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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INFORMATION SPECIFIED IN FORM 10-Q
(see note below)
(Mark one)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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, 2002
Note: This information is provided solely to comply with the obligation
contained in the indenture agreement governing the Company's Senior
Subordinated Notes.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited) (Note 1)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,751 583
Accounts receivable, net 17,106 10,818
Inventories 19,661 22,161
Deferred income taxes 1,758 1,758
Other current assets 577 491
--------- ---------
Total current assets 41,853 35,811
--------- ---------
Deferred income taxes 6,739 --
Property, plant and equipment, net 17,688 17,668
Loan financing costs, net 2,173 2,389
Other identifiable intangible assets, net 2,319 2,788
Goodwill and other indefinite lived intangible assets 15,873 45,930
--------- ---------
Total assets $ 86,645 $ 104,586
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 148 $ 147
Cash overdraft 4,155 --
Accounts payable 10,396 7,507
Accrued interest 1,287 1,241
Accrued expenses and other current liabilities 6,670 5,649
--------- ---------
Total current liabilities 22,656 14,544
--------- ---------
Long-term debt, net of current maturities 100,185 104,375
Deferred income taxes -- 3,391
Commitments and contingencies
Stockholder's equity (deficiency):
Common Stock 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (63,484) (45,012)
Accumulated other comprehensive loss (35) (35)
--------- ---------
Total stockholder's equity (deficiency) (36,196) (17,724)
--------- ---------
Total liabilities and stockholder's equity (deficiency) $ 86,645 $ 104,586
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 46,729 $ 41,804 $ 84,725 $ 79,877
Cost of sales 37,523 33,201 68,446 63,251
-------- -------- -------- --------
Gross profit 9,206 8,603 16,279 16,626
Selling, general and administrative expense 4,371 4,856 8,911 9,797
Accrued litigation income -- -- -- (5,049)
-------- -------- -------- --------
Income from operations 4,835 3,747 7,368 11,878
Interest expense, net 2,602 2,897 5,240 5,899
Minority interest -- (36) -- (68)
Other expense, net 80 26 91 38
-------- -------- -------- --------
Income before income tax expense and
cumulative effect of change in accounting
principle, net 2,153 860 2,037 6,009
Income tax expense 826 373 791 2,379
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle, net 1,327 487 1,246 3,630
Cumulative effect of change in accounting
principle, net of income taxes of $10,130 -- -- (19,718) --
-------- -------- -------- --------
Net income (loss) $ 1,327 $ 487 $(18,472) $ 3,630
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $(18,472) $ 3,630
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,736 2,760
Amortization of financing costs 216 215
Deferred income taxes (10,130) 1,919
Provision for bad debt (16) 122
Gain on sale of assets (3) (27)
Impairment write off of goodwill and trademark costs 29,848 --
Impairment write off of patent and license agreement 65 --
Minority interest in earnings of subsidiaries -- (68)
Changes in assets and liabilities:
Accounts receivable (6,272) (3,260)
Inventories 2,500 3,153
Other assets (86) 1,082
Accounts payable 2,889 (1,185)
Accrued expenses and other liabilities 1,067 (8,298)
-------- --------
Net cash provided by operating activities 3,342 43
-------- --------
Cash flows from investing activities:
Proceeds from sale of assets 3 100
Capital expenditures (1,096) (836)
Patent acquisition cost (47) --
-------- --------
Net cash used in investing activities (1,140) (736)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 70,970 74,344
Principal payments on long-term debt (75,159) (75,223)
Financing costs incurred -- (14)
Cash overdraft 4,155 1,611
-------- --------
Net cash provided by (used in) financing activities (34) 718
-------- --------
Net increase in cash and cash equivalents 2,168 25
Cash and cash equivalents, beginning of period 583 172
-------- --------
Cash and cash equivalents, end of period $ 2,751 $ 197
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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 in accordance with accounting principles generally accepted in the
United States for interim financial information and Article 10 of Regulation
S-X. 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, 2001 included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
18, 2002. 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, cooking appliances and low-voltage
compressor refrigerators for the recreation vehicle industry, and wall mount air
conditioners, environmental control units 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, Suburban Manufacturing Company and Insta Freeze while
the heating, ventilating and air conditioning industry is supplied by the
Marvair division, formerly 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.
3. RECLASSIFICATIONS
The Company has made certain reclassifications in the 2001 financial
statements to conform to the current year presentation.
4. INVENTORIES:
Inventories consist of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Raw Materials $ 9,900 $ 9,944
Work-in-process 1,978 1,896
Finished goods 7,783 10,321
-------- ---------
$ 19,661 $ 22,161
======== =========
5
5. INTANGIBLE ASSETS:
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002. This new
accounting standard required that goodwill and indefinite lived assets no longer
be amortized but instead be tested at least annually for impairment and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. The company engaged an independent
appraisal company to assist with the valuation.
