AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 2004
REGISTRATION NO. 333-116013
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FEDDERS NORTH AMERICA, INC.
(Exact name of registrant as specified in its charter)
---------------------
<Table>
DELAWARE 3585 22-2103510
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Organization or Incorporation) Classification Code Number) Identification Number)
</Table>
505 MARTINSVILLE ROAD
LIBERTY CORNER, NEW JERSEY 07938-0813
(908) 604-8686
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
---------------------
FEDDERS CORPORATION
505 MARTINSVILLE ROAD
LIBERTY CORNER, NEW JERSEY 07938
Name, Address and Telephone Number of
Additional Registrant
<Table>
DELAWARE 3585 22-2572390
Jurisdiction of Organization Primary Standard Industry Classification I.R.S. Employer
Code Number Identification No.
</Table>
---------------------
ROBERT N. EDWARDS, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
FEDDERS CORPORATION
505 MARTINSVILLE ROAD
LIBERTY CORNER, NEW JERSEY 07938-0813
(908) 604-8686
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
COPIES TO:
MARK C. SMITH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036-6522
(212) 735-3000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO THE SAID SECTION 8(a), MAY DETERMINE.
$155,000,000
PROSPECTUS
FEDDERS NORTH AMERICA
FEDDERS NORTH AMERICA, INC.
Offer to Exchange All 9 7/8% Senior Notes Due 2014
for 9 7/8% Senior Notes due 2014
As Fully and Unconditionally Guaranteed on a
Senior Basis as Described Herein by Fedders Corporation and the Continuing
Subsidiaries of
Fedders North America, Inc.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY
23, 2004, UNLESS WE EXTEND IT.
We are offering a total of $155,000,000 9 7/8% Senior Notes, which are
registered with the Securities and Exchange Commission, to all holders of our
9 7/8% Senior Notes. We refer to this prospectus and the letter of transmittal
that accompanies it as the exchange offer. We refer to the 9 7/8% Senior Notes
being offered in the exchange offer as the new notes. We refer to the 9 7/8%
Senior Notes that can be exchanged for the new notes as the old notes. We refer
to the old notes and the new notes collectively as the notes, where the context
so requires.
Terms of the exchange offer:
-- We will issue up to $155,000,000 aggregate principal amount of new
notes.
-- The exchange offer expires at 5:00 p.m., New York City time, on July
23, 2004, unless extended.
-- We will exchange all old notes that are validly tendered and not
withdrawn prior to the expiration date of the exchange offer.
-- You may withdraw tenders of old notes at any time prior to the
expiration of the exchange offer.
-- There will be no United States federal income tax consequences to
holders that exchange an old note for a new note pursuant to the
exchange offer, but you should see "Certain United States Federal Tax
Consequences" on page 94 for more information.
-- We will not receive any cash proceeds from the exchange offer.
-- The terms of the new notes are substantially identical to the old
notes, except that select transfer restrictions and registration rights
relating to the old notes do not apply to the new notes.
-- The old notes are, and the new notes will be, unconditionally
guaranteed by Fedders Corporation and the continuing subsidiaries of
Fedders North America, Inc.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
18.
Neither the Securities and Exchange Commission nor any state securities
commission has approved and disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June 15, 2004.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
MARKET AND INDUSTRY DATA.................................... ii
FORWARD-LOOKING STATEMENTS.................................. ii
SUMMARY..................................................... 1
CONSEQUENCES OF NOT EXCHANGING OLD NOTES.................... 10
SUMMARY DESCRIPTION OF THE NEW NOTES........................ 10
RISK FACTORS................................................ 18
USE OF PROCEEDS............................................. 26
CAPITALIZATION.............................................. 27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 29
RATIO OF EARNINGS TO FIXED CHARGES.......................... 32
THE EXCHANGE OFFER.......................................... 33
BUSINESS.................................................... 40
MANAGEMENT.................................................. 52
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 54
DESCRIPTION OF OTHER INDEBTEDNESS........................... 55
DESCRIPTION OF THE NOTES.................................... 56
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES.............. 92
PLAN OF DISTRIBUTION........................................ 96
LEGAL MATTERS............................................... 97
EXPERTS..................................................... 97
WHERE YOU CAN FIND MORE INFORMATION......................... 97
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 98
INDEX TO FINANCIAL STATEMENTS............................... F-1
</Table>
---------------------
This prospectus does not contain all the information set forth or
incorporated by reference in the Form S-4 registration statement and the
exhibits and schedules relating thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the SEC. Statements
contained in this prospectus as to the contents of any contract or other
document referred to herein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Form S-4 registration statement or such other document, and each
such statement is qualified in all respects by such reference. For further
information, reference is made to the Form S-4 registration statement and the
exhibits filed or incorporated as a part thereof, which are on file at the
offices of the SEC and may be obtained upon payment of the fee prescribed by the
SEC, or may be examined without charge at the offices of the SEC. SHAREHOLDERS
MAY OBTAIN DOCUMENTS INCORPORATED BY REFERENCE IN THIS DOCUMENT FREE OF CHARGE
BY REQUESTING THEM ORALLY OR IN WRITING FROM FEDDERS NORTH AMERICA, INC. AT THE
FOLLOWING ADDRESS:
MAIL:
Fedders North America, Inc.
Attention: Corporate Secretary
505 Martinsville Road
Liberty Corner, New Jersey 07938-0813
TELEPHONE:
(908) 604-8686
TO OBTAIN TIMELY DELIVERY OF ANY OF OUR FILINGS, AGREEMENTS, OR OTHER DOCUMENTS,
YOU MUST MAKE YOUR REQUEST TO US NO LATER THAN FIVE DAYS BEFORE THE COMPLETION
OF THE EXCHANGE OFFER.
---------------------
i
MARKET AND INDUSTRY DATA
Market data and certain industry forecasts used throughout this prospectus
were obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information contained therein was obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. Similarly, internal surveys, industry forecasts and market research,
while believed to be reliable, have not been independently verified, and neither
we nor the initial purchaser make any representation as to the accuracy of such
information.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate," "believe,"
"intend," "estimate," "expect," "continue," "should," "could," "may," "plan,"
"project," "predict," "will" and similar expressions and include references to
assumptions and relate to our future prospects, developments and business
strategies. Factors that could cause our actual results to differ materially
from those expressed or implied in such forward-looking statements include, but
are not limited to:
- competition in the highly competitive HVACR business resulting from
industry overcapacity or other factors;
- a significant decline in industry sales resulting from an economic
downturn;
- fluctuations in working capital requirements because of the seasonal
nature of our business;
- climatic conditions, particularly cooler than normal summers;
- varying costs of electricity; and
- all the other factors described herein under "Risk Factors."
We undertake no obligation to revise the forward-looking statements
included or incorporated by reference in this prospectus to reflect any future
events or circumstances. Our actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences are discussed in this prospectus under the caption "Risk Factors" as
well as elsewhere in this prospectus and our other filings with the SEC. See
"Where You Can Find More Information."
ii
SUMMARY
This summary highlights selected information from this prospectus. It does
not contain all of the information that may be important to you in order to
understand this offering or the terms of the notes. You should read carefully
the entire document, including the "Risk Factors" section and Fedders
Corporation's consolidated financial statements and the related notes. As used
in this prospectus, unless the context otherwise requires (1) "Fedders," "we,"
"our," "ours" and "us" refer to Fedders Corporation and its subsidiaries, (2)
"Fedders North America" refers to Fedders North America, Inc., the issuer of the
notes and a wholly owned subsidiary of Fedders Corporation, and its subsidiaries
and (3) "Fedders International" refers to Fedders International, Inc., a wholly
owned subsidiary of Fedders, and its subsidiaries. Fedders conducts its
international operations primarily through Fedders International. Fedders and
Fedders International are not subject to the principal covenants contained in
the notes offered hereby. Unless otherwise noted, all references in this
prospectus, including financial information, assume the consummation of the
reorganization discussed below. Fedders' fiscal year end through the 2003 fiscal
year was August 31. However, on August 26, 2003, Fedders' board of directors
decided to change its fiscal year end from August 31 to December 31, effective
in the 2004 fiscal year.
FEDDERS CORPORATION
We are a leading global producer and marketer of air treatment products for
the residential, commercial and industrial markets. Our products include room
air conditioners, central air conditioners, dehumidifiers, humidifiers, air
cleaners and thermal technology products. We believe our Heating, Ventilation,
Air Conditioning and Refrigeration ("HVACR") segment is the largest supplier of
room air conditioners and dehumidifiers in North America, with over 30% market
share for each product. Our HVACR segment also manufactures central air
conditioning, humidification and air cleaning products for the residential and
commercial markets. Our Engineered Products segment manufactures air cleaning
and humidification systems and thermal technology products for commercial and
industrial applications. Our shares are traded on the New York Stock Exchange
under the symbol "FJC," and we had a common equity market capitalization of
$121.6 million as of June 8, 2004.
Our position as a low-cost producer of high-quality air treatment products
is one of our primary competitive advantages. Since Fedders launched its first
joint venture in China in 1995, we have successfully transitioned the majority
of our production from the United States to lower cost international locations,
including China, India and the Philippines. Fedders International has seven
manufacturing facilities in China, including Fedders Shanghai, which we believe
is the world's largest producer of window air conditioners, and is the largest
exporter of air conditioners from China. Products manufactured in our
international facilities now account for over 75% of our annual production
(measured as a percentage of cost of goods sold in fiscal 2003), and we
anticipate that this percentage will increase as we continue to move our
remaining high-volume production to overseas facilities.
We believe that our low-cost international manufacturing base will continue
to support our global leadership position in window air conditioners and will
facilitate our growth into new geographic markets, such as China and India, and
new product markets, such as central air conditioning. With an established
manufacturing infrastructure in place and targeted investments in sales and
marketing, we believe we have laid the foundation necessary to capture a larger
share of the global $37.0 billion air treatment market.
HIGH-GROWTH INTERNATIONAL MARKETS. In addition to our strong North
American retail and wholesale distribution networks, our global infrastructure
reaches several of the largest and fastest growing air treatment markets in the
world, including China and India. Both markets are large -- annual sales of room
air conditioners exceed ten million units in China and one million units in
India -- and growing rapidly. In addition, the demand for central air
conditioning and industrial air cleaning products is growing rapidly in these
markets as their economies modernize. Fedders International recently relocated
its headquarters to Shanghai, China to enhance our ability to serve these
markets. We have established key distribution relationships in these markets,
including Fedders International's joint venture with Suning Appliance Group,
which is a national appliance and electronics company and, we believe, the
largest retailer of air conditioners
1
in China. We believe that our strong Asian manufacturing and distribution
presence will make China and India cornerstones of our growth over the next
several years.
CENTRAL AIR CONDITIONER MARKET. The North American central air conditioner
market is more than five times larger than the North American room air
conditioner market in terms of dollar value. We are leveraging our low-cost
manufacturing capabilities and extensive sales and service networks to further
penetrate the $7.0 billion North American central air conditioner market. In
addition to the North American market, we believe that our cost-competitive
manufacturing capabilities and global sales and service network will allow
Fedders to participate in other geographic markets, such as Asia, Europe and
South America, as the use of central air conditioning increases in those
markets. Fedders International has begun to distribute central air conditioning
products in China and other global markets through our existing and new
wholesale distribution channels, contractors and original equipment
manufacturers ("OEMs").
OUR HVACR SEGMENT
Our HVACR segment designs, manufactures and distributes room air
conditioners, ductless split-system room air conditioners, residential and light
commercial central air conditioners and dehumidifiers. Our consumer products are
primarily sold through the retail channel and OEMs, and our residential and
commercial products are primarily sold through wholesale distributors,
contractors and OEMs. Our products are marketed under widely recognized brand
names, including "Fedders," "Maytag," "Emerson Quiet Kool," "Trion" and
"Eubank."
The global HVACR markets in which our HVACR segment products compete have
sales in excess of $34.0 billion. These markets include the $4.3 billion window
air conditioner market, the $9.3 billion ducted central air conditioner market
and the $16.8 billion ductless split-system air conditioner market. In North
America, window and through-the-wall units dominate the room air conditioner
market. As a result of the addition of new HVACR products, in particular ducted
central air conditioning products, we believe we are now positioned to sell our
products to a North American market estimated to be over $8.0 billion, compared
to the $1.5 billion market we served in 1997. Globally, the market for our HVACR
products is growing rapidly. Ductless split systems predominate in the
international market for consumer and residential air conditioners, but there is
growing interest in ducted central air conditioners. In China, the domestic
market for room air conditioners has grown to ten million units annually and is
also becoming a growth market for central air conditioners. In India, the
domestic market for room air conditioners has grown to one million units
annually, and is expected to grow to approximately five million units within
five years due to the country's expanding middle class and government
deregulation.
OUR ENGINEERED PRODUCTS SEGMENT
Our Engineered Products segment designs, manufactures and distributes
products for the indoor air quality and thermal technology markets. These
products include electronic air cleaners, fan filters, media filters and
humidification systems and thermoelectric-based components and equipment. Our
Engineered Products are primarily sold through manufacturers' representatives,
distributors and directly to end-users. Our indoor air quality products are
marketed under the brand names "Trion," "Envirco" and "Herrmidifier," and our
thermal technology products are marketed under the "Melcor" brand name.
The products and services of our Engineered Products segment compete in the
$2.5 billion global indoor air quality market. This market is growing as a
result of industrial expansion primarily in Asia in the semiconductor,
electronics and pharmaceutical and medical industries and as a result of the
overall growing awareness of indoor air quality issues. For example, China is
becoming a high growth market for air treatment products such as fan filter
units used in cleanrooms for the semiconductor industry. We expect growth in the
North American market from expansion of sales of our high efficiency particulate
air ("HEPA") and ultra low penetration air ("ULPA") media cleanroom products
into the medical and pharmaceutical markets and from retrofits of existing
cleanrooms. In the commercial and industrial markets, we expect growth from
sales of our electrostatic air cleaners for exhaust systems, electronic filter
banks for HVAC systems and from sales of our humidification systems.
2
OUR COMPETITIVE STRENGTHS
We believe that the following strengths differentiate us from our
competitors and provide us with significant competitive advantages:
LEADING MARKET POSITIONS. We have leading market positions and significant
market shares in our principal product categories. We are the leading supplier
of room air conditioners and dehumidifiers in North America, with approximately
a 30% market share in each product. Fedders International is the largest
exporter of air conditioners from China, with approximately a 20% share of units
exported. Our leading market positions give us the operating scale to support
the broad product offerings and comprehensive customer support infrastructure
that is required by many of our largest customers. This operating scale allows
us to form successful long-term partnerships with many of the world's largest
retailers and distributors of air treatment products. It also provides us with
economies of scale in manufacturing and purchasing that we believe give us a
significant cost advantage.
LOW-COST PRODUCER OF HIGH QUALITY PRODUCTS. Fedders is a low-cost producer
of high quality air treatment products due, in part, to Fedders International's
significant Asian manufacturing operations and our continuous cost-reduction
programs in product design and manufacturing processes. Since launching our
first joint venture in China in 1995, we have successfully transitioned the
majority of our production from the United States to our lower cost Asian
locations, including China, India and the Philippines. Products manufactured in
these Asian facilities now account for over 75% of our annual production
(measured as a percentage of cost of goods sold in fiscal 2003). Despite
continued price deflation in the room air conditioning products market, our
ability to continually lower our costs has allowed us to maintain gross margins
in our HVACR segment. We believe that our manufacturing costs can continue to
improve as we leverage these strengths across a broader range of products and
produce more of our high-volume products overseas.
All of our domestic and international manufacturing facilities utilize
modern manufacturing technologies to produce the highest quality products. All
of our principal manufacturing facilities have received the highest level of
quality certification (ISO 9000 series) from the International Standards
Organization for our quality management systems. Internally, all of our
facilities adhere to our single world-wide standard of quality. We believe our
ability to maintain our high quality standards has been critical to our ability
to maintain and expand our market positions since significantly globalizing our
production base.
GLOBAL SOURCING EXPERTISE. We have dedicated substantial resources to the
global sourcing of components and raw materials on the most cost-effective basis
for over 20 years. Our sourcing operations in China and the United States
utilize the expertise of our local employees and agents and the opportunities
provided by the Internet, such as reverse auctions, to drive down costs. Our
commitment to global sourcing has allowed us to assemble a wide range of global
suppliers that provides us with great flexibility in sourcing high quality,
highly cost competitive components and materials for our products. We believe
these collective efforts have complemented improvements in our manufacturing
operations to provide us with a significant cost advantage over our competitors.
WELL-ESTABLISHED CONSUMER AND COMMERCIAL BRANDS. We market our products
under our well-established brand names, including "Fedders," "Maytag," "Emerson
Quiet Kool," "Airtemp," "Trion," "Eubank," "Herrmidifier" and "Envirco." Our
portfolio of brands allows us to market our products under different names
through multiple retail and wholesale distribution channels to maximize our
customer reach and profitability. In North America, we believe our
well-recognized brands have facilitated acceptance of our residential and
commercial HVACR products. We believe our Engineered Products brands are also
well-recognized and identify us as leaders in the field. In addition, we believe
that certain of our recognizable brands help facilitate our penetration of the
Chinese, Indian and other international markets.
EXTENSIVE DISTRIBUTION NETWORK. Our extensive distribution network
provides us with access to a broad base of domestic and international customers
for our air treatment products. We supply leading distributors of heating,
ventilation and air conditioning products and sell directly to leading retailers
in North America. We have long standing relationships with several of the
leading retailers of air conditioning products in North
3
America due to our ability to provide the required product quantities, product
breadth, on-time delivery, inventory management and after-sale customer service.
We are capitalizing on our North American distribution relationships and
expertise to establish leading distribution networks in our targeted high growth
international markets. Fedders International has established a joint venture
with the Suning Appliance Group, which we believe is the largest retailer of air
conditioners in China, and has also developed a rapidly growing distribution
base for all of our products in China. We are also working with our global
distribution partners as they expand into China. In addition, Fedders
International has established sales offices in Delhi, Chandigarh and Mumbai,
India, three of the country's largest air conditioner markets. We believe that
our ability to access and service these key distribution channels will allow us
to maintain our global leadership in window air conditioning and expand sales of
all of our products.
OUR STRATEGY
Our strategic initiatives are designed to grow our market share and
maximize our financial performance. These initiatives include:
MAINTAIN AND EXPAND CORE BUSINESS OPERATIONS. As a leading supplier of
room air conditioners and dehumidifiers in North America and, through Fedders
International, as the largest exporter of air conditioners from China, we are a
market leader in the $4.3 billion global window air conditioner market. Our
global manufacturing and distribution base allows us to offer our customers a
full line of high quality, low cost room air conditioners and dehumidifiers. We
intend to maintain and expand our current leadership position through a
continued focus on operational and manufacturing efficiencies and continued
product innovation and quality.
EXPAND PRESENCE IN INTERNATIONAL HIGH-GROWTH MARKETS. We are strategically
focused on further increasing our presence in international high-growth markets.
With our low cost, global manufacturing infrastructure in place, we have made
investments in developing extensive distribution and after-sales service for our
products. Fedders International has moved its headquarters to Shanghai, China
and has established a sales and service network to penetrate this important
market. Through Fedders International, we have established sales and service
operations in other key cities throughout China and India and are positioned to
participate in these expanding markets. We have focused our efforts on the
development of new products to meet the ever-increasing needs of these
high-growth international markets. Fedders International has 66 employees in
Asia engaged in research and development and is currently establishing a
research and development center in Shanghai, which will be focused on designing
new products tailored to capitalize on the specific demands of these markets.
CAPITALIZE ON GROWING CENTRAL AIR CONDITIONER MARKET. The $7.0 billion
central air conditioner market in North America is more than five times larger
than the room air conditioner market in terms of dollar value. In fiscal 2003,
we became the first U.S. air conditioner company to produce central air
conditioning products in China for export to North America. We intend to expand
our presence in the global central air conditioner market, with products aimed
at providing efficient central air conditioning, heating and air treatment to
residential and light commercial markets. By leveraging our core competencies,
such as our low-cost manufacturing platform, our supply base and our existing
sales, service and customer support, we believe we have laid the foundation on
which to build our position in this category. We believe that our
cost-competitive central air conditioners will allow us to participate in other
markets of the world, such as China, Europe and South America, where central air
conditioning is becoming more prevalent. Additionally, we believe our enhanced
research and development efforts will provide product designs capable of taking
advantage of this growing market.
THE ISSUER
Fedders North America is the issuer of the notes offered hereby and is a
wholly owned subsidiary of Fedders Corporation. Fedders North America and its
subsidiaries manufacture and market air treatment products for the North
American market and also market products in North America manufactured by
Fedders International.
4
Under the indenture governing the notes, Fedders North America and its
restricted subsidiaries will be subject to certain restrictive covenants.
Fedders and all of Fedders North America's continuing subsidiaries after the
reorganization described under "-- Reorganization," will guarantee Fedders North
America's obligations under the notes. As a general matter, Fedders, Fedders
International and its subsidiaries will not be subject to the principal
covenants set forth in the indenture. However, the indenture will contain
covenants that will limit the ability of Fedders International to transfer or
sell assets. Fedders International and its subsidiaries will not guarantee the
notes.
REORGANIZATION
Prior to the reorganization described below, we had four direct
subsidiaries, (i) Fedders North America, (ii) Fedders International, (iii)
Fedders Investment Corporation, which through its 60% owned subsidiary, Fedders
Xinle Co., Ltd., manufactures air conditioners, and (iv) NYCOR North America,
Inc., which through its subsidiaries manufactures and markets air conditioners
and thermoelectric devices.
In connection with our offering of old notes, we have commenced the
reorganization of our subsidiaries such that those subsidiaries engaged
principally in domestic operations, including Eubank Manufacturing Enterprises,
Inc. and Melcor Corporation, which were previously subsidiaries of NYCOR North
America, Inc. and are engaged in the production and sale of central air
conditioning and thermoelectric products, have become direct or indirect
subsidiaries of Fedders North America, and those subsidiaries engaged
principally in international operations, including Fedders Xinle Co., Ltd., will
become direct or indirect subsidiaries of Fedders International. References in
this prospectus to "continuing" subsidiaries of Fedders North America refer to
those entities that will be subsidiaries of Fedders North America following the
reorganization described below.
The reorganization will be consummated as soon as reasonably practicable.
In particular:
- NYCOR North America, Inc. has been merged with Fedders North America as
of March 8, 2004;
- Fedders Investment Corporation has been contributed to the capital of
Fedders International as of March 8, 2004; and
- subject to obtaining certain required consents, the shares of FNA
Mauritius Co., Inc., Fedders Shanghai Co., Ltd., Fedders Indoor Air
Quality (Suzhou) Co., Ltd., Xi'an Fedders Dong Fang Air Conditioner
Compressor Co., Ltd. and Quanzhou Melcor Hua Yu Thermoelectric Co., Ltd.,
which are or will be owned either directly or indirectly by Fedders North
America, will be distributed to Fedders and contributed by Fedders to the
capital of Fedders International. All of these entities will become
either direct or indirect subsidiaries of Fedders International.
Set forth on the following page are summary diagrams of our corporate
structure prior to and subsequent to the reorganization.
5
[FEDDERS CORPORATION AND SUBSIDIARIES ORGANIZATIONAL CHART]
- ---------------
(1) This chart shows all of the principal subsidiaries of Fedders and all of the
subsidiaries that will be directly affected by the reorganization described
above and is not intended to show all of the subsidiaries of Fedders. Unless
otherwise noted, Fedders has a 100% interest in each subsidiary shown on
this chart.
(2) Fedders North America is the issuer of the new notes offered hereby and was
the issuer of the old notes.
(3) Fedders guaranteed the old notes and will guarantee the new notes offered
hereby. All of Fedders North America's continuing subsidiaries following the
reorganization guaranteed the old notes and will also guarantee the new
notes offered hereby.
6
THE EXCHANGE OFFER
Old Notes..................... $155,000,000 aggregate principal amount of
9 7/8% Senior Notes due 2014, which were issued
on March 8, 2004.
New Notes..................... We are offering up to $155,000,000 aggregate
principal amount of 9 7/8% Senior Notes due
2014 in an offering which has been registered
under the Securities Act. The terms of the new
notes are substantially identical to those of
the old notes, except that certain transfer
restrictions and registration rights relating
to the old notes do not apply to the new notes.
In addition, old note holders will be entitled
to receive additional interest with respect to
the first 90-day period immediately following
the occurrence of a Registration Default (as
defined below) from and including the date on
which such Registration Default occurs, but
excluding the date on which all such
Registration Defaults have been cured, at a
rate of 0.25% per annum, and such rate shall
increase by an additional 0.25% per annum with
respect to each subsequent 90-day period, until
all Registration Defaults have been cured, up
to a maximum additional interest rate of 1.0%
per annum. See "Description of the
Notes -- Registered Exchange Offer;
Registration Rights."
Exchange Offer................ We are offering to issue the new notes in
exchange for a like principal amount of the old
notes. The old notes were not registered with
the Commission. We are offering to issue the
new notes to satisfy our obligations contained
in the registration rights agreement entered
into when the old notes were sold in
transactions pursuant to Rule 144A under the
Securities Act. You may tender your old notes
by following the procedures described in the
section of this prospectus entitled "The
Exchange Offer."
Resales....................... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, we believe that the
new notes you receive in the exchange offer may
be offered for resale, resold or otherwise
transferred without compliance with the
registration and prospectus delivery provisions
of the Securities Act. However, you will not be
able to freely transfer the new notes if:
- you are an "affiliate" (as defined in Rule
405 under the Securities Act) of our company;
- you are not acquiring the new notes in the
exchange offer in the ordinary course of your
business;
- you have an arrangement or understanding with
any person to participate in the distribution
(as defined in the Securities Act) of the new
notes you will receive in the exchange offer;
or
- you are a broker-dealer that receives new
notes for your own account in the exchange
offer in exchange for old notes that were
acquired as a result of market-making or
other trading activities.
If you fall within one of the exceptions listed
above, you must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction involving the new notes.
7
Tenders, Expiration Date...... The exchange offer will expire at 5:00 p.m.,
New York City time, on July 23, 2004, unless we
extend it. By tendering your old notes, you
represent to us:
- that you are not an "affiliate" (as defined
in Rule 405 under the Securities Act) of our
company;
- that any new notes you receive in the
exchange offer are being acquired by you in
the ordinary course of your business;
- that, at the time of commencement of the
exchange offer, neither you nor, to your
knowledge, anyone receiving new notes from
you, has any arrangement or understanding
with any person to participate in the
distribution (as defined in the Securities
Act) of the new notes in violation of the
Securities Act;
- if you are not a broker-dealer, that you are
not engaged in, and do not intend to engage
in, the distribution (as defined in the
Securities Act) of the new notes; and
- if you are a broker-dealer, that you will
receive the new notes for your own account in
exchange for old notes that were acquired by
you as a result of your market-making or
other trading activities and that you will
deliver a prospectus in connection with any
resale of the new notes you receive. For
further information regarding resales of the
new notes by participating broker-dealers,
see the section of this prospectus entitled
"Plan of Distribution."
Withdrawal; Non-Acceptance.... You may withdraw any old notes tendered in the
exchange offer at any time prior to 5:00 p.m.,
New York City time, on July 23, 2004. If we
decide for any reason not to accept any old
notes for exchange, the old notes will be
returned to the registered holder at our
expense promptly after the expiration or
termination of the exchange offer. In the case
of old notes tendered by book-entry transfer
into the exchange agent's account at The
Depository Trust Company, any withdrawn or
unaccepted old notes will be credited to the
tendering holder's account at The Depository
Trust Company. See "The Exchange Offer -- Terms
of the Exchange Offer; Period for Tendering Old
Notes" and "The Exchange Offer -- Withdrawal
Rights."
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary
conditions, which we may waive. Please read the
section of this prospectus entitled "The
Exchange Offer -- Conditions to the Exchange
Offer" for more information regarding
conditions to the exchange offer.
Guaranteed Delivery
Procedures.................... If you are a registered holder of the old notes
and wish to tender your old notes in the
exchange offer, but (1) the old notes are not
immediately available, (2) time will not permit
your old notes or other required documents to
reach the exchange agent before the expiration
of the exchange offer, or (3) the procedure for
book-entry transfer cannot be completed prior
to the expiration of the exchange offer, you
may tender old notes by following the
procedures described below under the section of
this prospectus entitled "The Exchange
Offer -- Guaranteed Delivery Procedures."
8
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender your old notes in the
exchange offer, you should promptly contact the
person in whose name the old notes are
registered and instruct that person to tender
on your behalf. If you wish to tender in the
exchange offer on your own behalf, prior to
completing and executing the letter of
transmittal and delivering your old notes, you
must either make appropriate arrangements to
register ownership of the old notes in your
name or obtain a properly completed bond power
from the person in whose name the old notes are
registered.
Certain United States Federal
Tax Consequences.............. There will be no United States federal income
tax consequences to holders that exchange an
old note for a new note pursuant to the
exchange offer. The new note received will be
treated as a continuation of the old note. See
"Certain United States Federal Tax
Consequences."
Use of Proceeds............... We will receive no proceeds from the exchange
offer.
Exchange Agent................ U.S. Bank National Association is the exchange
agent for the exchange offer. The address and
telephone number of the exchange agent are set
forth under the heading "The Exchange Offer --
Exchange Agent" of this prospectus.
Shelf Registration
Statement..................... Under select circumstances, some holders of old
notes (including holders who are not permitted
to participate in the exchange offer or who may
not freely resell new notes received in the
exchange offer) may require us to file, and
cause to become effective, a shelf registration
statement under the Securities Act which would
cover resales of old notes by these holders.
See the section of the prospectus entitled
"Description of the Notes -- Registered
Exchange Offer; Registration Rights."
9
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes in the exchange offer, your old notes
will continue to be subject to the restrictions on transfer set forth in the
legend on the certificate for your old notes. In general, you may offer or sell
your old notes only if they are registered under, offered or sold pursuant to an
exemption from, or offered or sold in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not currently intend
to register the old notes under the Securities Act. Under certain circumstances,
however, holders of old notes (including holders who are not permitted to
participate in the exchange offer or who may not freely resell new notes
received in the exchange offer) may require us to file and cause to become
effective a shelf registration statement which would cover resales of old notes
by their holders. See the sections of the prospectus entitled "The Exchange
Offer -- Consequences of Exchanging or Failing to Exchange Old Notes" and
"Description of the Notes -- Registered Exchange Offer; Registration Rights."
SUMMARY DESCRIPTION OF THE NEW NOTES
The new notes are identical in all material respects to the terms of the
old notes, except for certain transfer restrictions and registration rights
relating to the old notes. In addition, the old note holders will receive
additional interest with respect to the first 90-day period immediately
following the occurrence of a Registration Default (as defined below) at a rate
of 0.25% per annum from and including the date on which such Registration
Default occurs to but excluding the date on which all such Registration Defaults
have been cured, and such rate shall increase by an additional 0.25% per annum
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum additional interest rate of 1.0% per annum. See
the sections of the prospectus entitled "Description of Notes -- Registration
Rights; Liquidated Damages."
Issuer........................ Fedders North America, Inc.
Securities Offered............ $155.0 million aggregate principal amount of
9 7/8% Senior Notes Due 2014.
Maturity Date................. March 1, 2014.
Interest Payment Dates........ March 1 and September 1 of each year, beginning
September 1, 2004.
Guarantees.................... The payment of the principal, premium and
interest on the notes will be guaranteed on an
unsecured senior basis by Fedders (Fedders
North America's parent company) and by all of
Fedders North America's continuing
subsidiaries. See "Description of the Notes --
Guarantees."
Ranking....................... The notes will be Fedders North America's
unsecured senior obligations. The notes, the
Fedders guarantee and the guarantees by Fedders
North America's subsidiaries will rank senior
in right of payment to any existing and future
subordinated indebtedness of Fedders North
America, Fedders and the Fedders North America
subsidiary guarantors, equal in right of
payment with any existing and future senior
indebtedness of Fedders North America, Fedders
and the Fedders North America subsidiary
guarantors and effectively junior in right of
payment to any existing and future secured
indebtedness (to the extent of the value of the
security for that indebtedness) of Fedders
North America, Fedders and the Fedders North
America subsidiary guarantors. The notes will
be effectively subordinated to indebtedness and
other liabilities of the subsidiaries of
Fedders that do not guarantee the notes. As of
March 31, 2004, on a pro forma basis after
giving effect to the offering and
10
Fedders North America's intended use of
proceeds therefrom, Fedders North America
(excluding its subsidiaries) would have had
approximately $172.0 million of senior
indebtedness (net of $4.7 million of discount
in connection with the notes offered hereby),
$21.7 million of which is secured, Fedders
(excluding its subsidiaries) would have had
approximately $150.3 million of senior
indebtedness (net of $4.7 million of discount
in connection with the notes offered hereby),
none of which is secured, Fedders North
America's continuing subsidiaries would have
had approximately $157.6 million of senior
indebtedness (net of $4.7 million of discount
in connection with the notes offered hereby),
$7.3 million of which is secured, and Fedders'
subsidiaries that are not guaranteeing the
notes would have had approximately $32.4
million of indebtedness and $89.7 million of
other liabilities (excluding intercompany
liabilities owed to persons other than Fedders,
Fedders North America and the subsidiary
guarantors), including trade payables.
Optional Redemption........... Fedders North America may redeem some or all of
the notes beginning on March 1, 2009, at the
redemption prices listed under "Description of
the Notes -- Redemption of Notes -- Optional
Redemption."
Prior to March 1, 2007, Fedders North America
may redeem up to 35% of the aggregate principal
amount of the notes with the net proceeds of
certain equity offerings at the redemption
price set forth in "Description of the
Notes -- Redemption of Notes -- Optional
Redemption."
Change of Control............. If a change of control occurs, subject to
certain conditions, Fedders North America must
offer holders of the notes an opportunity to
sell to Fedders North America their notes at a
purchase price of 101% of the principal amount
of the notes, plus accrued and unpaid interest
to the date of the purchase. See "Description
of the Notes -- Mandatory Offers to Purchase
Notes -- Change of Control."
Restrictive Covenants......... The indenture governing the notes will contain
covenants which limit the ability of Fedders
North America and its subsidiaries to:
- incur or guarantee additional debt and issue
certain types of preferred stock;
- pay dividends on its capital stock or redeem,
repurchase or retire its capital stock or
subordinated debt;
- make investments;
- create restrictions on the ability of its
restricted subsidiaries to pay dividends or
make other payments to it;
- engage in transactions with affiliates;
- transfer or issue shares of stock of certain
subsidiaries;
- transfer or sell assets;
- enter into sale and leaseback transactions;
11
- create certain liens; and
- consolidate, merge or transfer all or
substantially all of Fedders North America's
or Fedders' assets and the assets of its
subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described under "Description of the Notes --
Certain Covenants."
The indenture governing the notes will also
contain covenants which limit the ability of
Fedders and Fedders International to transfer
or sell assets, the ability of Fedders to
consolidate, merge or transfer all or
substantially all of its assets and the ability
of Fedders to pay dividends with the proceeds
of distributions made to it from non-Fedders
North America subsidiaries to the extent such
distributions in the aggregate are in excess of
the aggregate consolidated net income of such
non-Fedders North America subsidiaries. The
indenture does not otherwise contain covenants
restricting Fedders or Fedders International or
any of the subsidiaries of Fedders
International.
Certain United States Federal
Income Tax Consequences....... The old notes were issued with original issue
discount for United States federal income tax
purposes in an amount equal to the excess of
their principal amount over their issue price.
Since new notes received pursuant to the
exchange offer will be treated as a
continuation of the old notes, holders will
have the same original issue discount income in
respect of the new notes issued in the exchange
offer as such holders had in the old notes
immediately prior to such exchange. A holder of
a note will be required to accrue such discount
into taxable income on a constant yield basis
over the life of the note without regard to
when cash attributable to such income is
actually received by the holder. See "Certain
United States Federal Tax Consequences."
