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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, 2003
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, 2003
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, 2003 December 31, 2002
------------------ -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 374 $ 179
Accounts receivable, net of allowances for doubtful accounts
of $470 and $324, in 2003 and 2002, respectively 15,933 11,171
Inventories 19,771 22,498
Other current assets 4,083 3,939
-------- --------
Total current assets 40,161 37,787
-------- --------
Deferred income taxes 1,160 4,096
Property, plant and equipment, net 16,274 17,725
Loan financing costs, net 1,701 1,956
Other identifiable intangible assets, net 1,767 1,987
Goodwill and other indefinite lived intangible assets 15,873 15,873
Notes receivable from Holdings 3,447 --
-------- --------
Total assets $ 80,383 $ 79,424
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 63 $ 81
Cash overdraft 1,506 --
Accounts payable 9,091 9,097
Warranty reserve 2,166 1,905
Accrued interest 3,726 1,239
Accrued payroll 2,606 3,357
Accrued expenses and other current liabilities 2,825 1,972
-------- --------
Total current liabilities 21,983 17,651
-------- --------
Pension liability 1,723 1,693
Long-term debt, less current portion 93,199 97,833
Commitments and contingencies
Stockholder's equity (deficiency):
Common stock 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (62,860) (64,091)
Accumulated other comprehensive loss (985) (985)
-------- --------
Total stockholder's equity (deficiency) (36,522) (37,753)
-------- --------
Total liabilities and stockholder's equity (deficiency) $ 80,383 $ 79,424
======== ========
See accompanying notes.
2
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 44,155 $ 40,723 $ 124,062 $ 125,448
Cost of sales 35,247 33,273 99,713 101,719
--------- --------- --------- ---------
Gross profit 8,908 7,450 24,349 23,729
Selling, general and administrative expense 3,941 4,165 11,783 12,860
--------- --------- --------- ---------
Income from operations 4,967 3,285 12,566 10,869
Interest expense, net 2,667 2,662 8,100 8,118
Other expense, net 43 18 54 109
--------- --------- --------- ---------
Income before income tax expense and
cumulative effect of change in accounting
principle 2,257 605 4,412 2,642
Income tax expense 867 238 1,705 1,029
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle 1,390 367 2,707 1,613
Cumulative effect of change in accounting
principle, net of income taxes of $10,130 -- -- -- (19,718)
--------- --------- --------- ---------
Net income (loss) $ 1,390 $ 367 $ 2,707 $ (18,105)
========= ========= ========= =========
See accompanying notes.
3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
-----------------------------
September 30, September 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,707 $ (18,105)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,293 2,580
Amortization of financing costs 347 324
Deferred income taxes 1,465 (8,494)
Provision for bad debts 144 10
(Gain) loss on sale of property, plant and equipment 34 (3)
Impairment write off of goodwill and trademark costs -- 29,848
Impairment write off of patent and license agreements -- 65
Changes in operating assets and liabilities:
Accounts receivable (4,905) (1,299)
Inventories 2,727 2,135
Other assets (145) (157)
Accounts payable (7) 1,071
Accrued expenses and other liabilities 2,881 4,148
--------- ---------
Net cash provided by operating activities 7,541 12,123
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 45 3
Capital expenditures (700) (1,706)
Purchase of notes receivable from Holdings (3,447) --
Patent acquisition cost (1) (69)
--------- ---------
Net cash used in investing activities (4,103) (1,772)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 111,140 109,515
Principal payments on long-term debt (115,792) (121,736)
Cash overdraft 1,506 3,419
Financing costs incurred (92) --
Dividend to parent (5) --
--------- ---------
Net cash used in financing activities (3,243) (8,802)
--------- ---------
Net increase in cash and cash equivalents 195 1,549
Cash and cash equivalents at beginning of period 179 583
--------- ---------
Cash and cash equivalents at end of period $ 374 $ 2,132
========= =========
See accompanying notes.
4
AIRXCEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(Unaudited)
Nine Months Ended
--------------------
September 30, September 30,
2003 2002
------ ----
Supplemental non-cash financing information:
Basis reduction of certain assets related to Holdings taxable income on note
purchase recorded as a non-cash
distribution and a decrease in deferred income taxes. $1,471 $ --
====== ====
5
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 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 consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. 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, 2002 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 28, 2003. 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
refrigeration compressors 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 and Suburban Manufacturing Company 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.