Upon initial application of SFAS No. 142, the Company reassessed the useful
lives of the intangible assets and determined that certain trademarks are deemed
to have an indefinite useful life because they are expected to generate cash
flows indefinitely and there are no legal or contractual restrictions on their
use. In addition, assembled work force and customer base was reclassed to
goodwill in accordance with SFAS No. 142. Other trademarks have a finite life
and will continue to be amortized over their remaining useful life.
The Company has three reporting units with goodwill. As determined by the step
one assessment for each reporting unit, the estimated fair value, based on a
present value valuation, was less than its carrying amount including goodwill.
Step two of the assessment indicated there was an impairment, net of tax, of
$19,718, which was recorded as a cumulative effect of a change in accounting
principle in the accompanying condensed consolidated statement of operations.
Since the goodwill impairment was the result of a cumulative effect of change in
accounting principle that was effective January 1, 2002, the impairment is not
reflected in the second quarter results.
June 30, 2002 December 31, 2001
------------- -----------------
Intangible assets subject to amortization:
Gross carrying amount:
Computer software $ 694 $ 694
Trademarks and contract 1,454 1,454
Patents 3,677 3,652
License agreements 475 527
------- -------
Subtotal $ 6,300 $ 6,327
Accumulated amortization:
Computer software $ 397 $ 331
Trademarks and contract 325 310
Patent 3,177 2,833
License agreements 82 65
------- -------
Subtotal $ 3,981 $ 3,539
Intangible assets not subject to amortization:
Goodwill $12,973 $29,477
Trademarks 2,900 16,453
------- -------
Subtotal $15,873 $45,930
6
Amortization expense for the net carrying amount of intangible assets, as of
June 30, 2002, is expected to be $516 in 2002, $298 in 2003, $176 in 2004, $81
in 2005, and $81 in 2006.
The following table adjusts net income (loss) in the prior periods to exclude
amortization, net of any related tax effects on goodwill and indefinite lived
intangible assets.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) as originally reported $ 1,327 $ 487 $(18,472) $ 3,630
Add back after-tax effect of:
Goodwill amortization -- 226 -- 468
Trademark amortization -- 94 -- 172
-------- -------- -------- --------
Net income (loss) as adjusted $ 1,327 $ 807 $(18,472) $ 4,270
======== ======== ======== ========
6. DEBT:
The Company maintains a Credit Facility with a Bank which permits borrowings
at interest rates based on either the bank's base rate or LIBOR. The total
commitment under the credit facility is $31,000. Under the Credit Facility the
Company is required to maintain compliance with a fixed charge coverage ratio
and maintain a minimum effective capital balance. The credit facility is
collateralized by accounts receivable, equipment, general intangibles,
inventory, and investment property. The Company is in compliance with these
ratios at June 30, 2002 and December 31, 2001. Management's current business
plan estimates working capital levels and operating profitability at sufficient
levels to comply with various financial covenants during 2002. The possibility
exists that certain financial covenants will not be met if business conditions
are other than as anticipated. In such event, the Company would need an
amendment or waiver of such financial covenants; however, there can be no
assurance that such amendment or waiver will be obtained.
7. INCOME TAXES:
Total income taxes, including taxes related to the cumulative effect of a
change in accounting principle, differ from the statutory rate due primarily to
nondeductible goodwill impairment charges in 2002 and amortization in 2001, as
well as state income taxes.
8. CONTINGENCY:
On January 9, 2002 the Company entered into a letter of credit totaling $665
which obligates the Company to make payment in the event of a default on an
agreement with an insurance company to pay claims incurred. 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.
9. 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
7
(N.D. Ohio 1998) awarded damages against Crispaire for patent infringement in an
amount of $9,000. The matter was settled during the first quarter of 2001 and
all related legal proceedings have been dismissed. Although the terms of the
settlement are confidential, previous accruals exceed any payments made, and
there will be no additional charges or accruals as a result of the settlement.
The settlement does not require any change in the product offerings of the
company.
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.
10. RECENT ACCOUNTING PRONOUNCEMENTS:
On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This standard supercedes both SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and sections of Accounting Principles Board Opinion
30, providing one accounting model with which to review for asset impairment.
SFAS No. 144 retains much of the recognition and measurement provision of SFAS
No. 121, but removes goodwill and other indefinite lived assets from its scope.
It also alters the criteria of classifying long-lived assets to be disposed of
by sale and changes the method of accounting for the disposal of long-lived
assets if other than through a sale. Finally, while this statement retains the
basic presentation provisions for discontinued operations, it broadens the
definition of a discontinued operation to include a component of an entity. The
Company has determined the adoption of this standard did not have a material
effect on the consolidated financial position, results of operations or cash
flows.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales. Net sales increased 11.7% from $41.8 million to $46.7 million in
the quarter ended June 30, 2002 as compared to the corresponding quarter of
2001. For the six months ended June 30, 2002 net sales increased 6.0% from $79.9
million to $84.7 million in the same six months of 2001. For the quarter and six
months ended June 30, 2002 net sales increased in comparison to the same period
of 2001 primarily due to volume growth within the RV industry.
