<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, 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 September 30, 1999
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ ---------------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 335 $ 177
Accounts receivable, net 20,262 19,703
Inventories 27,920 27,434
Other current assets 1,177 2,438
------------------ ---------------------
Total current assets 49,694 49,752
------------------ ---------------------
Property, plant and equipment, net 18,667 18,163
Loan financing costs, net 3,938 4,437
Non-compete agreements, net 535 810
Other identifiable intangible assets, net 29,637 30,935
Goodwill, net 22,097 22,493
------------------ ---------------------
Total assets $ 124,568 $ 126,590
================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 1,415 $ 1,465
Accounts payable 12,487 10,719
Accrued expenses and other current liabilities 19,976 9,219
------------------ ---------------------
Total current liabilities 33,878 21,403
------------------ ---------------------
Long-term debt, net of current maturities 107,893 118,041
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 (45,263) (44,845)
------------------- ----------------------
Total stockholder's equity (deficiency) (18,316) (17,898)
------------------- ----------------------
Total liabilities and stockholder's equity (deficiency) $ 124,568 $ 126,590
================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
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AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 47,192 $ 44,176 $ 139,489 $ 114,956
Cost of sales 37,497 34,801 108,101 89,735
----------- ----------- ----------- -----------
Gross profit 9,695 9,375 31,388 25,221
Selling, general and administrative expense 4,856 4,351 15,386 12,028
Accrued litigation expense - - - - - - 7,600 - - -
------------ --------- ------------ ---------
Income from operations 4,839 5,024 8,402 13,193
Interest expense, net 2,849 3,211 8,844 8,787
----------- ----------- ----------- -----------
Income (loss) before income tax expense 1,990 1,813 (442) 4,406
Income tax expense (benefit) 805 648 ( 24) 1,686
----------- ----------- ------------ -----------
Net income (loss) $ 1,185 $ 1,165 $ (418) $ 2,720
=========== =========== ============ ===========
</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, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (418) $ 2,720
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,627 3,651
Deferred income taxes (2,519) 403
Other 359 518
(Gain) loss on sale of assets (1) 359
Changes in assets and liabilities:
Accounts receivable (918) (1,883)
Inventories (486) 1,295
Other assets (151) 336
Accounts payable 1,768 2,981
Accrued expenses and other liabilities 10,757 (1,556)
---------------- ----------------
Net cash provided by operating activities 13,018 8,824
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of assets 37 202
Capital expenditures (2,690) (1,470)
Acquisition of business, net of cash acquired - - - (28,306)
Acquisition of intangible assets (9) (36)
----------------- ----------------
Net cash used in investing activities (2,662) (29,610)
----------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt 133,889 120,533
Principal payments on long-term debt (144,087) (111,200)
Financing costs incurred - - - (1,201)
Capital contribution from parent company - - - 4,096
---------------- ----------------
Net cash provided by (used in) financing activities (10,198) 18,243
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 158 (8,558)
Cash and cash equivalents, beginning of period 177 9,691
---------------- ----------------
Cash and cash equivalents, end of period $ 335 $ 1,133
================ ================
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.
4
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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, 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 nine
months ended September 30, 1998 assuming the acquisition occurred as of the
beginning of 1998:
Pro Forma Operating Results
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------
<S> <C>
Net sales $ 124,887
Income before extraordinary item 4,201
Net income 2,258
</TABLE>
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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
The Company has made certain reclassifications to the condensed
consolidated statements of operations for the three months and the nine months
ended September 30, 1998 to conform to the current year presentation.
4. INVENTORIES:
Inventories, excluding that associated with discontinued operations
consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw Materials $ 13,750 $ 13,821
Work-in-process 2,901 2,787
Finished goods 11,269 10,826
------------- -------------
$ 27,920 $ 27,434
============= =============
</TABLE>
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. During the quarter ending September 30,
1999 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 previous quarters. In addition, the amendment modified
certain covenants which should allow the Company to maintain compliance in the
future.
6. INCOME TAXES:
Total taxes differ from the statutory rate due primarily to non-deductible
permanent differences and state income taxes.
7. CONTINGENCIES:
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 September 30,
1999, the remaining accrued liability was $107,000.
On September 21, 1999 the Company entered into a letter of credit totaling
$7,500,000 which obligates the Company to make payment in the event the judgment
in the matter discussed in Note 8 is not stayed, vacated, reversed or paid.
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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 provided a bank letter of
credit to secure a stay of execution of the judgment and has filed an appeal. A
decision by the appellate court on the appeal is expected within nine to
twenty-four months from November 1999. 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.
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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 6.8% from $44.2 million to $47.2 million in
the quarter ended September 30, 1999 as compared to the corresponding quarter
of 1998. For the nine months ended September 30, 1999 net sales increased 21.3%
from $115.0 million to $139.5 million in the same nine months of 1998. Net
sales increased during the quarter primarily due to growth in the RV industry
as well as the school and telecommunications markets in comparison to the same
period of 1998. For the nine months ended September 30, 1999 net sales
increased primarily due to the acquisition of Suburban on March 17, 1998, which
generated $12.0 million of additional sales and increases in the volume of OEM
sales, after market sales, and growth in the school and telecommunications
markets.
