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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 register 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
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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. ( )
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, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART 1
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, a division of Airxcel, Inc. ("Crispaire"), a designer,
manufacturer and marketer of air conditioning units and heat pump water heaters.
The acquisition was accounted for as a purchase. Accordingly, the purchase price
was allocated to the underlying assets and liabilities based on their respective
fair values. The financial statements include the accounts and results of
operations since that date.
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., a wholly owned subsidiary of Airxcel, Inc.("Suburban"),
a designer and manufacturer of heating, water heating and cooking appliances for
the recreation vehicle industry and other specialty products for the heating,
ventilating and air conditioning industry. The acquisition was accounted for as
a purchase and, accordingly, the purchase price was allocated to the underlying
assets and liabilities based on their respective fair values. The consolidated
financial statements include the accounts and results of operations since that
date.
(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, customer's, 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, and cooking appliances for the recreation
vehicle industry, and wall mount air conditioners, ECUs and heat pumps for the
heating, ventilating and air conditioning industry.
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 have
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resulted in its long term relationships with leading RV manufacturers such as
Fleetwood, Winnebago, Gulf Stream and Jayco, who have relied on the Company for
substantially all of their RV air conditioner needs for each of the past six
years. In addition, the Company supplies furnaces, water heaters and cooking
appliances to a large number of OEM's 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 only recently entered the cooking appliance field.
The Suburban product line has many attractive advantages including quieter
operation and longer life. Combining these advantages with outstanding customer
service, Suburban has longstanding relationships with a number of major OEM
customers such as Winnebago, Starcraft, 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 1998, as a percentage of Airxcel's net sales, OEM
sales represented 50%, and aftermarket sales represented 21%.
In addition to serving the RV industry, the Company designs,
manufactures and markets specialty wall mount air conditioners, ECUs and heat
pumps for various applications. Customers are principally telecommunications
companies, manufacturers of telecommunication shelters in the cellular, cable,
wireless, satellite and PCS markets, wholesale distributors for foreign
telecommunications sales, school districts and construction companies. The
Company believes that it is the largest provider of environmental control
equipment for the U.S. telecommunication shelter market, through sales to both
telecommunications companies and manufacturers of telecommunication shelters.
The Company also believes that it is well-positioned to benefit from growth in
cellular, wireless and PCS telecommunications markets and the resulting demand
for telecommunication shelters. 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
customers, including MCI/Worldcom, Andrew Corporation, Ericsson, Nextel
and other wireless communication providers. The Company also believes that it
will benefit from an increased need for cooling units in the nation's schools
due to new state regulations and certain building codes that mandate fresh air
requirements in classrooms, 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. 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.
In fiscal 1998, sales to the telecommunication shelter industry and school
industry represented 14% and 9%, of Airxcel's total net sales, respectively.
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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 its 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 standalone 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, Coast, Jayco, Winnebago, Forrest
River, Andrew Corporation and Air Spec Corporation, its largest customers,
accounted for approximately 44% of the Company's net sales for 1998. 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, 1998 there were five primary
competitors within the industry. The school and telecommunications air
conditioning industry is also highly competitive with five major competitors.
Although the Company competes with a number of established companies that have
greater financial, technological and marketing resources, Airxcel believes it
has a competitive advantage due to the following.
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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 the largest provider of environmental control
equipment of the U.S. telecommunications market, through sales to both
telecommunications companies and manufacturers of telecommunication shelters.
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, Gulf
Stream and Jayco substantially all of their air conditioner needs for each of
the past six 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
telecommunications customers, in some cases for as long as 15 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. The recent proliferation of shelters for telecommunications equipment and
the importance of protecting such equipment through the use of cooling units and
ECUs has generated an increasing demand for customized products and has
strengthened such relationships. In addition, the Company has worked with
multiple school districts throughout the country, such as the Los Angeles
Unified School District, for as long as seven years, to develop products which
are designed to meet the unique heating and cooling needs of the classroom such
as achieving certain industry ventilation standards and addressing other
concerns such as architectural design and ease of servicing considerations. The
Company believes that customization provides a high level of customer
satisfaction and will foster the continued development of significant customer
relationships.
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 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" name 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.
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Extensive Distribution Network and Experienced Sales Force. The Company believes
its sales force includes some of the most experienced sales people in the RV
industry who are located in close proximity to and actively work with many of
the largest OEMs regarding product design issues and estimated future orders. 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, and construction industries and international sales.
In addition, independent sales agents actively market products, particularly to
school districts, in which sales agents have developed relationships covering a
variety of channels, including wholesale distributors, factory direct dealers,
non-stocking representatives, as well as direct to manufacturers and to end
users and in the international market through distributors.
NUMBER OF PERSONS EMPLOYED
As of December 31, 1998, the Company had approximately 995 employees of
which approximately 350 were represented by a union.
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
-------- ----------- ------------
Norcross, Georgia 37,000 Leased
Cordele, Georgia 113,000 Owned
Cordele, Georgia 30,000 Leased
Elkhart, Indiana 27,000 Owned
Wichita, Kansas 50,000 Leased
Wichita, Kansas 100,000 Owned
Dayton, Tennessee 285,000 Owned
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit seeking monetary damages in an
unspecified amount, and an injunction, for patent, trademark and trade dress
infringement, Bard Manufacturing Company et al. v. Crispaire Corporation, No.
3:95-CV-7103 (N.D. Ohio 1998). The trade dress claims against Crispaire were
dismissed by the Court on summary judgment dated November 23, 1998. On that same
date, the court also granted summary judgment that (a) the Bard patents were
enforceable, but left open for trial the question of validity, and (b) certain
Crispaire products infringed certain claims under the patents, but left the
remaining claims for trial. A bifurcated jury trial - liability first and then
damages - commenced on or about December 2, 1998. On December 8, 1998, the court
entered a directed verdict in favor of Bard, holding that the patents were valid
and that Crispaire had infringed additional claims under the patents. A jury
trial to determine damages is scheduled for April 8, 1999. Crispaire intends to
move for reconsideration of the Trial Court's directed verdict, and, if
unsuccessful, to appeal that verdict.
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Crispaire also intends to appeal the adverse summary judgment rulings.
Management of the Company continues to believe that the outcome of the trial on
damages will not have a material adverse effect on the company's financial
position, results of operations or liquidity.
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.
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 1998.
