10-Q 1 y91392e10vq.txt AIRXCEL, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 INFORMATION SPECIFIED FORM 10-Q (see note below) (Mark one) [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ COMMISSION FILE NUMBER 333-43335 AIRXCEL, INC. (Exact name of Registrant as specified in its charter) Delaware 48-1071795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3050 North Saint Francis, Wichita, Kansas 67219 (Address of principal executive offices) (Zip Code) (316) 832-3400 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed, since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES XX NO ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 1,000 shares of Common Stock as of September 30, 2003 Note: This information is provided solely to comply with the obligation contained in the indenture agreement governing the Company's Senior Subordinated Notes. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AIRXCEL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See accompanying notes. 2 AIRXCEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 3 AIRXCEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 4 AIRXCEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (Unaudited)

5 AIRXCEL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) 1. BASIS OF PRESENTATION: The accompanying interim consolidated financial statements have not been audited but reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Company's financial position and results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States for interim financial information and Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes therein for the fiscal year ended December 31, 2002 included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 28, 2003. The results of operations for any interim period are not necessarily indicative of results for the full year or for any quarter. 2. ORGANIZATION AND BUSINESS: Airxcel, Inc. (the "Company") is a wholly-owned subsidiary of Airxcel Holdings Corporation (Holdings); formerly known as RV Holdings Corporation. The Company is a diversified designer, manufacturer and marketer of air conditioners, furnaces, water heaters, cooking appliances and low-voltage refrigeration compressors for the recreation vehicle industry, and wall mount air conditioners, environmental control units and heat pumps for the heating, ventilating and air conditioning industry in the United States, Canada and certain international markets. The recreation vehicle industry is supplied by its RV Products division and Suburban Manufacturing Company while the heating, ventilating and air conditioning industry is supplied by the Marvair division, formerly Crispaire division. Due to the similarities of the economic characteristics, production processes, customers, distribution methods and regulatory environment of the company's products, the Company is managed, operated and reported as one segment. A significant part of the Company's operations are directly dependent upon the conditions in the highly cyclical RV industry, highly competitive telecommunications industry and the commercial and public construction industry. Companies within these industries, including the Company's largest customers, are subject to volatility in operating results due to external factors such as economic, demographic and political changes. These factors include seasonal factors, fuel availability and fuel prices, overall consumer confidence and general economic conditions, the level of discretionary consumer spending, government regulation, interest rates and unemployment. 3. RECLASSIFICATIONS The Company has made certain reclassifications in the 2002 condensed consolidated financial statements to conform to the current year presentation. 6 4. INVENTORIES: Inventories consist of the following:

5. INTANGIBLE ASSETS: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. This new accounting standard required that goodwill and indefinite lived assets no longer be amortized but instead be tested at least annually for impairment and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount. The company engaged an independent appraisal company to assist with the valuation. Upon initial application of SFAS No. 142, the Company reassessed the useful lives of the intangible assets and determined that certain trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely and there are no material legal or contractual restrictions on their use. In addition, assembled work force and customer base was reclassified to goodwill in accordance with SFAS No. 142. Other trademarks have a finite life and will continue to be amortized over their remaining useful life. The Company has three reporting units with goodwill. As determined by the step one assessment for each reporting unit, the estimated fair value, based on a present value valuation, was less than its carrying amount including goodwill, primarily due to the decline in the telecommunications industry. Step two of the assessment indicated an impairment of goodwill and certain trademark costs amounting to $19,718, (net of $10,130 in taxes) which was recorded as a cumulative effect of a change in accounting principle in the accompanying 2002 condensed consolidated statement of operations.