Use of Proceeds............... We will not receive any proceeds from the
offering of the new notes upon consummation of
the exchange offer. The net proceeds from the
offering of the old notes were used primarily
to (i) fund the purchase of $150 million of the
9 3/8% Senior Subordinated Notes due 2007 (the
"9 3/8% Notes"), plus accrued interest, that
were validly tendered through the tender offer,
(ii) redeem all outstanding 9 3/8% Notes that
were not tendered in the tender offer and (iii)
pay premiums, fees and expenses incurred in
connection with offering and the repayment of
the 9 3/8% Notes. See "Use of Proceeds."
RISK FACTORS
Investing in the notes involves substantial risks. You should carefully
consider the information under the caption "Risk Factors" and the other
information included or incorporated by reference in this prospectus prior to
making an investment in the notes.
12
ADDITIONAL INFORMATION
Fedders North America is incorporated in the state of Delaware, with
principal executive offices located at the following address:
Fedders North America, Inc.
505 Martinsville Road
Liberty Corner, New Jersey 07938-0813
Telephone: (908) 604-8686
Further information on us can be found on Fedders' website at
www.fedders.com. Information on Fedders' website is not a part of this
prospectus.
13
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary consolidated financial data of
Fedders as of and for each of the periods indicated. Fedders derived the
consolidated financial data as of and for each of the fiscal years in the period
ended August 31, 2003 from Fedders' audited consolidated financial statements.
Fedders derived the consolidated financial data as of and for the four months
ended December 31, 2003 and as of and for the three months ended March 31, 2003
and 2004 from its unaudited financial statements prepared on a basis consistent
with its audited financial statements. This information is only a summary and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our historical consolidated
financial statements and related notes included herein and incorporated by
reference in this prospectus and other information that Fedders has filed with
the SEC. See "Incorporation of Certain Documents by Reference."
<Table>
<Caption>
FOUR MONTHS THREE MONTHS
ENDED ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, MARCH 31,
------------------------------ ------------ -----------------------
2001 2002 2003 2003 2003 2004
-------- -------- -------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales.................... $405,697 $373,702 $421,703 $ 55,554 $123,354 $123,177
Cost of sales(1)............. 336,997 290,652 328,835 48,253 95,320 101,419
-------- -------- -------- -------- -------- --------
Gross profit................. 68,700 83,050 92,868 7,301 28,034 21,758
Selling, general and
administrative
expense(1)................. 74,798 63,108 61,904 23,508 15,273 17,050
Restructuring and other
charges (credits)(1)....... 8,947 (397) (115) (638) -- --
-------- -------- -------- -------- -------- --------
Operating (loss) income...... (15,045) 20,339 31,079 (15,569) 12,761 4,708
Interest expense, net........ (17,845) (18,617) (18,546) (6,003) (5,062) (4,943)
Other (expense) income(1).... (373) 1,254 487 (1,090) (1) (7,326)
-------- -------- -------- -------- -------- --------
(Loss) income before income
taxes and cumulative effect
of a change in accounting
principle.................. (33,263) 2,976 13,020 (22,662) 7,698 (7,561)
(Benefit) provision for
income taxes............... (10,810) (5,033) 4,224 (7,361) 2,502 (2,414)
-------- -------- -------- -------- -------- --------
(Loss) income before
cumulative effect of a
change in accounting
principle.................. (22,453) 8,009 8,796 (15,301) 5,196 (5,147)
Cumulative effect of a change
in accounting
principle(2)............... -- -- 11,906 -- -- --
-------- -------- -------- -------- -------- --------
Net (loss) income............ (22,453) 8,009 (3,110) (15,301) 5,196 (5,147)
Preferred stock dividends.... -- -- (618) (484) (174) (1,005)
-------- -------- -------- -------- -------- --------
Net (loss) income applicable
to common stockholders..... $(22,453) $ 8,009 $ (3,728) $(15,785) $ 5,022 $ (6,152)
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.... $ 51,192 $ 67,379 $ 60,902 $ 22,043 $ 13,393 $ 23,344
Total assets................. 362,332 366,128 408,929 416,248 430,887 482,292
Long-term debt (including
current portion)........... 168,455 167,131 164,044 161,744 165,607 184,158
Total debt................... 175,925 176,960 171,564 192,190 228,301 233,510
Total stockholders'
equity(3).................. 73,014 77,818 74,928 62,950 57,689 84,277
</Table>
14
<Table>
<Caption>
FOUR
MONTHS THREE MONTHS
ENDED ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, MARCH 31,
------------------------------ ------------ -----------------------
2001 2002 2003 2003 2003 2004
-------- -------- -------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
Depreciation and
amortization(4)............ $ 15,431 $ 14,830 $ 9,543 $ 3,413 $ 2,455 $ 2,356
Capital expenditures......... 10,773 7,846 7,271 2,116 1,545 1,613
Net cash provided by (used
in) operating activities... 5,919 34,134 5,617 (58,232) (44,190) (55,045)
Net cash (used in) provided
by investing activities.... (30,327) (14,564) (7,368) (555) (1,530) (1,565)
Net cash (used in) provided
by financing activities.... (11,593) (3,383) (4,726) 19,928 36,294 57,911
</Table>
- ---------------
(1) Results for the three months ended March 31, 2004 include non-recurring
costs of approximately $7.4 million associated with the retirement of the
9 3/8% Notes and the issuance of the new 9 7/8% notes. Results for the four
months ended December 31, 2003 include non-recurring costs of approximately
$1.6 million associated with the closing of our air conditioner plant in
Georgia and consolidation of the production of commercial air conditioners
at our plant in Texas, start-up and transition costs of approximately $1.0
million associated with the transfer of production of additional high volume
products from the U.S. to China, a non-cash compensation expense of $2.3
million due to the variable accounting treatment associated with the value
of re-priced stock options to reflect the increase in the market price of
Fedders' stock during that period, a $1.6 million charge to account for the
tax gross-up upon the expiration of restrictions on stock granted pursuant
to an employment agreement in October 1997 and a $0.6 million gain on the
sale of our interest in a joint venture.
Fiscal 2003 results include non-recurring costs of approximately $4.0
million associated with the movement of production of residential central
air conditioners from Texas to China and commercial air conditioners from
Georgia to Texas, $1.0 million associated with the transfer of production of
compressors and industrial air cleaners from the U.S. to China, $0.7 million
of asset impairment charges and $0.1 million of non-cash compensation
expense due to the variable accounting treatment associated with the value
of re-priced stock options to reflect the increase in the market price of
Fedders' stock during that period.
Results for the four months ended December 31, 2002 include $0.3 million of
non-cash income due to the variable accounting treatment associated with the
value of re-priced stock options to reflect a decrease in the market price
of Fedders' stock during that period.
Fiscal 2002 results include a $0.4 million asset impairment, employee
severance and other restructuring credit, $0.4 million of operating losses
incurred at the Tennessee and Maryland facilities subsequent to the
announcement that production at these facilities would cease and $0.3
million of non-cash income to reduce the compensation accrual due to the
variable accounting treatment associated with the value of re-priced stock
options to reflect the increase in the market price of Fedders' stock during
that period.
Fiscal 2001 results include $8.9 million of asset impairment, employee
severance and other restructuring charges, $4.0 million of one-time
inventory charges, a $7.6 million deferred compensation charge relating to
the retirement of an officer of Fedders, an additional $2.3 million of other
non-recurring inventory write-offs, $1.4 million of operating losses at the
Tennessee and Maryland facilities subsequent to the announcement that
production at these facilities would cease, a $0.7 million non-cash
compensation expense due to the variable accounting treatment associated
with the value of re-priced stock options to reflect the increase in the
market price of Fedders' stock during that period and $0.7 million of other
one-time charges.
(2) Upon adoption of SFAS No. 142, Fedders was required to perform a
transitional goodwill impairment test. The transitional goodwill impairment
test was completed during the fourth quarter of fiscal year 2003. As a
result, Fedders recognized a non-cash transitional goodwill impairment
charge of $11.9 million in its Engineered Products segment, because the
projected financial performance of the Engineered Products segment was
insufficient to support the related goodwill. As required, the transitional
goodwill impairment charge was recorded as a cumulative effect of a change
in accounting principle as of September 1, 2002.
15
(3) During fiscal 2001, Fedders repurchased shares of Common Stock for a total
of $13.2 million, excluding commissions.
On March 26, 2002, Fedders' stockholders approved a recapitalization plan
which became effective the same day. Under the plan, the holder of each
share of Common Stock received 1.1 shares of new Common Stock, the holder of
each share of Class A Stock received one share of new Common Stock and the
holder of each share of Class B Stock received 1.1 shares of new Class B
Stock.
In October 2002, Fedders' Board of Directors approved a plan pursuant to
which a new class of cumulative preferred stock would be offered to
stockholders in exchange for up to 15,000,000 shares of Fedders' Common
Stock, with 0.14 shares of Series A Cumulative Preferred Stock being
exchanged for every share of Common Stock. The Series A Cumulative Preferred
Stock receives a cumulative annual dividend of $2.15 and has a liquidation
preference of $25.00 plus the amount of any accrued and unpaid dividends.
The holders of the Series A Cumulative Preferred Stock have no right to
vote, except in limited circumstances. The exchange of 2,315,750 shares of
Common Stock for 323,947 shares of Series A Cumulative Preferred Stock was
completed on December 27, 2002.
On February 14, 2003, Fedders announced an offer to exchange shares of
Series A Cumulative Preferred Stock for up to 12,500,000 shares of Fedders'
Common Stock, with 0.14 shares of Preferred Stock being offered in exchange
for every share of Common Stock. The exchange of 633,082 shares of Common
Stock for 88,276 shares of Series A Cumulative Preferred Stock was completed
on March 18, 2003.
On May 16, 2003, Fedders' Board of Directors authorized the distribution of
transferable rights to Fedders' Common and Class B stockholders.
Stockholders received one right for every ten shares of Common Stock and
Class B Stock they held as of July 1, 2003. Each transferable right
represented the right to purchase one share of Fedders' Series A Cumulative
Preferred Stock at the subscription price of $23.70, until the expiration
date of August 12, 2003. At the expiration of the offering on August 12,
2003, 262,316 rights had been subscribed.
(4)In accordance with SFAS No. 142, beginning September 1, 2002, Fedders no
longer amortizes goodwill. Goodwill amortization expense was $3.0 million and
$2.7 million in fiscal years 2002 and 2001, respectively.
16
FEDDERS NORTH AMERICA
The following table shows summary financial information of Fedders North
America, which has been derived from the supplemental condensed consolidating
financial statements appearing in note 16 to the Fedders audited consolidated
financial statements and note 14 to the Fedders unaudited consolidated financial
statements included in the Transition Report on Form 10-Q for the four months
ended December 31, 2003, which are included herein and incorporated by reference
in this prospectus; and note 12 to the Fedders unaudited interim consolidated
financial statements included in the Quarterly Report on Form 10-Q for the three
months ended March 31, 2004, which is incorporated by reference in this
prospectus. You should read this table together with those financial statements.
Unless otherwise stated herein, note references in the following table are to
the notes preceding this table.
<Table>
<Caption>
FOUR
MONTHS
FISCAL YEAR ENDED AUGUST 31, ENDED THREE MONTHS ENDED MARCH 31,
------------------------------ DECEMBER 31, ----------------------------
2001 2002 2003 2003 2003 2004
-------- -------- -------- ------------ ---------- ---------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $356,727 $337,293 $382,228 $ 44,481 $115,856 $110,161
Gross profit..................................... 54,858 65,205 67,654 (843) 20,724 16,644
Restructuring expense(1)......................... 8,947 (397) (115) -- -- --
-------- -------- -------- -------- -------- --------
Operating (loss) income.......................... (611) 21,507 25,930 (12,984) 8,574 3,319
Interest expense, net............................ (17,599) (16,653) (16,010) (5,236) (4,137) (4,332)
Debt extinguishment(1)........................... -- -- -- -- -- (7,392)
OTHER DATA:
Capital expenditures............................. 7,347 3,410 3,142 814 1,062 447
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........................ $ 44,940 $ 64,502 $ 53,731 $ 13,657 $ 3,868 $ 7,125
Total assets..................................... 262,066 262,086 273,831 266,504 283,339 320,835
Long-term debt (including current portion)....... 161,144 161,666 160,204 158,473 160,788 180,954
Total debt....................................... 161,144 161,666 160,204 158,473 160,788 201,067
Total stockholders' equity....................... 24,067 30,387 37,680 (4,908) 11,328 (10,533)
</Table>
17
RISK FACTORS
You should carefully consider the following factors in addition to the
other information in this prospectus before deciding to tender your old notes in
the exchange offer. The risk factors set forth below, other than those which
discuss the consequences of failing to exchange your old notes in the exchange
offer, are generally applicable to both the old notes and the new notes. The
risk factors noted in this section and other factors contained in this
prospectus describe examples of risks, uncertainties and events that may cause
our actual results to differ materially from those contained in any
forward-looking statement. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual outcomes may
vary materially from those included in this prospectus.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS CAN BE ADVERSELY AFFECTED BY AN ECONOMIC DOWNTURN.
Our business is affected by a number of economic factors, including the
level of economic activity in the markets in which we operate. A decline in
economic activity in the United States could materially affect our financial
condition and results of operations. In our business, a decline in economic
activity, as a result of cyclical or other factors typically results in a
decline in purchases of our products, which would result in a decrease in our
sales volume and profitability.
COOLER THAN NORMAL SUMMERS MAY DEPRESS OUR SALES.
Demand for our products is strongly affected by the weather. Hotter than
normal summers generate strong demand for our air conditioning products.
Conversely, cooler than normal summers depress our sales. Because a high
percentage of our overhead and operating expenses is relatively fixed throughout
the year, operating earnings and net earnings tend to be lower in quarters with
lower sales. Variations in demand could have a material adverse effect on the
timing of our cash flows and therefore our ability to service our obligations
with respect to our indebtedness, including the notes.
WE MAY INCUR MATERIAL COSTS AS A RESULT OF WARRANTY AND PRODUCT LIABILITY
CLAIMS, WHICH WOULD NEGATIVELY AFFECT OUR PROBABILITY.
The development, manufacture, sale and use of our products involve a risk
of warranty and product liability claims. Our product liability insurance
policies have limits that, if exceeded, may result in material costs that would
have an adverse effect on our future profitability. In addition, warranty claims
are not covered by our product liability insurance and there may be types of
product liability claims that are also not covered by our product liability
insurance.
OUR FAILURE TO SUCCESSFULLY INTEGRATE ANY BUSINESSES THAT WE MAY ACQUIRE IN THE
FUTURE COULD ADVERSELY AFFECT US.
We continually evaluate potential acquisitions and intend to actively
pursue acquisition opportunities, some of which may be material. We may finance
future acquisitions with internally generated funds, bank borrowings, issuances
of debt or equity securities or a combination of the foregoing. If we complete
acquisitions, we will encounter various associated risks. These risks include
the possible inability to integrate an acquired business into our operations,
diversion of management's attention and unanticipated problems or liabilities.
Some of these risks could result in a material adverse effect on our financial
condition or operating results.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE HVACR
BUSINESS.
Competition in our various markets could cause us to reduce our prices or
lose market share, or could negatively affect our cash flow, which could have an
adverse effect on our future financial results. Substantially all of the markets
in which we participate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price,
with the relative importance of these
18
factors varying among our product lines. Other factors that affect competition
in the HVACR market include the development and application of new technologies
and an increasing emphasis on the development of more energy efficient HVACR
products. Moreover, new product introductions are an important factor in the
market categories in which our products compete. Several of our competitors have
greater financial and other resources than we have, allowing them to invest in
more extensive research and development. We may not be able to compete
successfully against current and future competition, and we cannot assure you
that the current and future competitive pressures faced by us will not
materially adversely affect our business and results of operations.
CURRENTLY, OUR BUSINESS DEPENDS ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF
LARGE CUSTOMERS.
In fiscal 2003, 2002 and 2001 two customers accounted for 48%, 49% and 49%,
respectively, of net sales. While we have done business with most of our
principal customers for a number of years, agreements with principal customers
are reached annually and are based on purchase orders. We cannot assure you that
sales to principal customers will continue at current levels. Further,
continuation of the relationships depends on the customers' satisfaction with
the price, quality and delivery of our products. The loss of, or a reduction in
purchase levels by, a significant customer would have a material adverse effect
on our business.
OUR WORKING CAPITAL REQUIREMENTS FLUCTUATE BECAUSE OF THE SEASONAL NATURE OF OUR
BUSINESS. UNAVAILABILITY OF NEEDED WORKING CAPITAL COULD ADVERSELY AFFECT US.
Because of the seasonal nature of our business, our working capital
requirements are significantly higher at certain times of the year. Additional
working capital may not be available on satisfactory terms. Unavailability of
needed working capital could have a material adverse effect on our business and
operating results.
OUR LOSS OF CERTAIN KEY MEMBERS OF MANAGEMENT OR INABILITY TO ATTRACT OTHER
QUALIFIED PERSONNEL COULD NEGATIVELY AFFECT OUR BUSINESS PROSPECTS.
We believe that our performance has been and will continue to be dependent
upon the efforts of our principal executive officers. Although we have designed
incentive and compensation programs to retain key employees, including options
to purchase our stock, we cannot assure you that our principal executive
officers will continue to be available. Mr. Sal Giordano, Jr., Chairman and CEO
of Fedders Corporation and Fedders North America, is the only principal
executive officer with an employment agreement, the term of which expires on
September 30, 2006. The loss of some or all of these principal executive
officers could have a material adverse effect on us. We believe that our future
success will depend in large part on our continued ability to attract and retain
highly skilled and qualified personnel.
THE UNAVAILABILITY OF AND FLUCTUATION IN THE COST OF RAW MATERIALS COULD
ADVERSELY AFFECT OUR FUTURE RESULTS.
Our operations are dependent on the supply of various raw materials,
including steel, copper and aluminum, from domestic and foreign suppliers. We
obtain substantially all of our supply of steel, copper and aluminum under
purchase orders rather than long-term supply contracts. Supply interruptions or
cost increases which we are unable to pass on to our customers could adversely
affect our future operating results.
WE ARE SUBJECT TO VARIOUS REGULATORY LAWS THAT AFFECT OUR BUSINESS AND PRODUCTS.
We are subject to various federal, state and local laws affecting our
business. Air conditioners are subject to regulations providing for minimum
energy efficiency rating requirements. A combination of an efficient compressor
and the design of the air conditioning system using the compressor is needed to
achieve the required ratings. The required efficiency levels may be changed by
the relevant regulatory authority. Any future changes in required efficiency
levels or other government regulations could adversely affect our industry and
our business.
19
EXPOSURE TO ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our future profitability could be adversely affected by current or future
environmental laws. We are subject to extensive and changing federal, state,
local and foreign laws and regulations designed to protect the environment,
including those governing the discharge of pollutants into the air and water,
the management and disposal of hazardous materials and the cleanup of
contaminated sites. These laws and regulations could impose liability for
remediation costs and often result in civil or criminal penalties in cases of
non-compliance. In addition, liability for cleanup costs under certain
environmental laws, such as the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA, or the federal Superfund law), can be
imposed retroactively and without regard to the lawfulness of our conduct.
Compliance with environmental laws increases our costs of doing business.
Because these laws are subject to frequent change, we are unable to predict the
future costs resulting from environmental compliance.
The United States and other countries have established programs for
limiting the production, importation and use of certain ozone depleting
chemicals, including refrigerants that we use in most of our air conditioning
and refrigeration products. Some categories of these refrigerants have been
banned completely and others are currently scheduled to be phased out in the
United States by the year 2010. The industry's failure to find suitable
replacement refrigerants for substances that have been or will be banned or the
acceleration of any phase out schedules for these substances in countries where
we do business could have an adverse effect on our future financial results.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS INHERENT IN SUCH ACTIVITIES.
We have dedicated resources to participate in the international market by
establishing operations in a number of countries. Through Fedders International,
we have operations in a number of countries, including China, India, Germany,
the United Kingdom and the Philippines. Of our 14 manufacturing facilities,
seven are in China. Foreign operations are subject to the risks inherent in such
activities, such as foreign regulations, unsettled political conditions,
exchange rate fluctuations, logistical and communications challenges, burdensome
costs of complying with a variety of foreign laws, greater difficulties in
protecting intellectual property and general economic conditions in these
foreign markets.
Our international operations may be adversely affected by changes in
government policies, such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of measures to control inflation,
changes in the rate or method of taxation, the imposition of restrictions on
currency conversion and remittances abroad and the expropriation of private
enterprise. In addition, policy concerns particular to the United States with
respect to a country in which we have operations could adversely affect our
operations in that country.
A significant portion of our net sales and costs are denominated in foreign
currencies, including the Chinese Yuan, and, to a lesser extent, the Canadian
dollar, the euro, the Philippine peso and the Indian rupee. As a result, changes
in exchange rates of these foreign currencies to the U.S. dollar will affect our
sales, cost of sales and operating margins and could result in exchange losses.
The impact of future exchange rate fluctuations on our results of operations
cannot be accurately predicted. In the future we may engage in exchange rate
hedging activities in an effort to mitigate the impact of exchange rate
fluctuations. However, we cannot assure you that any hedging transactions we may
enter into will be effective or will not result in foreign exchange hedging
loss.
RISKS RELATED TO THE NOTES
THERE ARE CONSEQUENCES SHOULD YOU CHOOSE NOT TO EXCHANGE YOUR OLD NOTES.
If you do not exchange your old notes for the new notes in the exchange
offer, you will continue to be subject to the restrictions on transfer of your
old notes described in the legend on your old notes. The restrictions on
transfer of your old notes arise because we issued the old notes under
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old notes if they are registered under
the Securities Act and
20
applicable state securities laws, or offered and sold under an exemption from
these requirements. We do not intend to register the old notes under the
Securities Act. In addition, if you exchange your old notes in the exchange
offer for the new notes, you may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. To the extent old notes are tendered and accepted in the
exchange offer, the trading market, if any, for the old notes would be adversely
affected. See "The Exchange Offer -- Consequences of Exchanging or Failing to
Exchange Old Notes."
THE NOTES AND THE GUARANTEES WILL BE UNSECURED AND EFFECTIVELY SUBORDINATE TO
OUR, FEDDERS NORTH AMERICA'S AND THE SUBSIDIARY GUARANTORS' SECURED DEBT.
The notes and the guarantees will not be secured by any of the assets of
Fedders or its subsidiaries, including Fedders North America, Fedders
International and their respective subsidiaries. The obligations of Fedders,
Fedders North America and the Fedders North America subsidiaries under the
Fedders North America revolving credit facility are secured by a security
interest in substantially all of the property of Fedders, Fedders North America
and the Fedders North America subsidiaries, including all of their respective
material contracts, inventory, equipment and other tangible assets, receivables,
intellectual property and other intangible assets, as well as the capital stock
of Fedders North America's direct and indirect subsidiaries. As of March 31,
2004, on a pro forma basis after giving effect to the sale of the old notes and
Fedders North America's use of proceeds therefrom, Fedders, Fedders North
America and the subsidiary guarantors would have had a total of $29.0 million of
secured indebtedness. In addition, Fedders North America would have been able to
borrow $65.8 million of secured indebtedness under its revolving credit
facility.
The indenture governing the notes will permit the incurrence of additional
debt, some of which may be secured debt. Holders of our secured debt will have
claims that are effectively senior to your claims as holders of the notes, to
the extent of the value of the assets securing the secured debt. If Fedders
North America becomes insolvent or is liquidated, or if payment under the
Fedders North America revolving credit facility is accelerated, lenders under
the revolving credit facility would be entitled to exercise the remedies
available to a secured lender. Therefore, Fedders North America's bank lenders
will have a claim on such assets before the holders of the notes. Fedders North
America cannot assure you that the liquidation value of Fedders North America's
assets would be sufficient to repay in full the indebtedness under the Fedders
North America revolving credit facility and Fedders North America's other
indebtedness, including the notes.
THE NOTES WILL NOT BE GUARANTEED BY FEDDERS INTERNATIONAL OR ANY OF ITS
SUBSIDIARIES.
The notes will not be guaranteed by Fedders International or its
subsidiaries. As a result, if Fedders North America defaults on its obligations
under the notes, holders of the notes will not have any claims against Fedders
International or its subsidiaries. Claims of any creditors, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by Fedders International or its subsidiaries, against Fedders
International or its subsidiaries will generally have priority with respect to
the assets and earnings of such entities over our claims or those of our
creditors, including holders of the notes.
A GUARANTEE COULD BE VOIDED IF IT CONSTITUTES A FRAUDULENT TRANSFER UNDER U.S.
BANKRUPTCY LAW OR SIMILAR STATE LAWS, WHICH WOULD PREVENT THE HOLDERS OF NOTES
FROM RELYING ON THE GUARANTEE TO SATISFY PAYMENT OBLIGATIONS UNDER THE NOTES.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees, or require that claims under the guarantee be subordinated to
all other debts of the guarantor, and to require creditors such as the
noteholders to return payments received from guarantors. Under federal
bankruptcy law and comparable provisions of state fraudulent transfer laws, a
guarantee could be voided or claims in respect of a guarantee could be
subordinated to all other debts of that guarantor if, for example, the
guarantor, at the time it issued its guarantee:
- intended to hinder, delay or defraud any present or future creditor or
received less than reasonably equivalent value or fair compensation for
the guarantee;
21
- was insolvent or rendered insolvent by making the guarantee;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay them as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, a guarantor would be considered
insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
To the extent a court voids a guarantee as a fraudulent transfer or holds
the guarantee unenforceable for any other reason, holders of notes would cease
to have any direct claim against the guarantor. If a court were to take this
action, the guarantor's assets would be applied first to satisfy the guarantor's
liabilities, if any, before any portion of its assets could be distributed to
Fedders North America to be applied to the payment of the notes. Fedders North
America cannot assure you that the guarantor's remaining assets would be
sufficient to satisfy the claims of the holders of notes related to any voided
portions of the guarantee.
FEDDERS, FEDDERS INTERNATIONAL AND THE SUBSIDIARIES OF FEDDERS INTERNATIONAL
WILL NOT BE SUBJECT TO THE PRINCIPAL COVENANTS CONTAINED IN THE INDENTURE.
The indenture governing the notes will contain covenants which limit the
ability of Fedders and Fedders International to transfer or sell assets, the
ability of Fedders to consolidate, merge or transfer all or substantially all of
its assets and the ability of Fedders to pay dividends with the proceeds of
distributions made to it from non-Fedders North America subsidiaries to the
extent such distributions in the aggregate are in excess of the aggregate
consolidated net income of such non-Fedders North America subsidiaries. The
indenture will not otherwise place restrictions on Fedders, Fedders
International or the subsidiaries of Fedders International. As a result, the
indenture will not limit the ability of Fedders, Fedders International or the
subsidiaries of Fedders International to incur or guarantee additional debt and
issue certain types of preferred stock, pay dividends on their capital stock or
redeem, repurchase or retire their capital stock or subordinated debt, make
investments and engage in transactions with their affiliates. If Fedders,
Fedders International or any of its subsidiaries engage in any such conduct, the
ability of Fedders to honor its guarantee could be compromised.
IT MAY NOT BE POSSIBLE FOR FEDDERS NORTH AMERICA TO PURCHASE NOTES ON THE
OCCURRENCE OF A CHANGE OF CONTROL.
Upon the occurrence of a change in control, holders of the notes may
require Fedders North America to purchase all or a portion of their notes. If a
change of control occurs, Fedders North America may not have enough funds to pay
the purchase price for all tendered notes. Fedders North America's current
credit agreement contains, and any future credit agreements or other agreements
relating to Fedders North America's indebtedness may contain, provisions that
prohibit the purchase of the notes upon a change of control or may provide that
a change of control constitutes an event of default under that agreement. If a
change of control occurs at a time when Fedders North America is prohibited from
purchasing the notes, Fedders North America could seek the consent of its
lenders to purchase the notes or could attempt to refinance this debt. If
Fedders North America does not obtain a consent, it could not purchase the
notes. Fedders North America's failure to purchase tendered notes would
constitute an event of default under the indenture and may constitute a default
under the terms of its other debt. The term "change of control" is
22
limited to certain specified transactions and may not include other events that
may harm Fedders North America's financial condition. Fedders North America's
obligation to offer to purchase the notes upon a change of control would not
necessarily afford holders of the notes protection in the event of a highly
leveraged transaction, reorganization, merger or similar transaction involving
Fedders North America. See "Description of the Notes -- Mandatory Offers to
Purchase Notes -- Change of Control."
IF AN ACTIVE TRADING MARKET FOR THE NOTES DOES NOT DEVELOP, THE MARKET PRICE OF
THE NOTES MAY DECLINE OR YOU MAY BE UNABLE TO SELL YOUR NOTES.
There is currently no trading market for the new notes. The initial
purchaser has advised us that it currently intends to make a market in the new
notes. However, the initial purchaser is not obligated to make a market and may
discontinue this market-making activity at any time without notice. In addition,
market-making activity by the initial purchaser will be subject to the limits
imposed by U.S. federal securities laws. As a result, we cannot assure you that
any market for the new notes will develop or, if one does develop, that it will
be maintained. In addition, the old notes may only be transferred or resold in
transactions registered under, or exempt from, U.S. federal and applicable state
securities laws. While the old notes are eligible for trading in PORTAL, we do
not intend to apply for listing for any of the notes on any securities exchange.
The liquidity of any market for the notes will depend upon the number of
holders of the notes, our performance, the market for similar securities, the
interest of securities dealers in making a market in the notes and other
factors. We cannot assure you that a liquid trading market will develop for the
notes. If an active market for the notes fails to develop or be maintained, the
trading price of the notes could decline significantly.
THE NOTES WILL BE DEEMED TO HAVE BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR
UNITED STATES FEDERAL INCOME TAX PURPOSES.
The old notes were issued with original issue discount in the amount of the
notes' principal amount over their issue price for United States federal income
tax purposes. Since new notes received pursuant to the exchange offer will be
treated as a continuation of the old notes, holders will have the same original
issue discount income in respect of the new notes issued in the exchange offer
as such holders had in the old notes immediately prior to such exchange. A
holder of a note will be required to accrue such discount into taxable income on
a constant yield basis over the life of the note without regard to when cash
attributable to such income is actually received by the holder. See "Certain
United States Federal Tax Consequences."
RISKS RELATED TO OUR INDEBTEDNESS
FEDDERS NORTH AMERICA'S DEBT LEVELS MAY LIMIT ITS FUTURE ABILITY TO OBTAIN
ADDITIONAL FINANCING AND TO PURSUE BUSINESS OPPORTUNITIES AND PREVENT IT FROM
FULFILLING ITS OBLIGATIONS UNDER THE NOTES.
As of March 31, 2004, Fedders North America had total consolidated debt of
approximately $201.1 million. The proceeds from the sale of the old notes were
used primarily to repay some of Fedders North America's debt and to pay
premiums, fees and expenses in connection with the offering of the old notes and
the repayment of such debt.
Fedders North America's substantial debt could have important consequences
to you, including the following:
- its ability to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes may be impaired or such
financing may not be on favorable terms;
- a portion of its cash from operating activities will be used to pay
interest expense and under certain conditions to repay indebtedness;
- competitive pressures and adverse economic conditions are more likely to
have a negative effect on its business;
23
- its interest expense could increase if interest rates in general
increase, because a substantial portion of its debt will bear interest at
floating rates and it cannot assure you that it will be able to
effectively hedge against fluctuations in interest rates or that such
hedging activities will not result in payments by it;
- its debt service obligations could limit its flexibility in planning for,
or reacting to, changes in its business;
- its failure to comply with the financial and other restrictive covenants
in its debt instruments, including the indenture governing these notes,
which require it to maintain specified financial ratios and limit its
ability to incur debt and sell assets, could result in an event of
default that, if not cured or waived, could harm its business or
prospects and could result in a bankruptcy; and
- it may be more highly leveraged than its competitors, placing it at a
competitive disadvantage.
Fedders North America's ability to pay the required interest and principal
payments on its debt depends on the future performance of its business. The
performance of its business is subject to general economic conditions and other
financial and business factors. Many of these factors are beyond its control. If
it does not have enough cash flow in the future to pay the required interest or
principal payments on its debt, it may be required to refinance all or a part of
its debt or borrow additional amounts. Fedders North America does not know if
refinancing its debt will be possible at that time or if it will be able to find
someone who will lend it more money.
FEDDERS NORTH AMERICA WILL BE ABLE TO INCUR MORE INDEBTEDNESS, WHICH MAY
INCREASE THE RISKS ASSOCIATED WITH ITS LEVERAGE, INCLUDING ITS ABILITY TO
SERVICE ITS INDEBTEDNESS.
The indenture relating to the notes and the Fedders North America credit
agreement will permit Fedders North America and its subsidiaries, under certain
circumstances, to incur a significant amount of additional indebtedness.
Additionally, the indenture does not place any restrictions on the ability of
Fedders, Fedders International and the subsidiaries of Fedders International to
incur additional debt. If Fedders North America incurs additional debt, the
risks associated with its leverage, including its ability to service its debt,
would increase.
SERVICING FEDDERS NORTH AMERICA'S INDEBTEDNESS REQUIRES A SIGNIFICANT AMOUNT OF
CASH, AND ITS ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND ITS
CONTROL.
Fedders North America cannot be certain that its earnings will be
sufficient to allow it to pay principal and interest on its debt, including the
notes, and meet its other obligations. Its ability to generate cash from its
operations is subject to weather, general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. As a
result, it cannot assure you that its business will generate sufficient cash
flow from operations in amounts sufficient to enable it to service its debt and
to fund its other liquidity needs. If Fedders North America cannot service its
debt, it will have to take actions such as reducing or delaying strategic
acquisitions, investments and joint ventures, selling assets, restructuring or
refinancing its debt or seeking additional equity capital. It cannot assure you
that any of these remedies could, if necessary, be effected on commercially
reasonable terms, or at all. In addition, the terms of existing or future debt
instruments, including the Fedders North America credit agreement and the
indenture for the notes, may restrict it from adopting some of these
alternatives. Therefore, because of these and other factors beyond its control,
it may be unable to pay the principal, premium, if any, interest or other
amounts on the notes.
24
FEDDERS NORTH AMERICA'S DEBT INSTRUMENTS CONTAIN VARIOUS COVENANTS THAT LIMIT
ITS BUSINESS OPERATIONS AND COULD LEAD TO AN ACCELERATION OF ITS DEBT AND
POSSIBLY BANKRUPTCY.
The Fedders North America revolving credit facility and the indenture for
the notes contain various restrictive covenants. These covenants, among other
things, limit its ability to:
- incur or guarantee additional debt and issue certain types of preferred
stock;
- pay dividends on its capital stock or redeem, repurchase or retire its
capital stock or subordinated debt;
- make investments;
- create restrictions on the ability of its restricted subsidiaries to pay
dividends or make other payments to it;
- engage in transactions with its affiliates;
- transfer or issue shares of stock of certain subsidiaries;
- transfer or sell assets;
- enter into sale and leaseback transactions;
- create certain liens; and
- consolidate, merge or transfer all or substantially all of its assets and
the assets of its subsidiaries.
A breach of any of the restrictive covenants in the Fedders North America
credit agreement could result in a default under the credit agreement. If any
such default occurs, the lenders under the credit agreement may elect to declare
all outstanding borrowings, together with accrued interest and other fees, to be
immediately due and payable, enforce their security interest, require Fedders
North America to apply all of its available cash to repay these borrowings or
prevent it from making debt service payments on the notes, any of which would
result in an event of default under the notes. The lenders will also have the
right in these circumstances to terminate any commitments they have to provide
further borrowings. If Fedders North America is unable to repay outstanding
borrowings when due, the lenders under the Fedders North America credit
agreement will have the right to proceed against the collateral granted to them
to secure the debt owed to them. If the debt under such credit agreement were to
be accelerated, Fedders North America cannot assure you that its assets would be
sufficient to repay such debt in full or to repay the notes and its other debt.