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PART 2
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)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $153,396 $58,323 $58,169 $55,788 $56,162
Cost of sales 119,552 44,732 43,803 42,257 41,614
------- ------ ------ ------ ------
Gross profit 33,884 13,591 14,366 13,531 14,548
Selling, general and administrative expenses (1) 15,297 4,223 4,558 8,627 5,555
Operating income 15,565 8,729 8,386 2,572 6,662
Income from continuing operations before income taxes 3,801 4,087 5,968 1,383 5,352
Net income (loss) 2,251 (4,548) 1,074 (453) 2,616
OTHER DATA:
Gross margin percentage 22.1% 23.3% 24.7% 24.3% 25.9%
EBITDA (2) 20,671 9,850 10,369 5,554 9,683
EBITDA margin percentage 13.5% 16.9% 17.8% 10.0% 17.2%
Cash provided by operating activities 2,047 7,229 4,249 857 6,472
Cash used in investing activities (30,346) (44,083) (435) (1,183) (821)
Cash (used in) provided by financing activities 18,785 46,319 (4,209) 553 (5,395)
Depreciation and amortization (3) 5,106 1,144 1,983 2,982 3,021
Capital Expenditures 1,852 716 459 356 843
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (4) $28,349 $23,186 $5,632 $8,819 $9,301
Total assets (5) 126,590 76,933 24,748 26,561 24,753
Total debt 119,506 90,355 48,280 24,824 15,581
Total stockholders' equity (deficiency) (17,898) (25,009) (28,701) (4,255) 3,718
- ----------
(1) Selling, general and administrative expense (excluding amortization of
intangible assets and computer software) for 1995 includes $4,279 of
nonrecurring expenses related to costs incurred to compensate certain
option holders for their personal tax liabilities incurred when such
options were exercised.
(2) EBITDA represents earnings before interest expense, net, other
nonoperating expense, net, income tax expense, depreciation and
amortization. Other nonoperating (income) expenses were $92, $23, $145,
$92 and $28 for the years ended December 31, 1998, 1997, 1996, 1995,
and 1994, respectively. 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 cash flow data
prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity.
(3) Excludes depreciation and amortization related to the discontinued
Faulkner manufacturing division.
(4) Working capital represents current assets less current liabilities,
including net assets (liabilities) held for sale of the discontinued
Faulkner manufacturing division of $(1,290), $(466), $6,421, $5,634,
and $3,704 as of December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(5) Total assets include net assets held for sale of $6,421, $5,634, $3,704
as of December 31, 1996, 1995, 1994, respectively, and exclude net
liabilities of the discontinued Faulkner manufacturing division of
$1,290 and $466 as of December 31, 1998 and 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased 163.1% from $58.3 million in 1997 to $153.4
million is 1998. Net sales increased primarily due to the $43.1 million and
$42.7 million of additional sales related to the acquisition of the Crispaire on
November 10, 1997 and Suburban on March 17, 1998, respectively. In addition, the
volume of OEM and aftermarket sales of air conditioners increased in comparison
to the year ended December 31, 1997, which the company believes was the result
of dealer inventory adjustments in 1997, growth in the RV industry and sustained
hot weather beginning early in the second quarter of 1998.
Gross Profit. Gross profit increased 148.5% from $13.6 million in 1997 to
$33.8 million in 1998. The increase was principally due to the respective
acquisitions of Crispaire and Suburban which contributed $8.2 and $10.0,
respectively. The remainder is attributable to the increased volume of OEM and
aftermarket sales.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expenses increased 273.5% from $4.9 million in 1997 to $18.3 million in 1998
primarily due to the acquisition of Crispaire and Suburban which attributed $7.0
million and $6.3 million, respectively. Selling, general and administrative
expenses as a percentage of net sales increased from 8.4% in 1997 to 11.9% in
1998, primarily due to amortization of intangibles related to the acquisitions
and higher selling, general and administrative expenses as a percentage of sales
of the newly acquired businesses.
EBITDA. EBITDA was $9.9 million in 1997 and $20.7 million in 1998, primarily
due to the contribution from Crispaire and Suburban of $3.3 and $5.9,
respectively. The remainder is attributable the increased volume of OEM and
aftermarket air conditioner sales offset by increased selling, general and
administrative expenses as noted above.
Income from continuing operations before income tax expense and
extraordinary item. Income from continuing operations before income tax expense
and extraordinary item decreased 7.3% from $4.1 million in 1997 to $3.8 million
in 1998 primarily due to increased gross profit offset by higher interest
expense as a result of the issuance of $90.0 million of senior subordinated debt
in November, 1997, borrowings under the amended credit agreement with the bank
of $28.0 million in March 1998 and increased selling, general and administrative
expense as described above.
Net income (loss). Net income increased from a net loss of $4.5 million in
1997 to net income of $2.3 million in 1998 primarily as a result of the
extraordinary loss of $1.6 million for early extinguishment of debt and losses
from operations of the discontinued Faulkner manufacturing division of $5.5 in
1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased 0.2% from $58.2 million in 1996 to $58.3
million in 1997. Net sales increased primarily due to the $4.0 million of
additional sales related to the acquisition of the Crispaire Corporation on
November 10, 1997, offset by the decrease in volume of motor home
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and aftermarket sales, which the company believes was the result of unseasonably
cold weather.
Gross Profit. Gross profit decreased 5.4% from $14.4 million in 1996 to
$13.6 million in 1997. The decrease was principally attributable to weaker motor
home and aftermarket sales, which the Company believes was the result of
unseasonably cold weather. Gross margin percentages also decreased from 24.7% to
23.3% in 1996 and 1997, respectively.
Selling, general and administrative expenses (including amortization of
intangible assets and computer software). Selling, general and administrative
expenses decreased 18.3% from $6.0 million in 1996 to $4.9 million in 1997.
Selling, general and administrative expenses as a percentage of net sales
decreased from 10.3% in 1996 to 8.4% in 1997. The decrease was primarily due to
$458,000 of compensation expense incurred in 1996 related to stock compensation
and a decrease in amortization of intangibles of $738,000 due to the fact that
the carrying value of certain intangibles was fully amortized by the end of
1996.
EBITDA. EBITDA was $10.4 million in 1996 and $9.9 million in 1997, primarily
due to the decrease in gross profit attributable to weaker motor home and
aftermarket sales offset by lower compensation expense as noted above.
Income from continuing operations before income tax expense and
extraordinary item. Income from continuing operations before income tax expense
and extraordinary item decreased 31.7% from $6.0 million in 1996 to $4.1 million
in 1997 primarily due to lower gross profit and higher interest expense offset
by lower selling, general and administrative expense as described above. In
addition, the net sales and gross profit of Crispaire, included in the Company's
fourth quarter 1997 operations, were both lower than anticipated by management
due to what management believes are temporary integration issues. These
integration issues caused Crispaire's contribution to operating income to be at
levels below those expected by management.
Net income (loss). Net income decreased from $1.1 million in 1996 to a net
loss of $4.5 million in 1997 primarily as a result of the $1.0 million decrease
in income from continuing operations before extraordinary loss as previously
noted, a $3.2 million increase in losses from operations of the discontinued
Faulkner manufacturing division, which included a $1.7 million increase in
estimated losses from disposal of Faulkner recorded in the fourth quarter of
1997, and a $1.4 million increase in extraordinary loss on early extinguishment
of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.0 million in net cash flow from operating
activities for the year ended December 31, 1998 compared to $7.2 million for
1997, primarily as a result of increased accounts receivable and inventories
offset by increased profits and increased depreciation and amortization expense.
Cash used in investing activities includes the March 1998, acquisition of
Suburban for approximately $28.4 million. In November 1997, cash used in
investing activities reflects the purchase of the Crispaire net assets of $43.4
million. The excess of the purchase prices over the estimated fair value of
assets acquired, $17.0 million and $6.0 million, respectively, was accounted for
as goodwill and is being amortized over the straight line method for 40 years.
