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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(see note below)
(Mark one)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Note: This information is provided solely to comply with the
obligation contained in the indenture agreement governing the Company's Senior
Subordinated Notes.
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [ ] NO [XX]
State the aggregate market value: The Company does not have any
publicly traded equity securities.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
1,000 shares of Common Stock as of December 31, 2003
DOCUMENTS INCORPORATED BY REFERENCE
The Airxcel, Inc. Form S-4 Registration Statement Under the Securities Act of
1933, portions of which are incorporated by reference into Part IV.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Airxcel, Inc. (the "Company") is a wholly-owned subsidiary of Airxcel
Holdings Corporation ("Holdings"); formerly known as RV Holdings Corporation.
Airxcel, Inc. was formed in May, 1991 as Recreation Vehicle Products, Inc.
("RVP"). In November, 1995, the Company acquired Carter Shades, Inc., which was
merged with Faulkner Manufacturing. In October, 1997, the Company changed its
name to Airxcel, Inc. and the Company's board of directors adopted a formal plan
to dispose of the Faulkner Manufacturing division.
On November 10, 1997, the Company completed the acquisition of
Crispaire Corporation, currently operating as Marvair, a division of Airxcel,
Inc. ("Marvair"), a designer, manufacturer and marketer of specialty wall mount
air conditioners, environmental control units (ECUs) and heat pumps for various
applications.
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 ("RV") industry
and other specialty products for the heating, ventilating and air conditioning
industry.
On November 3, 2000, the Company completed the acquisition of
Instafreeze, Inc. ("Insta Freeze"), a designer and manufacturer of low-voltage
compressor refrigerators for the RV industry and other applications utilizing
compact compressor refrigerators.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in the heating, ventilation, and air conditioning
equipment industry. 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. Financial information about the Company's products and customers is
presented in the consolidated financial statements.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company is a designer, manufacturer and marketer of air
conditioners, furnaces, water heaters, cooking appliances and low-voltage
compressor refrigeration units for the recreation vehicle industry, and wall
mount air conditioners, environmental control units ("ECUs"), heat pumps for the
heating, ventilating and air conditioning industry and marine reverse cycle air
conditioners.
The Company supplies a variety of air conditioners to several of the
world's largest RV original equipment manufacturers ("OEMs"), marketing these
products under the popular and well-established "Coleman" brand name. The
Company believes that its air conditioners are superior to those of its
competitors due to greater air flow capacity, cooling efficiency and more
aerodynamic design. Its reputation as a dependable source of high-quality,
durable products has resulted in its long term relationships with leading RV
manufacturers such as
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Fleetwood, Winnebago and Jayco, who have relied on the Company for substantially
all of their RV air conditioner needs for each of the past eleven years. In
addition, the Company supplies furnaces, water heaters and cooking appliances to
a large number of OEMs under the "Suburban" brand name. Suburban entered the RV
heating market over 30 years ago and has a well recognized reputation for
innovation, quality and service. Suburban acquired an established water heater
line in 1988 and entered the cooking appliance field in 1997. The Suburban
product line has many attractive advantages including quiet operation and long
life. Combining these advantages with outstanding customer service, Suburban has
longstanding relationships with a number of major OEM customers such as
Winnebago, Thor, Fleetwood, and Forest River. Sales to such OEMs provide the
Company with a large installed base of products which generates a significant
recurring stream of revenue through sales of parts and replacement units in the
aftermarket. Aftermarket air conditioner sales to customers such as RV dealers,
supply and service centers are achieved primarily through an agreement with The
Coast Distribution System, Inc. ("Coast"), the largest wholesale distributor of
aftermarket products in the RV industry. The Company believes that Coast's
extensive market penetration and large sales force provide broad aftermarket
coverage and distribution capabilities which enhance its substantial aftermarket
business. The Company also supplies Suburban brand LP gas fired appliances to
Coast and a number of other aftermarket distributors. As in its air conditioning
products, the Company believes its LP gas appliances offer a greater value and
superior performance than those products produced by its competition. In fiscal
2003, as a percentage of Airxcel's net sales, RV industry OEM sales represented
64%, and aftermarket sales represented 17%.
In addition to serving the RV industry, the Company designs,
manufactures and markets specialty wall mount air conditioners, packaged
terminal air conditioners with gas heat, ECUs, reverse cycle air conditioners
and heat pumps for various applications. Customers are principally school
districts and bid and spec mechanical contractors, telecommunication shelter and
cabinet manufacturers, telecommunication service providers and their upgrade
contractors, modular construction companies and pleasure yacht manufacturers.
Sales are generated through manufacturers representatives and a direct sales
force for all markets. The Company believes that it is one of the largest
providers of heating, ventilating, air conditioning, and dehumidifying equipment
for the individually air conditioned classroom market. The Company believes that
it will continue to benefit from an increased need for cooling units in the
nation's schools due to building codes that mandate fresh air requirements in
classrooms, new legislation that requires classroom occupancy reduction, the
rebuilding of school system infrastructures and the steadily growing student
population. The Company supplies wall mount air conditioners to multiple school
districts throughout the country, including the Los Angeles Unified School
District, Orange County, Florida and Charleston County, South Carolina. The
Company also believes that it is well-positioned to benefit from a recovery in
cellular, wireless, fiber optics and PCS telecommunications markets and the
resulting demand for telecommunication cabinets and shelters. These markets are
served through OEM accounts like Cellxion, Fibrebond, Dupont and Oldcastle. Its
focus on customer service and quality control and its strong reputation for its
ability to offer a broad and innovative line of products in a timely manner has
attracted significant telecommunication providers such as Nextell, Cingular,
T-Mobile, Verizon and AT&T to specify its products for both renovation and new
construction. The Company has a leading position in each of its principal
specialty markets, through solid relationships with its customers who generally
require tailored products and a high level of customer service. The ability to
customize products without interruption of its larger production lines allows
the Company to work closely with customers to develop and produce equipment that
meets their specific needs quickly and efficiently. Marvair recently introduced
the reverse cycle air conditioner for pleasure yachts. Four sizes of units are
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currently offered throughout the United States. Customers include yacht builders
and dealers for replacement sales. In fiscal 2003, sales to the
telecommunication shelter industry and school industry represented 13% of
Airxcel's total net sales.
AVAILABILITY OF RAW MATERIALS
Most of the major component parts for the products such as
compressors, coils, electrical parts, and motors are purchased preassembled from
suppliers. Significant amounts of steel, copper, and plastic are also purchased.
The Company has strong relationships with its suppliers and has alternate
suppliers for all of its major components.
LIMITED USE OF COLEMAN BRAND NAME
The Company has an exclusive, royalty-free license to use the name
"Coleman" on certain products for a period of 50 years ending in 2041. Such
license automatically renews for another 50 years provided the Company is in
compliance with all material terms of the trademark license agreement. The
Company's license to use the "Coleman" brand name on a stand-alone basis expired
on April 30, 1997. As a result, the Company must use an additional name or
product name in conjunction with the "Coleman" brand name.
SEASONALITY
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.
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
Airxcel's net sales to Fleetwood Enterprises, Thor Industries, Forest
River, Coast Distribution, Winnebago Industries, and Jayco, its largest
customers, accounted for approximately 48% of the Company's net sales for 2003.
There can be no assurance that the Company will maintain or improve these
relationships or that the Company will continue to supply these customers at
current levels. The loss of a significant portion of sales to any of these
customers could have a material adverse effect on the financial position,
results of operations or liquidity of the Company. In addition, many of the
arrangements that the Company has with such customers are by purchase order and
terminable at will at the option of either party. A significant decrease or
interruption in businesses of any of the Company's significant customers could
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
COMPETITIVE CONDITIONS
The recreation vehicle industry is highly competitive, both as to
price and quality of the product. As of December 31, 2003 there were four
primary competitors to Airxcel within the industry. The school and
telecommunications air conditioning industry is also highly competitive with
four major competitors. Although the Company competes with a number of
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established companies that have greater financial, technological and marketing
resources, Airxcel believes it has a competitive advantage due to the following:
Strong Market Position in Principal Niche Markets. The Company has a large share
of the total North American RV air conditioning, heating, and water heating
market and believes it is one of the largest providers of heating, ventilating,
air conditioning, and dehumidifying equipment for the individually air
conditioned classroom market. Additionally, the Company believes it is the
largest provider of environmental control equipment of the U.S.
telecommunications market. The Company believes that its strong market shares
enable it to maintain significant competitive advantages in serving its
customers, including manufacturing efficiencies and greater product development
and marketing resources. Success in such markets has historically been driven by
areas in which the Company believes it compares favorably with its competitors
such as strong customer relationships, industry expertise, product quality and
speed and reliability of service.
Existing Long-Term Customer Relationships. The Company has long-term
relationships with most of its customers, including several of the largest OEMs,
major telecommunications companies and equipment manufacturers and school
districts. Airxcel has supplied leading OEMs such as Fleetwood, Winnebago and
Jayco substantially all of their air conditioner needs for each of the past
eleven years. The Company believes that such customer loyalty coupled with a
focused product line and reputation for meeting high volume production demands
have led to its success in the seasonal RV air conditioning industry and provide
a significant advantage over competitors. Airxcel has worked closely with its
school and telecommunications customers, in some cases for as long as twenty
years, to develop equipment to meet such customers' specialized requirements. To
support such equipment, the Company has an extensive network of service dealers
across the U.S.