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 2002 condensed
consolidated financial statements to conform to the current year presentation.
6
4. INVENTORIES:
Inventories consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 8,862 $ 9,431
Work-in-process 1,997 2,104
Finished goods 8,912 10,963
------- -------
$19,771 $22,498
======= =======
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 material legal or contractual
restrictions on their use. In addition, assembled work force and customer base
was reclassified 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,
primarily due to the decline in the telecommunications industry. Step two of the
assessment indicated an impairment of goodwill and certain trademark costs
amounting to $19,718, (net of $10,130 in taxes) which was recorded as a
cumulative effect of a change in accounting principle in the accompanying 2002
condensed consolidated statement of operations.
September 30, 2003 December 31, 2002
------------------ -----------------
Intangible assets subject to amortization:
Gross carrying amount:
Computer software $ 712 $ 712
Tradename 1,454 1,454
Patents 3,706 3,705
License agreements 475 475
------ ------
Subtotal $6,347 $6,346
7
September 30, 2003 December 31, 2002
------------------ -----------------
Accumulated amortization:
Computer software $ 557 $ 463
Tradename 361 339
Patent 3,520 3,451
License agreements 142 106
------- -------
Subtotal 4,580 4,359
------- -------
Net intangible assets subject to amortization $ 1,767 $ 1,987
======= =======
Intangible assets not subject to amortization:
Goodwill $12,973 $12,973
Trademarks 2,900 2,900
------- -------
Subtotal $15,873 $15,873
======= =======
Amortization expense on the intangible assets subject to amortization, as
of September 30, 2003, is expected to be $292 in 2003, $279 in 2004, $113 in
2005, $85 in 2006, and $83 in 2007.
6. NOTES RECEIVABLE FROM HOLDINGS:
On February 19, 2003, the Company purchased certain notes originally
issued by Holdings from the holders for an aggregate purchase price of $3,447.
These notes, which are reported as notes receivable from Holdings on the
accompanying 2003 condensed consolidated balance sheet, mature November 2008.
Although the Company may determine to distribute the notes to Holdings, subject
to compliance with the Company's credit facility, senior subordinated notes and
other debt agreements, the Company does not anticipate this will occur in the
foreseeable future. Pursuant to an IRS regulation issued on August 29, 2003, the
taxable income to Holdings associated with the note purchase results in a
reduction to the tax basis of certain assets and has been reflected in the
accompanying condensed consolidated financial statements as a non-cash
distribution to Holdings and a decrease in deferred income tax assets.
7. WARRANTY RESERVE:
The Company offers a one to five year warranty for its products. The
specific terms and conditions of those warranties vary depending upon the
product sold. An estimated cost of product warranty is recognized at the time
the revenue is recognized. The Company estimates the cost of its product
warranty obligation based on historical analysis of sales and warranty costs
incurred. The Company periodically assesses the adequacy of its recorded product
warranty obligation and adjusts the amounts as necessary.
8
Changes in the Company's product warranty liability during the period are as
follows:
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------ ------------------
Balance at beginning of period $ 2,084 $ 1,904
Warranties issued during the period 598 1,594
Settlements made during the period (570) (1,527)
Changes in estimated liability for pre-existing warranties
during the period, including expirations 54 195
------- -------
Balance at end of period $ 2,166 $ 2,166
======= =======
8. LONG-TERM 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. On
January 9, 2003 the Company reduced the total commitment available under the
credit facility to $25,000.
9. INCOME TAXES:
Total income taxes in 2002, 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 and amortization in 2002,
as well as state income taxes.