Capital expenditures were $1.9 million, $.7 million, and $.5 million for the
years ended
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December 31, 1998, 1997, and 1996, respectively. The increase in 1998 is
primarily due to the acquisitions of Suburban and Crispaire which accounted for
$.5 million and $.4 million, respectively.
Capital expenditures for 1999 are expected to be above the 1998 level. In
1999, the Company expects to construct a 53,000 square foot addition to its
Wichita, Kansas facility. The addition will increase the Company's production
area and increase the raw materials stockroom at a cost of approximately $1.2
million.
On November 5, 1997 the Company issued $90 million of 11% senior
subordinated debt (matures November 5, 2007). Substantially all of the proceeds
were used by the Company to finance its acquisition of substantially all of the
net assets of Crispaire, to repay certain indebtedness and to pay financing
costs associated with the offering. On March 17, 1998, the Company amended it's
credit agreement with a bank to include a $10 million term loan and a $28
million revolving credit facility (matures March 31, 2005 and March 31, 2003,
respectively). The proceeds of the credit agreement were used by the Company to
finance its acquisition of the outstanding stock of Suburban. The Company's term
loan and revolving credit facility with the bank permits borrowings at interest
rates based on either the bank's base rate or Libor rate plus a factor (7.44% at
December 31, 1998) based on certain financial covenants. The available line on
the revolving credit facility is limited to the lessor of $28 million or 85% of
net accounts receivable, 60% of net inventories, and cash and cash equivalents.
On April 7, 1998 the Company entered into an interest rate cap agreement
(notional principal amount of $10 million) to reduce the impact of increases in
interest rates.
Covenants under the Company's credit facility with the bank restrict the
ability, subject to certain exceptions, to dispose of assets, incur additional
indebtedness, guarantee obligations, prepay other indebtedness or amend other
debt instruments, make distributions or pay dividends, redeem or repurchase
capital stock, create liens on assets, make acquisitions, engage in mergers or
consolidations, and change the business conducted by the Company. In addition,
the Company is required to maintain compliance with various financial ratios
including interest coverage ratio, leverage ratio, minimum EBITDA, and debt
service coverage ratio. The Company obtained an amendment from the bank to waive
any existing Default or Event of Default that arose as a result of exceeding the
amount permitted to be expended for capital expenditures for the year ended
December 31, 1998.
The Company meets its working capital, capital equipment requirements and
cash requirements with funds generated internally and funds from agreements with
a bank. Management currently expects its cash on hand, funds from operations and
borrowings available under existing credit facilities to be sufficient to cover
both short-term and long-term operating requirements.
YEAR 2000 UPDATE
The Plan:
The Company is in the process of implementing a Year 2000 Project
("Project"). The Project is divided into three major sections -- applications
software, third parties (External Agents), and manufacturing facilities. The
phases common to all three sections are: (1) inventorying Year 2000 items; (2)
assessing the Year 2000 compliance of existing systems; (3) repairing or
replacing items that are determined not to be Year 2000 compliant; (4) testing
of systems repaired or replaced; and (5) designing and implementing a
contingency plan.
13
The applications software section includes the conversion or replacement of
software that is not Year 2000 compliant. The inventorying, assessment and
replacement phases of this section were completed by September 30, 1998. The
testing phase of this section is scheduled to begin in the first quarter of 1999
and be completed by the second quarter 1999. Contingency planning is scheduled
to begin in the second quarter of 1999.
The External Agents section includes identifying critical suppliers and
communicating with them about their plans and progress in addressing the Year
2000 problem. We are asking vendors, service suppliers, communications providers
and financial institutions whose systems failures potentially could have a
significant impact on our operations to verify their Year 2000 readiness.
Approximately 44% of the External Agents have responded to our request.
Responses will be evaluated and a contingency plan developed by the second
quarter of 1999.
Review of the manufacturing facilities has been completed ahead of schedule.
Verification of Year 2000 readiness has been received on all equipment using any
form of computer systems.
Costs:
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the company's financial position.
The estimated total cost of the Project is approximately $550,000. The total
amount expended through December 31, 1998 was $443,000 which is funded through
current operations.
Risks:
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The year 2000 Project is expected
to significantly reduce the company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material External Agents. The company believes that, with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 132 ("SFAS 132"), Employer's Disclosures about Pensions
and Other Postretirement Benefits and Statement of Financial Accounting
Standards No.133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS 132 requires disclosures about pension and other postretirement
benefit plans in a company's financial statements and is for the current fiscal
year. SFAS 133 requires that a Company recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value and is effective for the Company's 1999 fiscal year.
Adoption of these statements will not impact the company's consolidated
financial position, results of operations or cash flows.
During 1998, the American Institute of Certified Public Accounts issued
Statement of Position
14
98-1 ("SOP 98-1"), Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires companies to capitalize certain
internal-use software costs once certain criteria are met. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. Adoption of this statement
is not expected to have a material impact on the company's consolidated
financial position, results of operations or cash flows.
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
recreational vehicles, which, in turn, affects purchases by consumers of the
products that the Company sells.
15
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Airxcel, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 14 (a)(1) and (2) herein present fairly, in all
material respects, the financial position of Airxcel, Inc. and its subsidiary
(formerly known as Recreation Vehicle products, Inc.) at December 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 5, 1999
16
AIRXCEL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 177 $ 9,691
Accounts receivable, net of allowances for doubtful
accounts of $54 and $40, respectively 19,703 8,310
Inventory 27,434 13,129
Prepaid expenses 86 128
Income taxes receivable -- 175
Deferred income taxes 2,352 3,004
--------- ---------
Total current assets 49,752 34,437
--------- ---------
Property, plant and equipment, net 18,163 8,693
Computer software, net 87 20
Intangible assets, net 54,151 30,539
Loan financing costs, net 4,437 3,244
--------- ---------
Total assets $ 126,590 $ 76,933
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 1,465 $ 27
Accounts payable 10,719 6,197
Warranty reserve 1,856 1,052
Accrued vacation expense 777 343
Accrued interest 1,579 1,430
Other accrued expenses 3,717 1,736
Net liabilities of discontinued operations 1,290 466
--------- ---------
Total current liabilities 21,403 11,251
Long-term debt, less current portion 118,041 90,328
Deferred income taxes 5,044 363
--------- ---------
Total liabilities 144,488 101,942
--------- ---------
Commitments and contingencies (see Notes 1 and 4) -- --
Stockholder's equity (deficiency):
Common stock, par value $1; authorized
1,000 shares; 1,000 shares issued and outstanding 1 1
Additional paid-in capital 26,946 22,086
Accumulated deficit (44,845) (47,096)
--------- ---------
Total stockholder's equity (deficiency) (17,898) (25,009)
--------- ---------
Total liabilities and stockholder's equity(deficiency) $ 126,590 $ 76,933