Strong Brand Name Recognition. The Company markets its RV air conditioners using
the well established and recognized "Coleman" brand name. The "Coleman" brand
name, established in the early part of the twentieth century, is well recognized
as a leading brand name for a variety of products related to the outdoor
recreation industry. Coleman brand RV air conditioners have been the leading RV
air conditioners since they were introduced into the market and are recognized
by customers to represent high quality and reliability. The "Suburban" brand
name was established in the late 1940's and is synonymous with providing quality
LP gas fired appliances to the RV industry including furnaces, water heaters and
cooking appliances. The Company also benefits from the strong brand name
recognition of its "Marvair" name in the telecommunication shelter market and
its "Scholar", "Classic" and "GreenPac" names in the school market.
High Quality Products, Customer Service and Product Design Capabilities. The
Company believes it is recognized as a leader in the RV industry due to its high
product quality and customer service. The Company believes that its efficient
manufacturing and assembly processes enable it to offer competitively priced
products while maintaining high product quality. Because of the seasonal nature
of the RV industry, timely delivery of products to OEMs and aftermarket
customers has played a critical role in the Company's long-standing success.
Similarly, Marvair has developed a strong reputation with its customers for its
ability to develop unique solutions to customers' environmental control needs,
respond to short lead times and to deliver its products utilizing lean
manufacturing methods. In addition, Marvair attained its ISO-9001 certification
during 1998. In early 2002, Marvair achieved the most current certification of
ISO 9000-2000.
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Extensive Distribution Network and Experienced Sales Force. The Company believes
its sales force, who are located in close proximity to and actively work with
many of the largest OEMs regarding product design issues and estimated future
orders, includes some of the most experienced sales people in the RV industry.
In addition, the Company provides Coast, the largest wholesale distributor of
replacement parts, supplies, and RV accessories, serving more than 15,000
customers throughout the U.S. and Canada, with 100% of its RV air conditioning
products. Airxcel believes that Coast provides broad aftermarket coverage and
distribution capabilities. Sales efforts outside the recreation vehicle industry
are organized by industry segments with sales representatives covering the U.S.
telecommunications, school, marine and construction industries as well as
international sales. In addition, independent sales representatives actively
market products, particularly to school districts and marine applications in
which sales agents have developed relationships covering a variety of channels,
including wholesale distributors, factory direct sales, architectural and
engineering firms, original equipment manufacturers, end users and the
international market through distributors.
NUMBER OF PERSONS EMPLOYED
As of December 31, 2003, the Company had 889 employees of which 328
were represented by a bargaining agreement which expires October 6, 2006.
ITEM 2. PROPERTIES
The following table describes the principal facilities utilized by the
Company for manufacturing, warehousing, and administrative purposes.
Approximate
Location Square Feet Owned/Leased
-------- ----------- ------------
Altamonte Springs, Florida 700 Leased
Cordele, Georgia 103,700 Leased
Cordele, Georgia 113,000 Owned
Dayton, Tennessee 285,000 Owned
Elkhart, Indiana 27,000 Owned
Wichita, Kansas 50,000 Leased
Wichita, Kansas 153,000 Owned
ITEM 3. 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.
In addition to the claim previously described, the Company is a party
to various 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There has been no submission of matters to a vote of security holders
during the fourth quarter of fiscal year 2003.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company does not have any publicly traded equity securities.
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data
Years Ended December 31
(in thousands)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Net sales $ 161,213 $ 159,111 $ 145,144 $ 177,896 $ 183,037
Cost of goods sold 129,073 129,693 117,867 145,369 144,862
---------- ---------- ---------- ---------- ----------
Gross profit 32,140 29,418 27,277 32,527 38,175
Selling, general and administrative expenses 15,785 16,462 15,628 16,681 17,146
Operating income 16,064 11,919 13,998 12,141 10,733
Interest expense 10,732 10,789 11,436 11,944 12,416
Income (loss) from continuing operations before
income taxes, extraordinary item and cumulative
effect of change in accounting principle 5,191 945 2,656 164 (1,685)
Cumulative effect of change in accounting
principle - - (19,718) - - - - - -
Net income (loss) 3,176 (19,079) 1,671 (169) (1,042)
OTHER DATA:
Gross margin percentage 19.9% 18.5% 18.8% 18.3% 20.9%
EBITDA (1) $ 19,124 $ 15,304 $ 19,244 $ 18,072 $ 16,297
EBITDA margin percentage 11.9% 9.6% 13.3% 10.2% 8.9%
Cash provided by operating activities $ 7,376 $ 8,770 $ 6,515 $ 7,522 $ 12,812
Cash used in investing activities (4,458) (2,587) (2,219) (4,980) (3,133)
Cash used in financing activities (3,064) (6,587) (3,885) (2,495) (9,731)
Depreciation and amortization (2) 3,060 3,385 5,246 5,931 5,564
Capital expenditures 1,059 2,498 2,314 3,125 2,638
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (3) $ 20,107 $ 20,136 $ 21,499 $ 18,554 $ 15,781
Total assets 76,945 79,424 104,586 116,960 118,212
Total debt 94,948 97,914 104,501 107,338 106,910
Total stockholders' equity (deficiency) (36,484) (37,753) (17,724) (19,109) (18,940)
RECONCILIATION OF NET INCOME (LOSS) TO EBITDA
Net income (loss) $ 3,176 $ (19,079) $ 1,671 $ (169) $ (1,042)
Depreciation 2,769 2,348 2,546 3,126 2,868
Amortization 291 1,037 2,700 2,805 2,696
Interest expense, net 10,732 10,789 11,436 11,944 12,416
Minority interest - - - - (133) (19) - -
Other nonoperating expense, net 141 185 39 52 2
Recovery on disposal of Faulkner Manufacturing, net - - (62) (79) (277) (263)
Extraordinary loss on early extinguishment of debt, net - - - - - - 484 - -
Cumulative effect of change in accounting principle - - 19,718 - - - - - -
Income tax expense (benefit) 2,015 368 1,064 126 (380)
---------- ---------- ---------- ---------- ----------
EBITDA 19,124 15,304 19,244 18,072 16,297
- ----------
(1) EBITDA, as calculated by the Company, may not be similar to the method
used by other companies. Airxcel has included information concerning
EBITDA because it is relevant for covenant analysis under the
Indenture, which defines EBITDA as set forth above for the periods
shown, and is presented because it is used by certain investors as a
measure of a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
or other consolidated income or
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cash flow data prepared in accordance with accounting principles
generally accepted in the United States or as a measure of a company's
profitability or liquidity.
(2) Excludes depreciation and amortization related to the discontinued
Faulkner manufacturing division.
(3) Working capital represents current assets less current liabilities,
including net liabilities of the discontinued Faulkner manufacturing
division of $0, $0, $100, $228, and $662 as of December 31, 2003,
2002, 2001, 2000, and 1999, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of the financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Continuously, the Company evaluates its estimates which
are based on various assumptions and historical experience. Actual results may
differ from these estimates depending upon a variety of factors.
The Company recognizes revenue and related direct expenses when the
merchandise is shipped. Other operating expenses are recognized as incurred.
An allowance for doubtful accounts is maintained for uncollectible accounts
receivable. An analysis of the historical bad debts and customers' payment
trends are performed to evaluate the adequacy of the allowance for doubtful
accounts. The accounts receivable balance was $13.5 million, net of allowance
for doubtful accounts of $.6 million as of December 31, 2003. In the event the
Company's customers are unable to make required payments, revisions to the
allowance for doubtful accounts would be required.
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 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 as of
the January 1, 2002 date of adoption, 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 impairment, net of tax, of
$19,718,000, which was recorded as a cumulative effect of a change in accounting
principle in the accompanying 2002 consolidated statement of operations. Annual
reviews for impairment performed by the company in the fourth quarters of 2002
and 2003 indicated no further impairment of goodwill or other indefinite lived
assets.
The Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" as of January 1, 2002. This standard supercedes both SFAS
No. 121 "Accounting for the
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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.
While the Company continually monitors the quality of the products it
produces, occasionally product failures occur. 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. At December 31, 2003, the
warranty reserve balance was $2.2 million. Should actual product failure rates
differ from the Company's estimates, a revision to the warranty obligation would
be required.
The Company reserves for obsolete inventory based upon assumptions of
future product requirements of its customers. If actual requirements of its
customers differ from the Company's estimates, additional inventory write offs
may be required.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net Sales. Net sales increased 1.3% from $159.1 million in 2002 to $161.2
million in 2003. Net sales increased primarily due to volume growth within the
RV industry.
Gross Profit. Gross profit increased 9.2% from $29.4 million (19% of net
sales) in 2002 to $32.1 million (20% of net sales) in 2003. The increase was
principally due to cost reduction efforts and the effects of higher volumes,
particularly in the RV industry.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expenses decreased 8.0% from $17.5 million (11% of net sales) in 2002 to $16.1
million (10% of net sales) in 2003, primarily due to decreased amortization
expense related to intangible assets becoming fully amortized and efforts to
reduce certain fixed and other costs.
Interest Expense. Interest expense decreased 0.5% from $10.8 million in
2002 to $10.7 million in 2003 primarily due to reductions in average long term
borrowings outstanding resulting from positive operating cash flows, and
decreased average interest rates on outstanding borrowings.
EBITDA. EBITDA was $15.3 million in 2002 and $19.1 million in 2003. The
increase is primarily due to the increased gross profit and decreased selling,
general and administrative expenses as described above.
Income from continuing operations before income tax expense and cumulative
effect of change in accounting principle. Income from continuing operations
before income tax expense and cumulative effect of change in accounting
principle increased from $.9 million in 2002 to $5.2 million in 2003 primarily
due to the increased gross profit and decreased selling, general and
administrative expense as described above.
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Cumulative effect of change in accounting principle. Cumulative effect of
change in accounting principle decreased as a result of the adoption in 2002 of
SFAS No. 142, and the impairment charges recorded in 2002, as further discussed
in Note 2(g) of the notes to the consolidated financial statements.