25
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes in
the exchange offer. We will receive old notes in like principal amount in
exchange for the issuance of the new notes in the exchange offer. We will cancel
all old notes surrendered in exchange for new notes in the exchange offer.
The net proceeds that we received from the sale of the old notes, after
deducting fees and expenses and the initial purchaser's discount, were
approximately $145.1 million. We used the proceeds of the offering, together
with $10.0 million of cash on hand, to:
- fund the purchase of $150 million of the 9 3/8% Notes, plus accrued
interest that were validly tendered through the tender offer;
- redeem all outstanding 9 3/8% Notes that were not tendered through the
tender offer; and
- pay premium fees and expenses incurred in connection with its offering of
the old notes and the repayment of the 9 3/8% Notes.
26
CAPITALIZATION
The following table sets forth Fedders' capitalization as of March 31, 2004
on an actual basis and on an as adjusted basis to give effect to the retirement
of the remaining balance of the 9 3/8% Senior Subordinated Notes that was
completed on April 6, 2004 therefrom, assuming such transactions occurred on
March 31, 2004. You should read the adjusted capitalization data set forth in
the table below in conjunction with "Use of Proceeds" and "Selected Historical
Consolidated Financial Data" appearing elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this prospectus and our consolidated
financial statements and the accompanying notes included herein and incorporated
by reference in this prospectus.
<Table>
<Caption>
AS OF MARCH 31, 2004
-----------------------------
AS ADJUSTED FOR
THE RETIREMENT OF
THE 9 3/8% SENIOR
ACTUAL SUBORDINATED NOTES
-------- ------------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents(a)................................ $ 23,344 $ 811
======== ========
Revolving credit facility(b)................................ $ 20,114 $ 20,114
Short-term notes(c)......................................... 29,238 29,238
Long-term debt (including current portion):
Fedders Koppel promissory note(d)......................... 1,500 1,500
1% promissory note payable to the state of Illinois(e).... 1,565 1,565
Trion Industrial Revenue Bond(e)(f)....................... 3,200 3,200
Eubank Manufacturing Enterprises, Inc. promissory
note(e)(g)............................................. 483 483
Eubank Manufacturing Enterprises, Inc. mortgage(e)(h)..... 863 863
Melcor State of New Jersey Economic Development
bond(e)(i)............................................. 830 830
Capital lease obligations(j).............................. 3,598 3,598
9 7/8% senior notes due 2014 offered hereby, net of $4.7
million discount(e).................................... 150,269 150,269
9 3/8% senior subordinated notes.......................... 21,850 --
-------- --------
Total long-term debt (including current portion)..... 184,158 162,308
Total debt............................................. 233,510 211,660
Total stockholders' equity(k).......................... 84,277 83,594
-------- --------
Total capitalization................................... $317,787 $295,254
======== ========
</Table>
- ---------------
(a) Cash and cash equivalents as adjusted includes the use of $22.5 million of
cash on hand in connection with the tender offer for the 9 3/8% Notes.
(b) Fedders North America's revolving credit facility provides for up to $100
million of borrowings. Actual availability under the revolving credit
facility is subject to a borrowing base calculation. Borrowings under the
revolving credit facility are used for working capital and general corporate
purposes. See "Description of Other Indebtedness."
(c) Fedders utilizes various short-term borrowing facilities to support
production in China. The current notes bear interest ranging from 2.63% to
5.84% and expire no later than September, 2004.
(d) The Fedders Koppel promissory note is payable to a Philippines bank and
bears interest at PHIBOR plus 3%. The note is guaranteed by Fedders.
(e) These items of indebtedness represent obligations of Fedders North America
and its continuing subsidiaries.
27
(f) The Trion Industrial Revenue Bond is due in November 2011 and bears interest
at a variable rate which fluctuates in accordance with the Bond Market
Association Index. This bond is collateralized by Trion's Sanford, North
Carolina facility, including real property and equipment.
(g) The Eubank Manufacturing Enterprises, Inc. promissory note is due to Flag
Bank and has a variable rate of interest, payable at the prime rate. The
promissory note is collateralized by certain real property and equipment.
(h) In June 2003, Eubank Manufacturing Enterprises, Inc. refinanced its mortgage
with Bank One. This loan has an interest rate of 4.25% and is collateralized
by a mortgage on Eubank's facility.
(i) The loan from the New Jersey Economic Development Corporation to Melcor
Corporation has an interest rate of 6.6% and is collateralized by Melcor's
facility and certain equipment.
(j) Of the total capital lease obligations, $2.0 million represents obligations
of Fedders North America and its continuing subsidiaries and $1.6 million
represents obligations of the non-guarantor subsidiaries of Fedders.
(k) Adjusted amount includes an adjustment for $0.7 million of call premiums to
be paid in connection with refinancing the remaining balance of the 9 3/8%
Notes.
28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of Fedders as of and for each of the periods indicated. Fedders derived the
consolidated financial data as of and for each of the fiscal years in the period
ended August 31, 2003 from Fedders' audited consolidated financial statements.
Fedders derived the consolidated financial data as of and for the four months
ended December 31, 2003 and as of and for the three months ended March 31, 2003
and 2004 from its unaudited financial statements prepared on a basis consistent
with its audited financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our historical consolidated financial statements and
related notes included herein and incorporated by reference in this prospectus
and other information that Fedders has filed with the SEC. See "Incorporation of
Certain Documents by Reference."
<Table>
<Caption>
FOUR
MONTHS
ENDED THREE MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------ -------------------
1999 2000 2001 2002 2003 2003 2003 2004
-------- -------- -------- -------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales..................... $362,048 $416,181 $405,697 $373,702 $421,703 $ 55,554 $123,354 $123,177
Cost of sales(1).............. 277,457 311,353 336,997 290,652 328,835 48,253 95,320 101,419
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit.................. 84,591 104,828 68,700 83,050 92,868 7,301 28,034 21,758
Selling, general and
administrative expense(1)... 41,233 57,974 74,798 63,108 61,904 23,508 15,273 17,050
Restructuring and other
charges (credits)(1)........ 3,100 -- 8,947 (397) (115) (638) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)....... 40,258 46,854 (15,045) 20,339 31,079 15,569 12,761 4,708
Interest expense, net......... (9,684) (15,584) (17,845) (18,617) (18,546) (6,003) (5,062) (4,943)
Other income (expense)(1)..... 412 (796) (373) 1,254 487 (1,090) (1) (7,326)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and cumulative effect
of a change in accounting
principle................... 30,986 30,474 (33,263) 2,976 13,020 (22,662) 7,698 (7,561)
Provision (benefit) for income
taxes....................... 10,262 10,073 (10,810) (5,033) 4,224 (7,361) 2,502 (2,414)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of a
change in accounting
principle................... 20,724 20,401 (22,453) 8,009 8,796 (15,301) 5,196 (5,147)
Cumulative effect of a change
in accounting
principle(2)................ -- -- -- -- 11,906 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. 20,724 20,401 (22,453) 8,009 (3,110) (15,301) 5,196 (5,147)
Preferred stock dividends..... -- -- -- -- (618) (484) (174) (1,005)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable
to common stockholders...... $ 20,724 $ 20,401 $(22,453) $ 8,009 $ (3,728) $(15,785) $ 5,022 $ (6,152)
======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents..... $117,509 $ 87,193 $ 51,192 $ 67,379 $ 60,902 $ 22,043 $ 13,393 $ 23,344
Total assets.................. 382,342 388,175 362,332 366,128 408,929 416,248 430,887 482,292
Long-term debt (including
current portion)............ 161,363 166,434 168,455 167,131 164,044 161,744 165,607 184,158
Total debt.................... 161,363 170,187 175,925 176,960 171,564 192,190 228,301 233,510
Total stockholders'
equity(3)................... 108,933 112,260 73,014 77,818 74,928 62,950 57,689 84,277
</Table>
- ---------------
(1) Results for the three months ended March 31, 2004 include non-recurring
costs of approximately $7.4 million associated with the retirement of the
9 3/8% Notes and the issuance of the new 9 7/8% notes. Results for the four
months ended December 31, 2003 include non-recurring costs of approximately
$1.6 million associated with the closing of our air conditioner plant in
Georgia and consolidation of the
29
production of commercial air conditioners at our plant in Texas, start-up
and transition costs of approximately $1.0 million associated with the
transfer of production of additional high volume products from the U.S. to
China, a non-cash compensation expense of $2.3 million due to the variable
accounting treatment associated with the value of re-priced stock options to
reflect the increase in the market price of Fedders' stock during that
period, a $1.6 million charge to account for the tax gross-up upon the
expiration of restrictions on stock granted pursuant to an employment
agreement in October 1997 and a $0.6 million gain on the sale of our
interest in a joint venture.
Fiscal 2003 results include non-recurring costs of approximately $4.0
million associated with the movement of production of residential central
air conditioners from Texas to China and commercial air conditioners from
Georgia to Texas, $1.0 million associated with the transfer of production
of compressors and industrial air cleaners from the U.S. to China, $0.7
million of asset impairment charges and $0.1 million of non-cash
compensation expense due to the variable accounting treatment associated
with the value of re-priced stock options to reflect the increase in the
market price of Fedders' stock during that period.
Results for the four months ended December 31, 2002 include $0.3 million of
non-cash income due to the variable accounting treatment associated with
the value of re-priced stock options to reflect a decrease in the market
price of Fedders' stock during that period.
Fiscal 2002 results include a $0.4 million asset impairment, employee
severance and other restructuring credit, $0.4 million of operating losses
incurred at the Tennessee and Maryland facilities subsequent to the
announcement that production at these facilities would cease and $0.3
million of non-cash income to reduce the compensation accrual due to the
variable accounting treatment associated with the value of re-priced stock
options to reflect the increase in the market price of Fedders' stock
during that period.
Fiscal 2001 results include $8.9 million of asset impairment, employee
severance and other restructuring charges, $4.0 million of one-time
inventory charges, a $7.6 million deferred compensation charge relating to
the retirement of an officer of Fedders, an additional $2.3 million of
other non-recurring inventory write-offs, $1.4 million of operating losses
at the Tennessee and Maryland facilities subsequent to the announcement
that production at these facilities would cease, a $0.7 million non-cash
compensation expense due to the variable accounting treatment associated
with the value of re-priced stock options to reflect the increase in the
market price of Fedders' stock during that period and $0.7 million of other
one-time charges.
(2) Upon adoption of SFAS No. 142, Fedders was required to perform a
transitional goodwill impairment test. The transitional goodwill impairment
test was completed during the fourth quarter of fiscal year 2003. As a
result, Fedders recognized a non-cash transitional goodwill impairment
charge of $11.9 million in its Engineered Products segment, because the
projected financial performance of the Engineered Products segment was
insufficient to support the related goodwill. As required, the transitional
goodwill impairment charge was recorded as a cumulative effect of a change
in accounting principle as of September 1, 2002.
(3) During fiscal 2001, Fedders repurchased shares of Common Stock for a total
of $13.2 million, excluding commissions.
On March 26, 2002, Fedders' stockholders approved a recapitalization plan
which became effective the same day. Under the plan, the holder of each
share of Common Stock received 1.1 shares of new Common Stock, the holder
of each share of Class A Stock received one share of new Common Stock and
the holder of each share of Class B Stock received 1.1 shares of new Class
B Stock.
In October 2002, Fedders' Board of Directors approved a plan pursuant to
which a new class of cumulative preferred stock would be offered to
stockholders in exchange for up to 15,000,000 shares of Fedders' Common
Stock, with 0.14 shares of Series A Cumulative Preferred Stock being
exchanged for every share of Common Stock. The Series A Cumulative
Preferred Stock receives a cumulative annual dividend of $2.15 and has a
liquidation preference of $25.00 plus the amount of any accrued and unpaid
dividends. The holders of the Series A Cumulative Preferred Stock have no
right to vote, except in limited circumstances. The exchange of 2,315,750
shares of Common Stock for 323,947 shares of Series A Cumulative Preferred
Stock was completed on December 27, 2002.
30
On February 14, 2003, Fedders announced an offer to exchange shares of
Series A Cumulative Preferred Stock for up to 12,500,000 shares of Fedders'
Common Stock, with 0.14 shares of Preferred Stock being offered in exchange
for every share of Common Stock. The exchange of 633,082 shares of Common
Stock for 88,276 shares of Series A Cumulative Preferred Stock was
completed on March 18, 2003.
On May 16, 2003, Fedders' Board of Directors authorized the distribution of
transferable rights to Fedders' Common and Class B stockholders.
Stockholders received one right for every ten shares of Common Stock and
Class B Stock they held as of July 1, 2003. Each transferable right
represented the right to purchase one share of Fedders' Series A Cumulative
Preferred Stock at the subscription price of $23.70, until the expiration
date of August 12, 2003. At the expiration of the offering on August 12,
2003, 262,316 rights had been subscribed.
31
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
Fedders on a historical basis for the periods indicated.
<Table>
<Caption>
THREE MONTHS FOUR MONTHS
ENDED ENDED YEAR ENDED AUGUST 31,
MARCH 31, DECEMBER 31, --------------------------------
2004 2003 2003 2002 2001 2000 1999
------------ ------------- ---- ---- ---- ---- ----
Ratio of earnings to fixed
charges.......................... -- -- 1.7x 1.1x -- 2.7x 3.7x
</Table>
The ratio of earnings to fixed charges equals earnings before fixed charges
divided by fixed charges. For purposes of calculating the ratio of earnings to
fixed charges, earnings are the sum of income (loss) from continuing operations
before income taxes plus fixed charges reduced by capitalized interest. Fixed
charges consist of interest expense, capitalized interest, amortization of debt
issue costs and that portion of rental expense representative of the interest
factor. For the three month period ended March 31, 2004, earnings were
insufficient to cover fixed charges by approximately $7,561. For the four month
period ended December 31, 2003, earnings were insufficient to cover fixed
charges by approximately $22,662. For the year ended August 31, 2001, earnings
were insufficient to cover fixed charges by approximately $33,263.
32
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Subject to the terms and conditions set forth in this prospectus and the
letter of transmittal, we will accept for exchange old notes which are properly
tendered on or prior to the expiration date and not withdrawn as permitted
below. As used in this prospectus, the term "expiration date" means 5:00 p.m.,
New York City time, on July 23, 2004; provided, however, that if we, in our sole
discretion, have extended the period of time during which the exchange offer is
open, "expiration date" means the latest time and date to which we extend the
exchange offer.
As of the date of this prospectus, $155,000,000 aggregate principal amount
of the old notes are outstanding. This prospectus and the letter of transmittal
are first being sent on or about June 18, 2004, to all holders of old notes
known to us. Our obligation to accept old notes for exchange pursuant to the
exchange offer is subject to certain conditions as set forth below under
"-- Conditions to the Exchange Offer."
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any old notes, by giving oral or written notice of
such extension to the old note holders as described below. During any extension,
all old notes previously tendered will remain subject to the exchange offer and
may be accepted for exchange by us. We will return at no expense to the holder
any old notes not accepted for exchange as promptly as practicable after the
expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be in denominations of $1,000
and any integral multiples of $1,000.
If any of the events specified in "-- Conditions to the Exchange Offer"
should occur, we expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any old notes not already accepted for
exchange. We will give oral or written notice of any extension, amendment,
non-acceptance or termination to old note holders as promptly as practicable. In
the case of an extension we will issue a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled expiration date.
Following consummation of the exchange offer, we may, in our sole
discretion, commence one or more additional exchange offers to those old note
holders who did not exchange their old notes for new notes in the exchange offer
on terms which may differ from those contained in the registration agreement. We
may use this prospectus, as it may be amended or supplemented from time to time,
in connection with additional exchange offers. These additional exchange offers
will take place from time to time until all outstanding old notes have been
exchanged for new notes pursuant to the terms and conditions contained in this
prospectus.
PROCEDURES FOR TENDERING OLD NOTES
When an old note holder tenders, and we accept, the old notes, this will
constitute a binding agreement between us and that holder subject to the terms
and conditions set forth in this prospectus and the letter of transmittal.
Except as set forth below, to tender in the exchange offer, a holder must
transmit either:
- a properly completed and duly executed letter of transmittal, and all
other documents required by the letter of transmittal, to U.S. Bank
National Association, the exchange agent, at the address set forth under
"-- Exchange Agent" on or prior to the expiration date; or
- if the old notes are tendered pursuant to the book-entry procedures set
forth below, the tendering old note holder may transmit an agent's
message to the exchange agent instead of the letter of transmittal on or
prior to the expiration date.
33
In addition, either:
- the exchange agent must receive the certificates for the old notes and
the letter of transmittal; or
- the exchange agent must receive, prior to July 23, 2004, a timely
confirmation of a book-entry transfer of the old notes into the exchange
agent's account at The Depository Trust Company according to the
procedure for book-entry transfer described below, along with the letter
of transmittal and agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
The term "agent's message" means a message, transmitted to The Depository
Trust Company and received by the exchange agent and forming a part of the
book-entry confirmation, which states that The Depository Trust Company has
received an express acknowledgment from the tendering participant (as defined
here) that the participant has received and agrees to be bound by the letter of
transmittal and we may enforce the letter of transmittal against that
participant. The method of delivery of old notes, letters of transmittal or
agent's messages and all other required documents is at the election and risk of
the holders. If delivery is by mail, we recommend registered mail, properly
insured, with return receipt requested. In all cases, you should allow
sufficient time to assure timely delivery. Do not send letters of transmittal or
old notes to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
are tendered either by a registered holder of the old notes who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or for the account of an eligible
institution. An eligible institution is a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States. If signatures on a letter of transmittal
or a notice of withdrawal are required to be guaranteed, the guarantor must be
an eligible institution. If old notes are registered in the name of a person
other than a signer of the letter of transmittal, the old notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as we may determine in
our sole discretion, duly executed by the registered holder with the signature
guaranteed by an eligible institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of old notes tendered for exchange will be determined by
us in our sole discretion. Our determination will be final and binding. We
reserve the absolute right to reject any and all tenders of any particular old
notes not properly tendered or to not accept any particular old notes which
acceptance might, in our judgment or that of our counsel, be unlawful. We also
reserve the absolute right to waive any defects or irregularities or conditions
of the exchange offer as to any particular old notes either before or after the
expiration date (including the right to waive the ineligibility of any holder
who seeks to tender old notes in the exchange offer). Our interpretation of the
terms and conditions of the exchange offer as to any particular old notes either
before or after the expiration date (including the letter of transmittal and the
instructions thereto) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of old notes for
exchange must be cured within such reasonable period of time as we will
determine. Neither we, the exchange agent nor any other person shall be under
any duty to give notification of any defect or irregularity with respect to any
tender of old notes for exchange, nor shall any of us incur any liability for
failure to give such notification.
If a person or persons other than the registered holder or holders of old
notes signs the letter of transmittal, those old notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the old
notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any old notes, those persons should
so indicate when signing, and must submit proper evidence satisfactory to us of
such persons' authority to so act unless we waive this requirement.
34
By tendering, each holder represents to us that, among other things, the
new notes acquired in the exchange offer are being obtained in the ordinary
course of business of the person receiving the new notes, whether or not that
person is the holder, and that neither the holder nor the other person has any
arrangement or understanding with any person to participate in the distribution
of the new notes. In the case of a holder that is not a broker-dealer, each such
holder, by tendering, will also represent to us that he is not engaged in, and
does not intend to engage in, a distribution of the new notes. If any holder or
any other person is an "affiliate" of ours, as that term is defined under Rule
405 under the Securities Act, or is engaged in or intends to engage in or has an
arrangement or understanding with any person to participate in a distribution of
the new notes to be acquired in the exchange offer, that holder or any other
person cannot rely on the applicable interpretations of the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange for
old notes, where those old notes were acquired by the broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of those new notes.
See "Plan of Distribution." The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See "-- Conditions to the Exchange Offer." For purposes of the exchange
offer, we shall be deemed to have accepted properly tendered old notes for
exchange when, as and if we have given oral or written notice of the acceptance
to the exchange agent, with written confirmation of any oral notice to be given
promptly thereafter.
For each old note accepted for exchange, the old note holder will receive a
new note having a principal amount at maturity equal to that of the surrendered
old note. Interest on the new notes will accrue from (i) the last interest
payment date on which interest was paid on the old notes surrendered therefor,
or (ii) if no interest has been paid on the old notes, from March 8, 2004. In
addition, the old note holders will receive additional interest with respect to
the first 90-day period immediately following the occurrence of a Registration
Default (as defined below) at a rate of 0.25% per annum from and including the
date on which such Registration Default occurs to but excluding the date on
which all such Registration Defaults have been cured, and such rate shall
increase by an additional 0.25% per annum with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum
additional interest rate of 1.0% per annum. Holders of notes will be required to
make certain representations to Fedders North America (as described in the
registration rights agreement) in order to participate in the exchange offer and
will be required to deliver information to be used in connection with the shelf
registration statement and to provide comments on the shelf registration
statement within the time periods set forth in the registration rights agreement
in order to have their notes included in the shelf registration statement and
benefit from the provisions regarding liquidated damages, if any, set forth
above.
Payments of interest, if any, on old notes in exchange for which new notes
were issued will be made to the persons who, at the close of business on
February 15 or August 15 next preceding the interest payment date, are
registered holders of the old notes if the record date occurs prior to the
exchange, or are registered holders of the new notes if the record date occurs
on or after the date of the exchange, even if notes are cancelled after the
record date and on or before the interest payment date.
In all cases, issuance of new notes for old notes that are accepted for
exchange pursuant to the exchange offer will be made only after the exchange
agent timely receives either certificates for such old notes or book-entry
confirmation of those old notes into the exchange agent's account at The
Depository Trust Company, a properly completed and duly executed letter of
transmittal and all other required documents or, in the case of a book-entry
confirmation, an agent's message. If for any reason set forth in the terms and
conditions of the exchange offer we do not accept any tendered old notes or if
old notes are submitted for a greater principal amount than the holder desired
to exchange, we will return those unaccepted or non-exchanged old notes
35
without expense to the tendering holder (or, in the case of old notes tendered
by book-entry transfer into the exchange agent's account at The Depository Trust
Company pursuant to the book-entry procedures described below, non-exchanged old
notes will be credited to an account maintained with The Depository Trust
Company) as promptly as practicable after the expiration or termination of the
exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account for the old
notes at The Depository Trust Company for purposes of the exchange offer within
two business days after the date of this prospectus, and any financial
institution that is a participant in The Depository Trust Company's systems may
make book-entry delivery of old notes by causing The Depository Trust Company to
transfer old notes into the exchange agent's account at The Depository Trust
Company in accordance with The Depository Trust Company's procedures for
transfer. However, although delivery of old notes may be effected through
book-entry transfer at The Depository Trust Company, the letter of transmittal
or facsimile thereof, with any required signature guarantees, or an agent's
message in lieu of a letter of transmittal and any other required documents
must, in any case, be transmitted to and received by the exchange agent at one
of the addresses set forth below under "-- Exchange Agent" on or prior to the
expiration date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the old notes desires to tender his old notes and
the old notes are not immediately available, or time will not permit that
holder's old notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed letter of
transmittal (or a facsimile thereof) and notice of guaranteed delivery,
substantially in the form provided by us (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address
of the holder of old notes and the amount of old notes tendered, stating
that the tender is being made and guaranteeing that within three New York
Stock Exchange (NYSE) trading days after the date of execution of the
notice of guaranteed delivery, the certificates for all physically
tendered old notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by the
letter of transmittal will be deposited by the eligible institution with
the exchange agent; and
- the certificates for all physically tendered old notes, in proper form
for transfer, or a book-entry confirmation, as the case may be, and all
other documents required by the letter of transmittal, are received by
the exchange agent within three NYSE trading days after the date of
execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time prior to the expiration
date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth below under "--
Exchange Agent." Any notice of withdrawal must specify the name of the person
having tendered the old notes to be withdrawn, identify the old notes to be
withdrawn (including the principal amount of the old notes), and (where
certificates for old notes have been transmitted) specify the name in which the
old notes are registered, if different from that of the withdrawing holder. If
certificates for old notes have been delivered or otherwise identified to the
exchange agent, then, prior to the release of the certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and signed notice of withdrawal with signatures guaranteed by an
eligible institution unless the holder is an eligible institution. If old notes
have been tendered pursuant to the procedure
36
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at The Depository Trust Company to be
credited with the withdrawn old notes and otherwise comply with The Depository
Trust Company's procedures. We will determine all questions as to the validity,
form and eligibility (including time of receipt) of the notices, and our
determination shall be final and binding on all parties. Any old notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the exchange offer. Any old notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to their
holder without cost to the holder (or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at The Depository Trust
Company pursuant to the book-entry transfer procedures described above, those
old notes will be credited to an account maintained with The Depository Trust
Company for the old notes) as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures described under "-- Procedures for
Tendering Old Notes" above at any time on or prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we shall not be
required to accept for exchange, or to issue new notes in exchange for, any old
notes. We may terminate or amend the exchange offer, if at any time before the
acceptance of such old notes for exchange or the exchange of the new notes for
old notes, any of the following events shall occur, which in our reasonable
judgment in any case, and regardless of the circumstances (including any action
by us) giving rise to any event described below, makes it inadvisable to proceed
with the exchange offer and/or with any acceptance for exchange or with any
exchange:
- if any court, governmental agency or other governmental regulatory or
administrative agency or commission, threatens, institutes or issues any
action, injunction, or order of decree seeking to restrain or prohibit
the making or consummation of the exchange offer or any other transaction
contemplated by the exchange offer, or assessing or seeking any damages
as a result of the exchange offer, which results in a material delay in
our ability to accept or exchange some or all of the old notes pursuant
to the exchange offer;
- if any government or governmental authority, agency or court, domestic or
foreign, takes, proposes to take or threatens to take any action, or
seeks, proposes, introduces, enacts, promulgates or deems applicable to
the exchange offer or any of the transactions contemplated by the
exchange offer any statute, rule, regulation, order or injunction that in
our reasonable judgment might directly or indirectly result in any of the
consequences referred to above, or which in our reasonable judgment might
result in new note holders having obligations with respect to resales and
transfers of new notes greater than those described in the Commission's
interpretation referred to on the cover page of this prospectus, or would
otherwise make it inadvisable to proceed with the exchange offer;
- if any general suspension of or general limitation on prices for, or
trading in, securities on any national securities exchange or in the
over-the-counter market occurs;
- if any limitation by any governmental agency or authority which may
adversely affect our ability to complete the transactions contemplated by
the exchange offer occurs;
- if a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the extension of
credit occurs;
- if a commencement of war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time of
the commencement of the exchange offer, a material acceleration or
worsening thereof occurs; or
- if any change (or any development involving a prospective change) occurs
or is threatened in our and our subsidiaries' businesses, properties,
assets, liabilities, financial condition, operations, results of
operations or prospects taken as a whole that, in our reasonable
judgment, is or may be adverse to us, or
37
we become aware of facts that, in our reasonable judgment, have or may
have adverse significance with respect to the value of the old notes or
the new notes.
The above conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to any of these conditions or we may
waive them in whole or in part at any time and from time to time in our sole
discretion. Our failure at any time to exercise any of the above rights shall
not be deemed a waiver of any of these rights and each of these rights shall be
deemed an ongoing right which may be asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any old notes, if any stop order shall
be threatened or in effect with respect to the registration statement of which
this prospectus constitutes a part or the qualification of the Indenture under
the Trust Indenture Act of 1939 (the "TIA").
EXCHANGE AGENT
U.S. Bank National Association has been appointed as the exchange agent for
the exchange offer. All executed letters of transmittal and agent's messages
should be directed to the exchange agent at one of the addresses set forth
below. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal or agent's message and requests
for notices of guaranteed delivery should be directed to the exchange agent
addressed as follows:
DELIVERY TO: U.S. BANK NATIONAL ASSOCIATION, EXCHANGE AGENT
<Table>
BY MAIL: BY OVERNIGHT COURIER OR HAND DELIVERY:
U.S. Bank National Association U.S. Bank National Association
U.S. Bank Corporate Trust Services US Bank Corporate Trust Services
60 Livingston Ave 60 Livingston Ave
Attn: Specialized Finance Attn: Specialized Finance
EP-MN-WS-2N EP-MN-WS-2N
St. Paul, MN 55107 St. Paul, MN 55107
</Table>
FOR INFORMATION CALL: 1-800-934-6802
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS ONLY): (651) 495-8158
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer, which are estimated in the aggregate to be $150,000.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
us to register new notes in the name of, or request that old notes not tendered
or not accepted in the exchange offer be returned to, a person other than the
registered tendering holder, will be responsible for the payment of any
applicable transfer tax thereon.
38
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
Holders of old notes who do not exchange their old notes for new notes in
the exchange offer will continue to be subject to the provisions in the
Indenture regarding transfer and exchange of the old notes and the restrictions
on transfer of old notes as set forth in the legend on the old notes because the
old notes were issued under exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. In general, the old notes may not be offered or sold, unless
registered under the Securities Act, except under an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. We do not currently anticipate that we will register the old notes under
the Securities Act. See "Description of the Notes -- Registered Exchange Offer;
Registration Rights." Based on interpretations by the staff of the Commission,
as set forth in no-action letters issued to third parties, we believe that new
notes issued in the exchange offer in exchange for old notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
holder which is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the new notes are acquired in
the ordinary course of the holders' business and the holders have no arrangement
or understanding with any person to participate in the distribution of new
notes. However, we do not intend to request the Commission to consider, and the
Commission has not considered, the exchange offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the exchange offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of new notes
and has no arrangement or understanding to participate in a distribution of new
notes. If any holder is an affiliate of ours, is engaged in or intends to engage
in or has any arrangement or understanding with respect to the distribution of
the new notes to be acquired pursuant to the exchange offer, that holder could
not rely on the applicable interpretations of the staff of the Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives new notes for its own account in exchange for old notes, where the
old notes were acquired by the broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of new notes. See "Plan of
Distribution." In addition, to comply with state securities laws, the new notes
may not be offered or sold in any state unless they have been registered or
qualified for sale in that state or an exemption from registration or
qualification is available and is complied with. The offer and sale of the new
notes to "qualified institutional buyers" (as such term is defined under Rule
144A of the Securities Act) is generally exempt from registration or
qualification under the state securities laws. We currently do not intend to
register or qualify the sale of the new notes in any state where an exemption
from registration or qualification is required and not available.
39
BUSINESS
FEDDERS CORPORATION
We are a leading global producer and marketer of air treatment products for
the residential, commercial and industrial markets. Our products include room
air conditioners, central air conditioners, dehumidifiers, humidifiers, air
cleaners and thermal technology products. We believe our Heating, Ventilation,
Air Conditioning and Refrigeration ("HVACR") segment is the largest supplier of
room air conditioners and dehumidifiers in North America, with over 30% market
share for each product. Our HVACR segment also manufactures central air
conditioning, humidification and air cleaning products for the residential and
commercial markets. Our Engineered Products segment manufactures air cleaning
and humidification systems and thermal technology products for commercial and
industrial applications. Our shares are traded on the New York Stock Exchange
under the symbol "FJC", and we had a common equity market capitalization of
$121.6 million as of June 8, 2004.
Our position as a low-cost producer of high-quality air treatment products
is one of our primary competitive advantages. Since Fedders launched its first
joint venture in China in 1995, we have successfully transitioned the majority
of our production from the United States to lower cost international locations,
including China, India and the Philippines. Fedders International has seven
manufacturing facilities in China, including Fedders Shanghai, which we believe
is the world's largest producer of window air conditioners, and is the largest
exporter of air conditioners from China. Products manufactured in our
international facilities now account for over 75% of our annual production
(measured as a percentage of cost of goods sold in fiscal 2003), and we
anticipate that this percentage will increase as we continue to move our
remaining high-volume production to overseas facilities.
We believe that our low-cost international manufacturing base will continue
to support our global leadership position in window air conditioners and will
facilitate our growth into new geographic markets, such as China and India, and
new product markets, such as central air conditioning. With an established
manufacturing infrastructure in place and targeted investments in sales and
marketing, we believe we have laid the foundation necessary to capture a larger
share of the global $37.0 billion air treatment market.
HIGH-GROWTH INTERNATIONAL MARKETS. In addition to our strong North
American retail and wholesale distribution networks, our global infrastructure
reaches several of the largest and fastest growing air treatment markets in the
world, including China and India. Both markets are large -- annual sales of room
air conditioners exceed ten million units in China and one million units in
India -- and growing rapidly. In addition, the demand for central air
conditioning and industrial air cleaning products is growing rapidly in these
markets as their economies modernize. Fedders International recently relocated
its headquarters to Shanghai, China to enhance our ability to serve these
markets. We have established key distribution relationships in these markets,
including Fedders International's joint venture with Suning Appliance Group,
which is a national appliance and electronics company and, we believe, the
largest retailer of air conditioners in China. We believe that our strong Asian
manufacturing and distribution presence will make China and India cornerstones
of our growth over the next several years.
CENTRAL AIR CONDITIONER MARKET. The North American central air conditioner
market is more than five times larger than the North American room air
conditioner market in terms of dollar value. We are leveraging our low-cost
manufacturing capabilities and extensive sales and service networks to further
penetrate the $7.0 billion North American central air conditioner market. In
addition to the North American market, we believe that our cost-competitive
manufacturing capabilities and global sales and service network will allow
Fedders to participate in other geographic markets, such as Asia, Europe and
South America, as the use of central air conditioning increases in those
markets. Fedders International has begun to distribute central air conditioning
products in China and other global markets through our existing and new
wholesale distribution channels, contractors and OEMs.
OUR HVACR SEGMENT
Our HVACR segment designs, manufactures and distributes room air
conditioners, ductless split-system room air conditioners, residential and light
commercial central air conditioners and dehumidifiers. Our
40
consumer products are primarily sold through the retail channel and OEMs, and
our residential and commercial products are primarily sold through wholesale
distributors, contractors and OEMs. Our products are marketed under widely
recognized brand names, including "Fedders," "Maytag," "Emerson Quiet Kool,"
"Trion" and "Eubank."
The global HVACR markets in which our HVACR segment products compete have
sales in excess of $34.0 billion. These markets include the $4.3 billion window
air conditioner market, the $9.3 billion ducted central air conditioner market
and the $16.8 billion ductless split-system air conditioner market. In North
America, window and through-the-wall units dominate the room air conditioner
market. As a result of the addition of new HVACR products, in particular ducted
central air conditioning products, we believe we are now positioned to sell our
products to a North American market estimated to be over $8.0 billion, compared
to the $1.5 billion market we served in 1997. Globally, the market for our HVACR
products is growing rapidly. Ductless split systems predominate in the
international market for consumer and residential air conditioners, but there is
growing interest in ducted central air conditioners. In China, the domestic
market for room air conditioners has grown to ten million units annually and is
also becoming a growth market for central air conditioners. In India, the
domestic market for room air conditioners has grown to one million units
annually, and is expected to grow to approximately five million units within
five years due to the country's expanding middle class and government
deregulation.
OUR ENGINEERED PRODUCTS SEGMENT
Our Engineered Products segment designs, manufactures and distributes
products for the indoor air quality and thermal technology markets. These
products include electronic air cleaners, fan filters, media filters and
humidification systems and thermoelectric-based components and equipment. Our
Engineered Products are primarily sold through manufacturers' representatives,
distributors and directly to end-users. Our indoor air quality products are
marketed under the brand names "Trion," "Envirco" and "Herrmidifier," and our
thermal technology products are marketed under the "Melcor" brand name.