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
17
AIRXCEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
Net sales $ 153,396 $ 58,323 $ 58,169
Cost of goods sold 119,552 44,732 43,803
--------- --------- ---------
Gross profit 33,844 13,591 14,366
--------- --------- ---------
Operating expenses:
Selling, general and administrative 15,297 4,223 4,558
Amortization of intangible assets and computer
software 2,982 639 1,422
--------- --------- ---------
Total operating expenses 18,279 4,862 5,980
--------- --------- ---------
Income from operations 15,565 8,729 8,386
Interest expense 11,856 4,619 2,273
Other (income) expense, net (92) 23 145
--------- --------- ---------
Income from continuing operations before income
tax expense and extraordinary item 3,801 4,087 5,968
Income tax expense 1,550 1,553 2,411
--------- --------- ---------
Income from continuing operations before
extraordinary item 2,251 2,534 3,557
Discontinued operations:
Loss from operations of Faulkner Manufacturing,
less applicable income tax benefit of
$1,153 and $1,447, respectively -- 1,880 2,299
Loss on disposal of Faulkner Manufacturing
including provision of $1,000 for operating
losses during phase-out period, less applicable
income tax benefit of $2,079 -- 3,571 --
--------- --------- ---------
Income (loss) before extraordinary item 2,251 (2,917) 1,258
Extraordinary losses on early extinguishments of
debt, less applicable income tax benefits of
$641 and $115, respectively -- 1,631 184
--------- --------- ---------
Net income (loss) $ 2,251 $ (4,548) $ 1,074
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
18
AIRXCEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DEFICIENCY)
(in thousands, except shares)
Additional
Common Stock paid-in Accumulated
Shares Amount Capital Deficit Total Equity
------ ------ ------- ------- ------------
Balances, January 1, 1996 1,000 $ 1 $ 6,068 $(10,325) $ (4,256)
Dividends paid -- -- -- (33,297) (33,297)
Common stock options 458 -- 458
Capital contribution -- -- 7,320 -- 7,320
Net income -- -- -- 1,074 1,074
-------- -------- -------- -------- --------
Balances, December 31, 1996 1,000 $ 1 $ 13,846 $(42,548) $(28,701)
Capital contribution -- -- 8,240 -- 8,240
Net loss -- -- -- (4,548) (4,548)
-------- -------- -------- -------- --------
Balances, December 31, 1997 1,000 $ 1 $ 22,086 $(47,096) $(25,009)
Capital contribution -- -- 4,860 -- 4,860
Net income -- -- -- 2,251 2,251
-------- -------- -------- -------- --------
Balances, December 31, 1998 1,000 $ 1 $ 26,946 $(44,845) $(17,898)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
19
AIRXCEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 2,251 $ (4,548) $ 1,074
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,124 726 736
Amortization of intangible assets and computer
software 2,470 739 1,594
Amortization of financing costs 512 330 104
Provision for bad debts 297 38 63
Provision for loss on disposal of discontinued
operations -- 5,650 --
Deferred income taxes 1,430 (2,206) 143
Stock option compensation -- -- 458
(Gain) loss on sale of fixed assets 220 22 (9)
Extraordinary losses on early extinguishments of
debt -- 1,631 184
Changes in assets and liabilities:
Accounts receivable (1,160) 1,748 539
Inventory (4,721) 862 (1,040)
Prepaid expenses 105 17 120
Accounts payable (747) 952 (1,905)
Accrued expenses (734) 1,268 2,188
--------- --------- ---------
Net cash provided by operating activities 2,047 7,229 4,249
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of fixed assets 14 2 24
Capital expenditures (1,852) (716) (459)
Computer software expenditures (143) -- --
Acquisitions, net of cash acquired (28,365) (43,369) --
--------- --------- ---------
Net cash used in investing activities (30,346) (44,083) (435)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term obligations 155,485 90,109 87,135
Principal payments on long-term debt (139,334) (48,528) (63,695)
Financing costs incurred (2,226) (3,502) (1,672)
Capital contribution from parent company 4,860 8,240 7,320
Dividends paid -- -- (33,297)
--------- --------- ---------
Net cash provided by (used in) financing activities 18,785 46,319 (4,209)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (9,514) 9,465 (395)
Cash and cash equivalents, beginning of period 9,691 226 621
--------- --------- ---------
Cash and cash equivalents, end of period $ 177 $ 9,691 $ 226
========= ========= =========
20
AIRXCEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Years Ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 5,836 $ 6,419 $ 2,040
Income taxes, net 850 1,234 (493)
Supplemental disclosure of noncash investing and
financing activities:
Land acquired with debt, net of cash payment of $338 -- 375 --
Equipment financed with capital lease obligations 243 -- --
Airxcel, Inc. purchased certain assets and liabilities of
Crispaire Corporation as follows:
Tangible assets $ 17,916
Liabilities assumed (4,092)
Intangible assets 29,545
--------
Fair value of assets acquired $ 43,369
========
Airxcel, Inc. acquired the outstanding stock of Suburban:
Tangible assets $ 29,007
Intangible assets 26,057
Liabilities assumed (26,699)
---------
Fair value of assets acquired $ 28,365
=========
The accompanying notes are an integral part of these consolidated
financial statements.
AIRXCEL, INC. AND SUBSIDIARY
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As described in Note 8, on November 10, 1997, the Company
acquired substantially all of the net assets, properties and rights and assumed
certain related liabilities of Crispaire Corporation, a division of Airxcel,
Inc. ("Crispaire") which designs, manufactures and markets air conditioning
units and heat pump water heaters. Crispaire markets its products to companies
involved in modular construction, telecommunications, utilities and school
districts located throughout the United States and selected foreign markets. The
Crispaire acquisition was accounted for as a purchase and, accordingly, the
financial statements include the accounts and results of operations of Crispaire
since November 10, 1997. On March 17, 1998 (Note 9) the company acquired 100% of
the outstanding stock of Suburban Manufacturing Company, formerly KODA
Enterprises Group, Inc., a wholly owned subsidiary of Airxcel, Inc.
("Suburban"), a designer and manufacturer of heating, water heating, and cooking
appliances for the recreation vehicle industry and other specialty products for
the heating, ventilating and air conditioning industry. The Suburban acquisition
was accounted for as a purchase and, accordingly, the financial statements
include the accounts and results of operations of Suburban since March 17, 1998.
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 Holdings has
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 and 341,929 shares of $.01 par value common stock
and 9,076,923 and 8,984,615 shares of $1 par value Series A and Series B
exchangeable preferred stock outstanding as of December 31, 1998 and 1997,
respectively. The Preferred stock which is exchangeable at the stockholders'
option for junior subordinated notes issued by Holdings, is also subject to
mandatory redemption by Holdings on August 31, 2006 for an amount equal to the
original proceeds from sale of the stock plus accrued but unpaid dividends which
accrue at 14 percent annually. Total proceeds plus accrued and unpaid dividends
were $12,367,000 and $10,657,000 as of December 31, 1998 and 1997, 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 $4,015,000 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 August,
2006, 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 $5,536,000 and $4,826,000 as of December 31, 1998 and 1997,
respectively. As part of the November 10, 1997, Airxcel acquisition of
Crispaire, Holdings issued $5,304,000 of junior subordinated notes (the "PIK
Notes") to the seller. The PIK Notes and $3.1 million 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
22
of additional junior subordinated notes or cash at the election of Holdings.
Such notes, plus accrued interest, totaled $5,996,000 and $5,391,000 as of
December 31, 1998 and 1997, respectively. All of the notes described above are
uncollateralized and are not guaranteed by the Company. Although, Holdings is
entirely dependent upon the Company to service its note obligations and the
mandatory redemption provisions of the Preferred Stock, the Company has no cash
requirement to fund Holdings until at least 2006 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.