Net income (loss). Net income (loss) improved from a net loss of $19.1
million in 2002 to a net income of $3.2 million in 2003 primarily as a result of
the cumulative effect of change in accounting principle recorded in 2002, with
no impairment losses recorded in 2003, and the conditions resulting in the
increased income from continuing operations as described above.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales. Net sales increased 9.6% from $145.1 million in 2001 to $159.1
million in 2002. Net sales increased primarily due to volume growth within the
RV industry.
Gross Profit. Gross profit increased 7.7% from $27.3 million (19% of net
sales) in 2001 to $29.4 million (19% of net sales) in 2002. The increase was
principally due to the increased sales volume.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expenses decreased 4.4% from $18.3 million (13% of net sales) in 2001 to $17.5
million (11% of net sales) in 2002, 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. In
addition, the decrease in selling, general and administrative expense as a
percentage of sales is due to the relatively fixed nature of many of these
costs.
Accrued litigation (income) expense. Accrued litigation income decreased as
a result of the settlement of the litigation in 2001 as described in Note 11 of
the notes to the consolidated financial statements.
Interest Expense. Interest expense decreased 5.3% from $11.4 million in
2001 to $10.8 million in 2002 primarily due to reductions in average long term
borrowings outstanding resulting from improved operating cash flows and
decreased average interest rates on outstanding borrowings.
EBITDA. EBITDA was $19.2 million in 2001 and $15.3 million in 2002. The
decrease is primarily due to the decreased accrued litigation income as
described above offset by increased gross profit associated with higher sales
volumes.
Income from continuing operations before income tax expense and cumulative
effect of change in accounting principle. Income from continuing operations
before income tax expense and cumulative effect of change in accounting
principle decreased from $2.7 million in 2001 to $.9 million in 2002, primarily
due to decreased accrued litigation income as described above offset by the
effects of increased gross profit on higher sales volumes and lower amortization
expense associated with intangible assets.
Cumulative effect of change in accounting principle. Cumulative effect of
change in accounting principle increased as a result of the adoption of SFAS No.
142, in 2002 and the
Page 12 of 49
impairment charges recorded as further discussed in Note 2(g) of the notes to
the consolidated financial statements.
Net income (loss). Net income (loss) decreased from net income of $1.7
million in 2001 to a net loss of $19.1 million in 2002 primarily as a result of
the cumulative effect of change in accounting principle and the conditions
resulting in the decreased income from continuing operations as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $7.4 million in net cash flow from operating
activities for the year ended December 31, 2003 compared to $8.8 million for
2002, the decrease primarily the result of higher working capital requirements
on increased sales, which in turn generated higher gross profit.
Capital expenditures were $1.1 million, $2.5 million, and $2.3 million for
the years ended December 31, 2003, 2002, and 2001, respectively. The
expenditures include the normal replacement of machinery, equipment and tooling
for new products and existing product improvements. Capital expenditures for
2004 are expected to be $2.3 million.
Approximately $3.5 million was used in 2003 to purchase the notes
originally issued by Holdings as discussed further in note 1 to the consolidated
financial statements.
The Company's revolving credit facility with the bank, which matures June
29, 2005, is limited to the lessor of $25 million or the sum of 85% of net
accounts receivable and 60% of net inventories. The outstanding borrowing on the
credit facility at December 31, 2003 is $4.7 million which is approximately $2.9
million less that that outstanding at December 31, 2002, the net repayment made
possible from improved operating cash flows in 2003. Interest on the revolving
credit facility is based on the lower of either the bank's base rate or LIBOR
rate plus 2% (3.15% combined rate at December 31, 2003).
In addition to the revolving credit facility, the Company is party to
senior subordinated notes which mature on November 15, 2007. The $90.0 million
in notes payable bear interest at 11%, payable semiannually in May and November.
Additionally, the Company has an outstanding note payable to an individual
for a land purchase totaling $.2 million at December 31, 2003, which matures in
2007.
The Company is also party to capital lease obligations for machinery and
equipment and furniture and fixtures, which expire in 2007. Total outstanding
capital lease obligations at December 31, 2003 are $.1 million.
The Company leases certain buildings, machinery and equipment, office
equipment and vehicles which are accounted for as operating leases. Some leases
include renewal options and others contain purchase options. Total future
commitments under the operating lease agreements amount to $1.4 million as of
December 31, 2003.
The Company is a wholly-owned subsidiary of Holdings. Holdings has no
operating activities and no material assets other than its investment in the
Company. Accordingly, Holdings is dependent upon the Company for any cash
requirements. Holdings has 9,076,923
Page 13 of 49
shares of $1 par value Series A and Series B exchangeable preferred stock
outstanding as of December 31, 2003. The Preferred stock which is exchangeable
at the option of Holdings for junior subordinated notes issued by Holdings is
subject to mandatory redemption by Holdings on November 10, 2008 for an amount
equal to the original proceeds from sale of the stock plus accrued but unpaid
dividends which accrue at 14% annually. Total proceeds plus accrued and unpaid
dividends are $24.5 million as of December 31, 2003. The Company is not required
to fund the mandatory redemption of these preferred shares.
Holdings also previously issued $4.0 million of junior subordinated notes
to the parent company of a major stockholder, in exchange for cash, which are
due in November 2008. These notes bear interest at 14% payable semiannually in
the form of additional junior subordinated notes or cash at the election of
Holdings. Such notes and accrued interest totaled $11.0 million as of December
31, 2003. As part of the Marvair acquisition in 1997, Holdings issued $5.3
million of junior subordinated notes (the "PIK Notes") to the seller. The PIK
notes, which are due in November 2008, bear interest at 11.4% payable annually
in the form of additional junior subordinated notes or cash at the election of
Holdings. The PIK notes, and accrued interest, totaled $9.3 million as of
December 31, 2003. In February 2003, the Company purchased all of the PIK Notes
from the holders of the PIK Notes for an aggregate purchase price of $3.4
million. Although the Company may determine to distribute the PIK 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. Although Holdings is entirely
dependent upon the Company to service its note obligations and the mandatory
redemption provisions of the preferred stock, Holdings would not require cash
distributions from the Company for debt service until at least 2008 based upon
the stated intent of Holdings' management to elect to make interest payments due
on all such notes in the form of additional junior subordinated notes.
All of the obligations of Holdings described above are uncollateralized and
are not guaranteed by the Company, however, the Company is currently exploring
various options to satisfy these obligations on behalf of Holdings.
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 credit facility also
contains a subjective acceleration clause. The Company was in compliance with
these ratios at December 31, 2003 and 2002. The Company anticipates that they
will continue to comply in 2004 with the financial covenants. 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 2004. 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
amendments or waivers 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
Page 14 of 49
operating requirements. However, this is dependent upon the future performance
of the Company and its subsidiaries which, in turn, is subject to general
economic conditions and to financial, business and other factors, including
factors beyond the Company's control.
The Company did not have any other relationships with unconsolidated
entities or financial partnerships, such entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, the Company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the Company were engaged in such relationships.
On January 6, 2004 the Company entered into a letter of credit totaling
$1.2 million. On March 5, 2004 the Company also amended an existing letter of
credit to decrease the amount to $1.1 million. The letters of credit obligate
the Company to make payment in the event of default on the agreements with the
insurance companies 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 these instruments is zero.
INFLATION
Results of operations have not been significantly affected by inflation
since inception. The Company, in the normal course of business, has been able to
offset the impact of increased costs through operating efficiencies and selected
price increases.
FORWARD-LOOKING INFORMATION
Except for the historical financial information contained herein, this Form
10-K contains certain forward-looking statements. For this purpose, any
statements contained in this Form 10-K that are not statements of historical
fact may be 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, demographic and political
changes, prevailing interest rates or fuel prices, or the occurrence of
unusually severe weather conditions, overall consumer confidence and general
economic conditions, the level of discretionary consumer spending, government
regulation, and unemployment that can affect both the purchase and usage of the
products that the Company sells.
ITEM 7A. 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 3.7% per annum, a 1% increase in market interest rates would increase
interest expense and decrease earnings before income taxes by approximately
$47,000 annually.
Page 15 of 49
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.
Page 16 of 49
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Airxcel, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Airxcel, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations and comprehensive income (loss),
stockholder's equity (deficiency), and cash flows for the years then ended. Our
audits also included the financial statement schedule for 2003 and 2002 listed
in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Airxcel, Inc. and Subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for 2003
and 2002, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 6, 2004, except for Note 4 as
to which the date is March 24, 2004
Page 17 of 49
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of
Airxcel, Inc.
In our opinion, the consolidated statement of operations, statement of
stockholder's equity (deficiency), and statement of cash flows for the year
ended December 31, 2001, present fairly, in all material respects, the results
of operations and cash flows of Airxcel, Inc. and its subsidiaries for the year
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 13, 2002, except with respect to the 2001 transitional
disclosures relating to the adoption of Statement of Financial
accounting Standards No.142 as described in Note 2, as to
which date is January 1, 2002
Page 18 of 49
AIRXCEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 33 $ 179
Accounts receivable, net of allowances for doubtful
accounts of $550 and $314 in 2003 and 2002, respectively 13,472 11,171
Inventory 19,811 22,498
Prepaid expenses and other current assets 409 387
Deferred income taxes 2,533 3,552
------------ ------------
Total current assets 36,258 37,787
------------ ------------
Deferred income taxes 2,233 4,096
Property, plant and equipment, net 15,906 17,725
Loan financing costs, net 1,583 1,956
Other identifiable intangible assets, net 1,645 1,987
Goodwill and other indefinite lived intangible assets 15,873 15,873
Notes receivable from Holdings 3,447 - -
------------ ------------
Total assets $ 76,945 $ 79,424
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 64 $ 81
Accounts payable 7,021 9,097
Warranty reserve 2,186 1,905
Accrued interest 1,243 1,239
Accrued payroll 2,620 3,357
Pension liability 494 398
Other accrued expenses 2,523 1,574
------------ ------------
Total current liabilities 16,151 17,651
Pension liability 2,394 1,693
Long-term debt, less current portion 94,884 97,833
------------ ------------
Total liabilities 113,429 117,177
------------ ------------
Commitments and contingencies (see Notes 1 and 4)
Stockholder's equity (deficiency):
Common stock, par value $1; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (62,391) (64,091)
Accumulated other comprehensive loss (1,416) (985)
------------ ------------
Total stockholder's equity (deficiency) (36,484) (37,753)
------------ ------------
Total liabilities and stockholder's equity (deficiency) $ 76,945 $ 79,424
============ ============
See accompanying notes.