Gross Profit. Gross profit increased 7.0% from $8.6 million (21% of net sales)
to $9.2 million (20% of net sales) in the quarter ended June 30, 2002 as
compared to the corresponding quarter of 2001. For the six months ended June 30,
2002 gross profit decreased 1.8% from $16.6 million (21% of net sales) to $16.3
million (19% of net sales) in the same six months of 2001. The decrease was
principally due to the sales decrease in the telecommunication industry, change
in product mix, and increased pricing pressure from competitors.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense decreased 10.2% from $4.9 million (12% of net sales) to $4.4 million (9%
of net sales) in the quarter ended June 30, 2002 as compared to the
corresponding quarter of 2001. For the six months ended June 30, 2002 selling,
general and administrative expense decreased 9.2% from $9.8 million (12% of net
sales) to $8.9 million (11% of net sales) in the same six months as 2001. The
decrease was primarily due to decreased amortization expense of goodwill and
other indefinite lived intangible assets due to adoption of SFAS No. 142 and to
other fully amortized intangible assets and the relatively fixed nature of many
of these costs.
Accrued litigation income. Accrued litigation income decreased as a result of
the settlement of the litigation described in Note 9 of the notes to the
condensed consolidated financial statements.
Interest expense. Interest expense decreased from $2.9 million to $2.6 million
in the quarter ended June 30, 2002 as compared to the corresponding quarter of
2001 and decreased from $5.9 million to $5.2 million in the six months ended
June 30, 2002. Interest expense decreased during the quarter and six months
ended June 30, 2002 primarily due to reductions in average long-term borrowings
outstanding and decreased average interest rates on outstanding borrowings.
Cumulative effect of change in accounting principle. Upon adoption of SFAS No.
142, the Company recorded a cumulative effect of a change in accounting
principle of $19,718, net of income taxes, relating to the impairment write off
of goodwill and trademark costs.
LIQUIDITY AND CAPITAL RESOURCES
For the six (6) months ended June 30, 2002, the Company generated $3.3 million
in net cash flow from operating activities primarily as a result of improved
working capital management including reduced inventory levels and increased
accounts payable and accrued expenses and other liabilities, as compared to the
prior periods. Capital expenditures totaled $1.1 million for the six months
ended June 30, 2002, compared to $.8 million for the same period in 2001.
9
Cash from financing activities was minimal for the six months ended June 30,
2002 as borrowings under the credit facility approximated repayments.
The Company recorded a deferred tax asset of $8.6 million during the six
months ended June 30, 2002 in conjunction with the impairment write off of
goodwill and indefinite lived trademark costs. After assessing future taxable
income projections based upon currently available information and considering
possible tax planning strategies including alternate financing sources and sale
and or leaseback transactions involving appreciated property, management
believes it is more likely than not that we will be able to utilize the deferred
tax assets recorded in the financial statements. However, if the current
business plan estimates of working capital levels and operating profitability
are not achieved, the ability to utilize the deferred tax asset could be
effected. If it is determined that the Company will not realize all or part of
the deferred tax asset in the future, a valuation allowance will be recorded.
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 a fixed charge coverage
ratio and maintain a minimum effective capital balance. At June 30, 2002 the
Company is in compliance with such covenants and requirements or has obtained
waivers for such requirements.
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
operating requirements in the foreseeable future.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk on variable rate financial instruments: The Company maintains a
$31 million credit facility which permits borrowings at interest rates based on
either the bank's base rate or LIBOR.
10
Increases in market interest rates would cause interest expense to increase and
earnings before income taxes to decrease. The change in interest expense and
earnings before income taxes would be dependent upon the weighted average
outstanding borrowings during the reporting period following an increase in
market interest rates. Based on the Company's current outstanding borrowings
under the credit facility at an average interest rate of 5.0% per annum, a 1%
increase in market interest rates would increase interest expense and decrease
earnings before income taxes by approximately $100,000 annually.
Market risk on fixed-rate financial instruments: Included in long-term debt
are $90 million of 11% Senior Subordinated Notes due 2007. Increases in market
interest rates would generally cause a decrease in the fair market value of the
Notes and a decrease in market interest rates would generally cause an increase
in fair value of the Notes.
11
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. The matter was settled during
the first quarter of 2001 and all related legal proceedings have been dismissed.
Although the terms of the settlement are confidential, previous accruals exceed
any payments made, and there will be no additional charges or accruals as a
result of the settlement. The settlement does not require any change in the
product offerings of the company.
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
On May 16, 2002, the Company announced the termination of
PricewaterhouseCoopers LLP as its independent auditor and the hiring of Ernst &
Young LLP as its new independent auditor.
12
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.
8/14/02 /s/ Melvin L. Adams
- ------------------------------- ---------------------------------
Date Melvin L. Adams
President and Chief Executive
Officer
8/14/02 /s/ Richard L. Schreck
- ------------------------------- ---------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
13