During October 1997, the Company's board of directors adopted a formal plan
to dispose of its awning business (see Note 13).
On August 22, 1996 (the "closing date"), RV Products Holding 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.
The significant components of the Recapitalization on the Company are as
follows:
The Company issued new debt with interest rates ranging from 9.75% to 12.0%
as of December 31, 1996 as follows:
Revolver $ 7,222,000
Term loan A 12,750,000
Term loan B 15,250,000
Senior subordinate note 14,000,000
---------------
Total $ 49,222,000
===============
The senior subordinate 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 $218,000 with the offset to additional paid-in
capital. On April 3, 1998 new warrants were issued for 229,662.50 shares of
Class B Common Stock of Holdings. The new warrants are entitled to the same
rights as the existing warrants. Proceeds of $765,000 were contributed by
Holdings to the Company.
The total proceeds from the debt were used to pay $1.7 million in financing
costs relating to the recapitalization and to repay $21.3 million of existing
debt. The repayment of debt was accounted for as an early extinguishment of debt
whereby the Company recognized a charge of $184,000 as an extraordinary loss,
net of tax. The remaining proceeds of the new debt, amounting to $26.2 million,
were distributed as part of a $33.3 million dividend to Holdings that was used
by Holdings to retire all remaining shares of Common Stock outstanding at that
time.
2. SIGNIFICANT ACCOUNTING POLICIES:
23
a. Management's Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles 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 subsidiary. 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.
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 leasehold 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 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. Computer Software: All computer software acquisition and development
costs, including applicable internal labor, are capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. The cost of
capitalized software is amortized over its estimated useful lives (generally 5
years). Accumulated amortization as of December 31, 1998, 1997 and 1996 was
$654,000, $635,000 and $624,000, respectively. Amortization for the years ended
December 31, 1998, 1997 and 1996 was $19,000, $10,000 and $76,000, respectively.
24
h. Intangible Assets: Intangible assets, excluding those associated with
discontinued operations (see Note 13), are recorded at cost and are amortized on
a straight-line basis over their estimated economic lives as follows:
Amortization December 31, December 31,
Period 1998 1997
--------------- ------------- -------------
Non-compete agreement 5 years $ 1,100,000 $ - -
Trademarks and contract 1-50 years 19,811,000 13,458,000
Patents 5 years 3,600,000 3,000,000
Assembled work force 10 years 2,000,000 1,000,000
Customer base 20 years 7,500,000 7,500,000
Goodwill 40 years 23,036,000 6,032,000
-------------- -------------
57,047,000 30,990,000
Less accumulated amortization 2,896,000 451,000
------------- -------------
$ 54,151,000 $ 30,539,000
============== ==============
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 the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
k. 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 $383,000, $183,000, and $282,000 in 1998, 1997,
and 1996, respectively.
l. Allocation of Interest to Discontinued Operations: Interest expense is
allocated to discontinued operations based on the ratio of net assets of the
discontinued operations to the sum of total net assets of the Company plus debt.
m. Fair Value of Financial Instruments: The stated values of financial
instruments as of December 31, 1998, 1997 and 1996 approximate fair market
value. Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair values of existing debt.
n. Recently Issued Accounting Standards: During 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132"), Employer's Disclosures about Pensions and Other
Postretirement Benefits and Statement of Financial Accounting Standards No.133
("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS
132 requires disclosures about pension and other postretirement benefit plans in
a company's financial statements and is for the current fiscal year. SFAS 133
requires that a Company recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value and is effective for the Company's 1999 fiscal year. Adoption of
these statements is not expected to have a material impact on the company's
consolidated financial position, results of operations or cash flows.
25
During 1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires companies to
capitalize certain internal-use software costs once certain criteria are met.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
Adoption of this statement is not expected to have a material impact on the
company's consolidated financial position, results of operations or cash flows.
o. Derivatives: The Company uses an interest rate instrument to reduce the
impact of its floating rate debt. The notional amount of the interest rate
agreement is used to measure interest to be paid or received and does not
represent the amount of exposure to credit loss. The differential to be received
or paid is recognized in income over the life of the agreement as adjustments to
interest expense. The Company does not hold or issue derivative financial
instruments for trading purposes.
3. SUMMARY BALANCE SHEET DATA:
Inventory, excluding that associated with discontinued operations (see Note
13), consists of the following:
December 31, December 31,
1998 1997
-------------- -------------
Raw materials $ 13,821,000 $ 6,078,000
Work-in-process 2,787,000 1,057,000
Finished goods 10,826,000 5,994,000
-------------- -------------
$ 27,434,000 $ 13,129,000
============== ==============
Property, plant and equipment, excluding that associated with discontinued
operations (see Note 13), consist of the following:
December 31, December 31,
1998 1997
-------------- -------------
Land and land improvements $ 1,230,000 $ 754,000
Buildings and building improvements 5,624,000 2,845,000
Machinery and equipment 15,110,000 7,731,000
Furniture and fixtures 1,333,000 783,000
Construction in process 660,000 262,000
------------- --------------
23,957,000 12,375,000
Less accumulated depreciation (5,794,000) (3,682,000)
------------- --------------
Net $ 18,163,000 $ 8,693,000
============= ==============
4. LONG-TERM DEBT:
On March 13, 1998, the Company amended its credit agreement with a bank. The
proceeds of the credit agreement were used by the Company to finance its
acquisition of the outstanding stock of Suburban Manufacturing Company (see Note
9).
On November 5, 1997, the Company issued $90,000,000 of 11% senior
subordinated debt. Substantially all of the proceeds were used by the Company to
finance its acquisition of substantially all of the net assets of the Crispaire
Corporation (see Note 8), to repay certain indebtedness and to pay financing
costs associated with the offering.
26
Long-term debt consists of the following:
December 31, December 31,
1998 1997
------------ ------------
Note payable to bank under a $10,000,000 term loan which matures
March 31, 2005, with interest at prime or a Libor base rate
plus a factor determinable based on financial covenants,
7.44% at December 31, 1998, payable quarterly. $ 10,000,000 $ - -
Note payable to bank under a $28,000,000 revolving line
of credit matures on March 31, 2003, with interest at prime
or a Libor base rate plus a factor determinable based on
financial covenants, 7.44% at December 31, 1998,
payable quarterly. 18,660,000 - -
Senior subordinated notes, with interest at 11% payable
semiannually on May 15 and November 15, commencing on
May 15, 1998. 90,000,000 90,000,000
Note payable to individual for land purchase, 7.6%, due in
monthly principal and interest payments of $4,479 through
April 1, 2007, collateralized by the land 328,000 355,000
Capital leases 518,000 - -
--------------- -------------
119,506,000 90,355,000
Current portion of long term debt (1,465,000) (27,000)
--------------- -------------
$ 118,041,000 $ 90,328,000
=============== =============
Covenants under the Company's credit facility with the bank (both the term
loan and revolving line of credit) restrict the ability, subject to certain
exceptions, to dispose of assets, incur additional indebtedness, guarantee
obligations, prepay other indebtedness or amend other debt instruments, make
distributions or pay dividends, redeem or repurchase capital stock, create liens
on assets, make acquisitions, engage in mergers or consolidations, and change
the business conducted by the Company. In addition, the Company is required to
maintain compliance with various financial ratios including interest coverage
ratio, leverage ratio, minimum EBITDA, and debt service coverage ratio. The
credit facility is collateralized by accounts receivable, equipment, general
intangibles, inventory, and investment property.