Page 19 of 49
AIRXCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Years Ended
------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Net sales $ 161,213 $ 159,111 $ 145,144
------------ ------------ ------------
Cost of goods sold 129,073 129,693 117,867
------------ ------------ ------------
Gross profit 32,140 29,418 27,277
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 15,785 16,462 15,628
Amortization of intangible assets and computer
software 291 1,037 2,700
Accrued litigation income - - - - (5,049)
------------ ------------ ------------
Total operating expenses 16,076 17,499 13,279
------------ ------------ ------------
Income from operations 16,064 11,919 13,998
Interest expense 10,732 10,789 11,436
Minority interest - - - - (133)
Other expense, net 141 185 39
------------ ------------ ------------
Income from continuing operations before income
tax expense and cumulative effect of change
in accounting principle 5,191 945 2,656
Income tax expense 2,015 368 1,064
------------ ------------ ------------
Income from continuing operations before
cumulative effect of change in accounting principle 3,176 577 1,592
Discontinued operations:
Recovery on disposal of Faulkner Manufacturing
less applicable income tax expense of
$0, $38, and $49, respectively - - 62 79
------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 3,176 639 1,671
Cumulative effect of change in accounting principle,
net of income taxes of $10,130 - - (19,718) - -
------------ ------------ ------------
Net income (loss) 3,176 (19,079) 1,671
Other comprehensive loss:
Minimum pension liability, net of tax of $270
$595, and $22, respectively (431) (950) (35)
------------ ------------ ------------
Comprehensive income (loss) $ 2,745 $ (20,029) $ 1,636
============ ============ ============
See accompanying notes.
Page 20 of 49
AIRXCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
(in thousands, except shares)
Accumulated
Common Stock Additional Other
--------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Loss Total
------ ------ ---------- ----------- ------------- ----------
Balances, January 1, 2001 1,000 $ 1 $ 26,946 $ (46,056) $ - - $ (19,109)
Relinquishment of minority
interest - - - - 376 - - - - 376
Net income - - - - - - 1,671 - - 1,671
Dividend to parent - - - - - - (627) - - (627)
Minimum pension liability, net
of tax - - - - - - - - (35) (35)
------ ------ ---------- ----------- ------------- ----------
Balances, December 31, 2001 1,000 1 27,322 (45,012) (35) (17,724)
Net loss - - - - - - (19,079) - - (19,079)
Minimum pension liability, net
of tax - - - - - - - - (950) (950)
------ ------ ---------- ----------- ------------- ----------
Balances, December 31, 2002 1,000 1 27,322 (64,091) (985) (37,753)
Net income - - - - - - 3,176 - - 3,176
Dividend to parent - - - - - - (1,476) - - (1,476)
Minimum pension liability, net
of tax - - - - - - - - (431) (431)
------ ------ ---------- ----------- ------------- ----------
Balances, December 31, 2003 1,000 $ 1 $ 27,322 $ (62,391) $ (1,416) $ (36,484)
====== ====== ========== =========== ============= ==========
See accompanying notes.
Page 21 of 49
AIRXCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
--------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,176 $ (19,079) $ 1,671
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,769 2,348 2,546
Amortization of intangible assets and computer
software 291 1,037 2,700
Amortization of loan financing costs 466 433 432
Provision for bad debts 213 25 (20)
Recovery on disposal of discontinued operations - - (100) (128)
Deferred income taxes 1,681 (8,686) 1,619
(Gain) loss on sale of property, plant and equipment 60 90 (20)
Loss on disposition of intangible asset 52 - - - -
Minority interest in earnings of subsidiaries - - - - (133)
Impairment write off of goodwill and trademark costs - - 29,848 - -
Impairment write off of patent and license agreement costs - - 65 - -
Changes in operating assets and liabilities:
Accounts receivable (2,514) (378) 3,926
Inventory 2,687 (337) 4,036
Prepaid expenses and other assets (22) 104 1,456
Accounts payable (2,076) 1,590 (2,426)
Accrued expenses and other liabilities 593 1,810 (9,144)
------------ ------------ ------------
Net cash provided by operating activities 7,376 8,770 6,515
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 49 3 101
Capital expenditures (1,059) (2,498) (2,314)
Patent costs incurred (1) (92) (6)
Purchase of notes receivable from Holdings (3,447) - - - -
------------ ------------ ------------
Net cash used in investing activities (4,458) (2,587) (2,219)
------------ ------------ ------------
Cash flows from financing activities:
Cash overdraft - - - - (419)
Proceeds from long-term obligations 152,214 156,004 149,152
Principal payments on long-term debt (155,180) (162,591) (151,975)
Financing costs incurred (93) - - (16)
Dividend to parent (5) - - (627)
------------ ------------ ------------
Net cash used in financing activities (3,064) (6,587) (3,885)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (146) (404) 411
Cash and cash equivalents, beginning of year 179 583 172
------------ ------------ ------------
Cash and cash equivalents, end of year $ 33 $ 179 $ 583
============ ============ ============
Page 22 of 49
AIRXCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Years Ended
---------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 10,197 $ 10,375 $ 11,059
Income taxes, net (215) (1,439) (1,711)
Supplemental disclosure of noncash investing and financing activities:
Reduction in tax basis of certain assets in connection
with the purchase of notes receivable from Holdings,
treated as dividend to parent $ 1,471 $ - - $ - -
============ ============ ============
See accompanying notes.
Page 23 of 49
AIRXCEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Airxcel, Inc., formerly known as Recreation Vehicle Products, Inc. (the
"Company") is engaged in designing, manufacturing and marketing recreation
vehicle air conditioning equipment in the United States, Canada and certain
international markets. On November 10, 1997, the Company acquired substantially
all of the net assets, properties and rights and assumed certain related
liabilities of Crispaire Corporation, currently operating as Marvair
("Marvair"), a division of Airxcel, Inc., which designs, manufactures and
markets specialty wall mount air conditioners, packaged terminal air
conditioners with gas heat, environmental control units, heat pumps for the
heating, ventilating and air conditioning industry and marine reverse cycle air
conditioners. Marvair markets its products to companies involved in modular
construction, telecommunications, utilities, pleasure yacht manufacturers and
school districts located throughout the United States and selected foreign
markets. On March 17, 1998 the Company acquired 100% of the outstanding stock of
Suburban Manufacturing Company, formerly KODA Enterprises Group, Inc.
("Suburban"). Suburban, a wholly-owned subsidiary is 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. On November 3, 2000 the Company acquired substantially
all of the net assets, properties and rights and assumed certain related
liabilities of Instafreeze, Inc., currently operating as Insta Freeze ("Insta
Freeze"), a division of Airxcel, Inc., which designs and manufactures
low-voltage, compressor refrigeration units for the recreation vehicle, marine
and ambulance manufacturing industries. 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.
The Company is a wholly-owned subsidiary of Airxcel Holdings Corporation,
formerly known as RV Holdings Corporation ("Holdings"). The Company is the only
subsidiary of Holdings and Holdings has no operating activities and no material
assets other than its investment in the Company. Accordingly, Holdings is
dependent upon the Company for any cash requirements. However, Holdings does
have 1,544,237 shares of $.01 par value common stock and 9,076,923 shares of $1
par value Series A and Series B exchangeable preferred stock outstanding as of
December 31, 2003 and 2002. The Preferred stock which is exchangeable at the
option of Holdings for junior subordinated notes issued by Holdings is also
subject to mandatory redemption by Holdings on November 10, 2008 for an amount
equal to the original proceeds from sale of the stock plus accrued but unpaid
dividends which accrue at 14% annually. Total proceeds plus accrued and unpaid
dividends were $24,209, $21,354, and $18,618 as of December 31, 2003, 2002 and
2001, respectively. All proceeds generated from the sale of such common and
preferred shares have been contributed to the Company. However, the Company is
not required to fund the mandatory redemption of these preferred shares. During
1996, Holdings also issued $4,015 of junior subordinated notes to the parent
company of a major stockholder in exchange for cash. All proceeds from the
issuance of these notes have been contributed to the Company. These notes, which
are due in November, 2008, bear interest at 14% payable semiannually in the form
of additional junior subordinated notes or cash at the election of Holdings.