The products and services of our Engineered Products segment compete in the
$2.5 billion global indoor air quality market. This market is growing as a
result of industrial expansion primarily in Asia in the semiconductor,
electronics and pharmaceutical and medical industries and as a result of the
overall growing awareness of indoor air quality issues. For example, China is
becoming a high growth market for air treatment products such as fan filter
units used in cleanrooms for the semiconductor industry. We expect growth in the
North American market from expansion of sales of our HEPA and ULPA media
cleanroom products into the medical and pharmaceutical markets and from
retrofits of existing cleanrooms. In the commercial and industrial markets, we
expect growth from sales of our electrostatic air cleaners for exhaust systems,
electronic filter banks for HVAC systems and from sales of our humidification
systems.
OUR COMPETITIVE STRENGTHS
We believe that the following strengths differentiate us from our
competitors and provide us with significant competitive advantages:
LEADING MARKET POSITIONS. We have leading market positions and significant
market shares in our principal product categories. We are the leading supplier
of room air conditioners and dehumidifiers in North America, with approximately
a 30% market share in each product. Fedders International is the largest
exporter of air conditioners from China, with approximately a 20% share of units
exported. Our leading market positions give us the operating scale to support
the broad product offerings and comprehensive customer support infrastructure
that is required by many of our largest customers. This operating scale allows
us to form successful long-term partnerships with many of the world's largest
retailers and distributors of air treatment products. It also provides us with
economies of scale in manufacturing and purchasing that we believe give us a
significant cost advantage.
LOW-COST PRODUCER OF HIGH QUALITY PRODUCTS. Fedders is a low-cost producer
of high quality air treatment products due, in part, to Fedders International's
significant Asian manufacturing operations and our continuous cost-reduction
programs in product design and manufacturing processes. Since launching our
first joint venture in China in 1995, we have successfully transitioned the
majority of our production from the
41
United States to our lower cost Asian locations, including China, India and the
Philippines. Products manufactured in these Asian facilities now account for
over 75% of our annual production (measured as a percentage of cost of goods
sold in fiscal 2003). Despite continued price deflation in the room air
conditioning products market, our ability to continually lower our costs has
allowed us to maintain gross margins in our HVACR segment. We believe that our
manufacturing costs can continue to improve as we leverage these strengths
across a broader range of products and produce more of our high-volume products
overseas.
All of our domestic and international manufacturing facilities utilize
modern manufacturing technologies to produce the highest quality products. All
of our principal manufacturing facilities have received the highest level of
quality certification (ISO 9000 series) from the International Standards
Organization for our quality management systems. Internally, all of our
facilities adhere to our single world-wide standard of quality. We believe our
ability to maintain our high quality standards has been critical to our ability
to maintain and expand our market positions since significantly globalizing our
production base.
GLOBAL SOURCING EXPERTISE. We have dedicated substantial resources to the
global sourcing of components and raw materials on the most cost-effective basis
for over 20 years. Our sourcing operations in China and the United States
utilize the expertise of our local employees and agents and the opportunities
provided by the Internet, such as reverse auctions, to drive down costs. Our
commitment to global sourcing has allowed us to assemble a wide range of global
suppliers that provides us with great flexibility in sourcing high quality,
highly cost competitive components and materials for our products. We believe
these collective efforts have complemented improvements in our manufacturing
operations to provide us with a significant cost advantage over our competitors.
WELL-ESTABLISHED CONSUMER AND COMMERCIAL BRANDS. We market our products
under our well-established brand names, including "Fedders," "Maytag," "Emerson
Quiet Kool," "Airtemp," "Trion," "Eubank," "Herrmidifier" and "Envirco." Our
portfolio of brands allows us to market our products under different names
through multiple retail and wholesale distribution channels to maximize our
customer reach and profitability. In North America, we believe our
well-recognized brands have facilitated acceptance of our residential and
commercial HVACR products. We believe our Engineered Products brands are also
well-recognized and identify us as leaders in the field. In addition, we believe
that certain of our recognizable brands help facilitate our penetration of the
Chinese, Indian and other international markets.
EXTENSIVE DISTRIBUTION NETWORK. Our extensive distribution network
provides us with access to a broad base of domestic and international customers
for our air treatment products. We supply leading distributors of heating,
ventilation and air conditioning products and sell directly to leading retailers
in North America. We have long standing relationships with several of the
leading retailers of air conditioning products in North America due to our
ability to provide the required product quantities, product breadth, on-time
delivery, inventory management and after-sale customer service.
We are capitalizing on our North American distribution relationships and
expertise to establish leading distribution networks in our targeted high growth
international markets. Fedders International has established a joint venture
with the Suning Appliance Group, which we believe is the largest retailer of air
conditioners in China, and has also developed a rapidly growing distribution
base for all of our products in China. We are also working with our global
distribution partners as they expand into China. In addition, Fedders
International has established sales offices in Delhi, Chandigarh and Mumbai,
India, three of the country's largest air conditioner markets. We believe that
our ability to access and service these key distribution channels will allow us
to maintain our global leadership in window air conditioning and expand sales of
all of our products.
OUR STRATEGY
Our strategic initiatives are designed to grow our market share and
maximize our financial performance. These initiatives include:
MAINTAIN AND EXPAND CORE BUSINESS OPERATIONS. As a leading supplier of
room air conditioners and dehumidifiers in North America and, through Fedders
International, as the largest exporter of air conditioners from China, we are a
market leader in the $4.3 billion global window air conditioner market. Our
global manufacturing and distribution base allows us to offer our customers a
full line of high quality, low cost room
42
air conditioners and dehumidifiers. We intend to maintain and expand our current
leadership position through a continued focus on operational and manufacturing
efficiencies and continued product innovation and quality.
EXPAND PRESENCE IN INTERNATIONAL HIGH-GROWTH MARKETS. We are strategically
focused on further increasing our presence in international high-growth markets.
With our low cost, global manufacturing infrastructure in place, we have made
investments in developing extensive distribution and after-sales service for our
products. Fedders International has moved its headquarters to Shanghai, China
and has established a sales and service network to penetrate this important
market. Through Fedders International, we have established sales and service
operations in other key cities throughout China and India and are positioned to
participate in these expanding markets. We have focused our efforts on the
development of new products to meet the ever-increasing needs of these
high-growth international markets. Fedders International has 66 employees in
Asia engaged in research and development and is currently establishing a
research and development center in Shanghai, which will be focused on designing
new products tailored to capitalize on the specific demands of these markets.
CAPITALIZE ON GROWING CENTRAL AIR CONDITIONER MARKET. The $7.0 billion
central air conditioner market in North America is more than five times larger
than the room air conditioner market in terms of dollar value. In fiscal 2003,
we became the first U.S. air conditioner company to produce central air
conditioning products in China for export to North America. We intend to expand
our presence in the global central air conditioner market, with products aimed
at providing efficient central air conditioning, heating and air treatment to
residential and light commercial markets. By leveraging our core competencies,
such as our low-cost manufacturing platform, our supply base and our existing
sales, service and customer support, we believe we have laid the foundation on
which to build our position in this category. We believe that our
cost-competitive central air conditioners will allow us to participate in other
markets of the world, such as China, Europe and South America, where central air
conditioning is becoming more prevalent. Additionally, we believe our enhanced
research and development efforts will provide product designs capable of taking
advantage of this growing market.
INDUSTRY OVERVIEW
HVACR
Consumer/Residential Heating and Air Conditioning
The consumer/residential market is divided into two basic categories: air
conditioning systems and furnaces. Air conditioning is divided into two basic
categories: ducted central air conditioners, including heat pumps, and room air
conditioners, which include window units, through-the-wall units, ductless
split-systems and portable air conditioners. Ductless split-system air
conditioners are comprised of a condensing unit, normally located outside of the
household, and an evaporator unit (or units), which is typically positioned
indoors, mounted high on a wall or in a ceiling and connected to the condensing
unit by refrigerant tubes, rather than ducts. Portable units, which do not
require fixed installation, can be transported from room to room, where hot air
is exhausted outside through a window or door.
In North America, our products primarily service the $1.3 billion room air
conditioner market and the $7.0 billion central air conditioner market. Window
and through-the-wall units dominate the room air conditioner market. Sales of
room air conditioners in the North American market vary from year to year
according to the weather, especially in the major markets of the Northeast and
upper Midwest. Unusual summer weather affects manufacturers' shipments primarily
in the year following the unusual weather. A cool summer reduces consumer
demand, and unsold inventory is carried over to the following year. An unusually
hot summer depletes industry inventories, and the distribution system must be
refilled to meet the following year's demand. We believe that demand for room
air conditioners is principally driven by the replacement market. Unlike major
household appliances and central air conditioning systems, the sale of room air
conditioners is not dependent on the construction of new homes. Central air
conditioning systems cool or heat by blowing air through ducts into the home.
Approximately 60% of central air conditioner sales are attributable to the
replacement market and approximately 40% are related to new construction.
Ductless split systems predominate in the international market for consumer
and residential air conditioners. These products are sold for both the
replacement and new construction markets. The global
43
ductless split-system air conditioner market is estimated to be $16.8 billion
and is growing, as split-systems continue to become more popular than window
units in Asia, Europe and South America. In addition to ductless split systems,
there is a growing interest in ducted central air conditioners in these markets.
Commercial Air Conditioning
The global commercial air conditioner market is divided into two basic
categories: unitary air conditioners and applied systems. Unitary products
consist of modular split systems and packaged products with up to 30 tons of
cooling capacity. One ton of cooling capacity is equivalent to 12,000 BTUs
(British Thermal Units) and is generally adequate to air condition approximately
500 square feet of space. Packaged units are self-contained heating and cooling
or cooling only units that typically fit on top of a low-rise commercial
building, such as a shopping center or a restaurant. Applied systems are
typically larger engineered systems, which are designed to operate in
multi-story buildings and include air cooled and water cooled chillers, air
handling units and equipment to monitor and control the entire system.
ENGINEERED PRODUCTS
The global indoor air quality industry is estimated to exceed $2.5 billion
globally, and favorable long-term industry growth is expected due to current
industry dynamics. The market is growing as a result of industrial expansion
primarily in Asia in the semiconductor, electronics and pharmaceutical and
medical industries and as a result of the overall growing awareness of indoor
air quality issues. Comparative risk studies performed by the United States
Environmental Protection Agency have consistently ranked air pollution among the
top five environmental risks to the public. EPA studies have demonstrated that
indoor air can be two to five times, and occasionally more than 100 times, more
polluted than outdoor air. Indoor air pollution may contribute to illness and is
a serious concern for people with medical conditions, such as asthma and
allergies. In addition to health concerns, increasing requirements for "pure"
components utilized in high-performance end products (e.g., semiconductors in
computers) drive demand for indoor air quality products to ensure clean
manufacturing environments.
PRODUCTS
HVACR SEGMENT
Our HVACR segment designs, manufactures and distributes window units,
ducted central air conditioners, gas furnaces, ductless split- and multi-split
systems, through-the-wall, portable and packaged unit air conditioners,
residential humidifiers, dehumidifiers and air cleaners.
Consumer Appliances
We offer a full line of consumer appliances, including room air
conditioners, ductless split systems, through-the-wall and portable air
conditioners, dehumidifiers and electronic air purifiers under the brand names
"Fedders," "Emerson Quiet Kool," "Maytag, "Airtemp" and "Trion." Our consumer
products are designed to provide quiet, efficient comfort for any home. The
following chart sets forth our consumer appliance product offerings, their
primary uses, their end-markets and the geographic market in which each product
is currently sold.
<Table>
<Caption>
PRODUCT PRIMARY USE END-MARKET GEOGRAPHIC MARKET
- ------- ----------- ---------- -----------------
Window and through-the- Spot cool individual Consumer North America, South
wall air conditioners room America, Asia, Europe
Portable air Spot cool individual Consumer or Office North America, Europe
conditioners room
Dehumidifiers Dehumidify rooms or Consumer North America, Asia,
basements Europe
Electronic air cleaners Electronically clean Consumer North America, Asia
air in individual room
</Table>
Residential HVAC Products
Fedders offers an extensive line of central air conditioning, heating,
humidification and air filtration products under the brand names "Fedders,"
"Eubank," "Trion," "Herrmidifier" and "Polenz Klima" in
44
Germany and "Koppel" in the Philippines. We have positioned these different
brands across most price levels, emphasizing quality and value for consumers.
Our residential air conditioners provide home owners with cost effective, high
efficiency comfort solutions and are manufactured in capacities ranging from
5,000 BTUs to 60,000 BTUs. The following chart sets forth our residential HVAC
product offerings, their primary uses, their end-markets and the geographic
market in which each product is currently sold.
<Table>
<Caption>
PRODUCT PRIMARY USE END-MARKET GEOGRAPHIC MARKET
- ------- ----------- ---------- -----------------
Ductless split and Cooling and heating Home and light Asia, South America,
multi-split-systems for rooms in the home commercial, primarily Europe
or commercial in international
building markets
Gas furnaces Gas central heating Home North America
In-duct air cleaners Media and electronic Home and light North America, Asia,
air cleaners for commercial Europe
ducted systems
Whole-house Humidifier for ducted Home and light North America, Europe
humidifiers air conditioner and commercial
heating systems
</Table>
Commercial HVAC Products
Fedders also delivers dependable, high efficiency air conditioning and
heating to a broad range of commercial buildings, including modular buildings,
telecom equipment structures, schools, office buildings, retail stores, hotels
and restaurants. Our products in this area are distributed under the brand names
"Fedders," "Eubank" and "Sun." Moreover, in Germany, we are the exclusive
distributor for Hitachi air conditioners, Clivet chillers and Denco close
control air conditioners, and in the Philippines, we are the exclusive sales
partner for Hitachi air conditioners. The following chart sets forth our
commercial HVAC product offerings, their primary uses, their end-markets and the
geographic market in which each product is currently sold.
<Table>
<Caption>
PRODUCT PRIMARY USE END-MARKET GEOGRAPHIC MARKET
- ------- ----------- ---------- -----------------
Vertical Splits Alternative Light commercial Asia
evaporator for larger
split systems
Fan coil units Move conditioned air Light commercial North America, Asia,
Europe
PTAC air conditioners Cooling and heating Hotels, institutions North America
for commercial
applications
Heat pump systems Central cooling and Home and light North America, South
heating for moderate commercial America, Asia, Europe
climates
Packaged wall mount Cooling for Commercial North America, Asia
air conditioners telecommunications
equipment enclosures,
school classrooms,
modular buildings
</Table>
ENGINEERED PRODUCTS SEGMENT
Our Engineered Products segment designs, manufactures and distributes media
filters, electronic filters, humidifiers, dust collectors, fan filter units and
solid-state thermoelectric heat pump modules.
Commercial/Industrial Indoor Air Quality Products
Fedders manufactures and markets a wide range of air quality solutions for
commercial and industrial HVAC systems as well as for research, manufacturing
and industrial use in factories, office buildings, retail stores, restaurants,
hotels, hospitals, laboratories and cleanrooms. Our commercial/industrial indoor
air quality products are distributed under the brand names "Trion,"
"Herrmidifier" and "Envirco." The following chart
45
sets forth our commercial/industrial indoor air quality product offerings, their
primary uses, their end-markets and the geographic market in which each product
is currently sold.
<Table>
<Caption>
PRODUCT PRIMARY USE END-MARKET GEOGRAPHIC MARKET
- ------- ----------- ---------- -----------------
Media air cleaners Removes oil and Industrial North America, Asia,
coolant mist and Europe
smoke
Electrostatic Removes oil and Industrial Commercial North America, Asia,
precipitator coolant mist and buildings Europe
smoke; Removes smoke,
odors and airborne
particles
Exhaust fume Removes cooking Commercial kitchens North America,
extraction systems grease and food odors Europe, Asia
Dust collectors Removes welding Industrial North America, Europe
fumes, process dust,
grinding dust and
metal fines
Engineered Industrial Microprocessor, North America, Europe
humidification humidification, pharmaceutical, clean
systems cooling and dust rooms, food
suppression processing and
storage, woodworking,
printing, automotive,
human comfort
Fan filter units and Cleans air in Manufacturers of North America, Asia,
other HEPA/ULPA air cleanroom semiconductors, laser Europe
cleaning environments, laminar optical
flow benches, manufacturers,
contamination control aerospace/defense,
equipment disc drive
manufacturers,
medical devices,
hospitals,
education/research
</Table>
MANUFACTURING
All of our principal manufacturing facilities have received the highest
level of quality certification (ISO 9000 series) from the International
Standards Organization for our quality management systems. All of our facilities
adhere to our single worldwide standard of quality. Since launching our first
joint venture in China in 1995, we have successfully transferred the majority of
our production from the United States to lower cost Asian locations, including
China, India and the Philippines. Products manufactured in our international
facilities now account for over 75% of our annual production (measured as a
percentage of cost of goods sold in fiscal 2003).
46
HVACR SEGMENT
We manufacture our HVACR products worldwide through our subsidiaries in the
United States, China, India and the Philippines. The locations, products and
capacity of our manufacturing facilities are set forth below.
<Table>
<Caption>
FACILITY PRODUCTS CAPACITY
- -------- -------- --------
Fedders Shanghai (Shanghai, Window room air conditioners 1.6 million units per year
China)
Fedders Appliances Window and through-the-wall 1 million units per year
(Effingham, Illinois) room air conditioners
Fedders Xinle (Ningbo, China) Ducted central air 1 million units per year
conditioners and window and
through-the-wall room air
conditioners
Fedders Suning (Nanjing, Ductless split-system air 600,000 units per year
China) conditioners
Eubank Manufacturing Packaged air conditioners and 300,000 units per year
Enterprises (Longview, coils
Texas)
Fedders Koppel (Manila, Window room air conditioners, 200,000 units per year
Philippines) ductless split-system room
air conditioners and light
commercial air conditioning
products
Universal Comfort Products Window and ductless split 300,000 units per year
(Dadra, India) room air conditioners
Fedders Dong Fang (Xi'an, Rotary compressors 1.5 million units per year
China)
Changzhou Fedders Xingrong Heat exchangers 500,000 units per year
Air Conditioner Components
(Changzhou, China)
</Table>
ENGINEERED PRODUCTS SEGMENT
We manufacture our engineered products in the United States and China at
the facilities set forth below:
<Table>
<Caption>
FACILITY PRODUCTS
- -------- --------
Trion (Sanford, North Carolina) Electronic and media air cleaners and
humidifiers
Envirco (Albuquerque, New Mexico) HEPA/ULPA air cleaners for cleanrooms,
contamination equipment for medical and
pharmaceutical facilities
Fedders Indoor Air Quality (Suzhou, China) Residential, commercial and industrial indoor
air quality products
Melcor (Lawrence Township, New Jersey) Thermoelectric modules and products that use
them
Melcor Hua Yu (Quanzhou, China) Thermoelectric modules
</Table>
MARKETING AND DISTRIBUTION
HVACR
Our HVACR segment markets and distributes room air conditioners,
dehumidifiers, air cleaners and residential and light commercial central air
conditioners through our extensive distribution network to a broad base of
customers in markets around the world. Our products are marketed under our
widely recognized brand names that include "Fedders," "Maytag," "Emerson Quiet
Kool," "Trion" and "Eubank" as well as under private labels.
47
In North America, our salaried sales force primarily sells our consumer
products directly to retailers that include national and regional chains, home
improvement centers and retail buying groups, and to OEMs. The retail channel
represents over 10,000 retail outlets that are geographically dispersed
throughout North America. We have long-standing, mutually beneficial
relationships with some of the largest retailers of air conditioners, with whom
our sales, marketing and logistics departments work closely to effectively
manage inventories and maximize profitability.
Residential and commercial products are primarily sold to wholesale
distributors, contractors and OEMs by our salaried sales force and through a
network of manufacturers' representatives. End users of these products include
residences, schools, telecom providers, government facilities, hotels and eating
establishments.
To support and service our North American customers and end users, we have
established, and continually screen and monitor, a network of more than 3,000
independent servicers.
In order to increase the efficiency of our sales and distribution centers,
we have computerized systems, including electronic data interchange (EDI), to
accommodate major high-volume retailers for whom we replenish inventories
frequently and on short notice.
In recent years, we have capitalized on the relationships we have
established and the competencies we have developed to service our North American
customers to help penetrate high-growth global markets. In China, which has
grown in ten years from a small user of a few hundred thousand air conditioners
a year to the largest air conditioner market in the world, Fedders International
supplies big box global retailers, such as Wal-Mart, with whom we already have
relationships. Fedders International has also established a joint venture with
the Suning Appliance Group, which we believe is the largest retailer of air
conditioners in China. In India, the second most populous country in the world,
where the air conditioner market is expected to grow from one million units a
year to approximately five million units within the next five years, Fedders
International has established sales offices in three cities which we believe are
among the largest air conditioner markets in India, in order to cater to the
country's growing middle class, which is expected to double in size over the
next five years.
With so many of our activities centered on the growing markets of Asia,
Fedders International has relocated its headquarters to Shanghai, which now
serves as the hub for all of our sales and marketing activities outside of the
Americas. This location also provides service and logistics support for our
growing base of global customers.
ENGINEERED PRODUCTS
Our Engineered Products segment markets and distributes products for
commercial and industrial indoor air quality and thermal technology markets
around the world. These products include electronic air cleaners, fan filters,
media filters and humidification systems and thermoelectric-based components and
equipment. Our Engineered Products are primarily sold through manufacturers'
representatives, distributors and directly to end-users. These products are used
primarily in the electronics, semiconductor, pharmaceutical and medical
industries and also in hotels, airports, eating establishments and other venues
where large groups of people gather.
Our indoor air quality products are marketed under our widely recognized
brand names, which include "Trion," "Envirco" and "Herrmidifier," and our
thermal technology products are marketed under the "Melcor" brand name.
The global market for engineered products is growing, particularly as a
result of industrial expansion in Asia and an increased awareness of indoor air
quality issues. We believe the infrastructure we have established in Asia,
particularly our international headquarters in Shanghai, will continue to
support the marketing and distribution of our Engineered Products.
48
PROPERTIES
We own or lease the following primary facilities:
<Table>
<Caption>
APPROXIMATE
SQUARE FEET
LOCATION PRINCIPAL FUNCTIONS OF FLOOR AREA
- -------- ------------------- -------------
Liberty Corner, New Jersey (Leased)*... Corporate Headquarters 25,000
Shanghai, China (Leased)**............. International Headquarters 11,000
Effingham, Illinois (Owned)***......... Manufacture of air conditioners 650,000
Columbia, Tennessee (Owned)***......... Warehouse 232,000
Longview, Texas (Owned)***............. Manufacture of air conditioners 100,000
Vienna, Georgia (Owned)***............. Warehouse 65,000
Manila, Philippines (Leased)**......... Manufacture of air conditioners 41,000
Ningbo, China (Leased)**............... Manufacture of air conditioners 323,000
Shanghai, China (Leased)**............. Manufacture of air conditioners 175,000
Nanjing, China (Leased)**.............. Manufacture of air conditioners 140,000
Dadra, India (50% owned)**............. Manufacture of air conditioners 207,000
Xi'an China (Leased)**................. Manufacture of rotary compressors 120,000
Norderstedt, Germany (Leased)**........ Sales and distribution of air treatment 35,000
and thermal technology products
Singapore (Leased)**................... Research and Design Center 14,600
Lawrence Township, New Jersey Manufacture of thermoelectric devices 22,400
Owned)***............................
Quanzhou, China (Leased)**............. Manufacture of thermoelectric devices 29,000
Sanford, North Carolina (Owned)***..... Manufacture of air cleaning products 263,000
and humidifiers
Albuquerque, New Mexico (Leased)***.... Manufacture of cleanroom products 63,000
Suzhou, China (Leased)**............... Manufacture of cleanroom products 41,000
Changzhou, China (Leased)**............ Manufacture of heat exchangers 40,000
</Table>
- ---------------
* Leased by Fedders
** Owned or leased by Fedders International
*** Owned or leased by Fedders North America
The Effingham, Illinois facility is subject to a mortgage securing a $1.7
million, 1% promissory note payable over the next five years to the State of
Illinois. The Sanford, North Carolina and the Lawrence Township, New Jersey
facility are each subject to a mortgage securing repayment of economic
development bonds, and the Longview, Texas and Vienna, Georgia facilities are
each subject to a mortgage securing a bank loan. We believe that productive
capacity at our major manufacturing facilities is adequate to meet production
needs in the foreseeable future.
SERVICES AGREEMENT
In February 2004, Fedders North America and Fedders Corporation restated
their Services Agreement, dated as of July 31, 1997, whereby Fedders Corporation
provides treasury, tax, legal and other administrative services to Fedders North
America on an arms-length basis.
RAW MATERIALS
The principal raw materials used for producing our HVACR and Engineered
Products are steel, copper and aluminum, which we obtain from domestic and
foreign suppliers. We also purchase certain components used in our products from
other manufacturers including thermostats, compressors, motors and electrical
controls. We endeavor to obtain the lowest possible cost in our purchases of raw
materials and components, which must meet specified quality standards, through
an active global sourcing program.
49
QUALITY ASSURANCE
One of the key elements of our strategy is a commitment to a single
worldwide standard of quality. All of our principal manufacturing facilities
have received the highest level of quality certification (ISO 9000 series) from
the International Standards Organization for our quality management systems. The
ISO 9000 program is an internationally recognized benchmark of quality
management systems within a production facility. The same level of quality will
be required at all of our manufacturing facilities.
Our products are backed by a warranty policy that generally provides
five-year coverage for sealed systems, including compressors, two-year coverage
on motors and one-year coverage on all other parts and labor related to air
conditioners sold in North America.
COMPETITION
Domestically, our competitors include a number of domestic and foreign
manufacturers of air conditioners and appliances, including Whirlpool
Corporation, Frigidaire Company, Matsushita Electric Industrial Co., Ltd., Sharp
Corporation and LG Corporation. In the central air conditioner market,
competitors include Carrier Corporation, Trane, York International Corporation,
Lennox Industries Inc., Goodman Manufacturing Company and Nordyne, Inc. Many of
these competitors are substantially larger and have greater resources than we
do. We compete principally on the basis of quality, our ability to deliver
products and services to our customers on an accurate-response basis and price.
We believe that we compete effectively by using a multiple brand strategy of
providing competitively priced, high-quality products.
Internationally, competitors vary depending on the market. Some markets,
such as China, are served by many local manufacturers. Other markets are
dominated by foreign manufacturers of air conditioners and electronics products,
including Matsushita Electric Industrial Co., Ltd., Carrier-Toshiba Corporation,
Hitachi, Ltd., Mitsubishi Electric Corporation and Sanyo Electric Trading Co.,
Ltd., all of which also manufacture compressors. We believe that we can compete
effectively by using a strategy of manufacturing low cost air conditioners
locally, controlling our supply of compressors and utilizing our global sourcing
network.
GOVERNMENTAL REGULATION
We are subject to various federal, state and local laws affecting our
business. Room air conditioners are subject to federal regulations providing for
minimum energy efficiency rating (EER) requirements. A combination of an
efficient compressor and the design of the air conditioning system using the
compressor is needed to achieve the required ratings. On September 24, 1997, the
Office of Energy Efficiency and Renewable Energy of the United States Department
of Energy issued a final rule under the National Appliance Energy Conservation
Act. This rule revised the minimum required EERs for most classes of room air
conditioners to higher levels. The new EER levels apply to covered units
manufactured on or after October 1, 2000. The rule revision required us to
increase the efficiency levels of certain air conditioner models to achieve the
revised minimum EER levels. However, these EER regulations have not adversely
affected our operating results.
EMPLOYEES
As of December 31, 2003, we had approximately 2,800 employees worldwide, of
which 143 are covered by collective bargaining agreements. We consider our
relations with our employees to be generally satisfactory.
RESEARCH AND DEVELOPMENT
Our product development activities include ongoing research and development
programs to redesign existing products, reduce manufacturing cost, increase
product efficiencies and create new products. In fiscal 2003, 2002 and 2001, we
spent approximately $9.5 million, $8.9 million and $9.1 million, respectively,
on research and development.
We conduct our research and development of air conditioner technology and
design at our Effingham, Illinois and Asian design centers and our indoor air
quality technology and design at our Sanford, North Carolina, Albuquerque, New
Mexico and Suzhou, China facilities.
50
INTELLECTUAL PROPERTY
Fedders owns a number of trademarks, including:
- Fedders;
- Emerson Quiet Kool;
- Airtemp;
- Melcor;
- Trion;
- Sun;
- Koppel;
- Eubank;
- Polenz;
- Herrmidifier; and
- Mac-10.
Fedders also has an exclusive license to use the trademark Maytag on room
air conditioners and dehumidifiers in the United States, Canada and Mexico. The
initial term of the license is ten years and expires on August 31, 2010. We have
an option to renew the license for an additional ten years, provided we meet
certain renewal criteria.
We attempt to register and aggressively protect our material trademarks,
trade names and other intellectual property rights both domestically and in key
foreign markets. While we believe that our trademarks are well known and enhance
the marketing of our products, we do not consider the successful conduct of our
business to be dependent on such trademarks.
ENVIRONMENTAL MATTERS
Our operations are subject to various United States (federal and state) and
foreign environmental statutes and regulations, including laws and regulations
dealing with the discharge of pollutants into the air and water; the storage,
treatment, discharge and disposal of hazardous materials, substances and wastes;
and the production of chemical refrigerants used in the operation of some of our
products. The refrigerant used in room air conditioners is an HCFC that is to be
phased out of use in new products on January 1, 2010 in the United States.
Chemical producers are currently developing environmentally acceptable
alternative refrigerants for use in room air conditioners, some of which are
already available. Modifications to the design of our products may be necessary
in order to utilize alternative refrigerants. The cost of the substitution of
alternative refrigerants is not currently expected to have a material adverse
impact on us.
We believe we are currently in material compliance with applicable
environmental laws and regulations. We did not make capital expenditures on
environmental matters during the fiscal year ended August 31, 2003 that are
material to our total capital expenditures, earnings and competitive position
and do not anticipate making material capital expenditures on such items in the
fiscal year ending December 31, 2004.
LITIGATION
We are involved in litigation, both as plaintiff and defendant, incidental
to the conduct of our business. We do not believe that the outcome of such
litigation will have a material adverse effect on our financial position,
results of operations and cash flows.
51
MANAGEMENT
Fedders North America's directors and executive officers, their age and
their position as of February 1, 2004 are set forth below.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Sal Giordano, Jr.......................... 65 Chairman and Chief Executive Officer(1)
William J. Brennan........................ 76 Director
Jordan Bruno.............................. 52 Vice President, Taxes
David C. Chang............................ 62 Director
Nancy DiGiovanni.......................... 52 Treasurer
Michael L. Ducker......................... 50 Director
Robert N. Edwards......................... 57 Vice President and General Counsel
Michael B. Etter.......................... 48 President
Joseph Giordano........................... 71 Director(1)
Michael Giordano.......................... 40 Executive Vice President, Finance and
Administration, Chief Financial Officer and
President, Fedders International (1)
C. P. Ho.................................. 52 Vice President, Engineered Products
Kent E. Hansen............................ 57 Executive Vice President and Secretary
Robert L. Laurent, Jr..................... 49 Executive Vice President, Acquisitions and
Alliances
Howard S. Modlin.......................... 73 Director
S. A. Muscarnera.......................... 64 Director (1)
Anthony E. Puleo.......................... 69 Director
</Table>
- ---------------
(1) Mr. Joseph Giordano is the brother, Mr. S. A. Muscarnera is the cousin and
Mr. Michael Giordano is the son of Mr. Sal Giordano, Jr.
Mr. Sal Giordano, Jr. currently serves as Fedders' and Fedders North
America's Chief Executive Officer and Chairman of their Boards of Directors and
has been a director since 1965. He is also the Chairman of the Executive
Committee of the Fedders Board. Mr. Giordano has been Chief Executive Officer
since 1988.
Mr. Brennan has served as a member of Fedders' and Fedders North America's
Boards of Directors since 1980. He served as a director of Fedders from 1980 to
1987 and was again elected a director in 1989. Mr. Brennan is also currently the
Chairman of the Audit Committee of the Fedders Board. Mr. Brennan has been a
financial consultant since 1989.
Mr. Bruno was elected Vice President, Taxes in December 2000. Previously,
he was Director, Taxes for more than five years.
Dr. Chang has served as a member of Fedders' and Fedders North America's
Boards of Directors since 1998. Dr. Chang is currently a member of the
Compensation, Finance and Nominating and Corporate Governance Committees of the
Fedders Board. For the past five years, Dr. Chang has been the President of
Polytechnic University. Prior to that, Dr. Chang was Dean of the College of
Engineering and Applied Sciences at Arizona State University.
Ms. DiGiovanni was elected Treasurer in October 1998. Previously, she was
Assistant Treasurer of Fedders from 1989 to October 1998.
Mr. Ducker has served as a member of Fedders' and Fedders North America's
Boards of Directors since 2000. He is also a member of the Audit and
Compensation Committees of the Fedders Board. From 1999 to present, Mr. Ducker
has been Executive Vice President, International of Federal Express Corporation.
He was
52
President and Division Head, Asia Pacific Region from 1998 to 1999 and Senior
Vice President of that division from 1995 to 1998. He has been with Federal
Express Corporation since 1975.
Mr. Edwards was elected Vice President and General Counsel in June 2000. He
has been General Counsel of Fedders for more than five years.
Mr. Etter was elected President in June 2000. Previously, he was Senior
Vice President of Fedders and Chairman and Chief Executive Officer of Fedders
Air Conditioning from May 1, 1999 to June 2000. He served as Vice President of
Global Purchasing for Fedders from December 1997 to May 1999 and prior thereto
as Vice President, Purchasing of Fedders North America.
Mr. Joseph Giordano has served as a member of Fedders' and Fedders North
America's Boards of Directors since 1961 and has been retired for the past five
years. He was a Senior Vice President of Fedders until his retirement on August
31, 1992 and President of NYCOR, Inc. until its merger into Fedders on August
13, 1996. Mr. Giordano is currently a member of the Executive and Finance
Committees of the Fedders Board.
Mr. Michael Giordano was elected Executive Vice President, Finance and
Administration and Chief Financial Officer in June 2000 and was elected
President, Fedders International in February 2004. He was Vice President,
Finance and Chief Financial Officer of Fedders from July 1, 1999 to June 2000.
Previously, Mr. Giordano served as Senior Vice President of Fedders
International, Inc. from 1998 to 1999.
Mr. C.P. Ho was elected Vice President, Engineered Products in June 2003.
Previously, he was General Manager of our Trion Inc. subsidiary from March 2003
to June 2003. He was Vice President, Engineering -- FIAQ from September 2002 to
March 2003 and Director, Engineering -- Trion prior to 1998.
Mr. Hansen was elected Executive Vice President and Secretary in June 2000.
He was Senior Vice President and Secretary from August 1996 to June 2000.
Mr. Laurent was elected Executive Vice President, Acquisitions and
Alliances in January 1999. Previously, he was Executive Vice President, Finance
and Administration and Chief Financial Officer of Fedders.
Mr. Modlin has served as a member of Fedders' and Fedders North America's
Boards of Directors since 1977. He is also currently Chairman of the
Compensation Committee and a member of the Executive and Audit Committees of the
Fedders Board. For the past five years, Mr. Modlin has been the President of the
law firm of Weisman Celler Spett & Modlin, P.C. Mr. Modlin is also Chairman of
the Board of General DataComm Industries, Inc. and a director of Trans-Lux
Corporation.
Mr. Muscarnera has served as a member of Fedders' and Fedders North
America's Boards of Directors since 1982. He is also currently Chairman of the
Finance Committee and a member of the Audit Committee of the Fedders Board. Mr.
Muscarnera has been retired for the past five years. He was Senior Vice
President and Secretary of Fedders prior to his retirement on August 31, 1996.
Mr. Muscarnera served in various capacities with Fedders for over 39 years,
including human resources and legal.
Mr. Puleo has served as a member of Fedders' and Fedders North America's
Boards of Directors since 1994. He is also currently Chairman of the Nominating
and Corporate Governance Committee and a member of the Compensation Committee of
the Fedders Board. For the past five years, Mr. Puleo has been the President of
Puleo International, Inc., an importer of seasonal products. Prior to that, Mr.