Gross Profit. Gross profit increased 3.2% from $9.4 million (21% of net
sales) to $9.7 million (21% of net sales) in the quarter ended September 30,
1999 as compared to the corresponding quarter of 1998. For the nine months
ended September 30, 1999 gross profit increased 24.6% from $25.2 million (22%
of net sales) to $31.4 million (23% of net sales) in the same nine months of
1998. The increase was principally due to the increased sales volume in the
nine months ended September 30, 1999. In addition, Suburban generated
incremental gross margins of $2.5 million. The increase 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 11.4% from $4.4 million (10% of net sales) to $4.9 million
(10% of net sales) in the quarter ended September 30, 1999 as compared to the
corresponding quarter of 1998. For the nine months ended September 30, 1999
selling, general and administrative expense increased 28.3% from $12.0 million
(10% of net sales) to $15.4 million (11% of net sales) in the same nine months
as 1998. The increase was primarily due to increased sales commissions as a
result of increased sales, increased advertising expenses due to increased
marketing efforts both during the quarter and the nine months ended September
30, 1999, and $1.6 million of incremental expenses due to Suburban.
Accrued litigation expense. Accrued litigation expense for the nine months
ended September 30, 1999 increased due to the litigation discussed in Note 8 of
the notes to the condensed consolidated financial statements.
Interest expense. Interest expense decreased from $3.2 million to $2.8
million in the quarter ended September 30, 1999 as compared to the
corresponding quarter of 1998 and remained stable at $8.8 million in the nine
months ended September 30, 1999 and 1998. Interest expense decreased during the
quarter primarily due to reductions in average long-term borrowings
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its working capital requirements for operations
primarily with borrowings under a long-term revolving bank credit facility and
internally generated funds. For the nine months ended September 30, 1999, the
Company generated $13.0 million in net cash flow from operating activities
compared to $8.8 million for the comparable period in 1998, primarily as a
result of increased revenues offset by accrued litigation expense. The
Company's principal uses of cash during the nine months ended September 30,
1999 were for reductions in long-term debt of $10.2
8
<PAGE> 9
million and capital expenditures totaling $2.7 million. The increase in capital
expenditures consisted primarily of an expansion of the Company's production
facility of $1.1 million.
During the nine months ended September 30, 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 $12.6 million 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, leverage ratio, minimum EBITDA, and debt
service coverage ratio. During the quarter ending September 30, 1999 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 previous quarters. In addition, the amendment modified certain covenants
which should allow the Company to maintain compliance in the future.
Management currently expects its cash on hand, funds from operations and
borrowings available under existing credit facilities to be sufficient to cover
both short-term and long-term operating requirements.
YEAR 2000 UPDATE
The Plan:
The Company has implemented 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 with final
testing and implementation completed during the third 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 51% of the External Agents have responded to our
request. Responses have been evaluated and alternate suppliers are being
identified where necessary.
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.
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Contingency:
Although the Company presently does not have all contingency plans in
place to address the possibility that either it or its applications software,
External Agents, and customers may not be Year 2000 compliant, it has an
ongoing process to develop such plans as the results of systems use and the
status of External Agents and customers become known. The Company believes it
has tested its applications software sufficiently and simultaneously is relying
upon vendor certifications to substantially eliminate the possibility of a
system failure. However, in the event of a system failure does occur, the
Company has access to alternate computer systems that are Year 2000 compliant
and also has the ability to manufacture and ship its products manually. The
Company expects that most of its External Agents and customers will be Year
2000 compliant prior to the beginning of 2000. Nonetheless, that expectation is
based on information furnished to the Company by those External Agents and
customers. The Company has no cost-effective means of independently confirming
that these third parties will, in fact, achieve Year 2000 compliance in
sufficient time to avoid disruptions in their businesses that could affect the
Company.
Costs:
The total cost associated with required modifications to become Year 2000
compliant is not considered material to the company's financial position. The
total amount expended on the Project through September 30, 1999 was $674,000.
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 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 information contained herein, this Form 10-Q
contains forward-looking statements, and any statements contained in this Form
10-Q that are not statements of historical fact are 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.
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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
provided a bank letter of credit to secure a stay of execution of the judgment
and has filed an appeal. A decision by the appellate court on the appeal is
expected within nine to twenty-four months from November 1999. 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
11
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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.
- ---------------------------- ---------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
- ---------------------------- ---------------------------------
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 335,000
<SECURITIES> 0
<RECEIVABLES> 20,262,000
<ALLOWANCES> 824,000
<INVENTORY> 27,920,000
<CURRENT-ASSETS> 49,694,000
<PP&E> 18,667,000
<DEPRECIATION> 7,902,000
<TOTAL-ASSETS> 124,568,000
<CURRENT-LIABILITIES> 33,878,000
<BONDS> 107,893,000
0
0
<COMMON> 1,000
<OTHER-SE> 26,946,000
<TOTAL-LIABILITY-AND-EQUITY> 124,568,00
<SALES> 139,489,000
<TOTAL-REVENUES> 139,489,000
<CGS> 108,101,000
<TOTAL-COSTS> 108,101,000
<OTHER-EXPENSES> 22,986,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,844,000
<INCOME-PRETAX> (442,000)
<INCOME-TAX> (24,000)
<INCOME-CONTINUING> (418,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (418,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