Such notes, plus accrued interest totaled $10,998, $9,589, and $8,360 as of
December 31, 2003, 2002 and 2001, respectively. As part of the
Page 24 of 49
November 10, 1997 Airxcel acquisition of Marvair, Holdings issued $5,304 of
junior subordinated notes (the "PIK Notes") to the seller. The proceeds of the
PIK Notes and $3,100 of cash received by Holdings through the sale of its common
stock was contributed by Holdings to the Company. The PIK notes, which are due
in November, 2008, bear interest at 11.4% payable annually in the form of
additional junior subordinated notes or cash at the election of Holdings. Such
notes, plus accrued interest, totaled $9,259, $8,299 and $7,439 as of December
31, 2003, 2002 and 2001, respectively. On February 19, 2003, the Company
purchased the notes originally issued by Holdings from the holders for an
aggregate purchase price of $3,447. These notes, which are reported at cost as
notes receivable from Holdings on the accompanying 2003 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 of the
Company's assets and has been reflected in the accompanying consolidated
financial statements as a non-cash distribution to Holdings and a decrease in
deferred income tax assets.
In August 1996, Airxcel Holdings Corporation and Subsidiary consummated
exchange offers and adopted amendments to its Restated Certificate of
Incorporation pursuant to which the outstanding debt and common stock were
restructured (the "Recapitalization"). The objective of the Recapitalization was
to refinance existing indebtedness and pay fees and expenses associated with the
Recapitalization. As a part of the Recapitalization, new debt was issued
including a senior subordinate note. This note was issued with detachable stock
warrants to purchase 65,882 shares of Class B Common Stock of Holdings at $.02
per share at any time on or before August 22, 2006. The exercise price is
subject to adjustment from time to time in order to prevent dilution of the
rights granted under the warrants. The holders of these warrants are entitled to
receive dividend payments as if the warrants were exercised immediately prior to
the date of record for such dividends. The estimated fair value of the warrants
at the date of issuance has been recognized as a reduction of the note payable
(as debt discount) in the amount of $218 with the offset to additional paid-in
capital on Holdings financial statements. On April 3, 1998 new warrants were
issued for 229,662.50 shares of Class B Common Stock of Holdings at $.01 per
share at any time on or before April 30, 2008. The new warrants are entitled to
the same rights as the existing warrants. Proceeds from the issuance of warrants
of $765 were contributed by Holdings to the Company.
2. SIGNIFICANT ACCOUNTING POLICIES:
a. Management's Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
b. Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and accounts are eliminated in
consolidation.
c. Revenue Recognition: Revenue and related direct expenses are recognized
when the merchandise is shipped. Other operating expenses are recognized as
incurred.
Page 25 of 49
d. Cash and Cash Equivalents: The Company classifies as cash and cash
equivalents amounts on deposit in banks and cash invested temporarily in various
instruments with maturities of three months or less at time of purchase.
e. Inventories: Inventories are stated at the lower of cost or market.
Costs are based on standards which approximate the first-in, first-out (FIFO)
method.
f. Property, Plant and Equipment: Property, plant and equipment are
recorded at cost and depreciated on a straight-line basis over their estimated
useful lives as follows:
Buildings and building improvements 15-45 years
Furniture and fixtures 4-10 years
Machinery and equipment 3-15 years
Expenditures for repairs and maintenance are charged to operations as
incurred. Expenditures which materially increase values, change capacities or
extend useful lives of the related asset are capitalized. The cost of an asset
and the related accumulated depreciation is removed from the appropriate
accounts upon sale of the asset. The resulting gain or loss from the sale is
included in operations.
g. 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 requires 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 reclassified to
goodwill in accordance with SFAS No. 142. Other tradenames 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 as of the January 1, 2002 date of
adoption, 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 there was
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 consolidated statement of
operations. Annual reviews for impairment performed by the company in the fourth
quarters of 2002 and 2003 indicated no further impairment of goodwill or other
indefinite lived assets.
Page 26 of 49
Intangible assets, which are amortized on a straight-line basis over their
estimated economic lives, are as follows:
Amortization December 31, December 31
Period 2003 2002
------------ ------------ -----------
Intangible assets subject to amortization:
Gross carrying amount:
Computer software 5 years $ 712 $ 712
Tradename 50 years 1,454 1,454
Patents 5 - 7 years 3,706 3,705
License agreements 10 years 400 475
------------ -----------
Subtotal 6,272 6,346
Accumulated amortization:
Computer software $ 587 $ 463
Tradename 367 339
Patent 3,543 3,451
License agreements 130 106
------------ -----------
Subtotal 4,627 4,359
------------ -----------
Net intangible assets subject to amortization $ 1,645 $ 1,987
============ ===========
Intangible assets not subject to amortization:
Goodwill $ 12,973 $ 12,973
Trademarks 2,900 2,900
------------ -----------
Subtotal $ 15,873 $ 15,873
============ ===========
Amortization of finite lived intangible assets for the years ended December
31, 2003, 2002 and 2001 was $291, $829, and $983, respectively. Amortization for
the remaining amount of finite lived intangible assets, as of December 31, 2003,
is expected to be $272 in 2004, $105 in 2005, $77 in 2006, $75 in 2007, and $75
in 2008.
The following pro forma table reflects the effects of the adoption of SFAS
No. 142 on income to exclude amortization on goodwill and indefinite lived
intangible assets, net of any related tax effects.
December 31, 2001
-----------------
Income before cumulative effect of change in accounting principle,
as originally reported $ 1,671
Add back after-tax effect of:
Goodwill amortization 962
Trademark amortization 343
-------------
Income before cumulative effect of change in accounting principle $ 2,976
=============
Net income, as originally reported $ 1,671
Add back after-tax effect of:
Goodwill amortization 962
Trademark amortization 343
-------------
Net income as adjusted $ 2,976
=============
h. Impairment of Long Lived Assets: On January 1, 2002, the Company adopted
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
This standard supercedes both
Page 27 of 49
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. During 2002 the Company determined that certain patent and license
agreement costs, based on a present value valuation, were impaired. An
impairment charge of $65 was recognized and included in other expense. No
impairment charges were recorded in 2003.
i. Loan Financing Costs: Loan financing costs are amortized using the
effective yield method over the contracted terms of the related debt.
j. Income Taxes: The Company and its parent file a consolidated federal
income tax return. Deferred income taxes are recorded to reflect the tax
consequences in future years of operating loss carry forwards and temporary
differences between the tax basis of assets and liabilities and their financial
reporting amounts using enacted tax rates for the years in which these items are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is comprised of the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
k. Concentration of Credit Risk. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. The credit risk on trade receivables is controlled through credit
approvals, limits and monitoring procedures. Trade receivables are generally due
within 30 days. The majority of the Company's trade receivables are from
customers in the RV industry. Credit losses are provided for in the accompanying
consolidated financial statements and historically have been insignificant. The
Company's ten largest customers accounted for approximately 57%, 58% and 50% of
net sales for the years ended December 31, 2003, 2002 and 2001, respectively,
and approximately 38% and 46% of accounts receivable at December 31, 2003 and
2002, respectively. Sales to customers in excess of 10% of consolidated net
revenues are as follows:
December 31, December 31, December 31,
Customer 2003 2002 2001
------------ ------------ ------------
A. $ 19,186 $ 18,604 $ 14,400
B. 17,929 18,279 14,080
The Company maintains its cash accounts primarily with major financial
institutions, and had bank balances at December 31, 2003 and 2002 that exceeded
FDIC insurance limits by $0 and $53, respectively.
l. Advertising: The Company expenses advertising costs when the expense is
incurred and classifies it in selling, general and administrative expense. Total
advertising expense amounts to $204, $354, and $361 in 2003, 2002, and 2001,
respectively.
Page 28 of 49
m. Shipping and Handling Costs: The Company records charges to customers
for shipping and handling as sales, and costs incurred by the Company as cost of
goods sold.
n. Fair Value of Financial Instruments: The stated values of financial
instruments as of December 31, 2003, 2002 and 2001, excluding the $90 million of
senior subordinated notes, approximate fair market value. The fair value of the
Company's senior subordinated notes is $84.6 million at December 31, 2003 based
on the quoted market price for the same issue or similar issues.
o. Collective Bargaining Agreement: As of December 31, 2003, the Company
had 889 employees of which 37% were represented by a bargaining agreement that
expires October 6, 2006.
3. SUMMARY BALANCE SHEET DATA:
Inventory consists of the following:
December 31, December 31,
2003 2002
------------ ------------
Raw materials $ 8,744 $ 9,431
Work-in-process 2,013 2,104
Finished goods 9,054 10,963
------------ ------------
$ 19,811 $ 22,498
============ ============
Property, plant and equipment, including amounts under capital leases,
consist of the following:
December 31, December 31,
2003 2002
------------ ------------
Land and land improvements $ 1,222 $ 1,235
Buildings and building improvements 8,021 7,873
Machinery and equipment 23,225 22,592
Furniture and fixtures 1,733 1,665
Construction in process 362 440
------------ ------------
34,563 33,805
Less accumulated depreciation (18,657) (16,080)
------------ ------------
Net $ 15,906 $ 17,725
============ ============
Page 29 of 49
4. LONG-TERM DEBT:
Long-term debt consists of the following:
December 31, December 31,
2003 2002
------------ ------------
Note payable to bank under a $25,000 revolving line
of credit, maturing on June 29, 2005, with interest at
the lower of the bank's base rate or Libor plus 2%
(3.15% at December 31, 2003) payable monthly. $ 4,702 $ 7,583
Senior subordinated notes, with interest at 11% payable
semiannually on May 15 and November 15, commencing on
May 15, 1998, due November 15, 2007 90,000 90,000
Note payable to individual for land purchase, with interest
at 7.5%, due in monthly principal and interest payments
of $4 through April 1, 2007, collateralized by the land 154 195
Capital leases 92 136
------------ ------------
94,948 97,914
Current portion of long term debt (64) (81)
------------ ------------
$ 94,884 $ 97,833
============ ============
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, as defined. The
credit facility also contains a subjective acceleration clause and a requirement
to maintain a lock-box or other account by which the bank can apply cash
receipts against the revolver balance. On March 24, 2004, the credit facility
was amended to not require a lock-box or other account by which the bank can
apply cash receipts against the revolver balance unless an event of default
occurs. As such, amounts outstanding under this revolving line of credit are
classified as long-term liabilities on the accompanying consolidated balance
sheets, as the application of the subjective acceleration is not anticipated.