Amortization expense on the intangible assets subject to amortization, as of September 30, 2003, is expected to be $292 in 2003, $279 in 2004, $113 in 2005, $85 in 2006, and $83 in 2007. 6. NOTES RECEIVABLE FROM HOLDINGS: On February 19, 2003, the Company purchased certain notes originally issued by Holdings from the holders for an aggregate purchase price of $3,447. These notes, which are reported as notes receivable from Holdings on the accompanying 2003 condensed consolidated balance sheet, mature November 2008. Although the Company may determine to distribute the notes to Holdings, subject to compliance with the Company's credit facility, senior subordinated notes and other debt agreements, the Company does not anticipate this will occur in the foreseeable future. Pursuant to an IRS regulation issued on August 29, 2003, the taxable income to Holdings associated with the note purchase results in a reduction to the tax basis of certain assets and has been reflected in the accompanying condensed consolidated financial statements as a non-cash distribution to Holdings and a decrease in deferred income tax assets. 7. WARRANTY RESERVE: The Company offers a one to five year warranty for its products. The specific terms and conditions of those warranties vary depending upon the product sold. An estimated cost of product warranty is recognized at the time the revenue is recognized. The Company estimates the cost of its product warranty obligation based on historical analysis of sales and warranty costs incurred. The Company periodically assesses the adequacy of its recorded product warranty obligation and adjusts the amounts as necessary. 8 Changes in the Company's product warranty liability during the period are as follows:

8. LONG-TERM DEBT: The Company maintains a Credit Facility with a Bank which permits borrowings at interest rates based on either the bank's base rate or LIBOR. On January 9, 2003 the Company reduced the total commitment available under the credit facility to $25,000. 9. INCOME TAXES: Total income taxes in 2002, including taxes related to the cumulative effect of a change in accounting principle differ from the statutory rate due primarily to nondeductible goodwill impairment charges and amortization in 2002, as well as state income taxes. 10. CONTINGENCY: On March 13, 2003 the Company amended its letter of credit to increase the amount to $1,464. This letter of credit obligates the Company to make payment in the event of a default on an agreement with an insurance company to pay workers compensation claims incurred. Management does not expect any material losses to result from this arrangement because performance is not expected to be required, and therefore, is of the opinion that the fair value of this instrument is zero. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales. Net sales increased 8.6% from $40.7 million to $44.2 million in the quarter ended September 30, 2003 as compared to the corresponding quarter of 2002. For the nine month periods net sales decreased 1.0% from $125.4 million to $124.1 million in the nine months of 2003. For the quarter ended September 30, 2003 net sales increased in comparison to the same period of 2002 primarily due to increased volume within the school and telecommunications industries. For the nine months ended September 30, 2003 net sales remained relatively constant in comparison to the same period of 2002. Gross profit. Gross profit increased 18.7% from $7.5 million (18% of net sales) to $8.9 million (20% of net sales) in the quarter ended September 30, 2003 as compared to the corresponding quarter of 2002. For the nine month periods, gross profit increased 2.5% from $23.7 million (19% of net sales) in 2002 to $24.3 million (20% of net sales) in the nine months of 2003. For the quarter and nine months ended September 30, 2003, gross profit increased in comparison to the same period of 2002 primarily due to favorable changes in the product mix and cost reduction efforts. Selling, general and administrative expense (including amortization of intangible assets and computer software). Selling, general and administrative expense decreased 7.1% from $4.2 million (10% of net sales) to $3.9 million (9% of net sales) in the quarter ended September 30, 2003 as compared to the corresponding quarter of 2002. For the nine month periods, selling, general and administrative expense decreased 8.5% from $12.9 million (10% of net sales) in 2002 to $11.8 million (10% of net sales) in the nine months of 2003. The decrease was primarily due to cost reduction efforts. Interest expense. Interest expense remained constant at $2.7 million and $8.1 million, respectively, in the quarter and the nine months ended September 30, 2002 and 2003. Income tax expense. Income tax expense increased from $.2 million to $.8 million in the quarter ended September 30, 2003 as compared to the corresponding quarter of 2002 and increased from $1.0 million to $1.7 million in the nine months ended September 30, 2003, the increases being attributed to the increases in pre-tax income. The effective income tax rate is comparable for each of the periods presented. Cumulative effect of change in accounting principle. The cumulative effect of change in accounting principle is a result of the adoption in 2002 of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" and the impairment charges recorded in 2002. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 2003, the Company generated $7.5 million in net cash flow from operating activities compared to $12.1 million for the comparable period in 2002, primarily as a result of maintaining higher working capital levels in 2003. 10 Cash generated from operating activities was used primarily to repay borrowings under the Company's existing credit facility and other long term debt by approximately $4.7 million. In addition, cash was used to purchase, on February 19, 2003, certain notes from the holders for an aggregate purchase price of $3.4 million. Although the Company may determine to distribute the notes to Holdings, subject to compliance with the Company's credit facility, senior subordinated notes and other debt agreements, the Company does not anticipate this will occur in the foreseeable future. Covenants under the Company's credit facility with the bank restrict the Company's ability, subject to certain exceptions, to dispose of assets, incur additional indebtedness, guarantee obligations, prepay other indebtedness or amend other debt instruments, make distributions or pay dividends, redeem or repurchase capital stock, create liens on assets, make acquisitions, engage in mergers or consolidations, and change the business conducted by the Company. In addition, the Company is required to maintain compliance with a fixed charge coverage ratio and maintain a minimum effective capital balance. The Company is in compliance with these ratios at September 30, 2003. Management's current business plan estimates working capital levels and operating profitability. The achievement of this plan is necessary for compliance with various financial covenants during 2003. The possibility exists that certain financial covenants will not be met if business conditions are other than as anticipated. In such event, the Company would need an amendment or waiver of such financial covenants; however, there can be no assurance that such amendment or waiver will be obtained. The Company meets its working capital, capital equipment requirements and cash requirements with funds generated internally and funds from agreements with a bank. Management currently expects its cash on hand, funds from operations and borrowings available under existing credit facilities to be sufficient to cover both short-term and long-term operating requirements. CERTAIN IMPORTANT FACTORS Except for the historical information contained herein, this Form 10-Q contains forward-looking statements, and any statements contained in this Form 10-Q that are not statements of historical fact are deemed to be forward-looking statements. Without limiting the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "estimate", or "continue", the negative or other variations thereof, or comparable terminology, are intended forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, including possible changes in economic conditions, prevailing interest rates or gasoline prices, or the occurrence of unusually severe weather conditions, that can affect both the purchase and usage of recreational vehicles, which, in turn, affects purchases by consumers of the products that the Company sells. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk on variable rate financial instruments: The Company maintains a $25 million credit facility which permits borrowings at interest rates based on either the bank's base rate or LIBOR. Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease. The change in interest expense and earnings before income taxes would be dependent upon the weighted average outstanding borrowings during the reporting period following an increase in market interest rates. Based on the Company's current outstanding borrowings under the credit facility at an average interest rate of 3.8% per annum, a 1% increase in market interest rates would increase interest expense and decrease earnings before income taxes by approximately $30,000 annually. Market risk on fixed-rate financial instruments: Included in long-term debt are $90 million of 11% Senior Subordinated Notes due 2007. Increases in market interest rates would generally cause a decrease in the fair market value of the Notes and a decrease in market interest rates would generally cause an increase in fair value of the Notes. 12 ITEM 4. CONTROLS AND PROCEDURES (a) Our chief executive officer and chief financial officer have reviewed and evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this Quarterly Report. Based on such review and evaluation, the officers believe that the disclosure controls and procedures are designed effectively to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (1.) is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and (2.) that the information required to be discussed by the Company in the reports that it files and submits under the Securities Exchange Act of 1934, as amended, is documented and communicated to the Company's management, including the officers, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 13 PART 2 - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS N/A ITEM 2. CHANGES IN SECURITIES N/A ITEM 3. DEFAULTS UPON SENIOR SECURITIES N/A ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A ITEM 5. OTHER INFORMATION N/A ITEM 6 (A.) EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ITEM 6 (B.) REPORTS ON FORM 8-K None 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Airxcel, Inc. November 5, 2003 /s/ Melvin L. Adams ------------------------------ ------------------------------ Date Melvin L. Adams President and Chief Executive Officer November 5, 2003 /s/ Richard L. Schreck ------------------------------ ------------------------------ Date Richard L. Schreck Secretary/Treasurer and Chief Financial Officer 15

AIRXCEL INC 10-Q