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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INFORMATION SPECIFIED 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 September 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 September 30, 2002
1
Note: This information is provided solely to comply with the obligation
contained in the indenture agreement governing the Company's Senior Subordinated
Notes.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 2,132 $ 583
Accounts receivable, net ......................... 12,107 10,818
Inventories ...................................... 20,026 22,161
Deferred income taxes ............................ 122 1,758
Other current assets ............................. 320 491
--------- ---------
Total current assets ......................... 34,707 35,811
--------- ---------
Deferred income taxes ............................... 6,739 --
Property, plant and equipment, net .................. 17,704 17,668
Loan financing costs, net ........................... 2,065 2,389
Other identifiable intangible assets, net ........... 2,091 2,788
Goodwill and other indefinite lived intangible assets 15,873 45,930
--------- ---------
Total assets ................................. $ 79,179 $ 104,586
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Current portion of long-term debt ................ $ 133 $ 147
Cash overdraft ................................... 3,419 --
Accounts payable ................................. 8,578 7,507
Accrued interest ................................. 3,709 1,241
Accrued expenses and other current liabilities ... 7,001 5,649
--------- ---------
Total current liabilities .................... 22,840 14,544
--------- ---------
Long-term debt, net of current maturities ........... 92,168 104,375
Deferred income taxes ............................... -- 3,391
Commitments and contingencies
Stockholder's deficiency:
Common stock ..................................... 1 1
Additional paid-in capital ....................... 27,322 27,322
Accumulated deficit .............................. (63,117) (45,012)
Accumulated other comprehensive loss ............. (35) (35)
--------- ---------
Total stockholder's deficiency ............... (35,829) (17,724)
--------- ---------
Total liabilities and stockholder's deficiency $ 79,179 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
(As restated. (As restated.
See Note 7) See Note 7)
Net sales ......................................... $ 40,723 $ 37,401 $ 125,448 $ 117,278
Cost of sales ..................................... 33,273 30,982 101,719 94,233
--------- --------- --------- ---------
Gross profit ................................... 7,450 6,419 23,729 23,045
Selling, general and administrative expense ....... 4,165 4,290 12,860 14,087
Accrued litigation income ......................... -- -- -- (5,049)
--------- --------- --------- ---------
Income from operations ......................... 3,285 2,129 10,869 14,007
Interest expense, net ............................. 2,662 2,858 8,118 8,757
Minority interest ................................. -- (37) -- (105)
Other (income) expense, net ....................... 18 (3) 109 35
--------- --------- --------- ---------
Income (Loss) before income taxes and
cumulative effect of change in accounting
principle .................................... 605 (689) 2,642 5,320
Income tax expense (benefit) ...................... 238 (213) 1,029 2,166
--------- --------- --------- ---------
Income (Loss) before cumulative effect of change
in accounting principle ...................... 367 (476) 1,613 3,154
Cumulative effect of change in accounting
principle, net of income taxes of $10,130 ...... -- -- (19,718) --
--------- --------- --------- ---------
Net income (loss) .............................. $ 367 $ (476) $ (18,105) $ 3,154
========= ========= ========= =========
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)
Nine Months Ended
September 30, September 30,
2002 2001
---- ----
(As restated.
See Note 7)
Cash flows from operating activities:
Net income (loss) ...................................... $ (18,105) $ 3,154
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ...................... 2,580 3,997
Amortization of financing costs .................... 324 324
Deferred income taxes .............................. (8,494) 1,919
Provision for bad debt ............................. 10 43
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 ...... -- (105)
Changes in assets and liabilities:
Accounts receivable .............................. (1,299) (1,652)
Inventories ...................................... 2,135 5,634
Other assets ..................................... (157) 1,271
Accounts payable ................................. 1,071 (2,407)
Accrued expenses and other liabilities ........... 4,148 (6,100)
--------- ---------
Net cash provided by operating activities ...... 12,123 6,051
--------- ---------
Cash flows from investing activities:
Proceeds from sale of assets ........................... 3 100
Capital expenditures ................................... (1,706) (1,634)
Patent acquisition cost ................................ (69) (6)
Acquisition of license agreement ....................... -- --
--------- ---------
Net cash used in investing activities .......... (1,772) (1,540)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............... 109,515 107,838
Principal payments on long-term debt ................... (121,736) (113,754)
Financing costs incurred ............................... -- (16)
Cash overdraft ......................................... 3,419 1,439
--------- ---------
Net cash used in financing activities .......... (8,802) (4,493)
--------- ---------
Net increase in cash and cash equivalents ............... 1,549 18
Cash and cash equivalents at beginning of period ........ 583 172
--------- ---------
Cash and cash equivalents at end of period .............. $ 2,132 $ 190
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 consolidated 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, 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, Suburban Manufacturing Company and Insta Freeze while the heating,
ventilating and air conditioning industry is supplied by the Marvair division,
formerly 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.
A significant part of the Company's operations are directly dependent upon
the conditions in the highly cyclical RV industry, highly competitive
telecommunications industry and the commercial and public construction industry.
Companies within these industries, including the Company's largest customers,
are subject to volatility in operating results due to external factors such as
economic, demographic and political changes. These factors include seasonal
factors, fuel availability and fuel prices, overall consumer confidence and
general economic conditions, the level of discretionary consumer spending,
government regulation, interest rates and unemployment.