The credit facility is collateralized by accounts receivable, equipment, general
intangibles, inventory, and investment property. The Company was in compliance
with these ratios at December 31, 2003 and 2002. The Company anticipates that
they will continue to comply in 2004 with the financial covenants based on
estimates of working capital levels and operating profitability included in
management's current business plan for 2004. The achievement of this plan is
necessary to comply with the various financial covenants during 2004. 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 amendments or waivers will be obtained.
The Company may redeem the senior subordinated notes, in whole or in part,
at any time on or after November 15, 2002, at redemption prices ranging from 100
to 105.5% of the principal being paid based on the redemption periods defined in
the agreement. The aforementioned notes are uncollateralized and contain, among
other things, certain financial covenants and restrictive provisions pertaining
to the use of funds, payment of dividends and ability to incur obligations.
Page 30 of 49
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirement is dependent upon the future
performance of the Company and its subsidiaries which, in turn, is subject to
general economic conditions and to financial, business and other factors,
including factors beyond the Company's control.
Principal maturities of long-term debt, and capital lease amortization,
based on balances outstanding at December 31, 2003 for each of the five
succeeding years are as follows:
Capital Leases
---------------------------------------------
Long-term Minimum Net Present
Debt Lease Payment Interest Value Total
--------- ------------- -------- ----------- ----------
2004 40 29 5 24 64
2005 4,749 29 3 26 4,775
2006 50 29 2 27 77
2007 90,017 15 - - 15 90,032
2008 - - - - - - - - - -
--------- ------------- -------- ----------- ----------
$ 94,856 $ 102 $ 10 $ 92 $ 94,948
========= ============= ======== =========== ==========
Property, plant and equipment include the following amounts for capital
leases:
December 31, December 31,
2003 2002
------------ ------------
Machinery and equipment $ 200 $ 200
Furniture and fixtures 136 136
------------ ------------
336 336
Less accumulated depreciation (203) (158)
------------ ------------
Net property, plant and equipment $ 133 $ 178
============ ============
5. STOCK OPTION PLANS:
On May 23, 2000, Holdings adopted a Stock Option Plan for key employees
and/or directors of the Company to purchase up to 324,667.37 shares of Class A
Common Stock of Holdings at $1 per share. When granted, the stock options may be
exercised after the "trigger date", and will expire at the earlier of 15 years
from the date the plan is adopted or the date the employee ceases to be an
employee of the company. As defined in the Stock Option Plan, the "trigger date"
is the date on which the majority shareholder of Holdings has disposed of 60% or
more of the securities held by it on January 1, 1998 (i.e. common stock,
preferred stock and notes purchased by the majority shareholder) for cash and/or
marketable securities. The number of stock options that may be exercised is
based on the estimated annual interest rate of return as of the trigger date as
set forth in the plan agreement. No compensation expense relating to this stock
option plan will be recorded until the trigger date.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148 "Accounting for Stock Based Compensation-Transition
and Disclosure", the Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options
granted to the Company's employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company has not recorded any
compensation expense for the years ended December 31, 2003, 2002, and 2001.
Page 31 of 49
6. INCOME TAXES:
The significant components of the net deferred income tax asset (liability)
recognized in the accompanying consolidated balance sheets are as follows:
December 31, December 31,
2003 2002
------------ ------------
Accrued reserves and liabilities 3,442 $ 2,481
Depreciation (3,923) (2,610)
Intangibles 5,247 6,091
AMT tax credit carry forwards - - 310
Federal net operating loss carry forwards, expiring
beginning in 2021 - - 816
State income tax net operating loss carry forwards,
expiring beginning 2010 - - 560
------------ ------------
4,766 7,648
Less current deferred income taxes 2,533 3,552
------------ ------------
Total non-current deferred income taxes $ 2,233 $ 4,096
============ ============
The components of income tax (benefit) expense from continuing operations,
exclusive of taxes related to the extraordinary items and cumulative effect of
change in accounting principle, are as follows:
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Current $ 707 $ (1,038) $ (505)
Deferred 1,308 1,406 1,569
------------ ------------ ------------
Income tax expense $ 2,015 $ 368 $ 1,064
============ ============ ============
Income tax expense from continuing operations differed from the amounts
computed by applying the federal statutory rate to pretax income as follows:
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Income tax expense computed by applying
the federal statutory rate $ 1,763 $ 321 $ 930
Minority interest - - - - (46)
State income taxes, net of federal income tax
benefit 238 43 94
Nondeductible amortization expense - - - - 167
Other 14 4 (81)
------------ ------------ ------------
Income tax expense from continuing operations $ 2,015 $ 368 $ 1,064
============ ============ ============
7. COMMITMENTS:
The Company leases buildings, machinery and equipment, office equipment and
vehicles which are accounted for as operating leases. Some leases include
renewal options and others contain purchase options. Total rental expense for
operating leases was $635, $779 and $823 for the years ended December 31, 2003,
2002 and 2001, respectively.
Page 32 of 49
Commitments for future minimum lease payments under noncancellable leases as
of December 31, 2003 are as follows:
Operating
Leases
---------
2004 $ 573
2005 344
2006 279
2007 223
---------
$ 1,419
=========
8. BENEFIT PLAN:
Substantially all employees of the RV Products division and the Marvair
division are eligible to participate in the 401(k) plans offered by each
company. Subject to certain conditions, the divisions may match up to 30% of the
employees' contributions, respectively, up to a maximum of 6% of the employees'
annual salary. In addition, the divisions can make an additional contribution
determined at the discretion of the Company's Board of Directors. The Company's
contribution to its 401(k) plans for the years ended December 31, 2003, 2002 and
2001 totaled $316, $303 and $346, respectively.
Suburban sponsors two contributory defined benefit pension plans, the
Suburban Manufacturing Company Retirement Plan ("Plan 1") and the Suburban
Manufacturing Company Retirement Plan for Bargaining Employees ("Plan 2"). The
plans cover substantially all Suburban Manufacturing Company employees meeting
certain eligibility requirements. Assets of the plans consist of various
marketable securities and investments in bond funds. The Company's funding
policy is to contribute amounts that are sufficient, when added to participants'
contributions, to fund the retirement benefits of all participants in accordance
with the requirements of the Internal Revenue Code. The Company's contribution
to the defined benefit pension plans is expected to be $494 in 2004. The plans
actuarial measurement dates are September 30, 2003 and 2002.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions" an
additional minimum pension liability for pension plans with accumulated benefits
in excess of plan assets must be recognized. At December 31, 2003, 2002, and
2001 a minimum pension liability adjustment of $431, $950, and $35 (net of
income tax benefit of $270, $595, and $22), respectively, is included in the
accompanying consolidated financial statements.
Page 33 of 49
December 31, 2003 December 31, 2002
------------------- -------------------
Plan 1 Plan 2 Plan 1 Plan 2
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
period $ 3,811 $ 2,845 $ 2,939 $ 2,218
Service cost 183 276 163 218
Interest cost 254 190 218 164
Benefits paid (96) (147) (66) (114)
Actuarial gain 2 89 157 68
Change in assumptions 505 388 400 291
-------- -------- -------- --------
Benefit obligation at end of period $ 4,659 $ 3,641 $ 3,811 $ 2,845
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of period $ 2,279 $ 1,696 $ 2,414 $ 1,849
Employer contributions 140 345 179 113
Employee contributions 35 65 35 68
Actual return on plan assets 202 167 (283) (220)
Benefits paid (96) (147) (66) (114)
-------- -------- -------- --------
Fair value of plan assets at
end of period $ 2,560 $ 2,126 $ 2,279 $ 1,696
-------- -------- -------- --------
Unfunded status $ 2,099 $ 1,515 $ 1,532 $ 1,149
Unrecognized net actuarial loss (1,549) (1,403) (1,115) (1,005)
Employer contribution after
measurement date (31) (46) (27) (45)
Adjustment to recognize minimum
liability 1,225 1,078 857 745
-------- -------- -------- --------
Accrued benefit cost $ 1,744 $ 1,144 $ 1,247 $ 844
======== ======== ======== ========
Weighted-average assumptions as of September 30:
Discount rate 6.00% 6.00% 6.75% 6.75%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 3.00% 3.00% 3.00% 3.00%
The Company's asset allocations at December 31, 2003 and 2002, by asset category
are as follows:
December 31, 2003 December 31, 2002
------------------- -------------------
Asset category Plan 1 Plan 2 Plan 1 Plan 2
-------- -------- -------- --------
Equities 57.56% 57.22% 47.88% 49.58%
Corporate and government
securities 37.22% 38.82% 27.15% 32.74%
Money funds 5.22% 3.96% 24.97% 17.68%
-------- -------- -------- --------
100.00% 100.00% 100.00% 100.00%
======== ======== ======== ========
Page 34 of 49
December 31, 2003 December 31, 2002 December 31, 2001
------------------------- -------------------------- --------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 183 $ 276 $ 163 $ 218 $ 139 $ 178
Interest cost 254 190 218 164 220 146
Expected return on plan assets (197) (162) (208) (161) (237) (179)
Amortization of net gain 65 66 - - 6 (2) (1)
Employee contributions (31) (57) (31) (55) (35) (54)
---------- ---------- ----------- ---------- ----------- ----------
Net periodic benefit cost $ 274 $ 313 $ 142 $ 172 $ 85 $ 90
========== ========== =========== ========== =========== ==========
Benefits expected to be paid as of December 31, 2003 are as follows:
2004 $ 207
2005 236
2006 242
2007 273
2008 326
2009 - 2013 2,689
----------
$ 3,973
==========
The primary investment objective of the defined benefit pension plans is to
seek and earn a total rate of return modestly greater than that provided by a
portfolio equally divided between U.S. stocks and bonds. This objective desires
to keep portfolio risk below that of common stocks but to pursue a return
greater than that provided by bonds.
