<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 June 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 June 30, 1999
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------ ---------------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,741 $ 177
Accounts receivable, net 22,211 19,703
Inventories 26,653 27,434
Other current assets 1,196 2,438
------------------ ---------------------
Total current assets 51,801 49,752
------------------ ---------------------
Property, plant and equipment, net 18,280 18,163
Loan financing costs, net 4,093 4,437
Non-compete agreements, net 626 810
Other identifiable intangible assets, net 30,071 30,935
Goodwill, net 22,241 22,493
------------------ ---------------------
Total assets $ 127,112 $ 126,590
================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 1,443 $ 1,465
Accounts payable 16,285 10,719
Accrued expenses and other current liabilities 16,852 9,219
------------------ ---------------------
Total current liabilities 34,580 21,403
------------------ ---------------------
Long-term debt, net of current maturities 110,920 118,041
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 (46,448) (44,845)
------------------- ----------------------
Total stockholder's equity (deficiency) (19,501) (17,898)
------------------- ----------------------
Total liabilities and stockholder's equity (deficiency) $ 127,112 $ 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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 48,526 $ 42,724 $ 92,296 $ 70,780
Cost of sales 37,256 33,579 70,604 54,934
-------- -------- -------- --------
Gross profit 11,270 9,145 21,692 15,846
Selling, general and administrative expense 5,273 4,571 10,529 7,677
Accrued litigation expense - - - - - - 7,600 - - -
-------- -------- -------- --------
Income (loss) from operations 5,997 4,574 3,563 8,169
Interest expense, net 2,977 3,086 5,995 5,576
-------- -------- -------- --------
Income (loss) before income tax expense 3,020 1,488 (2,432) 2,593
Income tax expense (benefit) 1,198 595 (829) 1,038
-------- -------- -------- --------
Net income (loss) $ 1,822 $ 893 $ (1,603) $ 1,555
======== ======== ======== ========
</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)
SIX MONTHS ENDED
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,603) $ 1,555
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,081 2,224
Deferred income taxes (2,519) 403
Other 180 331
Gain on sale of assets (1) 359
Changes in assets and liabilities:
Accounts receivable (2,688) (1,408)
Inventories 781 (734)
Other assets (171) (412)
Accounts payable 5,566 2,091
Accrued expenses and other liabilities 7,633 (1,925)
------------ -------------
Net cash provided by operating activities 10,259 2,484
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets 37 202
Capital expenditures (1,580) (752)
Acquisition of business, net of cash acquired - - - (28,306)
Acquisition of patent (9) - - -
------------- ------------
Net cash used in investing activities (1,552) (28,856)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 91,013 80,016
Principal payments on long-term debt (98,156) (64,678)
Financing costs incurred - - - (1,191)
Capital contribution from parent company - - - 4,096
------------ ------------
Net cash provided by (used in) financing activities (7,143) 18,243
------------- ------------
Net increase (decrease) in cash and cash equivalents 1,564 (8,129)
Cash and cash equivalents, beginning of period 177 9,691
------------ ------------
Cash and cash equivalents, end of period $ 1,741 $ 1,562
============ ============
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.
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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, 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 and the six months ended June 30, 1998 assuming the acquisition occurred
as of the beginning of 1998:
Pro Forma Operating Results
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
<S> <C> <C>
Net sales $42,724 $80,711
Income before extraordinary item 1,488 2,388
Net income 893 1,093
</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 six months
ended June 30, 1998 to conform to the current year presentation.
4. INVENTORIES:
Inventories, excluding that associated with discontinued operations
consists of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials $ 12,388 $ 13,821
Work-in-process 3,349 2,787
Finished goods 10,916 10,826
------------- -------------
$ 26,653 $ 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. 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 June
30, 1999. 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 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 June 30, 1999,
the remaining accrued liability was $195,000.
On July 9, 1999 the Company entered into a letter of credit totaling
$1,250,000 which obligates the Company to make payment in the event of a default
on a contract with a customer. Management does not expect any material losses to
result from this off-balance sheet instrument because performance is not
expected to be required, and therefore, is of the opinion that the fair value of
this instrument is zero.
8. LITIGATION:
On April 15, 1999, the jury in a case involving patent, trademark and trade
dress infringement,
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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 has moved 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.