Puleo was President of Boulderwood Corporation.
53
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Mr. Sal Giordano, Jr. serves as our Chief Executive Officer as well as
Chairman of the Board of Directors. Mr. Joseph Giordano and Mr. Muscarnera are
currently serving as Directors and are the brother and cousin, respectively, of
Mr. Sal Giordano, Jr. Mr. Michael Giordano is the son of Mr. Sal Giordano, Jr.
and currently serves as the Executive Vice President, Finance and
Administration, Chief Financial Officer and President, Fedders International.
54
DESCRIPTION OF OTHER INDEBTEDNESS
Fedders North America and certain of its direct and indirect subsidiaries
are parties to a revolving credit facility as borrowers or guarantors, entered
into on December 23, 1992, as amended. The revolving credit facility provides
for loans to Fedders North America of up to $100.0 million, based on certain
customary percentages of accounts receivable and inventory. The obligations of
Fedders North America under the revolving credit facility are also guaranteed by
Fedders and certain of its other subsidiaries. While the revolving credit
facility is intended principally to provide financing for Fedders North
America's working capital requirements, Fedders North America may use up to
$15.0 million of the amount available under the revolving credit facility for
general corporate purposes.
At Fedders North America's option, borrowings under the revolving credit
facility bear interest at a rate per annum (i) based upon the London interbank
offered rate (LIBOR) plus 2.0% (provided that not more than 80% of loans
outstanding at any time may be based upon LIBOR); or (ii) equal to the prime
rate of Wachovia Bank, National Association.
In addition, Fedders North America must pay (i) an unused line fee of 0.5%
per annum on the amount by which $60.0 million ($50.0 million effective February
2004) exceeds the average daily principal balance of loans outstanding; (ii) an
early termination fee equal to 1.0% of the maximum availability if the revolving
credit facility is terminated prior to February 1, 2004 and 0.5% of the maximum
availability if the revolving credit facility is terminated during the period
from February 2, 2004 through January 31, 2006 (the expiration date of the
revolving credit facility); (iii) an amendment fee (the most recent of which was
$200,000); and (iv) a service fee of $60,000 annually.
Borrowings under the revolving credit facility are secured by collateral
assignments or other security interests in substantially all of the assets of
Fedders and certain of its subsidiaries, including (i) all material contracts;
(ii) substantially all property, plant, equipment, inventory, receivables and
other tangible assets; (iii) all intellectual property and other intangible
assets; and (iv) capital stock of certain of the direct and indirect
subsidiaries of Fedders.
The revolving credit facility contains negative covenants that limit the
ability of Fedders and certain of its direct and indirect subsidiaries to do the
following: (i) create liens and other encumbrances; (ii) incur indebtedness;
(iii) enter into transactions with affiliates; (iv) make loans, investments or
guarantees; and (v) pay dividends.
In addition, the revolving credit facility requires that Fedders meet
certain financial tests, including (i) maintaining consolidated net worth of not
less than $60.0 million and (ii) maintaining consolidated working capital of not
less than $25.0 million.
The revolving credit facility contains customary events of default,
including (i) non-payment of principal or interest; (ii) breach of any term,
covenant, condition or provision of the revolving credit facility; (iii)
material breach of representations and warranties; (iv) bankruptcy, insolvency
or assignment for the benefit of creditors; (v) cross-defaults on other
indebtedness; (vi) material adverse change in the business, assets or financial
condition; and (vii) a change in control.
55
DESCRIPTION OF THE NOTES
The old notes were, and the new notes will be, issued by us under the
Indenture dated as of March 8, 2004 (the "Indenture") among Fedders North
America, Fedders Corporation and U.S. Bank National Association, as trustee (the
"Trustee"). The terms of the notes include those terms stated in the Indenture
and those terms made part of the Indenture by reference to the Trust Indenture
Act of 1939 (the "TIA") as in effect on the date of the Indenture. The new notes
are identical in all material respects to the terms of the old notes, except for
certain transfer restrictions and registration rights relating to the old notes.
In addition, the old note holders will receive additional interest with respect
to the first 90-day period immediately following the occurrence of a
Registration Default (as defined below) at a rate of 0.25% per annum from and
including the date on which such Registration Default occurs to but excluding
the date on which all such Registration Defaults have been cured, and such rate
shall increase by an additional 0.25% per annum with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
additional interest rate of 1.0% per annum. See "-- Registered Exchange Offer;
Registration Rights."
The following description is a summary of the material provisions of the
Indenture. It does not include all of the provisions of the Indenture. We urge
you to read the Indenture because it defines your rights as holders of these
notes. We have filed copies of this Indenture as an exhibit to the registration
statement which includes this prospectus. A copy of the Indenture may be
obtained from us or the initial purchaser. You can find definitions of certain
capitalized terms used in the following summary under "-- Definitions" and
throughout this description. Capitalized terms that are used but not otherwise
defined herein have the meanings assigned to them in the Indenture and such
definitions are incorporated by reference.
GENERAL
Fedders North America will issue the notes pursuant to an indenture among
Fedders North America, Fedders and all of the continuing subsidiaries of Fedders
North America, as guarantors, and U.S. Bank National Association, as trustee.
The terms of the notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939, as amended, as
in effect on the date of original issuance of the notes. The notes are subject
to all such terms, and holders of the notes are referred to the indenture and
the Trust Indenture Act for a statement thereof. The following is a summary of
the provisions of the indenture. It is not complete and is qualified in its
entirety by reference to the indenture, including the definitions in the
indenture of certain terms used below.
As of the date of the indenture, all of the Subsidiaries of Fedders North
America (other than FNA Mauritius Co., Inc., Fedders Shanghai Co., Ltd., Fedders
Indoor Air Quality (Suzhou) Co., Ltd., Xi'an Fedders Dong Fang Air Conditioner
Compressor Co., Ltd. and Quanzhou Melcor Hua Yu Thermoelectric Co., Ltd., which
as part of the reorganization described under "Summary -- Reorganization" will
be transferred to Fedders International) will be Restricted Subsidiaries.
However, under certain circumstances, Fedders North America will be able to
designate each of its existing Subsidiaries, Subsidiaries formed by Fedders
North America or Subsidiaries acquired by Fedders North America after the
original issuance of the notes as Non-Restricted Subsidiaries. Non-Restricted
Subsidiaries will not be subject to any of the restrictive covenants set forth
in the indenture.
The notes will initially be limited to $155,000,000 in aggregate principal
amount, and will mature on March 1, 2014. Additional notes may be issued from
time to time subject to the limitations set forth under the "Limitation on
Incurrence of Indebtedness" covenant. References to the "notes" in this
Description of the Notes will include any such additional notes. The notes will
bear interest at the rate of 9 7/8% per annum. Interest on the notes is payable
semi-annually in cash in arrears on March 1 and September 1 in each year,
commencing September 1, 2004, to holders of record of notes at the close of
business on the February 15 or August 15 immediately preceding such interest
payment date. Interest on the notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. The notes will be issued in denominations of $1,000 and
integral multiples thereof.
56
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be presented for registration of transfer or exchange, at the
office of the paying agent and registrar in New York, New York. Holders of notes
must surrender their notes to the paying agent to collect principal payments,
and Fedders North America may pay principal and interest by check and may mail
checks to a holder's registered address; provided that all payments with respect
to global notes and certificated notes, the holders of which have given wire
transfer instructions to Fedders North America, will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
holders thereof. The registrar may require payment of a sum sufficient to cover
any transfer tax or similar governmental charge payable in connection with
certain transfers or exchanges. See "-- Transfer and Exchange." The trustee will
initially act as paying agent and registrar. Fedders North America may change
the paying agent or registrar without prior notice to holders of notes, and
Fedders North America or any of its Subsidiaries may act as paying agent or
registrar.
GUARANTEES
Fedders and all of the continuing Subsidiaries of Fedders North America
will, jointly and severally, irrevocably and unconditionally guarantee on a
senior basis the performance and punctual payment when due, whether at stated
maturity, by acceleration or otherwise, of all obligations of Fedders North
America under the indenture and the notes, whether for principal of, or interest
or additional interest, if any, on the notes, expenses, indemnification or
otherwise (all such obligations guaranteed by Fedders and the Subsidiary
Guarantors being herein called the "Guaranteed Obligations"). Fedders
International and its Subsidiaries will not guarantee the notes. Fedders' assets
consist primarily of the common stock of Fedders North America and Fedders
International and the common stock of their respective Subsidiaries, and,
accordingly, Fedders' ability to perform under its Guarantee will be dependent
on the financial condition and net worth of Fedders North America and Fedders
International. Fedders, Fedders International and the Subsidiaries of Fedders
International will not be subject to the principal covenants in the indenture.
Consequently, as a holder you will have limited contractual control over the
future financial condition and net worth of such entities, including Fedders.
The obligations of each Subsidiary Guarantor under its Subsidiary Guaranty
will be limited as necessary to prevent that Subsidiary Guaranty from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors -- Risks Related to the Notes -- A guarantee could be voided if it
constitutes a fraudulent transfer under U.S. bankruptcy law or similar state
laws, which would prevent the holders of notes from relying on the guarantee to
satisfy payment obligations under the notes."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled upon payment in full of all guaranteed obligations
under the indenture to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- Risks Related
to the Notes -- A guarantee could be voided if it constitutes a fraudulent
transfer under U.S. bankruptcy law or similar state laws, which would prevent
the holders of notes from relying on the guarantee to satisfy payment
obligations under the notes."
Pursuant to the indenture, (A) Fedders or a Subsidiary Guarantor may
consolidate with, merge with or into, or transfer all or substantially all its
assets to any other Person to the extent described below under "-- Merger or
Consolidation" and (B) the Capital Stock of a Subsidiary Guarantor may be sold
or otherwise disposed of to another Person to the extent described below under
"-- Mandatory Offers to Purchase Notes -- Asset Sales"; provided, however, that,
in the case of the consolidation, merger or transfer of all or substantially all
the assets of Fedders or such Subsidiary Guarantor if such other Person is not
Fedders North America, Fedders or a Subsidiary Guarantor, Fedders' obligations
or such Subsidiary Guarantor's obligations under the
57
applicable Guarantee, must be expressly assumed by such other Person, except
that such assumption will not be required in the case of:
(1) the sale or other disposition (including by way of consolidation
or merger) of a Subsidiary Guarantor, including the sale or disposition of
Capital Stock of a Subsidiary Guarantor following which such Subsidiary
Guarantor is no longer a Subsidiary; or
(2) the sale or disposition of all or substantially all the assets of
a Subsidiary Guarantor;
in each case other than to Fedders North America or a Restricted Subsidiary and
as permitted by the indenture and if in connection therewith Fedders North
America provides an Officers' Certificate to the Trustee to the effect that
Fedders North America will comply with its obligations under the caption
"-- Mandatory Offers to Purchase Notes -- Asset Sales" in respect of such
disposition. Upon any sale or disposition described in clause (1) or (2) above,
the obligor on the related Subsidiary Guaranty will be released from its
obligations thereunder.
The Subsidiary Guaranty of a Subsidiary Guarantor also will be released:
(1) upon the designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary;
(2) at such time as such Subsidiary Guarantor does not have any
Indebtedness outstanding that would have required such Subsidiary Guarantor
to enter into a Guaranty Agreement pursuant to the covenant described under
" -- Certain Covenants -- Future Guarantors"; or
(3) if Fedders North America exercises its legal defeasance option or
covenant defeasance option as described under "-- Satisfaction and
Discharge of the Indenture" or if Fedders North America's obligations under
the indenture are discharged in accordance with the terms of the indenture.
The guarantees are continuing guarantees and shall:
- remain in full force and effect until payment in full of all the
Guaranteed Obligations;
- be binding upon Fedders, the Subsidiary Guarantors and their respective
successors, transferees and assigns; and
- inure to the benefit of and be enforceable by the trustee, the holders of
the notes and their successors, transferees and assigns.
REDEMPTION OF NOTES
Optional Redemption. The notes will be redeemable, at the option of
Fedders North America, on or after March 1, 2009. During the 12-month period
beginning on March 1 of the years indicated below, the notes will be redeemable,
at the option of Fedders North America, in whole or in part, on at least 30 but
not more than 60 days' notice to each holder of notes to be redeemed, at the
redemption prices (expressed as percentages of the principal amount) set forth
below, plus any accrued and unpaid interest and additional interest, if any, to
the redemption date:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2009........................................................ 104.938%
2010........................................................ 103.292%
2011........................................................ 101.646%
2012 and thereafter......................................... 100.000%
</Table>
Notwithstanding the foregoing, at any time on or before March 1, 2007,
Fedders North America may (but will not have the obligation to) redeem for cash
up to 35% of the original aggregate principal amount of the notes (including the
original aggregate principal amount of any additional notes issued under the
indenture) at a redemption price of 109.875% of the principal amount thereof, in
each case plus any accrued and unpaid interest and additional interest, if any,
thereon to the redemption date, with the net proceeds of an Equity Offering;
provided that at least 65% of the original principal amount of the notes
(including the original
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aggregate principal amount of any additional notes issued under the indenture)
remains outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption will occur within 60 days of the date of
the closing of such Equity Offering.
Mandatory Redemption. Except as set forth below under "-- Mandatory Offers
to Purchase Notes -- Change of Control" and "-- Mandatory Offers to Purchase
Notes -- Asset Sales," Fedders North America is not required to make any
mandatory redemption, purchase or sinking fund payments with respect to the
notes.
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the notes
and the payment of the Guarantees will be unsecured and will rank pari passu in
right of payment to any other Senior Indebtedness of Fedders North America,
Fedders or the applicable Subsidiary Guarantor, as the case may be, including
the obligations, if any, of Fedders North America, Fedders and such Subsidiary
Guarantor, under the Credit Agreement.
As of March 31, 2004, after giving pro forma effect to the offering of the
notes and the application of proceeds therefrom:
(1) the Senior Indebtedness of Fedders North America (excluding its
Subsidiaries) would have been approximately $172.0 million (net of $4.7
million of discount in connection with the notes offered hereby), $21.7
million of which is secured Indebtedness;
(2) the Senior Indebtedness of the Subsidiary Guarantors would have
been approximately $157.6 million (net of $4.7 million of discount in
connection with the notes offered hereby), $7.3 million of which is secured
Indebtedness; and
(3) Fedders (excluding its subsidiaries) would have had $150.3 million
of Senior Indebtedness (net of $4.7 million of discount in connection with
the notes offered hereby), none of which is secured.
Additionally, Fedders North America would have had the ability to borrow up
to $100.0 million of secured Indebtedness under the Credit Agreement, subject to
a borrowing base. The Subsidiary Guarantors guarantee, on a senior secured
basis, the borrowings under the Credit Agreement. Although the indenture
contains limitations on the amount of additional Indebtedness that Fedders North
America and the Subsidiary Guarantors may incur, under certain circumstances the
amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be secured Indebtedness. See "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness." The indenture contains
no limitations on the amount of additional Indebtedness that may be Incurred by
Fedders.
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A substantial portion of the operations of each of Fedders North America
and Fedders are conducted through subsidiaries. Some of these subsidiaries,
including all of Fedders' foreign subsidiaries, are not Guaranteeing the notes.
Claims of creditors of these subsidiaries, including trade creditors and other
creditors holding indebtedness or guarantees issued by such subsidiaries, and
claims of preferred stockholders of such subsidiaries generally will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of Fedders North America and Fedders, including holders of
the notes. Accordingly, the notes will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders, if any, of such
subsidiaries.
At March 31, 2004, after giving pro forma effect to the offering of the
notes and the application of the net proceeds therefrom, the total Indebtedness
of the subsidiaries of Fedders (other than Fedders North America and the
Subsidiary Guarantors) would have been approximately $32.4 million and the other
liabilities of such subsidiaries would have been approximately $89.7 million
(excluding intercompany liabilities owed to Persons other than Fedders, Fedders
North America and the Subsidiary Guarantors), including trade payables. Although
the indenture limits the incurrence of Indebtedness and preferred stock of
certain subsidiaries of
59
Fedders North America, such limitation is subject to a number of significant
qualifications. The indenture does not limit the incurrence of Indebtedness or
preferred stock of any other Subsidiaries of Fedders. Moreover, the indenture
does not impose any limitation on the incurrence by any subsidiaries of
liabilities that are not considered Indebtedness under the indenture. See
" -- Certain Covenants -- Limitation on Incurrence of Indebtedness."
As of March 31, 2004, the total assets of the subsidiaries of Fedders
(other than Fedders North America and the Subsidiary Guarantors) were $116.0
million (excluding intercompany receivables).
BOOK-ENTRY, DELIVERY AND FORM
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where such old
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that, for a period of one year after the expiration
date of the exchange offer, we will make this prospectus available to any
broker-dealer for use in connection with any resale.
We will not receive any proceeds in connection with the exchange offer. New
notes received by broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Act and any profit on
any such resale or new notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Act.
For a period of one year after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay all expenses incident to
this exchange offer, other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the new notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Act.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them. Fedders North America takes no responsibility for these
operations and procedures and urge investors to contact the system or their
participants directly to discuss these matters.
DTC has advised Fedders North America that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
(collectively, the "participants") and to facilitate the clearance and
settlement of transactions in those securities between participants through
electronic book-entry changes in accounts of its participants. The participants
include securities brokers and dealers (including the initial purchaser), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly (collectively,
the "indirect participants"). Persons who are not participants may beneficially
own securities held by or on behalf of DTC only through the participants or the
indirect participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the participants and indirect participants.
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DTC has also advised Fedders North America that, pursuant to procedures
established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
participants designated by the initial purchaser with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the participants) or by
the participants and the indirect participants (with respect to other
owners of beneficial interests in the Global Notes).
Investors in the Global Notes who are participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not participants may hold their interests therein indirectly through
organizations which are participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of some
states require that certain Persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such Persons will be limited to that extent.
Because DTC can act only on behalf of participants, which in turn act on behalf
of indirect participants, the ability of a Person having beneficial interests in
a Global Note to pledge such interests to Persons that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF AN INTEREST IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
additional interest, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, Fedders North America and
the Trustee will treat the Persons in whose names the notes, including the
Global Notes, are registered as the owners of the notes for the purpose of
receiving payments and for all other purposes. Consequently, neither Fedders
North America, the Trustee nor any agent of Fedders North America or the Trustee
has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any participant's or indirect
participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its participants or indirect participants.
DTC has advised Fedders North America that its current practice, upon
receipt of any payment in respect of securities such as the notes (including
principal and interest), is to credit the accounts of the relevant participants
with the payment on the payment date unless DTC has reason to believe it will
not receive payment on such payment date. Each relevant participant is credited
with an amount proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the records of DTC.
Payments by the participants and the indirect participants to the beneficial
owners of notes will be governed by standing instructions and customary
practices and will be the responsibility of the participants or the indirect
participants and will not be the responsibility of DTC, the Trustee or Fedders
North America. Neither Fedders North America nor the Trustee will be liable for
any delay by DTC or any of its participants in identifying the beneficial owners
of the notes, and Fedders North America and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee for all
purposes.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
DTC has advised Fedders North America that it will take any action
permitted to be taken by a holder of notes only at the direction of one or more
participants to whose account DTC has credited the interests in the
61
Global Notes and only in respect of such portion of the aggregate principal
amount of the notes as to which such participant or participants has or have
given such direction. However, if there is an Event of Default under the notes,
DTC reserves the right to exchange the Global Notes for legended notes in
certificated form, and to distribute such notes to its participants.
Neither Fedders North America nor the Trustee nor any of their respective
agents will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for Certificated Notes if:
(1) DTC (A) notifies Fedders North America that it is unwilling or
unable to continue as depositary for the Global Notes or (B) has ceased to
be a clearing agency registered under the Exchange Act and, in each case, a
successor depositary is not appointed;
(2) Fedders North America, at its option, notifies the Trustee in
writing that it elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default with respect to the
notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes.
SAME DAY SETTLEMENT AND PAYMENT
Fedders North America will make payments in respect of the notes
represented by the Global Notes (including principal, premium, if any, interest
and additional interest, if any) by wire transfer of immediately available funds
to the accounts specified by the Global Note holder. Fedders North America will
make all payments of principal, interest and premium and additional interest, if
any, with respect to Certificated Notes by wire transfer of immediately
available funds to the accounts specified by the holders of the Certificated
Notes or, if no such account is specified, by mailing a check to each such
holder's registered address. The notes represented by the Global Notes are
expected to be eligible to trade in the PORTAL market and to trade in DTC's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such notes will, therefore, be required by DTC to be settled in
immediately available funds. Fedders North America expects that secondary
trading in any Certificated Notes will also be settled in immediately available
funds.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
Fedders North America has agreed pursuant to the Registration Rights
Agreement that it will, subject to certain exceptions,
(1) within 90 days after the Issue Date, file a registration statement
(the "Exchange Offer Registration Statement") with the SEC with respect to
a registered offer (the "Registered Exchange Offer") to exchange the notes
for new notes of Fedders North America (the "Exchange Notes") having terms
substantially identical in all material respects to the notes (except that
the Exchange Notes will not contain terms with respect to transfer
restrictions);
62
(2) use its reasonable best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act
within 180 days after the Issue Date;
(3) as soon as practicable after the effectiveness of the Exchange
Offer Registration Statement (the "Effectiveness Date"), offer the Exchange
Notes in exchange for surrender of the notes; and
(4) keep the Registered Exchange Offer open for not less than 30 days
(or longer if required by applicable law) after the date notice of the
Registered Exchange Offer is mailed to the holders of the notes.
For each note tendered to Fedders North America pursuant to the Registered
Exchange Offer, it will issue to the holder of such note an Exchange Note having
a principal amount equal to that of the surrendered note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the note surrendered in exchange therefor, or, if no interest has
been paid on such note, from the date of its original issue.
Under existing SEC interpretations, the Exchange Notes will be freely
transferable by holders other than affiliates of Fedders North America after the
Registered Exchange Offer without further registration under the Securities Act
if the holder of the Exchange Notes represents to Fedders North America in the
Registered Exchange Offer that it is acquiring the Exchange Notes in the
ordinary course of its business, that it has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes and
that it is not an affiliate of Fedders North America, as such terms are
interpreted by the SEC; provided, however, that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Registered Exchange Offer will
have a prospectus delivery requirement with respect to resales of such Exchange
Notes. The SEC has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to Exchange Notes
(other than a resale of an unsold allotment from the original sale of the notes)
with the prospectus contained in the Exchange Offer Registration Statement.
Under the Registration Rights Agreement, Fedders North America is required
to allow Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such Exchange
Notes for 180 days following the effective date of such Exchange Offer
Registration Statement (or such shorter period during which Participating
Broker-Dealers are required by law to deliver such prospectus).
A holder of notes (other than certain specified holders) who wishes to
exchange such notes for Exchange Notes in the Registered Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of Fedders North America, as defined in Rule 405 of the Securities
Act, or if it is an affiliate, that it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
In the event that:
(1) applicable interpretations of the staff of the SEC do not permit
Fedders North America to effect such a Registered Exchange Offer; or
(2) for any other reason Fedders North America does not consummate the
Registered Exchange Offer within 220 days of the Issue Date; or
(3) an Initial Purchaser shall notify Fedders North America following
consummation of the Registered Exchange Offer that notes held by it are not
eligible to be exchanged for Exchange Notes in the Registered Exchange
Offer; or
63
(4) certain holders are prohibited by law or SEC policy from
participating in the Registered Exchange Offer or may not resell the
Exchange Notes acquired by them in the Registered Exchange Offer to the
public without delivering a prospectus,
then, Fedders North America will, subject to certain exceptions,
(5) promptly file a shelf registration statement (the "Shelf
Registration Statement") with the SEC covering resales of the notes or the
Exchange Notes, as the case may be;
(6) (A) in the case of clause (1) above, use its reasonable best
efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act on or prior to the 180th day after the Issue Date
and (B) in the case of clause (2), (3) or (4) above, use its reasonable
best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act on or prior to the 60th day after the
date on which the Shelf Registration Statement is required to be filed; and
(7) keep the Shelf Registration Statement effective until the earliest
of (A) the time when the notes covered by the Shelf Registration Statement
can be sold pursuant to Rule 144 without any limitations under clauses (c),
(e), (f) and (h) of Rule 144, (B) two years from the Issue Date and (C) the
date on which all notes registered thereunder are disposed of in accordance
therewith.
Fedders North America will, in the event a Shelf Registration Statement is
filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the notes or the Exchange Notes,
as the case may be. A holder selling such notes or Exchange Notes pursuant to
the Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
holder (including certain indemnification obligations).
Notwithstanding anything to the contrary in the Registration Rights
Agreement, Fedders North America may notify the holders of its suspension of any
Shelf Registration Statement (and, upon receipt of such notice, the holders
shall not be authorized by Fedders North America to resell and shall not resell
notes covered by the Shelf Registration Statement during such period of
suspension) if the Board of Directors of Fedders North America determines in
good faith that there is a valid purpose for the suspension (all such periods of
suspension may not exceed 60 days during any 365-day period), and such
suspensions shall be disregarded when determining whether the holders have a
right to receive additional interest.
Fedders North America may require each holder requesting to be named as a
selling security holder to furnish to it such information regarding the holder
and the distribution of the notes or Exchange Notes by the holder as Fedders
North America may from time to time reasonably require for the inclusion of the
holder in the Shelf Registration Statement, including requiring the holder to
properly complete and execute such selling security holder notice and
questionnaires, and any amendments or supplements thereto, as Fedders North
America may reasonably deem necessary or appropriate. Fedders North America may
refuse to name any holder as a selling security holder that fails to provide it
with such information.
Fedders North America will pay additional cash interest on the notes and
Exchange Notes, subject to certain exceptions,
(1) if Fedders North America fails to file an Exchange Offer
Registration Statement with the SEC on or prior to the 90th day after the
Issue Date,
(2) if the Exchange Offer Registration Statement is not declared
effective by the SEC on or prior to the 180th day after the Issue Date or,
if obligated to file a Shelf Registration Statement pursuant to clause 6(A)
above, a Shelf Registration Statement is not declared effective by the SEC
on or prior to the 180th day after the Issue Date,
64
(3) if the Exchange Offer is not consummated on or before the 40th day
after the Exchange Offer Registration Statement is declared effective or,
if later, on or before the 220th day after the Issue Date,
(4) if obligated to file the Shelf Registration Statement pursuant to
clause 6(B) above, Fedders North America fails to file the Shelf
Registration Statement with the SEC on or prior to the 30th day (the "Shelf
Filing Date") after the date on which the obligation to file a Shelf
Registration Statement arises,
(5) if obligated to file a Shelf Registration Statement pursuant to
clause 6(B) above, the Shelf Registration Statement is not declared
effective on or prior to the 60th day after the Shelf Filing Date, or
(6) after the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, is declared effective, such
Registration Statement thereafter ceases to be effective or usable (subject
to certain exceptions) (each such event referred to in the preceding
clauses (1) through (6), a "Registration Default");
from and including the date on which any such Registration Default shall
occur to but excluding the date on which all Registration Defaults have been
cured.
The rate of the additional interest will be 0.25% per annum for the first
90-day period immediately following the occurrence of a Registration Default,
and such rate will increase by an additional 0.25% per annum with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum additional interest rate of 1.0% per annum. Fedders North
America will pay such additional interest on regular interest payment dates.
Such additional interest will be in addition to any other interest payable from
time to time with respect to the notes and the Exchange Notes.
All references in the indenture, in any context, to any interest or other
amount payable on or with respect to the notes shall be deemed to include any
additional interest pursuant to the Registration Rights Agreement.
If Fedders North America effects the Registered Exchange Offer, it will be
entitled to close the Registered Exchange Offer 30 days after the commencement
thereof provided that it has accepted all notes theretofore validly tendered in
accordance with the terms of the Registered Exchange Offer.
MANDATORY OFFERS TO PURCHASE NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of notes shall have the
right to require Fedders North America to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's notes pursuant to an
Offer (as defined below) at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus any accrued and unpaid interest and
additional interest, if any, to the date of purchase. Fedders North America
shall furnish to the trustee, at least two Business Days before notice of an
Offer is mailed to all holders of notes pursuant to the procedures described
below under "-- Procedures for Offers," notice that the Offer is being made.
Transactions constituting a Change of Control are not limited to hostile
takeover transactions not approved by the current management of Fedders North
America. Except as described, the indenture does not permit the holders of notes
to require Fedders North America to purchase or redeem the notes in the event of
a takeover, recapitalization or similar restructuring, including an issuer
recapitalization or similar transaction with management. Consequently, these
Change of Control provisions will not afford any protection in a highly
leveraged transaction, including such a transaction initiated by Fedders North
America, management of Fedders North America or an affiliate of Fedders North
America, if such transaction does not result in a Change of Control. Existing or
future Senior Indebtedness of Fedders North America or obligations of the
Subsidiaries of Fedders North America may prohibit Fedders North America from
repurchasing the notes upon a Change of Control. Moreover, the ability of
Fedders North America to repurchase notes following a Change of Control will be
limited by Fedders North America's then-available resources. These Change of
Control provisions may not be waived by the Board of Directors of Fedders North
America or the trustee without the consent of holders of at least a majority in
principal amount of the notes. See "-- Amendment, Supplement and Waiver."
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Fedders North America expects that prepayment of the notes following a
Change of Control would, and the exercise by holders of notes of the right to
require Fedders North America to purchase notes may, constitute a default under
the Credit Agreement or under other Senior Indebtedness of Fedders North
America. In the event a Change of Control occurs, Fedders North America will
likely be required to refinance the Senior Indebtedness outstanding under the
Credit Agreement and the notes. If there is a Change of Control, any Senior
Indebtedness under the Credit Agreement could be accelerated. Moreover, there
can be no assurance that sufficient funds will be available at the time of any
Change of Control to make any required repurchases of the notes. The financing
of the purchases of notes could additionally result in a default under the
Credit Agreement or other indebtedness of Fedders North America. The occurrence
of a Change of Control may also have an adverse impact on the ability of Fedders
North America to obtain additional financing in the future.
Asset Sales. The indenture provides that Fedders North America may not,
and may not permit any Restricted Subsidiary to, directly or indirectly,
consummate an Asset Sale (including the sale of any of the Capital Stock of any
Restricted Subsidiary) providing for Net Proceeds in excess of $5,000,000,
unless the Net Proceeds from such Asset Sale are applied (in any manner
otherwise permitted by the indenture) to one or more of the following purposes
in such combination as Fedders North America shall elect:
(i) an investment in any asset or business in a Related Business;
provided that such investment occurs on or prior to the 365th day following
the date of such Asset Sale (the "Asset Sale Disposition Date");
(ii) to reimburse Fedders North America or its Subsidiaries for
expenditures made, and costs incurred, to repair, rebuild, replace or
restore property lost, damaged or taken to the extent that the Net Proceeds
consist of insurance proceeds received on account of such loss, damage or
taking;
(iii) the purchase, redemption or other prepayment or repayment of
outstanding Senior Indebtedness or Indebtedness of Fedders North America's
Restricted Subsidiaries on or prior to the 365th day following the Asset
Sale Disposition Date; or
(iv) an Offer expiring on or prior to the Purchase Date (as defined
below).
The indenture also provides that Fedders North America may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset
Sale unless at least 75% of the consideration therefor received by Fedders North
America or such Restricted Subsidiary is in the form of cash, cash equivalents
or marketable securities; provided that, solely for purposes of calculating such
75% of the consideration, the amount of
(x) any liabilities (as shown on Fedders North America's or such
Restricted Subsidiary's most recent balance sheet or in the notes thereto,
excluding contingent liabilities and trade payables) of Fedders North
America or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the notes) that are assumed by the transferee
of any such assets, and
(y) any notes or other obligations received by Fedders North America
or any such Restricted Subsidiary from such transferee that are promptly,
but in no event more than 30 days after receipt, converted by Fedders North
America or such Restricted Subsidiary into cash (to the extent of the cash
received),
shall be deemed to be cash and cash equivalents for purposes of this provision.
Any Net Proceeds from any Asset Sale that are not applied or invested as
provided in clauses (a), (b), or (c) above (or clauses (a), (b) or (c) below)
shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $6,500,000 (such date
being an "Asset Sale Trigger Date"), Fedders North America shall make an Offer
(an "Asset Sale Offer") to all holders of notes to purchase the maximum
principal amount of the notes then outstanding that may be purchased out of
Excess Proceeds, at an offer price in cash in an amount equal to 100% of
principal amount thereof plus any accrued and unpaid interest and additional
interest, if any, to the Purchase Date in accordance with the procedures set
forth in the indenture governing the notes. Notwithstanding the foregoing, to
the extent that any or all of the
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Net Proceeds of an Asset Sale are prohibited or delayed by applicable local law
from being repatriated to the United States, the portion of such Net Proceeds so
affected will not be required to be applied as described in this or the next
preceding paragraph, but may be retained for so long, but only for so long, as
the applicable local law prohibits repatriation to the United States.
To the extent that any Excess Proceeds remain after completion of an Asset
Sale Offer, Fedders North America may use such remaining amount for general
corporate purposes. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
The indenture also provides that Fedders may not, and may not permit any of
its Non-FNA Subsidiaries to, directly or indirectly consummate an Asset Sale
unless the Net Proceeds from such Asset Sale are applied (in any manner
otherwise permitted by the indenture) to one or more of the following purposes
in such combination as Fedders shall elect:
(a) an investment in another asset or business in a Related Business;
provided that such investment occurs on or prior to the 365th day following
the Asset Sale Disposition Date;
(b) to reimburse Fedders or its Subsidiaries for expenditures made,
and costs incurred, to repair, rebuild, replace or restore property lost,
damaged or taken to the extent that the Net Proceeds consist of insurance
proceeds received on account of such loss, damage or taking;
(c) the purchase, redemption or other prepayment or repayment of
outstanding Indebtedness of Fedders or Indebtedness of Fedders'
Subsidiaries (other than Subordinated Obligations of Fedders North America
and the Subsidiary Guarantors) on or prior to the 365th day following the
Asset Sale Disposition Date; or
(d) an Offer expiring on or prior to the Purchase Date.
Although the Credit Agreement will permit Fedders North America to pay
interest on the notes, repurchases of notes by Fedders North America upon an
Asset Sale will not be permitted under the terms of the Credit Agreement.
Accordingly, Fedders North America would need to seek the consent of its lenders
under the Credit Agreement in order to repurchase notes with the Net Proceeds of
an Asset Sale.
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
indenture, Fedders North America shall mail a notice to each holder of notes at
such holder's registered address stating:
(a) that an offer (an "Offer") is being made pursuant to a Change of
Control or an Asset Sale Trigger Date, as the case may be, the length of
time the Offer shall remain open and the maximum principal amount of notes
that will be accepted for payment pursuant to such Offer;
(b) the purchase price, the amount of accrued and unpaid interest as
of the purchase date, and the purchase date (which shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Purchase Date")); and
(c) such other information required by the indenture and applicable
law and regulations.
On the Purchase Date for any Offer, Fedders North America will, to the
extent required by the indenture and such Offer:
(1) in the case of an Offer resulting from a Change of Control, accept
for payment all notes or portions thereof tendered pursuant to such Offer
and, in the case of an Offer resulting from an Asset Sale Trigger Date,
accept for payment the maximum principal amount of notes or portions
thereof tendered pursuant to such Offer that can be purchased out of Excess
Proceeds;
(2) deposit with the paying agent the aggregate purchase price of all
notes or portions thereof accepted for payment and any accrued and unpaid
interest and additional interest, if any, on such notes as of the Purchase
Date; and
(3) deliver or cause to be delivered to the trustee all notes tendered
pursuant to the Offer.
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The paying agent shall promptly mail to each holder of notes or portions
thereof accepted for payment an amount equal to the purchase price for such
notes plus any accrued and unpaid interest and additional interest, if any,
thereon, and the trustee shall promptly authenticate and mail (or cause to be
transferred by book-entry) to such holder of notes accepted for payment in part
a new note equal in principal amount to any unpurchased portion of the notes and
any note not accepted for payment in whole or in part shall be promptly returned
to the holder thereof. Fedders North America will publicly announce the results
of the Offer on or as soon as practicable after the Purchase Date.