The general approach in determining the long term rate of return is to use
a weighted-average of expected returns for each major asset class, based on the
target asset allocation percentages incorporated in the plan's investment
strategy. The expected returns for each major asset class are based primarily on
historical returns in the post-war period. It is expected that future returns
over the time horizon of the plan may be slightly less than historical returns,
and therefore the actual long-term rate of return on assets assumption is set at
a slightly lower level than would be determined based on historical returns
alone.
9. RESTRUCTURING CHARGE:
In November 2000, the board of directors of the Company approved a
restructuring plan designed to reduce costs and improve operating efficiencies.
The plan involved the consolidation of two manufacturing facilities and the
discontinuance of a product line. A restructuring charge relating to severance
and employee benefit costs and costs relating to the closure of the facility was
recorded at that time. At June 30, 2001, the restructure was complete and no
restructuring charges remained in accrued liabilities.
10. DISCONTINUED OPERATIONS:
During September 1997, the Company adopted a plan to discontinue its
Faulkner manufacturing division. A significant amount of the assets of the
division were liquidated and the liabilities were settled during 2002 and 2001.
Accordingly, Faulkner is reported as a discontinued operation for the years
ended December 31, 2003, 2002 and 2001.
Page 35 of 49
There were no sales from the Faulkner division for the years ended December
31, 2003, 2002 and 2001.
Liabilities of the discontinued operations were $0, $0 and $100 at December
31, 2003, 2002 and 2001, respectively, which primarily consist of remaining
warranty obligations.
The recoveries on the disposal of Faulkner were $0, $100, and $128 at
December 31, 2003, 2002 and 2001 respectively.
11. 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 remaining accrual at the date of settlement was written
off to income and is included in the accompanying 2001 consolidated statement of
operations. The settlement does not require any change in the product offerings
of the Company.
In addition to the claim that was previously described, 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.
12. SUBSEQUENT EVENT:
On January 6, 2004 the Company entered into a letter of credit totaling
$1,210. On March 5, 2004 the Company also amended an existing letter of credit
to decrease the amount to $1,064. The letters of credit obligate the Company to
make payment in the event of default on the agreements with the insurance
companies 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 these instruments is zero.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 16, 2002, Airxcel, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP as its independent auditor. The decision to dismiss
PricewaterhouseCoopers LLP was approved by its Board of Directors.
The reports of PricewaterhouseCoopers LLP on the financial statements
of the Company for each of the years ended December 31, 2000 and 2001 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with its audits for the years ended December 31, 2000
and 2001 and through the interim period between December 31, 2001 and May 16,
2002, there were no
Page 36 of 49
disagreements between the Company and PricewaterhouseCoopers LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the financial statements for such years.
During the years ended December 31, 2000 and 2001, and the interim
period between December 31, 2001 and May 16, 2002 there were no reportable
events (as defined in Item 301(a) (1) (v) of Regulation S-K promulgated by the
Securities and Exchange Commission) except that in connection with its audit for
the year ended December 31, 2001, PricewaterhouseCoopers LLP reported to the
Board of Directors a material weakness in the inventory system at the Company's
Marvair division. The Company has authorized PricewaterhouseCoopers LLP to
respond fully to Ernst & Young LLP (successor auditor) concerning this matter.
The Company has engaged Ernst & Young LLP as its new independent
auditor, effective May 21, 2002. During the years ended December 31, 2000 and
2001, and the interim period between December 31, 2001 and May 16, 2002, the
Company did not consult with Ernst & Young regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed,
(ii) the type of audit opinion that might be rendered on the Company's financial
statements or (iii) any matter that was either the subject of a disagreement or
a reportable event.
ITEM 9(a). CONTROLS AND PROCEDURES
In response to adoption of the Sarbanes-Oxley Act of 2002, the Company
formalized its disclosure controls and procedures. The Chief Executive Officer
and Chief Financial Officer met with members of management, members of the
financial accounting and legal departments, and the Company's independent
auditors to discuss and evaluate the Company's disclosures and the effectiveness
of the disclosure controls and procedures. Based on these discussions, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of the disclosure controls and procedures was effective and enabled
the Company to disclose all material financial and non-financial information
affecting its businesses. No significant changes were made in the Company's
internal controls or in other factors that could significantly affect those
controls after the date of the evaluation.
Page 37 of 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with respect to the persons
who are members of the Board of Directors or executive officers of the Company.
Name Age Position
- ------------------ --- ----------------------------------------------
Melvin L. Adams 58 President and Chief Executive Officer, Director
Gregory G. Guinn 55 President -- RV Products
Richard L. Schreck 51 Chief Financial Officer, Secretary, Treasurer
Lonnie L. Snook 68 Vice President -- RV Manufacturing and
Engineering
George D. Wyers 71 Retired, former President -- Marvair, Director
Dean T. DuCray 63 Director
Lawrence Jones 72 Director
James A. Urry 49 Director
Melvin L. Adams. Mr. Adams has been a Director, the Chief Executive Officer
and President of Airxcel since 1991. From 1989 until 1991, he served as Vice
President of The Coleman Company. From 1979 through 1984, he served as General
Manager of The Coleman Company's Camping Trailer Division. In 1984, he was
promoted to Corporate Vice President & General Manager of Coleman's RV Group. In
1991, he and three officers of RVP led the buy out of Coleman RV Products with
Berkshire Partners from MacAndrews and Forbes.
Gregory G. Guinn. Mr. Guinn was promoted to President of the RV Products
Division of Airxcel, Inc. in 1999. From 1989 to 1998, he served as Vice
President of Sales and Marketing of RVP. Prior to that, Mr. Guinn held various
positions with The Coleman Company, including National Sales Manager and
Marketing Manager of RV Products and Corporate Vice President and General
Manager of RV Products. Mr. Guinn handles all of RVP's major accounts and its
internal sales force.
Richard L. Schreck. Mr. Schreck has been the Chief Financial Officer,
Secretary and Treasurer of Airxcel since 1991. Beginning in 1981, Mr. Schreck
held various positions at The Coleman Company, including Corporate Vice
president of Operational Finance, RV Group Controller and
Controller/Administrative Manager for RV Products. Mr. Schreck is responsible
for all financial and MIS functions at Airxcel.
Lonnie L. Snook. Mr. Snook has been Vice President-Manufacturing and
Engineering of RVP since 1989. Prior to that, Mr. Snook held various positions
at The Coleman Company, including Industrial Engineer, Manager of Industrial
Engineering and Production Superintendent and Factory Manager of RV Products.
George D. Wyers. Mr. Wyers retired as President of the Marvair Division of
Airxcel on October 31, 2000. Prior to the acquisition, he served as President
and Chief Executive Officer of Marvair, a position he held since 1988. Prior to
joining Marvair, Mr. Wyers spent twelve years as a General Manager of a leading
air conditioning equipment distributor based in Dallas, Texas.
Page 38 of 49
Dean T. DuCray. Mr. DuCray has been a director of the Company since 1996.
In April 1998 Mr. DuCray retired as Chief Financial Officer and Vice President
of York International Corporation, a position held since 1987, a manufacturer of
heating and air conditioning equipment. Mr. DuCray is currently serving as a
consultant for various companies.
Lawrence Jones. Mr. Jones has been a director of the Company since 1991.
Mr. Jones retired from The Coleman Company February 1, 1994 having served as its
Chairman and CEO since 1989. Mr. Jones served as Chairman of the Executive
Committee at The Coleman Company from 1994 to 1995. From 1995 to 1997, Mr. Jones
served as consultant and Chairman of Roller Blade (in line skates) and Prince
Sports (tennis rackets). Mr. Jones retired from the Fleming Company's (food
distribution) Board of Directors on January 1, 1998.
James A. Urry. Mr. Urry has been a director of the Company since 1996. Mr.
Urry has been with Citibank, N.A. since 1981 and currently serves as a partner
of CVC. He is a director of Intersil Corporation, AMI Semiconductor, Inc. and
York International Corporation.
COMPENSATION OF DIRECTORS
Directors of the Company who are officers, employees of the Company or its
affiliates are presently not expected to receive compensation for their services
as directors. Directors of the Company who are not officers or employees of the
Company or any of its affiliates receive $2,000 per Board meeting attended. In
addition, directors of the Company will be entitled to reimbursement of their
reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the board of directors or committees thereof.
CODE OF BUSINESS CONDUCT
The Company has adopted a code of business conduct that applies to the
directors, officers, employees, representatives and agents of the Company. A
copy of this code of business conduct will be provided free of charge upon
request.
