expenditures totaled
$528,000 for the three months ended March 31, 1999, compared to $266,000 for the
same period in 1998. Capital expenditures increased primarily due to the
$257,000 of expenditures related to Suburban, which was acquired on March 17,
1998.
During the three (3) months ended March 31, 1998, the Company acquired
Suburban. The Company paid the 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 Suburban acquisition of $12,586,000 was repaid.
Covenants under the Company's credit facility with the bank restrict the
ability, subject to certain exceptions, to dispose of assets, incur additional
indebtedness, guarantee obligations, prepay other indebtedness or amend other
debt instruments, make distributions or pay dividends, redeem or repurchase
capital stock, create liens on assets, make acquisitions, engage in mergers or
consolidations, and change the business conducted by the Company. In addition,
the Company is required to maintain compliance with various financial ratios
including interest coverage ratio,
<PAGE>
leverage ratio, minimum EBITDA, and debt service coverage ratio. The Company
obtained an amendment from the bank to waive any existing Default or Event of
Default that arose as a result of exceeding the maximum leverage ratio during
the quarter ending March 31, 1999.
Due to the outcome of the Bard Manufacturing Company litigation, the
Company is currently working on an amendment to the existing credit agreement to
increase the available borrowing allowed under the revolving credit agreement.
With the amendment to the credit agreement, 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 were completed by September 30, 1998. The
testing phase of this section began in the first quarter of 1999 and is
scheduled for completion by the second quarter of 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 47% of the External Agents have responded to our request.
Responses will be evaluated 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 $600,000. The total
amount expended through March 31, 1999 was $542,000.
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
<PAGE>
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.
<PAGE>
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
On April 15, 1999, the jury in a case involving patent, trademark and trade
dress infringement, Bard Manufacturing Company et al. v. Crispaire Corporation,
No. 3:95-CV-7103 (N.D. Ohio 1998) awarded damages against Crispaire for patent
infringement in an amount of $9,000,000. Crispaire intends to move for
reconsideration of the judgment, and, in the alternative, a new trial. If
unsuccessful in the district court Crispaire will appeal. Pending these appeals,
which may not be finally decided for an estimated nine to twenty-four months,
Crispaire will seek a stay of execution of the judgment for damages and, if
required, will post a bond to secure such a stay. Management of the Company
believes that the current damages award was the result of legal and factual
errors both by the judge and jury and that the ultimate result of its appeals
process will be either a reversal or a significant reduction in its liability.
The Company does not believe that the eventual resolution of the Bard
Manufacturing litigation will have a material adverse effect on the Company's
financial position, results of operations or liquidity although, given the
inherent risks of litigation, there can be no assurances in that regard.
The Company is a party to various other 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 position, results of operations or liquidity of the
Company.
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
<PAGE>
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.
May 14, 1999 /s/ Melvin L. Adams
- ---------------------------- -----------------------------
Date Melvin L. Adams
President and Chief Executive Officer
May 14, 1999 /s/ Richard L. Schreck
- ---------------------------- -----------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,545,000
<SECURITIES> 0
<RECEIVABLES> 23,645,000
<ALLOWANCES> 539,000
<INVENTORY> 27,766,000
<CURRENT-ASSETS> 54,744,000
<PP&E> 17,970,000
<DEPRECIATION> 6,481,000
<TOTAL-ASSETS> 130,564,000
<CURRENT-LIABILITIES> 33,656,000
<BONDS> 117,118,000
0
0
<COMMON> 1,000
<OTHER-SE> 26,946,000
<TOTAL-LIABILITY-AND-EQUITY> 130,564,000
<SALES> 43,770,000
<TOTAL-REVENUES> 43,770,000
<CGS> 33,348,000
<TOTAL-COSTS> 33,348,000
<OTHER-EXPENSES> 12,856,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,018,000
<INCOME-PRETAX> (5,452,000)
<INCOME-TAX> (2,027,000)
<INCOME-CONTINUING> (3,425,000)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (3,425,000)
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</TABLE>