Fedders North America will comply with any tender offer rules under the
Securities Exchange Act of 1934 which may then be applicable, including Rule
14e-1, in connection with an offer required to be made by Fedders North America
to repurchase the notes as a result of a Change of Control or an Asset Sale
Trigger Date. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the indenture, Fedders North America
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the indenture by virtue
thereof.
Selection and Notice. In the event of a redemption or purchase of less
than all of the notes, the notes to be redeemed or purchased will be chosen by
the trustee pro rata, to the extent practicable, and if not practicable by lot
or by any other method that the trustee considers fair and appropriate and, if
the notes are listed on any securities exchange, by a method that complies with
the requirements of such exchange; provided that, if less than all of a holder's
notes and are to be redeemed or accepted for payment, only principal amounts of
$1,000 or multiples thereof may be selected for redemption or accepted for
payment. On and after any redemption or purchase date, interest shall cease to
accrue on the notes or portions thereof called for redemption or accepted for
payment. Notice of any redemption or offer to purchase will be mailed at least
30 days but not more than 60 days before the redemption or purchase date to each
holder of notes to be redeemed or purchased at such holder's registered address.
CERTAIN COVENANTS
The indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The indenture provides that Fedders
North America will not, and will not permit any Restricted Subsidiary to,
directly or indirectly,
(i) declare or pay any dividend or make any distribution on account of
Fedders North America's or such Restricted Subsidiary's Capital Stock or
other Equity Interests (other than dividends or distributions payable in
Capital Stock or other Equity Interests (other than Disqualified Stock) of
Fedders North America and dividends or distributions payable by a
Restricted Subsidiary to a Restricted Subsidiary or to Fedders North
America);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock or other Equity Interests of Fedders North America or any of
its Restricted Subsidiaries;
(iii) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund
payment, any Indebtedness of Fedders North America that is subordinate or
junior in right of payment to the notes; or
(iv) make any Restricted Investment (all such dividends,
distributions, purchases, redemptions, acquisitions, retirements,
prepayments and Restricted Investments being collectively referred to as
"Restricted Payments"), if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving pro
forma effect thereto, Fedders North America shall not be able to issue
$1.00 of additional Indebtedness pursuant to the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant; or
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(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made after the Issue Date, without
duplication, exceeds the sum of:
(1) 50% of the aggregate Consolidated Net Income (including, for
this purpose, gains or losses from Asset Sales) of Fedders North
America (or, in case such aggregate is a loss, 100% of such loss) for
the period (taken as one accounting period) from January 1, 2004 and
ended as of Fedders North America's most recently ended fiscal
quarter at the time of such Restricted Payment; plus
(2) 100% of the aggregate net cash proceeds and the fair market
value of any property or securities (as determined by the Board of
Directors in good faith) received by Fedders North America from the
issue or sale of Capital Stock or other Equity Interests of Fedders
North America subsequent to the Issue Date (other than (w) Capital
Stock or other Equity Interests issued or sold to a Restricted
Subsidiary, (x) the issuance or sale of Disqualified Stock, (y) the
Capital Stock of NYCOR North America, Inc. and its Subsidiaries
contributed to Fedders North America and (z) other than Excess
Proceeds contributed to Fedders North America for purposes of making
an Offer in accordance with "-- Mandatory Offers to Purchase Notes --
Asset Sales"); plus
(3) the amount by which the principal amount of and any accrued
interest on either (A) Indebtedness of Fedders North America or (B)
any Indebtedness of any Restricted Subsidiary is reduced on Fedders
North America's consolidated balance sheet upon the conversion or
exchange other than by a Restricted Subsidiary subsequent to the
Issue Date of any Indebtedness of Fedders North America or any
Restricted Subsidiary (not held by Fedders North America or any
Restricted Subsidiary) for Capital Stock or other Equity Interests
(other than Disqualified Stock) of Fedders North America (less the
amount of any cash, or the fair market value of any other property or
securities (as determined by the Board of Directors in good faith),
distributed by Fedders North America or any Restricted Subsidiary (to
persons other than Fedders North America or any other Restricted
Subsidiary) upon such conversion or exchange); plus
(4) if any Non-Restricted Subsidiary is redesignated as a
Restricted Subsidiary, the value of the Restricted Payment that would
result if such Subsidiary were redesignated as a Non-Restricted
Subsidiary at such time, as determined in accordance with the second
paragraph of the "Designation of Restricted and Non-Restricted
Subsidiaries" covenant.
Notwithstanding the foregoing, clauses (b) and (c) shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would
comply with all covenants of the indenture (including, but not limited to,
the "Limitation on Restricted Payments" covenant); provided that payments
made pursuant to this paragraph shall count as a Restricted Payment for
purposes of the calculation in clause (c) of this covenant;
(ii) payments to Fedders in an amount equal to the amount of income
tax that Fedders North America would have paid had it filed consolidated
tax returns on a separate company basis in any given tax year; provided
that payments made pursuant to this paragraph (ii) shall not count as a
Restricted Payment for purposes of the calculation in paragraph (c) of this
covenant;
(iii) cash dividends or loans from Fedders North America to Fedders
pursuant to the Services Agreement but in no event exceeding 4% of the
revenues of Fedders North America and its Restricted Subsidiaries for the
immediately preceding four fiscal quarters; provided, that payments made
pursuant to this paragraph (iii) shall not count as a Restricted Payment
for purposes of the calculation in paragraph (c) of this covenant;
(iv) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or other Equity Interests of Fedders North America or any
Restricted Subsidiary in exchange for, or out of the
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proceeds of, the substantially concurrent sale (other than to a Subsidiary
of Fedders North America) of other Capital Stock or other Equity Interests
of Fedders North America (other than any Disqualified Stock) or the
redemption, repurchase, retirement or other acquisition of any Capital
Stock or other Equity Interests of any Restricted Subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale (other
than to Fedders North America or a Subsidiary of Fedders North America) of
other Capital Stock or other Equity Interests of such Restricted
Subsidiary; provided that, in each case, any net cash proceeds that are
utilized for any such redemption, repurchase, retirement or other
acquisition, and any Net Income resulting therefrom, shall be excluded from
clause (c) of this covenant;
(v) Restricted Investments made or received in connection with the
sale, transfer or disposition of any business, properties or assets of
Fedders North America or any Restricted Subsidiary; provided that, if such
sale, transfer or disposition constitutes an Asset Sale, Fedders North
America complies with the "Asset Sale" provisions of the indenture, and
such Restricted Investments shall not count as a Restricted Payment for
purposes of the calculation in paragraph (c) of this covenant;
(vi) the payment of a dividend to Fedders in order to allow Fedders to
pay its regular quarterly dividend in respect of Fedders' Series A
Cumulative Preferred Stock, Common Stock, and Class B Stock; provided that
payments made pursuant to this paragraph (vi) shall count as a Restricted
Payment for purposes of the calculation in paragraph (c) of this covenant;
(vii) dividends or other Restricted Payments made to Fedders or any of
its Subsidiaries to the extent such amounts are used to make an Investment
in any Subsidiary of Fedders, provided that (A) the primary business of
such Subsidiary is a Related Business and (B) the amount of such dividend
or other Restricted Payment, when taken together with the aggregate amount
of other dividends and Restricted Payments made pursuant to this clause
(vii), does not exceed $30,000,000, provided further that amounts paid
pursuant to this clause (vii) shall not count as a Restricted Payment for
purposes of the calculation in paragraph (c) of this covenant;
(viii) any cash advances or loans to Fedders or any Non-FNA
Subsidiaries made in connection with ordinary course of business cash
management practices of Fedders and its Subsidiaries, provided that amounts
paid pursuant to this clause (viii) shall not count as a Restricted Payment
for purposes of the calculation in paragraph (c) of this covenant;
(ix) dividends or other Restricted Payments to Fedders or any of its
Subsidiaries with the Net Proceeds from the disposition of the
Walkersville, Maryland property owned by Rotorex Company, Inc. on the Issue
Date to the extent such amounts are used to make an Investment in any
Subsidiary of Fedders, provided that (A) the primary business of such
Subsidiary is a Related Business and (B) amounts paid pursuant to this
clause (x) shall not count as a Restricted Payment for purposes of the
calculation in paragraph (c) of this covenant;
(x) one or more dividends or other distributions to Fedders to the
extent they consist of the Capital Stock of or other equity interests in
each of FNA Mauritius Co., Inc., Fedders Shanghai Co., Ltd., Fedders Indoor
Air Quality (Suzhou) Co., Ltd., Xi'an Fedders Dong Fang Air Conditioner
Compressor Co., Ltd. and Quanzhou Melcor Hua Yu Thermoelectric Co., Ltd.;
provided, however, that (A) prior to the payment of such dividends neither
Fedders North America nor any Subsidiary Guarantor shall have contributed
or otherwise transferred to any such persons any material assets other than
in the ordinary course of business consistent with past practice, (B)
substantially concurrent with such dividend or other distribution, Fedders
contributes such Capital Stock to Fedders International or one of its
Subsidiaries and (C) such dividends shall not count as Restricted Payments
for purposes of the calculation in paragraph (c) of this covenant; and
(xi) Restricted Payments in an amount which, when taken together with
all Restricted Payments pursuant to this clause (xi) and then outstanding,
does not exceed $15,000,000; provided that payments made pursuant to this
paragraph (xi) shall count as a Restricted Payment for purposes of the
calculation in paragraph (c) of this covenant.
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The indenture also provides that Fedders will not directly or indirectly
declare or pay any cash dividend or make any cash distribution on account of
Fedders' Capital Stock or other Equity Interests with the proceeds of a
Disqualified Distribution.
"Disqualified Distribution" means a cash dividend, distribution or advance
received by Fedders from any Non-FNA Subsidiary to the extent the amount of such
cash dividend, distribution or advance and all other such cash dividends,
distributions and advances since the Issue Date would exceed the aggregate
Consolidated Net Income of the Non-FNA Subsidiaries accrued during the period
(treated as one accounting period) from January 1, 2004 to the end of the most
recent fiscal quarter at the time of such dividend, distribution or advance.
Limitation on Incurrence of Indebtedness. The indenture provides that
Fedders North America will not, and will not permit any Restricted Subsidiary
to, issue any Indebtedness (other than the Indebtedness represented by the notes
in an aggregate principal amount not to exceed $155,000,000); provided, however,
that Fedders North America and the Subsidiary Guarantors will be entitled to
issue Indebtedness if Fedders North America's Cash Flow Coverage Ratio for its
four full fiscal quarters next preceding the date such additional Indebtedness
is issued would have been at least 2.25 to 1 if such Indebtedness is issued
prior to March 1, 2005 or 2.5 to 1 if such Indebtedness is issued thereafter, in
each case determined on a Pro Forma Basis (including, for this purpose, any
other Indebtedness incurred since the end of the applicable four quarter period)
as if such additional Indebtedness and any other Indebtedness issued since the
end of such four-quarter period had been issued at the beginning of such
four-quarter period.
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of Fedders North America and/or the Subsidiary
Guarantors under one or more Credit Facilities as measured on such date of
issuance in an aggregate principal amount outstanding on any such date of
issuance not exceeding the greater of (x) the sum of (A) 85% of the book
value of the accounts receivable of Fedders North America and the
Subsidiary Guarantors on a consolidated basis and (B) 70% of the book value
of the inventory of Fedders North America and the Subsidiary Guarantors on
a consolidated basis or (y) $100,000,000;
(ii) Indebtedness of Fedders North America and its Restricted
Subsidiaries in connection with capital leases, purchase money obligations,
capital expenditures or similar financing transactions relating to their
properties, assets and rights up to $15,000,000 in aggregate principal
amount;
(iii) additional Indebtedness of Fedders North America and the
Subsidiary Guarantors in an aggregate principal amount of up to
$15,000,000; and
(iv) Other Permitted Indebtedness.
Notwithstanding the foregoing, no Restricted Subsidiary shall under any
circumstances issue a guarantee of any Indebtedness of Fedders North America
except for guarantees issued by Restricted Subsidiaries pursuant to the "Future
Guarantors" covenant; provided, however, that the foregoing will not limit or
restrict guarantees issued by Restricted Subsidiaries in respect of Indebtedness
of other Restricted Subsidiaries.
Sale and Leaseback Transactions. The indenture provides that Fedders North
America will not, and will not cause or permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Fedders North America and the Subsidiary Guarantors may enter into a sale and
leaseback transaction if:
(i) Fedders North America or such Subsidiary Guarantor could have
incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction pursuant to Fedders North America's
Cash Flow Coverage Ratio test set forth in the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant; and
(ii) the net cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an officers' certificate delivered to
the trustee) of the property that is the subject of such sale and leaseback
transaction; and
(iii) the transfer of assets in such sale and leaseback transaction is
permitted by, and the proceeds of such transaction are applied in
compliance with, the "Asset Sales" covenant.
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Limitation on Liens. The indenture provides that Fedders North America
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) upon any property or asset now owned or hereafter acquired by
them, or any income or profits therefrom, or assign or convey any right to
receive income therefrom; provided, however, that in addition to creating
Permitted Liens on its properties or assets, Fedders North America and any of
the Subsidiary Guarantors may create any Lien upon any of their properties or
assets (including, but not limited to, any Capital Stock of its Subsidiaries) if
the notes are equally and ratably secured.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The indenture provides that Fedders North America will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective, any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary that is
not a Subsidiary Guarantor to: (a) pay dividends or make any other distributions
on its Capital Stock or any other interest or participation in, or measured by,
its profits, owned by Fedders North America or any Restricted Subsidiary, or pay
any Indebtedness owed to, Fedders North America or any Restricted Subsidiary,
(b) make loans or advances to Fedders North America, or (c) transfer any of its
properties or assets to Fedders North America, except for such encumbrances or
restrictions existing under or by reason of:
(i) any agreement, obligation or instrument in effect on the Issue
Date, and any amendment, restatement or extension of such agreement,
obligation or instrument to the extent such encumbrances or restrictions
are not materially more restrictive to the noteholders than those in effect
on the Issue Date;
(ii) Indebtedness permitted (A) under the first sentence of the first
paragraph of the "Limitation on Incurrence of Indebtedness" covenant, (B)
under clauses (i) or (iii) of the second paragraph of the "Limitation on
Incurrence of Indebtedness" covenant or clauses (i), (v), (vi) or (viii) of
the definition of "Other Permitted Indebtedness," or (C) by agreements and
transactions permitted under the "Limitation on Restricted Payments"
covenant;
(iii) customary provisions restricting subletting or assignment of any
lease or license of Fedders North America or any Restricted Subsidiary;
(iv) any instrument governing Indebtedness or any other encumbrance or
restriction of a person acquired by Fedders North America or any Restricted
Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person,
so acquired;
(v) the Credit Agreement;
(vi) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant or clauses (i), (v) or (viii) of the
definition of Other Permitted Indebtedness; provided that the encumbrances
and restrictions created in connection with such Refinancing Indebtedness
are no more restrictive in any material respect with regard to the
interests of the holders of notes than the encumbrances and restrictions in
the refinanced Indebtedness;
(vii) the Existing Notes; or
(viii) the terms of purchase money obligations, but only to the extent
such purchase money obligations restrict or prohibit the transfer of the
property so acquired.
Nothing contained in this covenant shall prevent Fedders North America from
entering into any agreement or instrument providing for the incurrence of
Permitted Liens or restricting the sale or other disposition of property or
assets of Fedders North America or any of its Restricted Subsidiaries that are
subject to Permitted Liens.
Limitation on Transactions With Affiliates. The indenture provides that
neither Fedders North America nor any of its Restricted Subsidiaries may make
any loan, advance, guarantee or capital contribution
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to, or for the benefit of, or sell, lease, transfer or dispose of any properties
or assets to, or for the benefit of, or purchase or lease any property or assets
from, or enter into or amend any contract, agreement or understanding with, or
for the benefit of, an Affiliate (each such transaction or series of related
transactions that are part of a common plan are referred to as an "Affiliate
Transaction"), except in good faith and on terms that are no less favorable to
Fedders North America or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction on an arm's length basis
from an unrelated person.
The indenture further provides that Fedders North America will not, and
will not permit any Restricted Subsidiary to, engage in any Affiliate
Transaction involving aggregate payments or other transfers by Fedders North
America and its Restricted Subsidiaries in excess of $3,500,000 (including cash
and non-cash payments and benefits valued at their fair market value by the
Board of Directors of Fedders North America in good faith) unless Fedders North
America delivers to the trustee:
(i) a resolution of the Board of Directors of Fedders North America
stating that the Board of Directors (including a majority of the
disinterested directors, if any) has, in good faith, determined that such
Affiliate Transaction complies with the provisions of the indenture; and
(ii) (A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction
involving the transfer of real property, fixed assets or equipment, either
directly or by a transfer of 50% or more of the Capital Stock of a
Restricted Subsidiary which holds any such real property, fixed assets or
equipment, a written appraisal from a nationally recognized appraiser,
experienced in the review of similar types of transactions, or (C) with
respect to any Affiliate Transaction not otherwise described in (A) and (B)
above, a written certification from a nationally recognized professional or
firm experienced in evaluating similar types of transactions, in each case,
stating that the terms of such transaction are fair to Fedders North
America or such Restricted Subsidiary, as the case may be, from a financial
point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will
not apply to:
(i) transactions between Fedders North America and any wholly owned
Restricted Subsidiary or between wholly owned Restricted Subsidiaries;
(ii) transactions permitted by the "Limitation on Restricted Payments"
covenant;
(iii) compensation paid to officers, employees or consultants of
Fedders North America or any subsidiary as determined in good faith by
Fedders North America's Board of Directors or executives; or
(iv) transactions (A) between Fedders North America or any of its
Subsidiaries and Fedders or between (B) Fedders North America or any of its
Subsidiaries and a Subsidiary of Fedders in the ordinary course of business
on terms substantially consistent with past practice.
Future Guarantors. Fedders North America will not permit any domestic
Restricted Subsidiary to issue any Indebtedness (other than Other Permitted
Indebtedness) or any Foreign Subsidiary to guarantee any Indebtedness (other
than Indebtedness issued by another Foreign Subsidiary) unless such Restricted
Subsidiary contemporaneously executes and delivers a supplemental indenture to
the trustee providing for a guarantee of payment of the notes then outstanding
by such Restricted Subsidiary on the same terms as a Subsidiary Guaranty;
provided, however, that the provisions of this section do not apply to
guarantees by any Restricted Subsidiary of Fedders North America's Indebtedness
under the Credit Agreement as in effect on the Issue Date.
Each guarantee of the notes created by a Restricted Subsidiary pursuant to
the provisions described in the foregoing paragraph shall be in form and
substance satisfactory to the trustee and shall provide, among other things,
that it will be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer permitted by the indenture of (a)
all of Fedders North America's Capital Stock in such Restricted Subsidiary
or (b) the sale of all or substantially all of the assets of the
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Restricted Subsidiary and upon the application of the Net Proceeds from
such sale in accordance with the requirements of the "Asset Sales"
provisions described herein; or
(ii) the release or discharge of the Other Company Indebtedness
Guarantee that resulted in the creation of such guarantee of the notes.
Designation of Restricted and Non-Restricted Subsidiaries. The indenture
provides that, subject to the exceptions described below, from and after the
Issue Date, Fedders North America may designate any existing or newly formed or
acquired Subsidiary as a Non-Restricted Subsidiary; provided that either
(A) the Subsidiary to be so designated has total assets of $1,000,000
or less; or
(B) immediately before and after giving effect to such designation:
(1) Fedders North America could incur $1.00 of additional
Indebtedness pursuant to the first sentence of the "Limitation on
Incurrence of Indebtedness" covenant determined on a Pro Forma Basis;
(2) no Default or Event of Default shall have occurred and be
continuing;
(3) all Investments made by Fedders North America or by a
Restricted Subsidiary of Fedders North America in such Restricted
Subsidiary which is being designated a Non-Restricted Subsidiary prior
to or on the date such Restricted Subsidiary is being designated a
Non-Restricted Subsidiary shall have been permitted pursuant to the
"Limitation on Restricted Payments" covenant as if all of such
Restricted Payments had been made on the day such Restricted Subsidiary
is designated a Non-Restricted Subsidiary (to the extent not previously
included as a Restricted Payment) in the amount of the greater of (i)
the fair market value (as determined by the Board of Directors of
Fedders North America in good faith) of the Equity Interests of such
Subsidiary held by Fedders North America and its Restricted Subsidiaries
on such date or (ii) the amount of the Investments determined in
accordance with GAAP made by Fedders North America and any of its
Restricted Subsidiaries in such Restricted Subsidiary; and
(4) all transactions between the Subsidiary to be so designated and
its Affiliates remaining in effect are permitted pursuant to the
"Limitation on Transactions with Affiliates" covenant.
A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary.
Fedders North America may not, and may not permit any Restricted Subsidiary to,
take any action or enter into any transaction or series of transactions that
would result in a person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise, but
not including through the creation of a new Restricted Subsidiary) unless,
immediately before and after giving effect to such action, transaction or series
of transactions,
(a) Fedders North America could incur at least $1.00 of additional
Indebtedness pursuant to the first sentence of "Limitation on Incurrence of
Indebtedness" on a Pro Forma Basis; and
(b) no Default or Event of Default shall have occurred and be
continuing.
The designation of a Subsidiary as a Restricted Subsidiary or the removal
of such designation is required to be made by a resolution adopted by a majority
of the Board of Directors of Fedders North America stating that the Board of
Directors has made such designation in accordance with the indenture, and
Fedders North America is required to deliver to the trustee such resolution
together with an officers' certificate certifying that the designation complies
with the indenture. Such designation will be effective as of the date specified
in the applicable resolution which may not be before the date the applicable
officers' certificate is delivered to the trustee.
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MERGER OR CONSOLIDATION
The indenture provides that each of Fedders North America and Fedders shall
not consolidate or merge with or into, or sell, lease, convey or otherwise
dispose of all or substantially all of its assets to, any person (any such
consolidation, merger or sale being a "Disposition") unless:
(a) the successor corporation of such Disposition (if other than
Fedders or Fedders North America) or the corporation to which such
Disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(b) the successor corporation of such Disposition or the corporation
to which such Disposition shall have been made expressly assumes the
Obligations of Fedders North America or Fedders, as the case may be,
pursuant to a supplemental indenture in a form reasonably satisfactory to
the trustee, under the indenture and the notes;
(c) immediately after such Disposition, no Default or Event of Default
shall exist; and
(d) the corporation formed by or surviving any such Disposition, or
the corporation to which such Disposition shall have been made, shall be
permitted immediately after the Disposition by the terms of the indenture
to issue at least $1.00 of additional Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant
determined on a Pro Forma Basis; provided, however, that this clause (d)
will not be applicable to a merger of NYCOR North America, Inc. with and
into Fedders North America.
The limitations in the indenture on Fedders North America's ability to make
a Disposition described in the preceding paragraph do not restrict Fedders North
America's ability to sell less than all or substantially all of its assets, such
sales being governed by the "Asset Sales" provisions of the indenture as
described herein. Prior to the consummation of any proposed Disposition, Fedders
North America shall deliver to the trustee an officers' certificate to the
foregoing effect and an opinion of counsel stating that the proposed Disposition
and such supplemental indenture comply with the indenture.
The indenture provides that each Subsidiary Guarantor shall not consolidate
or merge with or into, or sell, lease, convey, or otherwise dispose of all or
substantially all of its assets to any Person unless:
(a) except in the case of a Subsidiary Guarantor (x) that has been
disposed of in its entirety to another Person (other than to Fedders North
America or an Affiliate of Fedders North America), whether through a
merger, consolidation or sale of Capital Stock or assets or (y) that, as a
result of the disposition of all or a portion of its Capital Stock, ceases
to be a Subsidiary, in both cases, if in connection therewith Fedders North
America provides an Officers' Certificate to the Trustee to the effect that
Fedders North America will comply with its obligations under the caption
"-- Mandatory Offers to Purchase Notes -- Asset Sales" in respect of such
disposition, the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by a Guaranty Agreement,
in a form satisfactory to the Trustee, all the obligations of such
Subsidiary, if any, under its Subsidiary Guaranty;
(b) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time
of such transaction), no Default shall have occurred and be continuing; and
(c) Fedders North America delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such Guaranty Agreement, if any,
complies with the indenture.
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PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES
So long as the notes are outstanding, whether or not Fedders is subject to
the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Fedders shall submit for filing with the SEC the annual reports,
quarterly reports and other documents relating to Fedders and its Subsidiaries
that Fedders and its Subsidiaries would have been required to file with the SEC
pursuant to Section 13 or 15(d) if Fedders and its Subsidiaries were subject to
such reporting requirements. Fedders will also provide to all holders of notes
and file with the trustee copies of such annual reports, quarterly reports and
other documents required to be furnished to stockholders generally under the
Securities Exchange Act of 1934.
EVENTS OF DEFAULT AND REMEDIES
The indenture provides that an Event of Default is:
(a) a default for 30 days in payment of interest on the notes;
(b) a default in payment when due of principal or premium, if any,
with respect to the notes;
(c) failure by Fedders North America, Fedders or any Subsidiary
Guarantor, as the case may be, to comply with the provisions described
under the captions "-- Mandatory Offers to Purchase Notes -- Change of
Control," "-- Certain Covenants -- Limitation on Restricted Payments," "--
Certain Covenants -- Limitation on Incurrence of Indebtedness," "-- Merger
or Consolidation" or "-- Certain Covenants -- Future Guarantors";
(d) the failure of Fedders North America, Fedders or any Subsidiary
Guarantor to comply with any of its other agreements or covenants in, or
provisions of, the indenture or the notes and the Default continues for the
period, if applicable, and after the notice specified in the next
paragraph;
(e) a default by Fedders North America, Fedders or any Restricted
Subsidiary under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Fedders North America or any Restricted
Subsidiary (or the payment of which is guaranteed by Fedders North America
or any Restricted Subsidiary), whether such Indebtedness or guarantee now
exists or shall be created hereafter, if (1) either (A) such default
results from the failure to pay principal of or interest on any such
Indebtedness (after giving effect to any extensions thereof) or (B) as a
result of such default the maturity of such Indebtedness has been
accelerated prior to its expressed maturity, and (2) the principal amount
of such Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal or interest thereon,
or, because of the acceleration of the maturity thereof, aggregates in
excess of $10,000,000;
(f) a failure by Fedders North America or any Restricted Subsidiary to
pay final judgments (not covered by insurance) aggregating in excess of
$10,000,000 which judgments a court of competent jurisdiction does not
rescind, annul or stay within 45 days after their entry;
(g) certain events of bankruptcy or insolvency involving Fedders North
America, Fedders or any Significant Subsidiary; and
(h) the failure of the Guarantee of Fedders or of any Subsidiary
Guarantor that is a Significant Subsidiary to be in full force and effect
(other than in accordance with the terms of such Guarantee) or the denial
or disaffirmation by Fedders or any Subsidiary Guarantor that is a
Significant Subsidiary of its obligations under its Guarantee, and such
failure, denial or disaffirmation continues for 10 days.
In the case of any Event of Default pursuant to clause (a) or (b) above
occurring by reason of any willful action (or inactions) taken (or not taken) by
or on behalf of Fedders North America with the intention of avoiding payment of
the premium that Fedders North America would have to pay pursuant to a
redemption of notes as described under "-- Redemption of Notes -- Optional
Redemption," an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law.
A Default or Event of Default under clause (d) is not an Event of Default
under the indenture until the trustee or the holders of at least 25% in
principal amount of the notes then outstanding notify Fedders North
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America of the Default and Fedders North America does not cure the Default
within 30 days after receipt of the notice. A Default or Event of Default under
clause (g) of the next preceding paragraph will result in the notes
automatically becoming due and payable without further action or notice.
Upon the occurrence of an Event of Default, the trustee or the holders of
at least 25% in principal amount of the then outstanding notes may declare all
notes to be due and payable by notice in writing to Fedders North America and
the trustee specifying the respective Event of Default and that it is a "notice
of acceleration" (the "Acceleration Notice") and the same shall become
immediately due and payable. The holders of a majority in principal amount of
the notes then outstanding under the indenture, by notice to the trustee, may
rescind any declaration of acceleration of such notes and its consequences (if
the rescission would not conflict with any judgment or decree) if all existing
Events of Default (other than the nonpayment of principal of or interest on such
notes that shall have become due by such declaration) shall have been cured or
waived. Subject to certain limitations, holders of a majority in principal
amount of the notes then outstanding may direct the trustee in its exercise of
any trust or power. Holders of the notes may not enforce the indenture, except
as provided therein. The trustee may withhold from holders of notes notice of
any continuing Default or Event of Default (except a Default or an Event of
Default in payment of principal, premium, if any, or interest) if the trustee
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding may on behalf of all holders of such notes waive any existing
Default or Event of Default under the indenture and its consequences, except a
continuing Default in the payment of the principal of, or premium, if any, or
interest on, such notes, which may only be waived with the consent of each
holder of the notes affected.
Upon any payment or distribution of assets of Fedders North America and its
subsidiaries in a total or partial liquidation, dissolution, reorganization or
similar proceeding, including a Default under clause (g) above involving certain
events of bankruptcy or insolvency of Fedders North America or a Significant
Subsidiary, there may not be sufficient assets remaining to satisfy the claims
of any holders of notes given the effective structural subordination of the
notes to the obligations of the Subsidiaries of Fedders North America.
Fedders North America is required to deliver to the trustee annually a
statement regarding compliance with the indenture, and upon an executive officer
of Fedders North America becoming aware of any Default or Event of Default, a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES AND STOCKHOLDERS
No officer, employee, director or stockholder of Fedders North America
shall have any liability for any Obligations of Fedders North America under the
notes or the indenture, or for any claim based on, in respect of, or by reason
of, such Obligations or the creation of any such Obligation. Each holder of the
notes by accepting a Note waives and releases all such liability, and such
waiver and release is part of the consideration for issuance of the notes. The
foregoing waiver may not be effective to waive liabilities under the federal
securities laws and the SEC is of the view that such a waiver is against public
policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
Fedders North America at any time may terminate all its obligations under
the notes, Fedders' and the Subsidiary Guarantors' Guaranteed Obligations and
the indenture ("legal defeasance option"), except for certain obligations
(including those with respect to the defeasance trust (as defined herein) and
obligations to register the transfer or exchange of the notes, to replace
mutilated, destroyed, lost or stolen notes and to maintain a registrar and
paying agent in respect of the notes).
Fedders North America at any time may terminate:
(1) its obligations under the "Mandatory Offers to Purchase Notes --
Change of Control" and "Mandatory Offers to Purchase Notes -- Asset Sales"
provisions described herein and the covenants described under "-- Certain
Covenants" and certain other covenants in the indenture;
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(2) the operation of clauses (c), (d), (e), and (f) contained in the
first paragraph of the "Events of Default and Remedies" provisions
described herein; and
(3) the limitations contained in clauses (c) and (d) under the "Merger
or Consolidation" provisions described herein (collectively, a "covenant
defeasance option").
Fedders North America may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. If Fedders
North America exercises its legal defeasance option, payment of the notes may
not be accelerated because of an Event of Default with respect thereto. If
Fedders North America exercises its covenant defeasance option, payment of the
notes shall not be accelerated because of an Event of Default specified in
clauses (c), (d), (e), (f) or (h) in the first paragraph under the "Events of
Default and Remedies" provisions described herein or because of Fedders North
America's failure to comply with clauses (c) and (d) under the "Merger or
Consolidation" provisions described herein.
To exercise either defeasance option with respect to the notes outstanding,
Fedders North America must irrevocably deposit in trust (the "defeasance trust")
with the trustee money or U.S. Government Obligations (as defined in the
indenture) for the payment of principal of, premium, if any, and unpaid interest
on the notes then outstanding to redemption or maturity, as the case may be, and
must comply with certain other conditions, including the passage of 91 days and
the delivery to the trustee of an opinion of counsel to the effect that holders
of such notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such opinion of counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of notes may transfer or exchange their notes in accordance with
the indenture, but the registrar may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and to pay any taxes
and fees required by law or permitted by the indenture, in connection with any
such transfer or exchange. Neither Fedders North America nor the registrar is
required to issue, register the transfer of, or exchange (i) any note selected
for redemption or tendered pursuant to an offer, or (ii) any note during the
period between (a) the date the trustee receives notice of a redemption from
Fedders North America and the date the notes to be redeemed are selected by the
trustee or (b) a record date and the next succeeding interest payment date. The
registered holder of a note will be treated as its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the notes then outstanding under the indenture, and any existing Default or
Event of Default (other than a payment default) or compliance with any provision
may be waived with the consent of the holders of a majority in principal amount
of the notes then outstanding under the indenture. Without the consent of any
holder of notes, Fedders North America and the trustee may amend or supplement
the indenture or the notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated notes in addition to or in place of certificated
notes, to provide for the assumption by a successor corporation of Fedders North
America's or Fedders' obligations to the holders of notes in the case of a
Disposition, to comply with the Trust Indenture Act, or to make any change that
does not materially adversely affect the legal rights of any holder of notes.
Without the consent of each holder of notes affected, Fedders North America
may not:
(i) reduce the principal amount of notes whose holders must consent to
an amendment to the indenture or a waiver under the indenture;
(ii) reduce the rate on or change the interest payment time of the
notes, or alter the redemption provisions with respect thereto (other than
the provisions relating to the covenants described above under the caption
"-- Mandatory Offers to Purchase Notes -- Change of Control" and "--
Mandatory Offers
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to Purchase Notes -- Asset Sales") or the price at which Fedders North
America is required to offer to purchase the notes;
(iii) reduce the principal of or change the fixed maturity of the
notes;
(iv) make the notes payable in money other than stated in the notes;
(v) make any change in the provisions concerning waiver of Defaults or
Events of Default by holders of the notes, or rights of holders of the
notes to receive payment of principal or interest;
(vi) make any change in any Guarantee that would materially and
adversely affect the noteholders, or release any Guarantee other than in
accordance with the indenture; or
(vii) waive any default in the payment of principal of, premium, if
any, or unpaid interest on, and additional interest, if any, with respect
to the notes.
CONCERNING THE TRUSTEE
The indenture contains certain limitations on the rights of the trustee, if
it becomes a creditor of Fedders North America, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that if an Event of Default occurs
(and has not been cured), the trustee will be required, in the exercise of its
power, to use the degree of care and skill of a prudent person in similar
circumstances in the conduct of its own affairs. Subject to the provisions of
the indenture, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any of the holders of the
notes, unless such holders shall have offered to the trustee security and
indemnity satisfactory to it.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the indenture.
Reference is made to the indenture for the definition of all other terms used in
the indenture.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with Fedders North America, (ii) any spouse, immediate family member or
other relative who has the same principal residence as any person described in
clause (i) above, (iii) any trust in which any such persons described in clause
(i) or (ii) above has a beneficial interest, and (iv) any corporation or other
organization of which any such persons described above collectively owns 10% or
more of the equity of such entity.