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.
27
Maturities of long-term debt, including minimum required reductions in the
revolving line of credit commitments based on balances outstanding at December
31, 1998 for each of the five succeeding years are as follows:
Minimum Net Present Long-term
Lease Payment Interest Value Debt Total
------------ ------------ ------------ ------------ ------------
1999 $ 237,000 $ 49,000 $ 188,000 $ 1,277,000 $ 1,465,000
2000 135,000 29,000 106,000 1,281,000 1,387,000
2001 99,000 17,000 82,000 1,534,000 1,616,000
2002 98,000 9,000 89,000 1,538,000 1,627,000
2003 55,000 2,000 53,000 20,700,000 20,753,000
Thereafter -- -- -- 92,658,000 92,658,000
------------ ------------ ------------ ------------ ------------
$ 624,000 $ 106,000 $ 518,000 $118,988,000 $119,506,000
============ ============ ============ ============ ============
Property, plant and equipment at year-end include the following amounts for
capitalized leases:
December 31,
1998
--------------
Machinery and equipment $ 200,000
Furniture and fixtures 60,000
Construction in process 242,000
--------------
$ 502,000
Less accumulated depreciation (35,000)
--------------
Net property, plant and equipment $ 467,000
==============
5. STOCK OPTION PLANS:
In 1994, Holdings adopted its second Performance Stock Option Plan (the 1994
Option Plan) and granted stock options to several employees of the Company.
During 1996, all 30,500 shares were exercised as part of the Recapitalization.
Compensation expense of $458,000 was recorded during the year ended December 31,
1996.
As part of the Recapitalization, Holdings adopted a Stock Option Plan for key
employees and/or directors of the Company to purchase up to 75,032 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 10 years from date of grant 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 has disposed of all the securities
(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 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), 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
28
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.
If the Company had elected to recognize compensation expense for options
granted in 1996 based on the fair value of the options granted at the date of
grant as prescribed by SFAS No. 123, the Company's net income (loss) would not
have been materially different from that reported.
6. INCOME TAXES:
The significant components of the net deferred income tax asset (liability)
recognized in the accompanying balance sheets are as follows:
December 31, December 31,
1998 1997
----------- -----------
Provision for discontinued operations $ 498,000 $ 2,079,000
Accrued reserves and liabilities 2,477,000 555,000
Depreciation (2,470,000) (418,000)
Intangibles (3,640,000) --
State income tax net operating loss carry forwards,
expiring in 2010 154,000 187,000
AMT credits 183,000 162,000
Federal income tax net operating loss carry forwards,
expiring beginning in 2006 106,000 --
Other -- 76,000
----------- -----------
(2,692,000) 2,641,000
Less current deferred income tax 2,352,000 3,004,000
----------- -----------
Total noncurrent deferred income tax $(5,044,000) $ (363,000)
=========== ===========
The components of income tax expense before discontinued operations and
extraordinary items are as follows:
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
Current $ 120,000 $ 1,933,000 $ 2,026,000
Deferred 1,430,000 (380,000) 385,000
----------- ----------- -----------
Total income tax expense before discontinued
operations and extraordinary item $ 1,550,000 $ 1,553,000 $ 2,411,000
=========== =========== ===========
29
Total income tax expense before discontinued operations and extraordinary
item differed from the amounts computed by applying the federal statutory rate
to pretax income as follows:
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
Income tax expense before discontinued
operations and extraordinary item computed by
applying the federal statutory rate $ 1,330,000 $ 1,431,000 $ 2,089,000
Adjustment to prior year expense -- (83,000) 143,000
State income taxes, net of federal income tax
benefit 250,000 156,000 181,000
Other (30,000) 49,000 (2,000)
----------- ----------- -----------
Total income tax expense before discontinued
operations and extraordinary item $ 1,550,000 $ 1,553,000 $ 2,411,000
=========== =========== ===========
Net deferred income tax assets are recognized based on the expected timing of
the reversal of taxable temporary differences and future taxable income of the
Company.
7. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT:
As stated in Note 1, the Company extinguished $21.3 million of debt as part
of the August 22, 1996 Recapitalization. The related unamortized loan financing
costs of $167,000 and the prepayment penalty of $132,000 were recorded as an
extraordinary loss on early extinguishment of debt of $184,000 (net of a
$115,000 income tax benefit).
In 1997, the Company extinguished $48.3M of debt as part of the November 5,
1997 debt offering (see Note 4). The related unamortized loan financing costs of
$1,712,000 and prepayment penalty of $560,000 were recorded as an extraordinary
loss on early extinguishment of debt of $1,631,000 (net of a $641,000 income tax
benefit).
8. ACQUISITION OF CRISPAIRE CORPORATION:
On November 10, 1997, the Company completed the acquisition of the business
of Crispaire Corporation. Pursuant to the purchase agreement, the Company
acquired certain assets and liabilities of the Crispaire Corporation. The
acquisition was funded with a portion of the cash proceeds from the $90.0
million senior subordinated note (see Note 4), issuance of $5.3 million of
junior subordinated notes by Holdings and the sale of $2.05 million of common
stock and $1.0 million of preferred stock by Holdings. The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated to
the underlying assets and liabilities based on their respective fair values at
the date of the acquisition (see Note 2(h)).
30
The following reflects the operating results of the Company for the years
ended December 31, 1997 and 1996 assuming the acquisitions occurred as of the
beginning of each of the respective periods:
PRO FORMA OPERATING RESULTS
(UNAUDITED)
December 31, December 31,
1997 1996
-------------- ---------------
Net sales $ 92,062,000 $ 93,469,000
Loss before extraordinary item (3,691,000) (1,861,000)
Net loss (5,322,000) (2,045,000)
The pro forma results of operations are not necessarily indicative of the
actual results that would have been obtained had the acquisition been made at
the beginning of the respective periods, or the results which may occur in the
future.
9. ACQUISITION OF SUBURBAN MANUFACTURING COMPANY, FORMERLY KODA ENTERPRISES
GROUP, INC.:
On March 17, 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Suburban Manufacturing Company. The acquisition was
funded with the proceeds from the amended credit agreement with the bank (see
Note 4). The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the underlying assets and liabilities based on
their respective fair values as of the date of the acquisition (see Note 2(h)).
The following reflects the operating results of the Company for the year
ended December 31, 1998 and 1997 assuming the acquisition occurred as of the
beginning of the period:
PRO FORMA OPERATING RESULTS
(UNAUDITED)
December 31, December 31
1998 1997
------------------ -----------------
Net sales $ 163,327,000 $ 135,527,000
Income (loss) before extraordinary item 3,593,000 (3,055,000)
Net income (loss) 1,787,000 (4,247,000)
The pro forma results of operations are not necessarily indicative of the
actual results that would have been obtained had the acquisition been made at
the beginning of the respective periods, or the results which may occur in the
future.