3. RECLASSIFICATIONS
The Company has made certain reclassifications in the 2001 condensed
consolidated financial statements to conform to the current year presentation.
5
4. INVENTORIES:
Inventories consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 9,334 $ 9,944
Work-in-process 2,187 1,896
Finished goods 8,505 10,321
------- -------
$20,026 $22,161
======= =======
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.
The goodwill impairment was the result of a cumulative effect of change in
accounting principle that was effective January 1, 2002.
September 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 3,699 3,652
License agreements 475 527
------ ------
Subtotal $6,322 $6,327
6
September 30, 2002 December 31, 2001
------------------ -----------------
Accumulated amortization:
Computer software $ 430 $ 331
Trademarks and contract 332 310
Patent 3,375 2,833
License agreements 94 65
------- -------
Subtotal $ 4,231 $ 3,539
Intangible assets not subject to amortization:
Goodwill $12,973 $29,477
Trademarks 2,900 16,453
------- -------
Subtotal $15,873 $45,930
Amortization expense for the net carrying amount of intangible assets, as
of September 30, 2002, is expected to be $524 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
Net income (loss) as originally reported $ 367 $ (476) $(18,105) $ 3,154
Add back after-tax effect of:
Goodwill amortization -- 236 -- 703
Trademark amortization -- 86 -- 258
-------- -------- -------- --------
Net income (loss) as adjusted $ 367 $ (154) $(18,105) $ 4,115
======== ======== ======== ========
6. 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.
7
7. RESTATEMENT:
The Company's financial statements as of September 30, 2001, have been
restated to reflect the recognition of the inventory adjustment of $259 as a
result of the physical inventory performed in the fourth quarter of 2001. The
inventory adjustment relates to the inventory produced throughout fiscal year
2001 and as a result has been recorded in the third quarter of 2001. This
restatement has no effect on the Company's annual financial statements for the
period ended December 31, 2001. The effect of the restatement is as follows:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
-------------------------- --------------------------
Previously Previously
Reported as Restated Reported as Restated
------------ ----------- ------------ -----------
Cost of sales $ 30,723 $ 30,982 $ 93,974 $ 94,233
Net income (loss) (315) (476) 3,315 3,154
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 (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 that 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 8.8% from $37.4 million to $40.7 million in
the quarter ended September 30, 2002 as compared to the corresponding quarter of
2001. For the nine months ended September 30, 2002 net sales increased 6.9% from
$117.3 million to $125.4 million in the same nine months of 2001. For the
quarter and nine months ended September 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 17.2% from $6.4 million (17% of net
sales) to $7.5 million (18% of net sales) in the quarter ended September 30,
2002 as compared to the corresponding quarter of 2001. For the nine months ended
September 30, 2002 gross profit increased 3.0% from $23.0 million (20% of net
sales) to $23.7 million (19% of net sales) in the same nine months of 2001. The
increase was due to the increased sales, favorable changes in the product mix
and cost reductions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (INCLUDING AMORTIZATION OF
INTANGIBLE ASSETS AND COMPUTER SOFTWARE). Selling, general and administrative
expense decreased 2.3% from $4.3 million (11% of net sales) to $4.2 million (10%
of net sales) in the quarter ended September 30, 2002 as compared to the
corresponding quarter of 2001. For the nine months ended September 30, 2002
selling, general and administrative expense decreased 8.5% from $14.1 million
(12% of net sales) to $12.9 million (10% of net sales) in the same nine months
of 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 intangible assets becoming fully amortized 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 $2.7
million in the quarter ended September 30, 2002 as compared to the corresponding
quarter of 2001 and decreased from $8.8 million to $8.1 million in the nine
months ended September 30, 2002. Interest expense decreased during the nine
months ended September 30, 2002 primarily due to reductions in average long-term
borrowings outstanding and declines in the interest rate.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2002, the Company generated $12.1
million in net cash flow from operating activities compared to $6.1 million for
the comparable period in 2001, primarily as a result of the effects of higher
sales, better controlled expenses, increased accounts payable, accrued expenses
and other current liabilities, and more moderate inventory growth. Capital
expenditures totaled $1.7 million for the nine months ended September 30, 2002,
compared to $1.6 million for the same period in 2001.
Cash generated from operating activities was used to repay the Company's
existing credit facility and other long term debt by approximately $12.2
million.
The Company recorded a deferred tax asset of $8.6 million during the nine
months ended September 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.
9
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.
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.
RESTATEMENT
The Company's financial statements as of September 30, 2001, have been
restated to reflect the recognition of the inventory adjustment of $259,000 as a
result of the physical inventory performed in the fourth quarter of 2001. The
inventory adjustment relates to the inventory produced throughout fiscal year
2001 and as a result has been recorded in the third quarter of 2001. This
restatement has no effect on the Company's annual financial statements for the
period ended December 31, 2001.
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.
10
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. 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 ($2 million at
September 30, 2002) at an average interest rate of 4.5% per annum, a 1% increase
in market interest rates would increase interest expense and decrease earnings
before income taxes by approximately $20,000 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 $9,000,000. 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
None
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.
11/13/02 /s/ Melvin L. Adams
- ----------------------- ---------------------------------
Date Melvin L. Adams
President and Chief Executive
Officer
11/13/02 /s/ Richard L. Schreck
- ----------------------- ---------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
13