"Asset Sale" means the sale, lease, conveyance or other disposition by
Fedders North America or a Restricted Subsidiary, or by Fedders or any Non-FNA
Subsidiary, in a single transaction or in a series of related transactions,
including any disposition by means of a merger, consolidation or similar
transaction of:
(1) any share of Capital Stock of a Subsidiary (other than directors'
qualifying shares or shares required by applicable law to be held by a
Person other than Fedders North America or a Restricted Subsidiary, or
Fedders or a Non-FNA Subsidiary, as the case may be);
(2) all or substantially all the assets of any division or line of
business of Fedders North America or any Restricted Subsidiary, or Fedders
or a Non-FNA Subsidiary, as the case may be;
(3) any other assets of Fedders North America or any Restricted
Subsidiary, or Fedders or a Non-FNA Subsidiary, as the case may be, outside
the ordinary course of business of such Person;
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provided that Asset Sales will not include such sales, leases, conveyances or
dispositions in connection with
(i) the surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind;
(ii) the sale of inventory in the ordinary course of business;
(iii) a sale-leaseback of assets within one year following the
acquisition of such assets;
(iv) the grant of any license of patents, trademarks, registration
therefor and other similar intellectual property;
(v) a transfer of assets by Fedders North America or a Restricted
Subsidiary to Fedders North America or a Restricted Subsidiary;
(vi) the designation of a Restricted Subsidiary as a Non-Restricted
Subsidiary pursuant to the "Designation of Restricted and Non-Restricted
Subsidiaries" covenant;
(vii) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Fedders or Fedders North America as
permitted under "-- Merger or Consolidation";
(viii) the sale or disposition of obsolete equipment or other obsolete
assets;
(ix) Restricted Payments permitted by the "Limitations on Restricted
Payments" covenant;
(x) the exchange of assets for other non-cash assets that (a) are
useful in the business of Fedders and its Subsidiaries and (b) have a fair
market value at least equal to the fair market value of the assets being
exchanged (as determined in good faith by the Board of Directors of Fedders
or the board of directors of the Subsidiary of Fedders which owns such
assets);
(xi) a transfer of assets by Fedders or a Subsidiary of Fedders (other
than Fedders North America and its Restricted Subsidiaries) to Fedders or a
Subsidiary of Fedders (other than Fedders North America and its Restricted
Subsidiaries); or
(xii) the disposition of Rotorex Company, Inc.'s property at
Walkersville, Maryland, provided that the Net Available Cash therefrom is
used to make a Restricted Payment of the type described in clause (ix) of
the second paragraph under "-- Certain Covenants -- Limitation on
Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means Fedders North America's board of directors or
any authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of corporate stock, including any
Preferred Stock.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus
(a) any provision for taxes based on income or profits to the extent
such income or profits were included in computing Consolidated Net Income,
plus
(b) Consolidated Interest Expense, to the extent deducted in computing
Consolidated Net Income, plus
(c) the amortization of all intangible assets, to the extent such
amortization was deducted in computing Consolidated Net Income (including,
but not limited to, inventory write-ups, goodwill, debt and financing
costs), plus
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(d) all depreciation and all other non-cash charges (including,
without limitation, those charges relating to purchase accounting
adjustments and LIFO adjustments), to the extent deducted in computing
Consolidated Net Income, plus
(e) any interest income, to the extent such income was not included in
computing Consolidated Net Income, plus
(f) all dividend payments on Preferred Stock (whether or not paid in
cash) to the extent deducted in computing Consolidated Net Income;
provided, however, that, if any such calculation includes any period during
which an acquisition or sale of a person or the incurrence or repayment of
Indebtedness occurred, then such calculation for such period shall be made on a
Pro Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and person, the
ratio of (i) Cash Flow, divided by (ii) the sum of Consolidated Interest Expense
(except dividends paid or payable in additional shares of Capital Stock (other
than Disqualified Stock)) in each case, without duplication; provided, however,
that if any such calculation includes any period during which an acquisition or
sale of a person or the incurrence or repayment of Indebtedness occurred, then
such calculation for such period shall be made on a Pro Forma Basis.
"Change of Control" means the occurrence of any of the following:
(i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934), excluding the Permitted
Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Securities Exchange Act of 1934, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total Voting Stock of Fedders North America or of
Fedders; or
(ii) Fedders North America or Fedders consolidates with, or merges
with or into, another person or sells, assigns, conveys, transfers, leases
or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, Fedders
North America or Fedders, in any such event pursuant to a transaction in
which the outstanding Voting Stock of Fedders North America or of Fedders
is converted into or exchanged for cash, securities or other property,
other than any such transaction where (A) the outstanding Voting Stock of
Fedders North America or of Fedders is converted into or exchanged for (1)
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation or (2) cash, securities and other property in an amount which
could be paid by Fedders North America as a Restricted Payment under the
indenture and (B) immediately after such transaction no "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934), excluding the Permitted Holders, is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total Voting Stock
of the surviving or transferee corporation; or
(iii) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of Fedders
North America or of Fedders (together with any new directors whose election
by such Board of Directors or whose nomination for election by the
stockholders of Fedders North America was approved by a vote of a majority
of the directors then still in office who are entitled to vote to elect
such new director and were either directors at the beginning of such period
or persons whose election as directors or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the Board of Directors of Fedders North America or of Fedders then in
office.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Fedders North America or Fedders. Although
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there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of notes to require Fedders North
America to repurchase such notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Fedders North
America or Fedders to another person may be uncertain.
"Consolidated Interest Expense" means, for any given period and person, the
aggregate of
(i) the interest expense in respect of all Indebtedness of such person
and the Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original
issue discount on any such Indebtedness, all non-cash interest payments,
the interest portion of any deferred payment obligation and the interest
component of capital lease obligations, but excluding amortization of
deferred financing fees if such amortization would otherwise be included in
interest expense); and
(ii) the product of (a) all cash dividend payments (and non-cash
dividend payments in the case of a person that is a Restricted Subsidiary)
on any series of Preferred Stock of such person and the Restricted
Subsidiaries payable to a party other than Fedders North America or a
wholly owned Subsidiary, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such person, expressed as a
decimal, on a consolidated basis and in accordance with GAAP; provided,
however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated
Interest Expense shall be calculated on a Pro Forma Basis.
"Consolidated Net Income" means, for any given period and person, the
aggregate of the Net Income of such person and the Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that
(i) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(ii) the Net Income (but not loss) of any person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the referent Person;
(iii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(iv) the cumulative effect of a change in accounting principles shall
be excluded;
(v) income or loss attributable to discontinued operations shall be
excluded;
(vi) all other extraordinary, unusual or nonrecurring gains or losses
shall be excluded;
(vii) non-cash gains and losses from foreign currency translation
shall be excluded;
(viii) any write down or write off of intangible assets pursuant to
the operation of SFAS 142 shall be excluded;
(ix) the Net Income (loss) of NYCOR North America, Inc. and its
Subsidiaries for periods prior to January 1, 2004 shall be excluded; and
(x) any expenses or charges related to the offering of the notes,
including the writeoff of deferred financing costs, the payment of
redemption or other premiums and any other loss on the early extinguishment
of Indebtedness shall be excluded;
provided, however, that for purposes of determining the Cash Flow Coverage
Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis. For the
avoidance of doubt, for purposes of calculating Consolidated
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Net Income as required by the definition of "Disqualified Distribution," no
Non-FNA Subsidiary or any Subsidiary of a Non-FNA Subsidiary shall be deemed to
be a Restricted Subsidiary.
"Credit Agreement" means collectively the Accounts Financing Agreement
between Columbia Specialties, Inc. and Congress Financial Corporation dated
December 23, 1992, and the Accounts Financing Agreement by and among Fedders
North America, Inc., Emerson Quiet Kool Corporation and Congress Financial
Corporation dated December 23, 1992, together with all loan documents and
instruments thereunder (including, without limitation, any guarantee agreements,
covenant supplements and security documents), in each case as such agreements
have been or may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing, replacing or otherwise restructuring
(including, without limitation, increasing the amount of available borrowings
thereunder, and all Obligations with respect thereto, in each case, to the
extent permitted by the "Limitation on Incurrence of Indebtedness" covenant or
adding Subsidiaries of Fedders North America as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Credit Facilities" means one or more debt facilities, including the Credit
Agreement, or commercial paper facilities with banks and other institutional
lenders or investors or indentures providing for revolving credit loans, term
loans, receivables financing, including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against receivables, letters of credit or other long-term indebtedness, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
(including, without limitation, increasing the amount of available borrowings,
and all Obligations with respect thereto, in each case, to the extent permitted
by the "Limitation on Incurrence of Indebtedness" covenant or adding Restricted
Subsidiaries or Subsidiaries of Fedders North America as additional borrowers or
guarantors thereunder), in whole or in part from time to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" with respect to any person means any Capital Stock or
Equity Interests that by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part on, or prior to, the maturity date of the notes, or any
Capital Stock or Equity Interests in any Restricted Subsidiary of such person.
"Equity Interests" means Capital Stock or partnership interests or
warrants, options or other rights to acquire Capital Stock or partnership
interests (but excluding (i) any debt security that is convertible into, or
exchangeable for, Capital Stock or partnership interests, and (ii) any other
Indebtedness or Obligation).
"Equity Offering" means a public or private offering by Fedders North
America or Fedders for cash of Capital Stock or other Equity Interests and all
warrants, options or other rights to acquire Capital Stock, other than an
offering of Disqualified Stock.
"Existing Notes" means the 9 3/8% Senior Subordinated Notes due 2007 of
Fedders North America.
"Foreign Subsidiary" means any Restricted Subsidiary of Fedders North
America that is not organized under the laws of the United States of America of
any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect in the United States from time to time. All financial and
accounting determinations and calculations under the indenture will be made in
accordance with GAAP.
"Guarantees" means the guarantee by Fedders and the Subsidiary Guarantors
of Fedders North America's obligations with respect to the notes, including any
Guarantee entered into after the Issue Date.
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"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees Fedders
North America's obligations with respect to the notes on the terms provided for
in the indenture.
"Hedging Obligations" means, with respect to any person, the Obligations of
such persons under
(i) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements,
(ii) foreign exchange contracts, currency swap agreements or similar
agreements, and
(iii) other agreements or arrangements designed to protect such person
against fluctuations, or otherwise to establish financial hedges in respect
of, exchange rates, currency rates or interest rates.
"Indebtedness" means, with respect to any person,
(i) any indebtedness, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof) or representing the deferred and unpaid balance of the purchase
price of any property (including pursuant to capital leases), except any
such balance that constitutes an accrued expense or a trade payable, and
any Hedging Obligations, if and to the extent such indebtedness (other than
a Hedging Obligation) would appear as a liability upon a balance sheet of
such person prepared on a consolidated basis in accordance with GAAP, and
also includes, to the extent not otherwise included, the guarantee of items
that would be included within this definition;
(ii) Disqualified Stock of such person; or
(iii) Preferred Stock issued by a Restricted Subsidiary of such
person.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person. For the purposes of the "Limitation on Restricted
Payments" covenant, the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by Fedders North
America or any of the Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received by Fedders
North America or any Restricted Subsidiary in respect of such Investment to the
extent not included in Consolidated Net Income.
"issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
For this definition, the terms "issuing," "issuer," "issuance" and "issued" have
meanings correlative to the foregoing.
"Issue Date" means March 8, 2004.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell and any filing of or
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain or
loss, together with any related provision for taxes, realized in connection with
any Asset Sale (including, without limitation, dispositions pursuant to sale and
leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or similar
account established in connection with
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any such Asset Sale, but, in either such case, only as and when so received)
received by (A) Fedders North America or any of its Restricted Subsidiaries in
respect of such Asset Sale or (B) Fedders or any Non-FNA Subsidiary in respect
of such Asset Sale, net of
(i) the cash expenses of such Asset Sale (including, without
limitation, the payment of principal of, and premium, if any, and interest
on, Indebtedness required to be paid as a result of such Asset Sale (other
than the notes) and legal, accounting, management and advisory and
investment banking fees and sales commissions);
(ii) taxes paid or payable as a result thereof; and
(iii) any portion of cash proceeds that Fedders determines in good
faith should be reserved for post-closing adjustments, it being understood
and agreed that on the day that all such post-closing adjustments have been
determined, the amount (if any) by which the reserved amount in respect of
such Asset Sale exceeds the actual post-closing adjustments payable by
Fedders North America or any of its Restricted Subsidiaries or Fedders or
any Non-FNA Subsidiary shall constitute Net Proceeds on such date.
"Non-FNA Subsidiary" means any Subsidiary of Fedders other than Fedders
North America and its Subsidiaries.
"Non-Restricted Subsidiary" means any Subsidiary of Fedders North America
other than a Restricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal fees
and expenses), reimbursement obligations and other liabilities payable to the
holder of such Indebtedness under the documentation governing such Indebtedness,
and any other claims of such holder arising in respect of such Indebtedness.
"Officer" means the Chairman of the Board of Directors, the President, any
Vice President, the Treasurer or the Secretary of Fedders North America.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to
Fedders, Fedders North America or the Trustee.
"Other Permitted Indebtedness" means:
(i) Indebtedness of Fedders North America and its Restricted
Subsidiaries existing as of the Issue Date and all related Obligations as
in effect on such date;
(ii) Indebtedness of Fedders North America and its Restricted
Subsidiaries in respect of bankers' acceptances and letters of credit
(including, without limitation, letters of credit in respect of workers'
compensation claims) issued in the ordinary course of business, or other
Indebtedness in respect of reimbursement-type obligations regarding
workers' compensation claims;
(iii) Refinancing Indebtedness; provided that: (A) the principal
amount of such Refinancing Indebtedness shall not exceed the outstanding
principal amount of Indebtedness (including unused commitments) extended,
refinanced, renewed, replaced, substituted or refunded plus any amounts
incurred to pay premiums, fees and expenses in connection therewith, (B)
the Refinancing Indebtedness shall have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being extended, refinanced, renewed, replaced, substituted or
refunded and (C) a Restricted Subsidiary that is not a Subsidiary Guarantor
may not refinance Indebtedness of Fedders North America or of any
Subsidiary Guarantor;
(iv) intercompany Indebtedness of and among Fedders North America and
its Restricted Subsidiaries (excluding guarantees by Restricted
Subsidiaries of Indebtedness of Fedders North America not issued in
compliance with the "Future Guarantors" covenant);
85
(v) Indebtedness of any Non-Restricted Subsidiary created after the
Issue Date; provided that such Indebtedness is nonrecourse to Fedders North
America and its Restricted Subsidiaries and Fedders North America and its
Restricted Subsidiaries have no Obligations with respect to such
Indebtedness;
(vi) Indebtedness of Fedders North America and its Restricted
Subsidiaries under Hedging Obligations;
(vii) Indebtedness of Fedders North America and its Restricted
Subsidiaries arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts, which will not be, and will not be
deemed to be, inadvertent) drawn against insufficient funds in the ordinary
course of business;
(viii) guarantees by a Restricted Subsidiary of Indebtedness of
Fedders North America if the Indebtedness so guaranteed is permitted under
the indenture and the notes are guaranteed by such Restricted Subsidiary to
the extent required by the "Future Guarantors" covenant;
(ix) Indebtedness of Fedders North America and its Restricted
Subsidiaries in connection with performance, surety, statutory, appeal or
similar bonds in the ordinary course of business;
(x) intercompany Indebtedness of Fedders North America owed to
Fedders; provided such Indebtedness does not bear interest; and
(xi) the Existing Notes (but no Refinancing Indebtedness in respect
thereof).
"Permitted Holders" means the Giordano Holding Company, a New Jersey
corporation, its successors, its stockholders on the Issue Date and their
respective Affiliates.
"Permitted Liens" means, with respect to Fedders North America and its
Restricted Subsidiaries,
(i) Liens for taxes, assessments, governmental charges or claims which
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(ii) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', material-men's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(iii) Liens incurred on deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(iv) Liens incurred on deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money);
(v) easements, rights-of-way, zoning or other restrictions, minor
defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the business of
Fedders North America or any of its Restricted Subsidiaries incurred in the
ordinary course of business;
(vi) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(vii) judgment and attachment Liens not giving rise to an Event of
Default;
(viii) leases or subleases granted to others not interfering in any
material respect with the business of Fedders North America or any of its
Restricted Subsidiaries;
(ix) Liens securing Indebtedness under Hedging Obligations;
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(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements;
(xi) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by Fedders North America or its Restricted
Subsidiaries in the ordinary course of business;
(xii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xiii) Liens existing on the Issue Date and any extensions,
refinancings, renewals, replacements, substitutions or refundings thereof;
(xiv) any Lien granted to the trustee and any substantially equivalent
Lien granted to any trustee or similar institution under any indenture for
the Existing Notes or any Senior Indebtedness permitted by the terms of the
indenture;
(xv) Liens securing Indebtedness of Fedders North America or a
Subsidiary Guarantor if such Indebtedness is permitted to be incurred
pursuant to clause (i) of the second paragraph of the covenant "Limitation
on Incurrence of Indebtedness;"
(xvi) Liens securing Indebtedness of Fedders North America and its
Restricted Subsidiaries in connection with capital leases, sale and
leaseback transactions, purchase money obligations, capital expenditures or
similar financing transactions, which Indebtedness is permitted under the
"Limitation on Incurrence of Indebtedness" or "Sale and Leaseback
Transactions" covenants;
(xvii) Liens on property existing at the time of acquisition thereof
by Fedders North America or a Restricted Subsidiary of Fedders North
America; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(xviii) Liens securing Senior Indebtedness of Fedders North America or
a Restricted Subsidiary; provided, however, that the aggregate amount of
Senior Indebtedness secured by a Lien pursuant to this clause (xviii) shall
not exceed $25.0 million outstanding at any time; provided further,
however, that Liens outstanding pursuant to any other clause of this
definition shall not be counted for purposes of this calculation if not
outstanding pursuant to this clause (xviii); and
(xix) additional Liens at any one time outstanding in respect of
properties or assets where aggregate fair market value does not exceed
$2,000,000 (the fair market value to be determined on the date such Lien is
granted on such properties or assets).
"Preferred Stock" of any person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such person.
"Pro Forma Basis" means, for purposes of determining Consolidated Net
Income in connection with the Cash Flow Coverage Ratio (including in connection
with the "Limitation on Restricted Payments" covenant, the "Designation of
Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or
Consolidation" covenant, the incurrence of Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant),
giving pro forma effect to
(x) any acquisition or sale of a person, business or asset, related
incurrence, repayment or refinancing of Indebtedness or other related
transactions, including any Restructuring Charges which would otherwise be
accounted for as an adjustment permitted by Regulation S-X under the
Securities Act or on a pro forma basis under GAAP, or
(y) any incurrence, repayment or refinancing of any Indebtedness and
the application of the proceeds therefrom, in each case, as if such
acquisition or sale and related transactions, restructurings,
consolidations, cost savings, reductions, incurrence, repayment or
refinancing were realized on the first
87
day of the relevant period permitted by Regulation S-X under the Securities
Act or on a pro forma basis under GAAP.
Notwithstanding the foregoing, the Consolidated Net Income (loss), the
EBITDA and the Consolidated Interest Expense of NYCOR North America, Inc. and
its Subsidiaries for all periods prior to January 1, 2004 shall be excluded from
any calculation required by the indenture.
Furthermore, in calculating the Cash Flow Coverage Ratio,
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the determination date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
determination date;
(2) if interest on any Indebtedness actually incurred on the
determination date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the determination
date will be deemed to have been in effect during the relevant period;
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to interest rate swaps or similar interest rate
protection Hedging Obligations, shall be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such agreements;
and
(4) interest on outstanding Indebtedness determined on a fixed basis
pursuant to its terms will continue to be so determined, notwithstanding
the fact that such interest may be covered by agreements relating to
interest rate swaps or similar interest rate protection Hedging Obligations
that effectively convert such fixed rate interest to fluctuating interest.
"Refinancing Indebtedness" means Indebtedness of Fedders North America and
the Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute or refund the
notes or Indebtedness contemplated by clause (i) of the definition of Other
Permitted Indebtedness or any Indebtedness issued to so extend, refinance,
renew, replace, substitute for or refund such Indebtedness.
"Registration Rights Agreement" means the Registration Rights Agreement
dated March 8, 2004, among Fedders North America, Fedders, the Subsidiary
Guarantors and Credit Suisse First Boston LLC.
"Related Business" means any business in which Fedders or any of its
Subsidiaries was engaged on the Issue Date and any business determined by the
Board of Directors to be related, ancillary or complementary to such businesses.
"Restricted Investment" means any Investment in any person; provided that
Restricted Investments will not include:
(i) Investments in marketable securities and other negotiable
instruments permitted by the indenture;
(ii) Investments in Fedders North America;
(iii) Investments in any Restricted Subsidiary or in a person that
becomes a Restricted Subsidiary as a result of such investment (provided
that any Investment in a Restricted Subsidiary or in a Person that becomes
a Restricted Subsidiary is made for fair market value (as determined by the
Board of Directors in good faith));
(iv) Investments which existed on the Issue Date;
(v) Investments in joint ventures not to exceed $5 million outstanding
at any time;
(vi) Receivables owing to Fedders North America or any Restricted
Subsidiary if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary
88
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as Fedders North America or any such Restricted
Subsidiary deems reasonable under the circumstances;
(vii) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(viii) loans or advances to employees made in the ordinary course of
business consistent with past practices of Fedders North America or such
Restricted Subsidiary;
(ix) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Fedders North
America or any Restricted Subsidiary or in satisfaction of judgments;
(x) Investments acquired by Fedders North America or any of its
Restricted Subsidiaries (A) in exchange for any Investment or accounts
receivable held by Fedders North America or any such Restricted Subsidiary
in connection with or as a result of a bankruptcy, workout, reorganization
or recapitalization of the issuer of such other Investment or accounts
receivable or (B) as a result of a foreclosure by Fedders North America or
any of its Restricted Subsidiaries with respect to any secured Investment
or other transfer of title with respect to any secured Investment in
default;
(xi) Investments consisting of prepaid expenses, negotiable
instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits made in the ordinary
course of business by Fedders North America or any Restricted Subsidiary;
(xii) investments consisting of Hedging Obligations otherwise
permitted under the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness";
(xiii) extensions, modifications or renewals of any Investments
existing on the Issue Date; or
(xiv) Investments made in exchange for Capital Stock (other than
Disqualified Stock) of Fedders North America or Fedders.
The amount of any Restricted Investment shall be the amount of cash and the
fair market value at the time of transfer of all other property (as determined
by the Board of Directors in good faith) initially invested or paid for such
Restricted Investment, plus all additions thereto, without any adjustments for
increases or decreases in value of or write-ups, write-downs or write-offs with
respect to, such Restricted Investment.
"Restricted Subsidiary" means
(i) any Subsidiary of Fedders North America existing on the Issue
Date, other than FNA Mauritius Co., Inc., Fedders Shanghai Co., Ltd., Xi'an
Fedders Dong Fang Air Conditioner Compressor Co., Ltd., Fedders Indoor Air
Quality (Suzhou) Co., Ltd., Fedders de Mexico SA de CV and Quanzhou Melcor
Hua Yu Thermoelectric Co., Ltd.;
(ii) Melcor Corporation and Eubank Manufacturing Enterprises, Inc.;
and
(iii) any other Subsidiary of Fedders North America formed, acquired
or existing after the Issue Date that is designated as a "Restricted
Subsidiary" by Fedders North America pursuant to a resolution approved by a
majority of the Board of Directors; provided, however, that the term
Restricted Subsidiary shall not include any Subsidiary of Fedders North
America that has been redesignated by Fedders North America pursuant to a
resolution approved by a majority of the Board of Directors as a
Non-Restricted Subsidiary in accordance with the "Designation of Restricted
and Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have
subsequently been redesignated a Restricted Subsidiary in accordance with
clause (ii) of this definition.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with Fedders North America or any
Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the
Securities Act.
89
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of Fedders North America, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, all monetary
obligations (including guarantees thereof) of every nature of Fedders North
America under the Credit Agreement, including, without limitation, obligations
to pay principal and interest, reimbursement obligations under letters of
credit, fees, expenses and indemnities. "Senior Indebtedness" shall not include
(i) any Indebtedness of Fedders North America to a Subsidiary of
Fedders North America;
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of Fedders North America or any Subsidiary of
Fedders North America (including, without limitation, amounts owed for
compensation);
(iii) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(iv) Indebtedness represented by Disqualified Stock;
(v) any liability for federal, state, local or other taxes owed or
owing by Fedders North America;
(vi) that portion of any Indebtedness incurred in violation of the
indenture provisions set forth under "-- Certain Covenants -- Limitation on
Incurrence of Indebtedness"; and
(vii) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of Fedders North America.
"Services Agreement" means the Services Agreement, dated as of February 27,
2004, between Fedders North America and Fedders.
"Significant Subsidiary" means any Restricted Subsidiary of Fedders North
America that would be a "significant subsidiary" as defined in clause (2) of the
definition of such term in Rule 1-02 of Regulation S-X under the Securities Act
and the Securities Exchange Act of 1934.
"Subordinated Obligations" means, with respect to a person, any
Indebtedness of such person (whether outstanding on the Issue Date or thereafter
incurred) which is subordinate or junior in right of payment to the notes or a
Guarantee of such person, as the case may be, pursuant to a written agreement to
that effect.
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all Equity
Interests having ordinary voting power for the election of directors or other
governing body of such entity are owned by such person (regardless of whether
such Equity Interests are owned directly by such person or through one or more
Subsidiaries).
"Subsidiary Guarantor" means each Subsidiary of Fedders North America that
executes the indenture as a guarantor on the Issue Date and each other
Subsidiary of Fedders North America that thereafter guarantees the notes
pursuant to the terms of the indenture.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of
Fedders North America's obligations with respect to the notes.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect the board of directors.
90
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(i) the then outstanding principal amount of such Indebtedness into
(ii) the sum of the product(s) obtained by multiplying (a) the amount
of each then remaining installment, sinking fund, serial maturity or other
required payment of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) which will elapse between such date and the making of such
payment.
91
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following discussion is a summary of certain United States federal
income and estate tax consequences of the exchange of old notes for new notes
pursuant to the exchange offer and the ownership and disposition of such new
notes by a holder that acquired its old notes in their original issuance at
their initial offering price. The discussion is based upon the provisions of the
Internal Revenue Code of 1986, as amended, applicable Treasury regulations,
rulings, administrative pronouncements and judicial decisions as of the date
hereof, all of which are subject to change or differing interpretations at any
time with possible retroactive effect. No assurance can be given that the
Internal Revenue Service (the "IRS") will agree with the views expressed in this
summary, or that a court will not sustain any challenge by the IRS in the event
of litigation.
This discussion does not describe all of the United States federal income
tax consequences that may be relevant to a holder in light of its particular
circumstances or to holders subject to special rules, such as dealers or traders
in securities, financial institutions or "financial services entities", banks,
thrifts, insurance companies, tax-exempt entities, persons that hold notes as a
part of a hedge, straddle, conversion transaction, constructive sale or other
arrangement involving more than one position, holders that received notes as
compensation, holders that have elected mark-to-market accounting, holders that
have a "functional currency" that is not the United States dollar and holders
that do not hold the notes as a capital asset. It also does not include any
description of the tax laws of any state, local or non-United States government
that may be applicable to a particular holder.
If a partnership or other entity or arrangement treated as a partnership
for United States federal income tax purposes holds notes, the tax treatment of
a partner generally will depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership investing
in notes, you should consult your tax advisor.
PROSPECTIVE HOLDERS OF THE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER ARE
URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES
OF EXCHANGING OLD NOTES FOR NEW NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND
OTHER TAX LAWS.
EXCHANGE OFFER
There will be no United States federal income tax consequences to U.S.
Holders and Non-U.S. Holders, as defined below, that exchange an old note for a
new note pursuant to the exchange offer. The new note received will be treated
as a continuation of the old note. Therefore, a U.S. Holder will have the same
adjusted tax basis and holding period in the new note as it had immediately
before the exchange offer. Further, an exchanging U.S. Holder, as defined below,
will have the same original issue discount ("OID") income in respect of the new
notes issued in the exchange offer as such holder had in the old notes
immediately prior to such exchange. See "-- United States Holders -- Original
Issue Discount" below.
UNITED STATES HOLDERS
For purposes of this discussion, a United States Holder ("U.S. Holder") is
a beneficial owner of the notes that is, for United States federal income tax
purposes: (a) an individual who is a citizen or resident of the United States;
(b) a corporation (or other business entity treated as a corporation) created or
organized in or under the laws of the United States or any state thereof
(including the District of Columbia); (c) an estate the income of which is
subject to United States federal income taxation regardless of its source; or
(d) a trust if a court within the United States can exercise primary supervision
over its administration, and one or more United States persons have the
authority to control all of the substantial decisions of that trust or a trust
that was in existence on August 20, 1996, and validly elected to continue to be
treated as a domestic trust.
92
STATED INTEREST
Payment of stated interest on a note will be taxable to a U.S. Holder as
ordinary interest income at the time that such payments are accrued or are
received, in accordance with the U.S. Holder's method of accounting for United
States federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
The notes will be treated as issued with OID in an amount equal to the
excess of the notes' principal amount over their "issue price." For this
purpose, the issue price of a note is the price paid by the first buyer of such
a note, which should be the initial offering price set forth on the cover of the
Offering Circular for the old notes. U.S. Holders generally must accrue OID in
gross income over the term of the notes on a constant yield basis, regardless of
their regular method of tax accounting. As a result, U.S. Holders generally will
recognize taxable income in respect of a note in advance of the receipt of cash
attributable to such income. For each taxable year of a U.S. Holder, the amount
of OID that must be included in gross income in respect of a note will be the
sum of the daily portions of OID for each day during such taxable year or
portion thereof in which such a U.S. Holder held the note. Such daily portions
are determined by allocating to each day in an accrual period a pro rata portion
of the OID allocable to that accrual period. The amount of OID allocable to an
accrual period generally will equal (1) the product of the note's adjusted
issued price at the beginning of such accrual period multiplied by its yield to
maturity (as adjusted to take into account the length of such accrual period),
less (2) the amount of stated interest allocable to that accrual period. The
adjusted issue price of a note at the beginning of any accrual period will equal
the issue price of the note, as defined above, (1) increased by previously
accrued OID from prior accrual periods, and (2) reduced by any payment made on
such note, other than payments of stated interest, on or before the first day of
the accrual period.
SALE OR RETIREMENT OF NOTES
If a U.S. Holder sells a note or it is redeemed, such U.S. Holder will
recognize gain or loss equal to the difference between (i) the amount realized
upon the disposition (except to the extent such amount is attributable to
accrued but unpaid interest or OID, which will be taxable as ordinary income)
and (ii) such U.S. Holder's adjusted tax basis in the note. A U.S. Holder's
adjusted tax basis in a note generally will equal the cost of the note to such
U.S. Holder increased by any OID previously included in income. This gain or
loss generally will be capital gain or loss and will be long-term capital gain
or loss if the U.S. Holder's holding period for the note exceeded one year. The
deductibility of capital losses is subject to limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply with respect to
payments of principal and interest (including OID) on a note to U.S. Holders
other than corporations and other exempt recipients. A backup withholding tax,
currently at a rate of 28%, may apply to such payments unless the U.S. Holder
(i) provides a correct taxpayer identification number in the manner required by
law, certifies that such U.S. Holder is not subject to backup withholding, and
otherwise complies with the backup withholding rules or (ii) otherwise
establishes an exemption. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Holder can be refunded or credited against such U.S. Holder's United States
federal income tax liability, provided the required information is furnished to
the IRS in a timely manner.
NON-UNITED STATES HOLDERS
For purposes of this discussion, a Non-United States Holder ("Non-U.S.
Holder") is a beneficial owner of the Notes that is not a U.S. Holder (as
defined above). Certain Non-U.S. Holders (including banks, Non-U.S. Holders that
actually or constructively own 10% or more of the total combined voting power of
all classes of our stock entitled to vote, and Non-U.S. Holders that are
"controlled foreign corporations" with respect to us) may be subject to special
rules not discussed below.
93
WITHHOLDING TAXES
Payments of principal and interest (including OID) on the notes to a
Non-U.S. Holder generally will not be subject to United States withholding
taxes, provided that such Non-U.S. Holder furnishes a statement, signed under
penalties of perjury, that includes such Non-U.S. Holder's name and address and
certifies that such Non-U.S. Holder is either (i) a Non-U.S. Holder or (ii)
entitled to an exemption from withholding tax on interest under a tax treaty
between the United States and such Non-U.S. Holder's country of residence, in
compliance with applicable requirements. These certifications are generally made
on Form W-8BEN. Further, neither we nor our paying agent may have actual
knowledge to the contrary.
If such Non-U.S. Holder does not qualify for the exemption from tax
described above, such Non-U.S. Holder generally will be subject to United States
withholding tax at a flat rate of 30% (or lower applicable treaty rate) on
payments of interest (including OID), unless such Non-U.S. Holder's income from
the notes is effectively connected with a United States trade or business and
such Non-U.S. Holder satisfies certain other certification and disclosure
requirements. See "-- United States Trade or Business" below.
The rules regarding withholding are complex and vary depending on a
Non-U.S. Holder's particular situation. They are also subject to change.
Non-U.S. Holders should consult their tax advisors regarding the specific
methods for satisfying these requirements.
SALE OR RETIREMENT OF NOTES
If a Non-U.S. Holder sells a note or it is redeemed, such Non-U.S. Holder
will not be subject to United States federal income tax on any gain recognized
unless:
- the gain is effectively connected with a trade or business that such
Non-U.S. Holder conducts in the United States; or
- such Non-U.S. Holder is an individual that is present in the United
States for at least 183 days during the year in which such Non-U.S.
Holder disposes of the note and certain other conditions are satisfied.
UNITED STATES TRADE OR BUSINESS
If a Non-U.S. Holder holds notes in connection with a trade or business
that such Non-U.S. Holder is conducting in the United States:
- any interest (including OID) on the note, and any gain from disposing of
the note, generally will be subject to United States federal income tax
on a net income basis in the same manner as if such non-U.S. Holder were
a United States person; and
- if such Non-U.S. Holder is a corporation, such Non-U.S. Holder may be
subject to the "branch profits tax" on such Non-U.S. Holder's earnings
that are effectively connected with such Non-U.S. Holder's United States
trade or business, including earnings from the note. This tax is 30%, but
may be reduced or eliminated by an applicable income tax treaty.
ESTATE TAXES
Notes held by individuals that are not citizens or residents (as specially
defined for United States estate tax purposes) of the United States will not be
subject to United States estate tax when such holder dies as long as, at the
time of such holder's death, payments on the notes were not effectively
connected with a trade or business that such holder was conducting in the United
States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must generally report to the IRS the amount of interest (including OID)
paid, the name and address of the recipient, and the amount, if any, of tax
withheld. These information reporting requirements apply even if no tax was
required to be withheld. A similar report is sent to the recipient of the
interest. In general, backup withholding will not apply to interest (including
OID) on the notes paid by us or our paying agents, in their
94
capacity as such, to a Non-U.S. Holder if the Non-U.S. Holder has provided the
required certification that it is a Non-U.S. Holder.
In general, information reporting and backup withholding will not apply to
proceeds from the sale or redemption of notes paid to a Non-U.S. Holder if the
Non-U.S. Holder has provided the required certification that it is a Non-U.S.
Holder. Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a Non-U.S. Holder can be refunded
or credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
IRS in a timely manner.
95
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where such old
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that, for a period of one year after the expiration
date of the exchange offer, we will make this prospectus available to any
broker-dealer for use in connection with any resale.
We will not receive any proceeds in connection with the exchange offer. New
notes received by broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Act and any profit on
any such resale or new notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Act.
For a period of one year after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay all expenses incident to
this exchange offer, other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the new notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Act.
96
LEGAL MATTERS
Certain legal matters in connection with the offering of the notes will be
passed on for us by Robert N. Edwards, Esq., our Vice President and General
Counsel. Mr. Edwards holds options to acquire shares of our Common Stock.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedule of Fedders and its subsidiaries as of August 31,
2003 and 2002, and for each of the three years in the period ended August 31,
2003, included and incorporated by reference in this prospectus from the
Fedders' Annual Report on Form 10-K for the fiscal year ended August 31, 2003
have been audited by Deloitte & Touche LLP, independent registered public
accounting firm, as stated in their reports, which are included and incorporated
herein by reference (which reports express an unqualified opinion and include an
explanatory paragraph relating to a change in method of accounting for goodwill
and intangible assets in 2003), and have been so included and incorporated in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Each purchaser of the notes from the initial purchaser will be furnished
with a copy of this prospectus and any related amendments or supplements hereto.