10. 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 $578,000, $448,000 and $407,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
31
Commitments for minimum lease payments under noncancellable leases as of
December 31, 1998 are as follows:
Operating
Leases
--------------
1999 $ 439,000
2000 246,000
2001 39,000
2002 18,000
2003 6,000
--------------
$ 748,000
==============
As part of the Crispaire acquisition, the Company entered into certain
management and employment agreements. Compensation expense related to these
agreements was $366,000, and $51,000 for the year ended December 31, 1998 and
1997, respectively. Under the agreements, future management fees are as follows:
1999 $ 366,000
2000 295,000
11. BENEFIT PLAN:
Substantially all employees of the RV Products division and the Crispaire
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% and
25% 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,
1998, 1997 and 1996 totaled $276,000, $261,000 and $263,000, 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.
32
Plan 1 Plan 2
-------------- --------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at 3-17-98 $ 2,151,000 $ 1,404,000
Service cost 98,000 100,000
Interest cost 117,000 77,000
Benefits paid (29,000) (56,000)
Actuarial gain 59,000 58,000
Plan amendment - - - -
Change in assumptions 214,000 115,000
-------------- --------------
Benefit obligation at 9-30-98 $ 2,610,000 $ 1,698,000
------------- ---------------
Change in plan assets
Fair value of plan assets at 3-17-98 $ 1,858,000 $ 1,410,000
Employer contributions - - - -
Employee contributions 22,000 24,000
Actual return on plan assets 91,000 55,000
Benefits paid (29,000) (56,000)
-------------- --------------
Fair value of plan assets at 9-30-98 $ 1,942,000 $ 1,433,000
-------------- ---------------
Funded status $ 668,000 $ 265,000
Unrecognized net actuarial loss 303,000 209,000
Unrecognized prior service cost - - - -
-------------- --------------
Accrued benefit cost $ 365,000 $ 56,000
============== ==============
Weighted-average assumptions as of September 30, 1998:
Discount rate 7.0% 7.0%
Expected return on plan assets 8.5% 8.5%
Rate of compensation increase 3.0% 3.0%
The change in assumptions was due to the original discount rate of 7.5% at
March 17, 1998 which was changed to 7.0% at September 30, 1998.
12. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK:
The Company's ten largest customers accounted for approximately 50%, 85% and
93% of sales for the years ended December 31, 1998, 1997 and 1996, respectively,
and approximately 31%, 33% and 85% of accounts receivable at December 31, 1998,
1997 and 1996, respectively. The credit risk on trade receivables is controlled
through credit approvals, limits and monitoring procedures. Sales to customers
in excess of 10% of consolidated net revenues are as follows:
December 31, December 31, December 31
Customer 1998 1997 1996
----------- ----------- -----------
A. $22,187,000 $18,985,000 $18,980,000
B. 19,940,000 15,553,000 22,465,000
C. 6,613,000 7,110,000 8,377,000
The Company maintains its cash accounts primarily with major financial
institutions, and had bank balances at December 31, 1998 and 1997 that exceeded
FDIC insurance limits by $10,000 and $9,459,000, respectively.
33
13. 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 of
were liquidated and the liabilities were settled during 1998. Accordingly,
Faulkner is reported as a discontinued operation for the years ended December
31, 1998, 1997 and 1996.
Net sales from Faulkner were $5,569,000, $7,964,000 and $12,003,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest expense
allocated to discontinued operations was $0, $1,494,000 and $1,013,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Net liabilities of the discontinued operations are summarized as follows:
December 31, December 31,
1998 1997
--------------- -------------
ASSETS
Accounts receivable, net $ - - $ 701,000
Inventory - - 790,000
Other current assets - - 35,000
--------------- -------------
Total current assets - - 1,526,000
Property, plant and equipment, net - - 243,000
Intangible assets, net - - - -
--------------- -------------
Total assets - - 1,769,000
LIABILITIES
Account payable - - 303,000
Other accrued expenses 1,290,000 1,932,000
--------------- -------------
Total current liabilities 1,290,000 2,235,000
Other noncurrent liabilities - - - -
--------------- -------------
Total liabilities 1,290,000 2,235,000
--------------- -------------
Net liabilities of discontinued operations $ (1,290,000) $ (466,000)
=============== =============
As of December 31, 1998 the majority of the accrued expenses relate to
remaining warranty obligations.
Components of the $5.65 million loss recorded during 1997 on disposal of
Faulkner are as follows:
Reduction in carrying value of inventories $ 2,400,000
Write-off of intangible assets 1,100,000
Accrued holding period loss 1,000,000
Reduction in carrying value of property, plant and
equipment 450,000
Accrued employee severance costs 150,000
Accrued sales returns 250,000
Other accrued expenses 300,000
---------------
$ 5,650,000
===============
34
14. CONTINGENCY:
During September 1997, the Company made a decision to upgrade certain air
conditioning units which were sold in previous years. In 1997 the Company's
portion of the costs to complete the upgrade was estimated and accrued at
$500,000. In 1998 the Company revised the estimate and accrued an additional
$100,000. Management has an agreement with the vendor that supplied the
component to bear a substantial portion of the total cost. At December 31, 1998
and 1997, the remaining accrued liability was $212,000 and $500,000. Management
believes the remaining liability will be applied to the completion of the
upgrade during 1999.
15. LITIGATION:
The Company is a defendant in a lawsuit seeking monetary damages in an
unspecified amount, and an injunction, for patent, trademark and trade dress
infringement, Bard Manufacturing Company et al. v. Crispaire Corporation, No.
3:95-CV-7103 (N.D. Ohio 1998). The trade dress claims against Crispaire were
dismissed by the Court on summary judgment dated November 23, 1998. On that same
date, the court also granted summary judgment that (a) the Bard patents were
enforceable, but left open for trial the question of validity, and (b) certain
Crispaire products infringed certain claims under the patents, but left the
remaining claims for trial. A bifurcated jury trial - liability first and then
damages - commenced on or about December 2, 1998. On December 8, 1998, the court
entered a directed verdict in favor of Bard, holding that the patents were valid
and that Crispaire had infringed additional claims under the patents. A jury
trial to determine damages is scheduled for April 8, 1999. Crispaire intends to
move for reconsideration of the Trial Court's directed verdict, and, if
unsuccessful, to appeal that verdict. Crispaire also intends to appeal the
adverse summary judgment rulings. Management of the Company continues to believe
that the outcome of the trial on damages will not have a material adverse effect
on the company's financial position, results of operations or liquidity.
In addition to the claim that was 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 these 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.
16. DERIVATIVES:
The Company entered into a three year interest rate cap agreement on April 7,
1998 to reduce the impact of its floating rate debt. The agreement, based on a
notional principal amount of $10 million, entitles the Company to receive
payments on the last day of each quarter if the floating Libor rate exceeds the
rate of 7.69% stated in the agreement. The payment amount is calculated at the
actual Libor rate compared to the stated rate applied to the principal amount.