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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 13.6% from $42.7 million to $48.5 million in
the quarter ended June 30, 1999 as compared to the corresponding quarter of
1998. For the six months ended June 30, 1999 net sales increased 30.4% from
$70.8 million to $92.3 million in the same six months of 1998. Net sales
increased during the quarter primarily due to increases in the volume of OEM and
after market sales in comparison to the same period of 1998, which the Company
believes was the result of growth in the RV industry. For the six months ended
June 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 and after market sales.
Gross Profit. Gross profit increased 24.2% from $9.1 million (21% of net
sales) to $11.3 million (23% of net sales) in the quarter ended June 30, 1999 as
compared to the corresponding quarter of 1998. For the six months ended June 30,
1999 gross profit increased 37.3% from $15.8 million (22% of net sales) to $21.7
million (23% of net sales) in the same six months of 1998. The increase was
principally due to the increased volume of OEM and aftermarket sales in the six
months ended June 30, 1999. In addition, the Suburban acquisition generated
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 15.2% from $4.6 million (11% of net sales) to $5.3 million
(11% of net sales) in the quarter ended June 30, 1999 as compared to the
corresponding quarter of 1998. For the six months ended June 30, 1999 selling,
general and administrative expense increased 36.4% from $7.7 million (11% of net
sales) to $10.5 million (11% of net sales) in the same six 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 six months ended June 30, 1999, and $1.6
million of expenses relating to the acquisition of Suburban.
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 decreased from $3.1 million to $3.0
million in the quarter ended June 30, 1999 as compared to the corresponding
quarter of 1998 and increased from $5.6 million to $6.0 million in the six
months ended June 30, 1999. Interest expense decreased during the quarter
primarily due to reductions in average long-term borrowings outstanding. The
increase in the six months ended June 30, 1999 resulted primarily from the
borrowing of $27.0 million of additional bank debt on March 17, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the six (6) months ended June 30, 1999, the Company generated $10,259,000
in net cash flow from operating activities compared to $2,484,000 for the
comparable period in 1998, primarily as a result of increases in accounts
payable and accrued expenses and other liabilities offset by decreased profits,
decreased deferred taxes and increases in accounts receivable. Capital
expenditures totaled $1,580,000 for the six months ended June 30, 1999, compared
to $752,000 for the same period in 1998. Capital expenditures increased
primarily as a result of expenditures of $507,000 for an
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expansion of the Company's production facility and $257,000 of expenditures
related to Suburban.
During the six (6) months ended June 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 $12,586,000 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, 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 June 30, 1999. In addition, the
amendment modified certain covenants which should allow the Company to maintain
compliance in the future.
The Company meets its working capital, capital equipment requirements and
cash requirements with funds generated internally and funds from agreements with
a bank. 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 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 with final
testing and implementation scheduled for completion during the third quarter of
1999. Although the Company presently does not have all contingency plans in
place, it has started a process to develop such plans and expects the plans to
be in place by the fourth quarter of 1999. In the event of a system failure 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 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 are being evaluated and alternate suppliers are being identified where
necessary.
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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 $650,000. The total
amount expended through June 30, 1999 was $599,000.
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 has moved 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
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.
August 13, 1999 /s/ Melvin L. Adams
- ------------------------------- ---------------------------------
Date Melvin L. Adams
President and Chief Executive
Officer
August 13, 1999 /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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,741,000
<SECURITIES> 0
<RECEIVABLES> 22,211,000
<ALLOWANCES> 655,000
<INVENTORY> 26,653,000
<CURRENT-ASSETS> 51,801,000
<PP&E> 18,280,000
<DEPRECIATION> 7,183,000
<TOTAL-ASSETS> 127,112,000
<CURRENT-LIABILITIES> 34,580,000
<BONDS> 110,920,000
0
0
<COMMON> 1,000
<OTHER-SE> 26,946,000
<TOTAL-LIABILITY-AND-EQUITY> 127,112,000
<SALES> 92,296,000
<TOTAL-REVENUES> 92,296,000
<CGS> 70,604,000
<TOTAL-COSTS> 70,604,000
<OTHER-EXPENSES> 18,129,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,995,000
<INCOME-PRETAX> (2,432,000)
<INCOME-TAX> (829,000)
<INCOME-CONTINUING> (1,603,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,603,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