10. CONTINGENCY:
On March 13, 2003 the Company amended its letter of credit to increase the
amount to $1,464. This letter of credit obligates the Company to make payment in
the event of a default on an agreement with an insurance company to pay workers
compensation claims incurred. Management does not expect any material losses to
result from this arrangement because performance is not expected to be required,
and therefore, is of the opinion that the fair value of this instrument is zero.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales. Net sales increased 8.6% from $40.7 million to $44.2 million in
the quarter ended September 30, 2003 as compared to the corresponding quarter of
2002. For the nine month periods net sales decreased 1.0% from $125.4 million to
$124.1 million in the nine months of 2003. For the quarter ended September 30,
2003 net sales increased in comparison to the same period of 2002 primarily due
to increased volume within the school and telecommunications industries. For the
nine months ended September 30, 2003 net sales remained relatively constant in
comparison to the same period of 2002.
Gross profit. Gross profit increased 18.7% from $7.5 million (18% of net
sales) to $8.9 million (20% of net sales) in the quarter ended September 30,
2003 as compared to the corresponding quarter of 2002. For the nine month
periods, gross profit increased 2.5% from $23.7 million (19% of net sales) in
2002 to $24.3 million (20% of net sales) in the nine months of 2003. For the
quarter and nine months ended September 30, 2003, gross profit increased in
comparison to the same period of 2002 primarily due to favorable changes in the
product mix and cost reduction efforts.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense decreased 7.1% from $4.2 million (10% of net sales) to $3.9 million (9%
of net sales) in the quarter ended September 30, 2003 as compared to the
corresponding quarter of 2002. For the nine month periods, selling, general and
administrative expense decreased 8.5% from $12.9 million (10% of net sales) in
2002 to $11.8 million (10% of net sales) in the nine months of 2003. The
decrease was primarily due to cost reduction efforts.
Interest expense. Interest expense remained constant at $2.7 million and
$8.1 million, respectively, in the quarter and the nine months ended September
30, 2002 and 2003.
Income tax expense. Income tax expense increased from $.2 million to $.8
million in the quarter ended September 30, 2003 as compared to the corresponding
quarter of 2002 and increased from $1.0 million to $1.7 million in the nine
months ended September 30, 2003, the increases being attributed to the increases
in pre-tax income. The effective income tax rate is comparable for each of the
periods presented.
Cumulative effect of change in accounting principle. The cumulative effect
of change in accounting principle is a result of the adoption in 2002 of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" and the impairment charges recorded in 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2003, the Company generated $7.5
million in net cash flow from operating activities compared to $12.1 million for
the comparable period in 2002, primarily as a result of maintaining higher
working capital levels in 2003.
10
Cash generated from operating activities was used primarily to repay
borrowings under the Company's existing credit facility and other long term debt
by approximately $4.7 million. In addition, cash was used to purchase, on
February 19, 2003, certain notes from the holders for an aggregate purchase
price of $3.4 million. Although the Company may determine to distribute the
notes to Holdings, subject to compliance with the Company's credit facility,
senior subordinated notes and other debt agreements, the Company does not
anticipate this will occur in the foreseeable future.
Covenants under the Company's credit facility with the bank restrict the
Company's 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 is
in compliance with these ratios at September 30, 2003. Management's current
business plan estimates working capital levels and operating profitability. The
achievement of this plan is necessary for compliance with various financial
covenants during 2003. 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.
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.
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.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk on variable rate financial instruments: The Company maintains
a $25 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 at an average
interest rate of 3.8% per annum, a 1% increase in market interest rates would
increase interest expense and decrease earnings before income taxes by
approximately $30,000 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.
12
ITEM 4. CONTROLS AND PROCEDURES
(a) Our chief executive officer and chief financial officer have reviewed and
evaluated the Company's disclosure controls and procedures within 90 days of the
filing date of this Quarterly Report. Based on such review and evaluation, the
officers believe that the disclosure controls and procedures are designed
effectively to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (1.) is recorded, processed, summarized and reported
within the time period specified in the SEC's rules and forms and (2.) that the
information required to be discussed by the Company in the reports that it files
and submits under the Securities Exchange Act of 1934, as amended, is documented
and communicated to the Company's management, including the officers, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
13
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
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 (A.) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
ITEM 6 (B.) REPORTS ON FORM 8-K
None
14
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.
November 5, 2003 /s/ Melvin L. Adams
- ------------------------------ ------------------------------
Date Melvin L. Adams
President and Chief
Executive Officer
November 5, 2003 /s/ Richard L. Schreck
- ------------------------------ ------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
15