For the period ended December 31, 1998 the floating Libor rate did not exceed
the stated interest rate.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART 3
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 52 President and Chief Executive Officer, Director
Gregory G. Guinn 50 Vice President -- RV Sales and Marketing
Richard L. Schreck 46 Chief Financial Officer, Secretary, Treasurer
Lonnie L. Snook 63 Vice President -- RV Manufacturing and
Engineering
George D. Wyers 66 President -- Crispaire, Director
Dean T. DuCray 58 Director
Lawrence Jones 67 Director
Thomas F. McWilliams 55 Director
James A. Urry 44 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 has been the Vice President of Sales and
Marketing of RVP since 1989. 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.
36
George D. Wyers. Mr. Wyers has been the President and Chief Executive Officer
of Crispaire since 1988. After the acquisition, he serves as President of the
Crispaire Division of Airxcel. Prior to joining Crispaire, Mr. Wyers spent
twelve years as a General Manager of a leading air conditioning equipment
distributor based in Dallas, Texas.
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 the Chief
Financial Officer of Just Like Home, Inc., a provider of assisted living
services based in Bradenton, Florida.
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 currently serves as a Director to Union
Pacific Resources (gas exploration). Mr. Jones retired from the Fleming
Company's (food distribution) Board of Directors on January 1, 1998.
Thomas F. McWilliams. Mr. McWilliams has been a director of the Company since
1996. Mr. McWilliams has been affiliated with Citicorp Venture Capital, Ltd.
("CVC"), a private equity investment company, since 1983 and presently serves as
managing director of CVC as well as a member of CVC's investment committee. Mr.
McWilliams is currently a director of each of Chase Brass Industries, Inc., Ergo
Science Corporation and various privately owned companies.
James A. Urry. Mr. Urry has been a director of the Company since 1996. Mr.
Urry has been with Citibank, N.A. since 1981, serving as a vice president since
1986. He has been a vice president of CVC since 1989. He is a director of
AmeriSource Health Corporation, CLARK Material Handling Corporation, CORT
Business Services Corporation, Hancor Holding Corporation, International Knife
and Saw Corporation, Palomar Technologies, Inc., York International Corporation
and Brunner Mondple.
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.
37
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, 1998.
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 1998 $ 215,004 $ 55,052 - - - - $ 3,791
President and Chief Executive Officer 1997 215,004 - - - - - - 3,822
1996 215,004 74,334 141,606 - - 4,236
Gregory G. Guinn 1998 120,838 2,350 - - - - 542
Vice President - RVP Sales and 1997 100,008 - - - - - - 535
Marketing 1996 100,008 34,445 85,554 - - 139
Richard L. Schreck 1998 120,838 27,350 - - - - 428
Chief Financial Officer, Secretary and 1997 100,008 - - - - - - 355
Treasurer 1996 100,008 34,445 85,554 - - 82
Lonnie L. Snook 1998 120,838 2,350 - - - - 956
Vice President -- RVP Manufacturing 1997 100,008 - - - - - - 950
and Engineering 1996 100,008 34,445 85,554 - - 562
George D. Wyers 1998 203,859 - - - - - - 1,550
President - Crispaire division 1997 23,078 480,835 - - - - - -
1996 - - - - - - - - - -
- ------------------
(1) The named 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.
EMPLOYMENT AGREEMENTS
In connection with the Crispaire Acquisition, the Company entered into
employment agreements with each of Messrs. Sellers, Shuford and Wyers on
November 10, 1997. Each agreement is for a term that expires upon the earlier of
October 31, 2000, the employee's death, voluntary termination, termination by
resolution by the Board of Directors, at the Company's option, or the employee's
disability. Mr. Sellers' base salary is $66,934 per year. Mr. Shuford's base
salary is $98,946 per year. Mr. Wyers' base salary is $200,000 per year. Each
employee is eligible for an annual performance bonus. Each agreement contains a
nonsolicitation provision, and Mr. Wyers' agreement contains a noncompetition
provision.
38
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) 901,029.05 58.35(2) 40.25%
399 Park Avenue
New York, New York 10043
Melvin L. Adams 141,637.30 9.17 13.23%
George D. Wyers 138,331.53 8.96 12.92%
Gregory G. Guinn 76,348.75 4.94 7.13%
Richard L. Schreck 76,348.75 4.94 7.13%
Lonnie L. Snook 61,533.75 3.98 5.75%
All directors and executive officers as a group
(9 persons, including those named above) 512,324.24 33.18 47.84%
- ------------------
(1) Includes shares held by employees and affiliates of CVC.
(2) Includes shares of (i) voting Class A Common Stock representing 40.46% of
outstanding voting Class A Common Stock and (ii) non-voting Class B Common
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
39
PART IV
ITEM 14. 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 15
Consolidated Balance Sheets - December 31, 1998 and 1997 16
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997, and 1996 17
Consolidated Statements of Changes in Stockholder's Equity (Deficiency)
Years ended December 31, 1998, 1997, and 1996 18
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997, and 1996 19
Notes to Consolidated Financial Statements 21
(a)(2) The following financial statement schedules are included in Item 14, Part
IV of this report.
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
Exhibit Number Description
-------------- -----------
99.1. Asset Purchase Agreement among Crispaire Corporation and Airxcel, Inc.
and Airxcel Holdings, Inc. dated October 17, 1997.
99.2 Stock Purchase Agreement among William S. Karol and Airxcel, Inc.
Dated March 17, 1998.
27. Financial Data Schedule.
40
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------
Balance at Charged to Balance at
Beginning Charged to Other (1) End of
Description of Year Expense Accounts Deductions Year
- ----------- ------- ------- -------- ---------- ----
Allowance for Doubtful Accounts
Year ended December 31,
1998 $ 40 $ 297 $ - - $ (283) $ 54
1997 20 38 - - (18) 40
1996 20 63 - - (63) 20
Allowance for Discounts
Year ended December 31,
1998 $ 52 $ - - $ - - $ - - $ 52
1997 52 - - - - - - 52
1996 52 - - - - - - 52
(1) Deduction for purposes for which reserve was created.
41
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.
March 15, 1999 /s/ Melvin L. Adams
- ------------------------------ ---------------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
March 15, 1999 /s/ Richard L. Schreck
- ------------------------------ ---------------------------------------
Date Richard L. Schreck
Secretary/Treasurer and Chief Financial
Officer
March 15, 1999 /s/ Lawrence Jones
- ------------------------------ ---------------------------------------
Date Lawrence Jones
Director
March 15, 1999 /s/ Dean T. DuCray
- ------------------------------ ---------------------------------------
Date Dean T. DuCray
Director
March 15, 1999 /s/ James A. Urry
- ------------------------------ ---------------------------------------
Date James A. Urry
Director
March 15, 1999 /s/ Thomas F. McWilliams
- ------------------------------ ---------------------------------------
Date Thomas F. McWilliams
Director
March 15, 1999 /s/ George D. Wyers
- ------------------------------ ---------------------------------------
Date George D. Wyers
Director
42
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
99.1 Asset Purchase Agreement among Crispaire Corporation and
Airxcel, Inc. and Airxcel Holdings, Inc. dated October
17, 1997.
99.2 Stock Purchase Agreement among William S. Karol and
Airxcel, Inc. Dated March 17, 1998.
27. Financial Data Schedule.