Page 39 of 49
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers of the Company is determined by the
Board of Directors of the Company. The following table sets forth information
concerning compensation received by the five most highly compensated officers of
the Company for services rendered in the fiscal year ended December 31, 2003.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation --------------------------------------
------------------------------ Options/ LTIP All Other
Name and Principal Position Year Salary Bonus SAR(#) Payouts Compensation(1)
--------------------------- ---- ---------- --------- -------- ------- ---------------
Melvin L. Adams 2003 $ 300,000 $ 351,556 - - - - $ 18,286
President and Chief Executive Officer 2002 289,585 100,000 - - - - 17,180
2001 250,008 35,551 - - - - 15,638
Gregory G. Guinn 2003 180,000 212,250 - - - - 13,287
President - RVP 2002 176,875 67,320 - - - - 11,662
2001 165,000 12,343 - - - - 11,239
Richard L. Schreck 2003 180,000 171,746 - - - - 13,011
Chief Financial Officer, Secretary and 2002 176,875 75,000 - - - - 11,427
Treasurer 2001 165,000 23,107 - - - - 10,824
Lonnie L. Snook 2003 148,334 168,004 - - - - 13,511
Vice President -- RVP Manufacturing 2002 140,004 57,122 - - - - 11,860
and Engineering 2001 140,004 13,810 - - - - 11,121
There are no other executive officers whose compensation exceeds $100,000.
- -----------
(1) The named employee officers have participated in the Company's profit
sharing, 401(k) match, deferred compensation and excess benefit programs. The
aggregate payments made by the Company pursuant to such programs are listed as
All Other Compensation.
Page 40 of 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's issued and outstanding capital stock is owned by
Holdings. The following table sets forth certain information with respect to the
common and preferred equity interests of Holdings.
Common Stock Percentage of Aggregate
Beneficially Common Voting
Name of Beneficial Owner Owned Stock Power
------------------------ ------------ ------------- ---------
Citicorp Venture Capital, Ltd.("CVC") (1) 1,196,573.55 65.35(2) 40.72%
399 Park Avenue
New York, New York 10043
Melvin L. Adams 141,637.30 7.74 13.31%
George D. Wyers 138,331.53 7.56 13.00%
Gregory G. Guinn 76,348.75 4.17 7.17%
Richard L. Schreck 76,348.75 4.17 7.17%
Lonnie L. Snook 61,533.75 3.36 5.78%
All directors and executive officers as a group
(8 persons, including those named above) 505,010.20 27.98 47.44%
- -----------
(1) Includes shares held by employees and affiliates of CVC.
(2) Includes shares of (i) voting Class A Common Stock representing 40.72% of
outstanding voting Class A Common Stock, (ii) non-voting Class B Common Stock
and (iii) stock warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 19, 2003, the Company purchased the notes originally issued by
Holdings from the holders for an aggregate purchase price of $3,447. These
notes, which are reported at cost as notes receivable from Holdings on the
accompanying 2003 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 of the Company's assets and has been reflected in the
accompanying consolidated financial statements as a non-cash distribution to
Holdings and a decrease in deferred income tax assets.
Page 41 of 49
PART IV
ITEM 14. FEES PAID TO INDEPENDENT AUDITORS
The following is a summary of fees billed by Ernst & Young LLP for audit
and other professional services during the year ended December 31:
2003 2002
-------- --------
Audit Fees:
Consists of fees and expenses billed for the audit of
Airxcel's consolidated financial statements for such
year and for the review of Airxcel's quarterly reports
on Form 10-Q $165,869 $147,096
Audit-Related Fees:
Consists of fees and expenses billed for the audits of Airxcel's
benefit plans, assistance in documenting internal control policies
and procedures over financial reporting and accounting consultations 98,642 68,871
Tax Fees:
Consists of fees billed for tax advisory services,
including compliance and planning 91,490 9,025
All Other Fees: - - - -
-------- --------
Total All Fees $356,001 $224,992
======== ========
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part 2, Item 8:
Page
----
Report of Independent Accountants 17
Consolidated Balance Sheets - December 31, 2003 and 2002 19
Consolidated Statements of Operations and Comprehensive
Income (Loss) - Years ended - December 31, 2003, 2002, and 2001 20
Consolidated Statements of Stockholder's Equity (Deficiency)
Years ended December 31, 2003, 2002, and 2001 21
Consolidated Statements of Cash Flows - Years ended
December 31, 2003, 2002, and 2001 22
Notes to Consolidated Financial Statements 24
(a)(2) The following financial statement schedules are included in Item 15, Part
IV of this report.
Page 42 of 49
Schedule II - Valuation and Qualifying Accounts
Other financial statement schedules are omitted either because of the
absence of the conditions under which they are required or because the required
information is contained in the consolidated financial statements or notes
thereto.
(b) Reports on Form 8-K
None
(c) Exhibits
The following exhibits, except exhibit 16.1, are incorporated by reference
to the Airxcel, Inc. Form S-4 Registration Statement.
3.1 Certificate of Incorporation of Airxcel, Inc., as amended.
3.2 Amended and Restated By-laws of Airxcel, Inc.
4.1 Indenture dated as of November 10, 1997 between Airxcel, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of November 5, 1997 among Airxcel, Inc.,
Chase Securities Inc. and NationsBanc Montgomery Securities, Inc.
4.3 Exchange and Registration Rights Agreement dated as of November 10,
1997 among Airxcel, Inc., Chase Securities Inc. and NationsBanc
Montgomery Securities, Inc.
10.1 Amended and Restated Credit Agreement dated as of November 10, 1997
among Airxcel, Inc. and The Chase Manhattan Bank, as Agent.
10.2 Security Agreement dated as of August 22, 1996 among Recreation
Vehicle Products, Inc. and The Chase Manhattan Bank, as agent.
10.3 Security Agreement and Mortgage -- Trademarks and Patents dated as
of August 22, 1996 among Recreation Vehicle Products, Inc. and The
Chase Manhattan Bank, as agent.
10.4 Pledge Agreement dated as of August 22, 1996 among Recreation
Vehicle Products, Inc. and The Chase Manhattan Bank, as agent.
10.5 Executive Securities Purchase Agreement dated as of November 10,
1997 by and between Airxcel Holdings, Inc. and the Purchasers.
10.6 Registration Rights Agreement dated as of August 22, 1996 by and
among RV Products Holding Corp., Citicorp Venture Capital, Ltd.,
Citicorp Mezzanine Partners, L.P., CCT III Partners, L.P., the
Executives, and the Individual Investors.
10.7 Joinder to Registration Rights Agreement dated as of November 10,
1997 by and among Airxcel Holdings, Inc., Citicorp Venture Capital,
Ltd., the Existing Stockholders, and the New Executives.
10.8 Stockholders Agreement dated as of August 22, 1996, as amended by
and among RV Products Holding Corp., Citicorp Venture Capital, Ltd.,
Citicorp Mezzanine Partners, L.P., CCT III Partners, L.P., the
Executives and the Individual Investors.
10.9 Stock Purchase Warrant dated as of August 22, 1996.
10.10 Asset Purchase Agreement effective as of October 17, 1997 by and
among Crispaire Corporation, Airxcel, Inc. and Airxcel Holdings,
Inc.
10.11 Distribution Agreement dated as of October 11, 1995 by and between
The Coast Distribution System and Recreation Vehicle Products, Inc.
10.12 Agreement dated as of October 6, 1997 by and between Crispaire
Corporation and the Los Angeles Unified School District.
10.13 Agreement dated as of October 6, 1997 by and between Crispaire
Corporation and the Los Angeles Unified School District.
Page 43 of 49
10.14 Agreement dated as of October 6, 1997 by and between Crispaire
Corporation and the Los Angeles Unified School District.
10.15 Executive Employment Agreement dated as of November 10, 1997 by and
among Airxcel, Inc. and T.K. Sellers, Jr.
10.16 Executive Employment Agreement dated as of November 10, 1997 by and
among Airxcel, Inc. and George D. Wyers.
10.17 Executive Employment Agreement dated as of November 10, 1997 by and
among Airxcel, Inc. and David Shuford.
10.18 Trademark License Agreement by and between the Coleman Company, Inc.
and Coleman R.V. Products, Inc. dated as of May 1, 1991.
10.19 Trademark License Agreement by and between the Canadian Coleman
Company, Ltd. and Coleman R.V. Products, Inc. dated as of May 1,
1997.
10.20 Second Amended and Restated Credit Agreement dated as of March 17,
1998 among Airxcel, Inc., KODA Enterprises Group, Inc., the
Guarantors at any time party thereto, the Lenders named thereto and
The Chase Manhattan Bank, as Agent.
10.21 Stock Purchase Agreement among William S. Karol and Airxcel, Inc.
dated March 17, 1998.
16.1 Letter regarding change in certifying accountant dated May 22, 2002.
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
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350,
Page 44 of 49
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Additions Balance at
Beginning Charged to (1) End of
Description of Year Expense Deductions Year
----------- ---------- ---------- ---------- ----------
Allowance for Doubtful Accounts
Year ended December 31,
2003 $ 314 $ 213 $ 23 $ 550
2002 295 25 (6) 314
2001 315 (20) - 295
Allowance for Discounts
Year ended December 31,
2003 $ 171 $ 2,112 $ (2,110) $ 173
2002 110 2,148 (2,087) 171
2001 110 1,714 (1,714) 110
- -------------
1. Deduction for purposes for which reserve was created.
Page 45 of 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
3-26-04 /s/ Melvin L. Adams
- ------------------------ -------------------------------------
Date Melvin L. Adams
President & Chief Executive Officer
3-26-04 /s/ Richard L. Schreck
- ------------------------ -------------------------------------
Date Richard L. Schreck
Secretary/Treasurer and Chief
Financial Officer
3-26-04 /s/ Lawrence Jones
- ------------------------ -------------------------------------
Date Lawrence Jones
Director
3-26-04 /s/ Dean T. DuCray
- ------------------------ -------------------------------------
Date Dean T. DuCray
Director
3-26-04 /s/ James A. Urry
- ------------------------ -------------------------------------
Date James A. Urry
Director
3-26-04 /s/ George D. Wyers
- ------------------------ -------------------------------------
Date George D. Wyers
Director
Page 46 of 49