You acknowledge that (i) you have been afforded an opportunity to request from
us and to review and have received all additional information considered by you
to be necessary to verify the accuracy and completeness of the information
contained herein, (ii) you have not relied on the initial purchaser or any
person affiliated with the initial purchaser in connection with your
investigation of the accuracy of such information or your investment decision
and (iii) except as provided pursuant to clause (i) above, no person has been
authorized to give any information or to make any representation concerning the
notes offered hereby other than those contained in this prospectus and, if given
or made, such other information or representation should not be relied upon as
having been authorized by us or the initial purchaser.
While any notes remain outstanding, we will make available, upon request,
to any holder and any prospective purchaser of notes the information required
pursuant to Rule 144(d)(4) under the Securities Act, during any period in which
we are not subject to Section 13 or 15(d) of the Exchange Act of 1934. Any such
request should be directed to the Secretary of Fedders North America, Inc.
Fedders files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read or copy any document Fedders files
at the public reference room maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of this information may also be obtained by mail
from the SEC's Public Reference Branch at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, Fedders' filings with the SEC are also available to the
public on the SEC's internet web site at www.sec.gov. Fedders' Common Stock and
Series A Cumulative Preferred Stock are listed on the New York Stock Exchange,
and its reports, proxy statements and other information concerning us may also
be read and copied at the offices of the NYSE.
97
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC, allows us to "incorporate by reference" information that Fedders
files with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus, and information in documents that
Fedders files later with the SEC will automatically update and supersede
information in this prospectus. Specifically, we are incorporating by reference
the following documents listed below and any future filings that Fedders will
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until the completion of the offering:
- Our Current Report on Form 8-K, filed with the SEC on March 9, 2004;
- Quarterly Report on Form 10-Q for the three months ended March 31, 2004;
- Transition Report on Form 10-Q for the four months ended December 31,
2003; and
- Annual Report on Form 10-K for the fiscal year ended August 31, 2003.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Corporate Secretary
Fedders North America, Inc.
505 Martinsville Road
Liberty Corner, New Jersey 07938-0813
Telephone: (908) 604-8686
98
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Fedders audited year end financial statements:
Report of Independent Registered Public Accounting Firm... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended August 31, 2003, 2002
and 2001............................................... F-4
Consolidated Balance Sheets as of August 31, 2003 and
2002................................................... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 2003, 2002 and 2001......................... F-6
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 2003, 2002 and 2001............. F-7
Notes to Consolidated Financial Statements................ F-8
Fedders unaudited interim financial statements:
Consolidated Statements of Operations and Comprehensive
Loss for the four months ended December 31, 2003 and
2002................................................... F-39
Consolidated Balance Sheets as of December 31, 2003 and
2002, and August 31, 2003.............................. F-40
Consolidated Statements of Cash Flows for the four months
ended December 31, 2003 and 2002....................... F-41
Notes to the Consolidated Financial Statements......... F-42
</Table>
F-1
FEDDERS AUDITED FINANCIAL STATEMENTS
AS OF AUGUST 31, 2003 AND 2002 AND FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED AUGUST 31, 2003
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fedders Corporation:
We have audited the accompanying consolidated balance sheets of Fedders
Corporation and subsidiaries as of August 31, 2003 and 2002, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2003. 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 in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Fedders Corporation and
subsidiaries as of August 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, effective September 1,
2002, the Company changed its method of accounting for goodwill and intangible
assets upon adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 14, 2003
(February 13, 2004, as to Note 16)
F-3
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Net sales................................................... $421,703 $373,702 $405,697
Costs and expenses:
Cost of sales............................................. 328,835 290,652 336,997
Selling, general and administrative expense............... 61,904 63,108 74,798
Asset impairment, employee severance and other
restructuring (credits) charges........................ (115) (397) 8,947
-------- -------- --------
390,624 353,363 420,742
-------- -------- --------
Operating income (loss)..................................... 31,079 20,339 (15,045)
Partners' net interest in joint venture results............. (14) 713 (160)
Interest expense (net of interest income of $1,409, $1,232
and $2,934 in 2003, 2002 and 2001, respectively).......... (18,546) (18,617) (17,845)
Other income (expense)...................................... 501 541 (213)
-------- -------- --------
Income before income taxes and cumulative effect of a change
in accounting principle................................... 13,020 2,976 (33,263)
Provision (benefit) for income taxes........................ 4,224 (5,033) (10,810)
-------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle...................................... 8,796 8,009 (22,453)
Cumulative effect of a change in accounting principle....... 11,906 -- --
-------- -------- --------
Net (loss) income........................................... (3,110) 8,009 (22,453)
Preferred stock dividends................................... (618) -- --
-------- -------- --------
Net (loss) income applicable to common stockholders......... (3,728) 8,009 (22,453)
Other comprehensive (loss) income:
Foreign currency translation, net of tax.................... (933) 853 (1,037)
-------- -------- --------
Comprehensive (loss) income................................. $ (4,661) $ 8,862 $(23,490)
======== ======== ========
Earnings (loss) per common share:
Basic/diluted earnings (loss) per common share before
cumulative effect of a change in accounting principle,
less preferred stock dividends......................... $ 0.27 $ 0.25 $ (0.71)
Cumulative effect of a change in accounting principle..... (0.39) -- --
-------- -------- --------
Basic/diluted (loss) earnings per common share............ $ (0.12) $ 0.25 $ (0.71)
======== ======== ========
Weighted average shares:
Basic..................................................... 30,638 31,492 31,808
Diluted................................................... 30,704 31,494 31,808
Dividends per share declared:
New Common Stock.......................................... $ 0.120 $ 0.060 --
Old Common/Class A Stock.................................. -- 0.060 $ 0.120
New Class B Stock......................................... 0.120 0.060 --
Old Class B Stock......................................... -- 0.054 0.108
Preferred Stock........................................... 1.613 -- --
======== ======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-4
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AUGUST 31,
-----------------------
2003 2002
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 60,902 $ 67,379
Accounts receivable (less allowances of $2,032 and $2,613 in
2003 and 2002, respectively).............................. 51,178 31,768
Net inventories........................................... 78,948 48,580
Deferred income taxes..................................... 7,654 5,620
Assets held for sale...................................... 8,564 --
Other current assets...................................... 21,463 13,564
-------- --------
Total current assets........................................ 228,709 166,911
Net property, plant and equipment........................... 55,860 66,846
Deferred income taxes....................................... 8,224 2,867
Goodwill.................................................... 78,630 90,536
Other intangible assets..................................... 1,788 1,556
Other assets................................................ 35,718 37,412
-------- --------
TOTAL ASSETS................................................ $408,929 $366,128
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes.......................................... $ 7,520 $ 9,829
Current portion of long-term debt......................... 4,652 3,362
Accounts payable.......................................... 56,812 41,888
Income taxes payable...................................... 5,452 5,955
Accrued expenses.......................................... 64,552 37,099
-------- --------
Total current liabilities................................... 138,988 98,133
Long-term debt.............................................. 159,392 163,769
OTHER LONG-TERM LIABILITIES:
Warranty.................................................. 805 1,285
Other..................................................... 30,232 20,940
Partners' interest in joint ventures........................ 4,584 4,183
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value, 15,000 shares authorized,
675 and none issued at August 31, 2003 and 2002,
respectively.............................................. 7 --
Common Stock, $0.01 par value, 70,000 shares authorized,
35,278 and 38,249 issued at August 31, 2003 and 2002,
respectively.............................................. 353 382
Class B Stock, $0.01 par value, 5,000 shares authorized,
2,493 issued at August 31,2003 and 2002, respectively..... 25 25
Additional paid-in capital................................ 74,025 68,870
Retained earnings......................................... 40,179 47,551
Accumulated other comprehensive loss...................... (2,245) (1,312)
-------- --------
112,344 115,516
Deferred compensation..................................... (94) (376)
Treasury stock, at cost, 8,158 shares of Common Stock at
August 31, 2003 and 2002, respectively.................... (37,322) (37,322)
-------- --------
Total stockholders' equity.................................. 74,928 77,818
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $408,929 $366,128
======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-5
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------
2003 2002 2001
-------- -------- --------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (3,110) $ 8,009 $(22,453)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................. 9,543 14,830 15,431
Deferred income taxes..................................... 4,341 6,756 (5,950)
Tax benefit related to stock options exercised............ -- -- 134
Stock option repricing charge............................. 147 (339) 726
Fixed asset impairment.................................... -- -- 6,206
Goodwill impairment....................................... 11,906 -- --
Partners' net interest in joint venture results........... 14 (713) 160
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable....................................... (19,410) (6,667) 3,639
Inventories............................................... (30,368) 25,557 8,215
Other current assets...................................... (7,899) (6,755) (812)
Other assets.............................................. 2,751 (4,238) (704)
Income taxes payable...................................... (503) (471) (4,631)
Accounts payable.......................................... 14,924 673 665
Accrued expenses.......................................... 27,317 (2,858) 1,434
Other long-term liabilities............................... (2,920) (285) 4,320
Other -- net.............................................. (1,116) 635 (461)
-------- -------- --------
Net cash provided by operating activities................... 5,617 34,134 5,919
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.................. (7,271) (7,846) (10,773)
Disposal of property, plant and equipment................... 1,236 1,290 140
Acquisition of businesses, net of cash acquired............. (1,333) (8,008) (19,694)
-------- -------- --------
Net cash used in investing activities....................... (7,368) (14,564) (30,327)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from short-term notes............ (2,309) 2,238 3,717
Repayments of long-term debt.............................. (4,087) (3,666) (2,826)
Proceeds from long-term borrowing......................... 1,000 2,000 4,519
Proceeds from stock options exercised..................... 30 1 526
Cash dividends............................................ (4,126) (3,725) (3,914)
Repurchases of capital stock.............................. -- -- (13,237)
Proceeds from stock rights subscribed..................... 6,167 -- --
Cost of offerings and recapitalization.................... (1,401) (428) (587)
Other..................................................... -- 197 209
-------- -------- --------
Net cash used in financing activities..................... (4,726) (3,383) (11,593)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents...... (6,477) 16,187 (36,001)
Cash and cash equivalents at beginning of year............ 67,379 51,192 87,193
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 60,902 $ 67,379 $ 51,192
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Net interest paid......................................... $ 18,345 $ 16,880 $ 16,857
Income taxes paid......................................... 970 967 379
-------- -------- --------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment acquired under capital
leases................................................. -- -- $ 826
======== ======== ========
Property, plant and equipment contributed to joint
ventures............................................... $ 340 $ 4,908 --
======== ======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-6
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------
2003 2002 2001
-------- -------- --------
(AMOUNTS IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of year............................... -- -- --
Issuance of shares upon Exchange Offer..................... $ 4 -- --
Stock rights subscribed.................................... 3 -- --
Balance at end of year..................................... $ 7 -- --
-------- -------- --------
NEW COMMON STOCK
Balance at beginning of year............................... $ 382 -- --
Stock options exercised.................................... -- $ 1 --
Issuance of shares upon recapitalization................... -- 381 --
Exchange of shares upon Preferred Stock exchange offer..... (29) -- --
-------- -------- --------
Balance at end of year..................................... $ 353 $ 382 --
======== ======== ========
OLD COMMON STOCK
Balance at beginning of year............................... -- $ 16,135 $ 16,135
Exchange of shares upon recapitalization................... -- (16,135) --
-------- -------- --------
Balance at end of year..................................... -- -- $ 16,135
======== ======== ========
CLASS A STOCK
Balance at beginning of year............................... -- $ 20,298 $ 19,825
Stock options exercised.................................... -- -- 425
Exchange of shares upon recapitalization................... -- (20,298) --
Other...................................................... -- -- 48
-------- -------- --------
Balance at end of year..................................... -- -- $ 20,298
======== ======== ========
NEW CLASS B STOCK
Balance at beginning of year............................... $ 25 -- --
Issuance of shares upon recapitalization................... -- $ 25 --
-------- -------- --------
Balance at end of year..................................... $ 25 $ 25 --
======== ======== ========
OLD CLASS B STOCK
Balance at beginning of year............................... -- $ 2,267 $ 2,267
Exchange of shares upon recapitalization................... -- (2,267) --
-------- -------- --------
Balance at end of year..................................... -- -- $ 2,267
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............................... $ 68,870 $ 31,146 $ 29,591
Stock options exercised.................................... 30 1 1,114
Tax benefit related to stock options exercised............. -- -- 134
Cost of offerings and recapitalization..................... (1,401) (428) (587)
Stock option repricing..................................... 147 (339) 726
Effect of recapitalization and exchange offer.............. 23 38,294 --
Proceeds from rights offering.............................. 6,167 -- --
Other...................................................... 189 196 168
-------- -------- --------
Balance at end of year..................................... $ 74,025 $ 68,870 $ 31,146
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year............................... $ 47,551 $ 43,313 $ 69,575
Net (loss) income.......................................... (3,110) 8,009 (22,453)
Dividends.................................................. (4,262) (3,771) (3,809)
-------- -------- --------
Balance at end of year..................................... $ 40,179 $ 47,551 $ 43,313
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year............................... $ (1,312) $ (2,165) $ (1,128)
Foreign currency translation adjustment, net of tax........ (933) 853 (1,037)
-------- -------- --------
Balance at end of year..................................... $ (2,245) $ (1,312) $ (2,165)
======== ======== ========
DEFERRED COMPENSATION
Balance at beginning of year............................... $ (376) $ (658) $ (940)
Amortization of deferred compensation...................... 282 282 282
-------- -------- --------
Balance at end of year..................................... $ (94) $ (376) $ (658)
======== ======== ========
TREASURY STOCK
Balance at beginning of year............................... $(37,322) $(37,322) $(23,065)
Repurchase of stock........................................ -- -- (13,237)
Shares relinquished or purchased........................... -- -- (1,020)
-------- -------- --------
Balance at end of year..................................... $(37,322) $(37,322) $(37,322)
======== ======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-7
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fedders Corporation (the "Company") is a leading global manufacturer and
marketer of air treatment products, including air conditioners, air cleaners,
dehumidifiers, humidifiers, and thermal technology products.
FISCAL YEAR
On August 26, 2003, the Board of Directors of the Company decided to change
the Company's fiscal year end from August 31 to December 31. The Company intends
to file a transition report on Form 10-Q to cover the transition period of
September 1, 2003 to December 31, 2003.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly owned and majority-owned subsidiaries and
joint ventures. Joint ventures which are not majority owned, but over which the
Company shares joint control, are accounted for by the equity method. All
significant intercompany accounts and transactions are eliminated in
consolidation.
REVENUE RECOGNITION
Sales are recorded consistent with their related shipping terms upon the
passing of the title and the risks and rewards of ownership to the customer. For
a majority of the Company's customers, title and the risks and rewards of
ownership pass at the time of shipment. However, certain of the Company's sales
are recorded at the time the products are delivered to the customers. Sales are
recorded net of a provision for sales allowances and warranties and defective
returns.
WARRANTY AND DEFECTIVE RETURN POLICY
The Company's policy is to accrue the estimated cost of warranty coverage
and defective returns at the time the sale is recorded.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated
at the rate of exchange in effect at the end of the period. Net sales and
expenses are translated at the average rate of exchange for the period.
Translation adjustments are reflected in other comprehensive loss as a separate
component of stockholders' equity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
F-8
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
INVENTORIES
Inventories are stated at the lower of the first-in, first-out (FIFO) cost
or market. The Company reviews inventory periodically for slow-moving and
obsolete items. Write-downs are recorded in the period in which they are
identified. Inventories consist of the following at August 31:
<Table>
<Caption>
2003 2002
------- -------
Finished goods.............................................. $52,226 $25,364
Work-in-process............................................. 5,114 3,042
Raw materials and supplies.................................. 21,608 20,174
------- -------
$78,948 $48,580
======= =======
</Table>
OTHER CURRENT ASSETS
Other current assets consist of the following at August 31:
<Table>
<Caption>
2003 2002
------- -------
VAT tax refund receivable................................... $16,105 $ 8,048
Other....................................................... 5,358 5,516
------- -------
$21,463 $13,564
======= =======
</Table>
PROPERTY, PLANT AND EQUIPMENT
Replacements, betterments and additions to property, plant and equipment
are capitalized at cost. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon sale or retirement of property, plant and equipment,
the cost and related accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in cost of sales or selling, general
and administrative expense, as appropriate. Net property, plant and equipment
consist of the following at August 31:
<Table>
<Caption>
ESTIMATED
USEFUL LIFE 2003 2002
-------------- -------- --------
Land and improvements............................ $ 1,508 $ 3,770
Buildings and leasehold improvements............. 10 to 30 years 31,423 40,246
Machinery and equipment.......................... 3 to 12 years 100,581 98,271
-------- --------
Property, plant and equipment -- gross........... 133,512 142,287
Accumulated depreciation......................... (77,652) (75,441)
-------- --------
Net property, plant and equipment................ $ 55,860 $ 66,846
======== ========
</Table>
The Company, using estimates based on reasonable assumptions and
projections, reviews for impairment of long-lived assets and certain
identifiable intangibles to be held and used whenever events or changes in
circumstances indicate the carrying amount of its assets might not be
recoverable and appropriately records any necessary adjustments. Depreciation is
provided on the straight-line basis over the estimated useful life of each asset
as noted above. Depreciation expense for the fiscal years ended August 31, 2003,
2002 and 2001 was $9,112, $10,394 and $10,671, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company records the excess purchase price of net tangible and
intangible assets acquired over their estimated fair value as goodwill. The
Company adopted the provisions of SFAS 142 as of September 1, 2002.
F-9
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Under SFAS 142, the Company is required to test goodwill for impairment at least
annually. The Company has elected to perform its annual test for indications of
goodwill impairment as of September 30 of each year. The Company identifies
potential goodwill impairment by comparing the fair value of a reporting segment
with its carrying amount, including goodwill. The Company determines fair value
using a discounted cash flow and market-multiple approach. If the fair value of
a reporting segment exceeds its carrying amount, goodwill of the reporting
segment is not considered impaired. If the carrying amount of a segment exceeds
its fair value, the amount of goodwill impairment loss, if any, must be
measured. The Company measures the amount of goodwill impairment loss by
comparing the implied fair value of reporting segment goodwill with the carrying
amount of that goodwill. If the carrying amount of the segment goodwill exceeds
the implied fair value of goodwill, an impairment loss is recognized as an
operating expense.
The Company completed the transitional goodwill impairment test during the
fourth quarter for fiscal 2003. The Company did not identify any impairment
within its HVACR reporting segment but has recognized a non-cash goodwill
impairment charge of $11.9 million within its Engineered Products reporting
segment. The projected financial performance of the Engineered Products
reporting segment was insufficient to support the related goodwill. As required,
the transitional goodwill impairment charge was recorded as a cumulative effect
of a change in accounting principle as of September 1, 2002.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company ceased amortization of goodwill as of September 1, 2002. The
following table presents the annual results of the Company on a comparable
basis:
<Table>
<Caption>
YEAR ENDED AUGUST 31,
----------------------------
2003 2002 2001
------- ------- --------
Net (loss) income:
Reported net (loss) income applicable to common
stockholders......................................... $(3,728) $ 8,009 $(22,453)
Goodwill amortization, net of tax...................... -- 2,000 1,827
------- ------- --------
Adjusted net (loss) income applicable to common
stockholders......................................... $(3,728) $10,009 $(20,626)
======= ======= ========
Basic net (loss) earnings per common share:
Reported basic net (loss) earnings per common share.... $ (0.12) $ 0.25 $ (0.71)
Goodwill amortization.................................. -- 0.06 0.06
------- ------- --------
Adjusted basic net (loss) earning per common share..... $ (0.12) $ 0.31 $ (0.65)
======= ======= ========
Diluted net (loss) earnings per common share:
Reported diluted net (loss) earning per common share... $ (0.12) $ 0.25 $ (0.71)
Goodwill amortization.................................. -- 0.06 0.06
------- ------- --------
Adjusted diluted net (loss) earning per common share... $ (0.12) $ 0.31 $ (0.65)
======= ======= ========
</Table>
Goodwill and other intangible assets consist of the following at August 31:
<Table>
<Caption>
2003 2002
------- -------
Goodwill.................................................... $78,630 $90,536
======= =======
Gross other amortizable intangibles......................... $ 3,189 $ 2,787
Accumulated amortization.................................... (1,401) (1,231)
------- -------
Other intangible assets..................................... $ 1,788 $ 1,556
======= =======
</Table>
As of August 31, 2003 and 2002, the Company had goodwill of $70,133
reflected in its HVACR reportable segment. As of August 31, 2003 and 2002, the
Company had goodwill of 8,497 and 20,403 in its
F-10
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Engineered Products reportable segments, respectively. Other intangible assets
primarily include a right associated with a joint venture that is being
amortized over 20 years. Amortization expense for the fiscal years ended August
31, 2003, 2002 and 2001, is $181, $215 and $187, respectively. Estimated
amortization expense for other intangibles will be approximately $120 for each
of the next five years and $1,188 thereafter.
OTHER ASSETS
Other assets consist of the following at August 31:
<Table>
<Caption>
2003 2002
------- -------
Note due from an executive officer (note 11)................ $ 6,000 $ 6,000
Unamortized deferred finance costs, amortized over the life
of the debt............................................... 2,413 3,112
Cash surrender value of life insurance...................... 7,939 7,227
Supplemental retirement assets.............................. 7,389 8,858
Investment in unconsolidated joint ventures (note 12)....... 9,979 9,784
Other....................................................... 1,998 2,431
------- -------
$35,718 $37,412
======= =======
</Table>
ACCRUED EXPENSES
Accrued expenses consist of the following at August 31:
<Table>
<Caption>
2003 2002
------- -------
Warranty.................................................... $ 8,855 $ 6,173
Marketing programs.......................................... 14,371 8,867
Salaries and benefits....................................... 10,962 8,901
Insurance and taxes......................................... 3,512 3,944
Professional fees........................................... 1,274 923
Other....................................................... 9,578 8,291
------- -------
$48,552 $37,099
======= =======
</Table>
INCOME TAXES
Deferred income taxes are provided to reflect the tax effects of temporary
differences between assets and liabilities for financial reporting purposes and
income tax purposes. Provisions are also made for U.S. income taxes on
undistributed earnings of foreign subsidiaries not considered to be indefinitely
reinvested (note 7).
SHIPPING AND HANDLING FEES AND COSTS
Costs associated with the handling and warehousing of finished goods are
charged to selling, general and administrative expense and amounted to $5,811,
$4,817 and $3,819 in 2003, 2002 and 2001, respectively.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to selling, general and
administrative expense as incurred and amounted to $9,478, $8,896 and $9,086 in
2003, 2002 and 2001, respectively.
F-11
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
STOCK COMPENSATION
The Company accounts for stock options issued to its employees under the
recognition and measurement principles of APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying Common Stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value recognition
provisions of SFAS 123 to stock-based employee compensation.
<Table>
<Caption>
2003 2002 2001
------- ------ --------
Net (loss) income applicable to common stockholders --
as reported........................................... $(3,728) $8,009 $(22,453)
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all
awards, net of related tax effects.................... 360 779 496
------- ------ --------
Pro forma net (loss) income............................. $(4,088) $7,230 $(22,949)
======= ====== ========
Net (loss) income per common share:
Basic and diluted -- as reported........................ $ (0.12) $ 0.25 $ (0.71)
Basic and diluted -- pro forma.......................... $ (0.13) $ 0.23 $ (0.72)
</Table>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America 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.
RISKS AND UNCERTAINTIES
Through certain subsidiary companies, the Company has operations in a
number of countries, including China, India, Germany, the United Kingdom and the
Philippines. Of our thirteen manufacturing facilities, six are in China.
The Company's foreign operations, at times, may be adversely affected by
changes in government policies such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of measures to control inflation,
changes in the rate or method of taxation, the imposition of restrictions on
currency conversion and remittances abroad and the expropriation of private
enterprise. In addition, policy concerns particular to the United States with
respect to a country in which the Company has operations could adversely affect
the Company's operations in that country.
The Company monitors its operations with a view to minimizing the impact on
its foreign investments and overall business that could arise as a result of the
risks inherent in maintaining operations in foreign countries as described
above.
EARNINGS PER SHARE
Basic earnings (loss) per common share are computed by dividing net income
(loss) applicable to common stockholders by the weighted average number of
shares outstanding for the period. Diluted earnings (loss) per common share are
computed by adjusting outstanding shares assuming conversion of all potentially
F-12
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
dilutive stock options. In 2001, stock options were not included in the
computation of diluted (loss) per common share due to their anti-dilutive effect
given the net loss for the year. The number of anti-dilutive stock options
excluded from the computation of diluted (loss) per common share was 289,274 for
2001. The computation of basic earnings (loss) per common share and diluted
earnings (loss) per share is as follows:
<Table>
<Caption>
2003 2002 2001
------- ------- --------
Net (loss) income applicable to common stockholders.... $(3,728) $ 8,009 $(22,453)
------- ------- --------
Weighted average shares outstanding (amounts in
thousands)........................................... 30,638 31,492 31,808
Assumed conversion of stock options (amounts in
thousands)........................................... 66 2 --
------- ------- --------
Dilutive average shares outstanding (amounts in
thousands)........................................... 30,704 31,494 31,808
======= ======= ========
(Loss) earnings per common share:
Basic.................................................. $ (0.12) $ 0.25 $ (0.71)
Diluted................................................ (0.12) 0.25 (0.71)
======= ======= ========
</Table>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, accounts receivable,
accounts payable, short term notes and accrued expenses approximates fair value
due to the short maturity of these instruments. At August 31, 2003 and 2002, the
fair value of long-term debt (including current portion), is estimated to be
$138,731 and $146,776, respectively, based on current market rates that could be
obtained by the Company for similar debt.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The nature of the Company's business activities necessarily involves the
management of various financial and market risks, including those related to
changes in foreign currency exchange rates. The Company's use of derivative
financial instruments is limited primarily to the use of forward foreign
currency exchange contracts to mitigate certain foreign currency exchange rate
risks relative to Canadian dollar receivables, Euro dollar payables, and
Philippine peso payables. Such contracts are not designated as hedges and any
changes in fair value are recognized in "Other income (expense)" in the current
period. The Company does not have any such contracts outstanding as of August
31, 2003 and 2002.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. The adoption of this statement
in the first quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003. The adoption of this statement did not
have a material effect on the Company's financial position, results of
operations and its cash flows.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). This
statement addresses the recognition, measurement and reporting of costs that are
associated with exit and disposal activities. SFAS 146 is effective for the
Company for disposal activities initiated after December 31, 2002 and will be
applied prospectively.
F-13
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting And Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in interim and annual financial statements for periods
ending after December 15, 2002. The Company adopted this statement in the second
quarter of fiscal year 2003.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123 ("SFAS 123")." This statement
provides alternative methods of transition for a voluntary change to the fair-
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements.
The Company adopted the disclosure requirements of this statement in the second
quarter of fiscal year 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31, 2003
and became effective for all other transactions as of July 1, 2003. However, in
October 2003 the FASB permitted companies to defer the July 1, 2003 effective
date to December 31, 2003, in whole or in part, and indicated that it would
provide further clarification of this interpretation before December 31, 2003.
The Company has determined that it is not reasonably probable that it will be
required to consolidate or disclose information about a variable interest
entity.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, generally all provisions of this
statement should be applied prospectively. The adoption of this statement in the
fourth quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS 150"). This statement changes the accounting
for certain financial instruments that issuers could account for as equity. SFAS
150 requires that those instruments be classified as liabilities in statements
of financial position. SFAS 150 also requires disclosures about alternative ways
of settling the instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement in the fourth quarter of
fiscal year 2003 did not have a material effect on the Company's financial
position, results of operations and its cash flows.
2. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES
In the fourth quarter of 2001, the Company announced a plan to restructure
its then existing operations, which included the transfer of a majority of the
Company's room air conditioner production, as well as all production of
dehumidifiers and compressors, from its Illinois, Tennessee and Maryland
facilities to facilities
F-14
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
in China in order to lower costs and improve profitability. The Company's plan
resulted in charges for fixed-asset impairments, employee severance costs,
inventory write-downs and other restructuring charges directly related to the
restructuring plan, including facility closing costs and lease termination
costs. In conjunction with the restructuring plan, the Company recorded $13,694
of charges in the fourth quarter of 2001, of which $4,747 is recorded within
cost of sales and $8,947 is recorded within asset impairment, employee severance
and other restructuring (credits) charges. In fiscal year 2002, the Company
recorded a restructuring credit of $397 due to a change in estimate for accrued
medical costs related to terminated employees. In fiscal year 2003, the Company
expended $408, primarily for facility closing costs and recorded a restructuring
credit of $115 associated with a gain on the disposal of certain fixed assets
previously impaired as part of the 2001 restructuring.
The following table displays the activity and balances of the restructuring
reserve account from August 31, 2001 to August 31, 2003:
<Table>
<Caption>
AUGUST 31, AUGUST 31, AUGUST 31,
2001 2002 2003
BALANCE ADDITIONS DEDUCTIONS BALANCE ADDITIONS DEDUCTIONS BALANCE
---------- --------- ---------- ---------- --------- ---------- ----------
Workforce reductions....... $1,773 -- $1,152 $ 621 -- $ 35 $ 586
Facility closing costs..... 787 -- 126 661 -- 184 477
Other costs................ 517 -- 114 403 -- 189 214
------ -- ------ ------ -- ---- ------
Total.................... $3,077 -- $1,392 $1,685 -- $408 $1,277
====== == ====== ====== == ==== ======
</Table>
The remaining balance of $1,277, which consists primarily of workforce
reduction and facility closing costs, is expected to be expended during fiscal
2004. The final amounts will be settled upon the expiration period for workers'
compensation claims and completion of facility clean up and waste removal.
3. CONTINGENCIES
The Company is involved in litigation, both as plaintiff and defendant,
incidental to the conduct of its business. It is the opinion of management,
after consultation with counsel, that the outcome of such litigation will not
have a material adverse effect on its financial position, results of operations
and cash flows.
4. SHORT-TERM BORROWING
At August 31, 2003 and 2002, the Company had no short-term borrowing
outstanding under its $100,000 U.S. revolving credit facility with a commercial
finance company. Availability under the revolving credit facility is based on
accounts receivable and inventory and requires maintenance of certain financial
covenants. The Company is currently in compliance with the terms of these
covenants.
The maximum amount outstanding under the credit facility was $41,841 and
$62,726 during fiscal 2003 and 2002, respectively. The average amount
outstanding and average rate of interest charged on outstanding borrowings under
the credit facility were $8,440 and 3.89% in fiscal 2003. The credit facility is
collateralized by substantially all of the Company's assets and is in effect
until February 2006. The rate of interest on the facility is prime rate or LIBOR
plus 2%.
At August 31, 2003 and 2002, certain foreign subsidiaries had short-term
notes of $7,520 and $9,829, respectively, outstanding under loan agreements with
various banks. The current notes bear interest ranging from 3.15% to 12.38% and
expire no later than June 2004.
The Company utilized various short-term borrowing facilities to support
production in China. At August 31, 2003 and 2002, the outstanding balance under
these borrowing facilities was $7,000 and $9,473, respectively. The maximum
amount outstanding under these credit facilities was $26,726 and $11,451 during
F-15
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
fiscal 2003 and 2002, respectively. The average amount outstanding and average
rate of interest charged on outstanding borrowings under these credit facilities
were $19,578 and 5.64% in fiscal 2003.
5. LONG-TERM DEBT
Long-term debt consists of the following at August 31:
<Table>
<Caption>
2003 2002
-------- --------
9 3/8% Senior Subordinated Notes due in 2007:
$100,000 principal amount less unamortized discount of
$189 and $237.......................................... $ 99,811 $ 99,763
$50,000 principal amount less unamortized discount of
$1,175 and $1,468...................................... 48,825 48,532
Fedders Koppel promissory note.............................. 2,140 3,574
Promissory note payable to the State of Illinois............ 1,804 2,129
Trion Industrial Revenue Bond............................... 3,200 3,200
Eubank Manufacturing Enterprises, Inc. Industrial Revenue
Bond...................................................... 1,517 1,809
Eubank Manufacturing Enterprises, Inc. promissory note...... 599 890
Melcor, State of New Jersey Economic Development Bond....... 906 1,037
Eubank Manufacturing Enterprises, Inc. mortgage............. 970 1,019
Capital lease obligations................................... 4,272 5,178
-------- --------
164,044 167,131
Less current maturities..................................... 4,652 3,362
-------- --------
$159,392 $163,769
======== ========
</Table>
Aggregate amounts of long-term debt, excluding capital leases of $4,272,
maturing in each of the years ending August 31 are as follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- --------
2004........................................................ $ 4,014
2005........................................................ 1,605
2006........................................................ 699
2007........................................................ 149,347
2008........................................................ 656
Thereafter.................................................. 3,451
--------
Total..................................................... $159,772
========
</Table>
F-16
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Aggregate future minimum rental payments under capital leases are as
follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- ------
2004........................................................ $ 735
2005........................................................ 843
2006........................................................ 842
2007........................................................ 840
2008........................................................ 1,022
Thereafter.................................................. 1,393
------
Total minimum lease payments................................ 5,675
Less amount representing interest........................... 1,403
------
Total obligation under capital leases....................... $4,272
======
</Table>
In August 1997, a subsidiary of the Company issued $100,000 principal
amount of 9 3/8% Senior Subordinated Notes due 2007. In August 1999, the same
subsidiary issued an additional $50,000 principal amount of 93/8% Senior
Subordinated Notes due 2007. The notes are guaranteed by the Company on a senior
subordinated basis. The notes may be redeemed by the subsidiary after August
2002 at a redemption price of 104.688% of principal amount. The provisions of
the notes limit, among other things, the payment of dividends by the subsidiary.
The loan from the State of Illinois has an interest rate of 1%, is to be
paid over the next five years, and is collateralized by a mortgage on the
Company's Illinois facility.
The Trion Industrial Revenue Bond is due in November 2011, bears interest
at a variable rate which fluctuates in accordance with the Bond Market
Association Index, and requires no principal payments until maturity. This bond
is collateralized by Trion's Sanford, North Carolina facility, including real
property and equipment.
The Fedders Koppel promissory note payable to a Philippines bank is to be
paid over the next two years, bears interest at PHIBOR plus 3%, and is
guaranteed by the Company.
The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been
paid in October 2003. The bond is collateralized by certain real property and
equipment, is guaranteed by the Company, and bears interest at a variable rate
calculated as 75% of the sum of LIBOR plus 1.75.
The Eubank Manufacturing Enterprises, Inc. promissory note due to Flag Bank
is to be paid next year and has a variable rate of interest, payable at the
prime rate. The promissory note is collateralized by certain real property and
equipment.
The loan from the New Jersey Economic Development Corporation to Melcor
Corporation has an interest rate of 6.6%, is to be paid over the next seven
years and is collateralized by Melcor's facility and certain equipment.
In June 2003, Eubank Manufacturing Enterprises Inc. refinanced its mortgage
with Bank One and repaid the mortgage payable to Bank of America Leasing and
Capital. The new loan has an interest rate of 4.25%, is to be paid over the next
five years and is collateralized by a mortgage on Eubank's facility.
6. COMMITMENTS
The Company leases certain property and equipment under operating leases.
Most of these operating leases contain one of the following options: (a) the
Company may, at the end of the initial lease term, purchase the property at the
then fair market value or (b) the Company may renew its lease at the then fair
F-17
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
rental value for a period of one month to five years. The Company also has
contractual minimum payments under license agreements. Minimum payments for
operating leases having non-cancelable terms and contractual minimum payments
under the license agreements are as follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- -------
2004........................................................ $ 3,463
2005........................................................ 3,001
2006........................................................ 2,953
2007........................................................ 2,729
2008........................................................ 2,712
Thereafter.................................................. 4,738
-------
Total..................................................... $19,596
=======
</Table>
Total rent and licensing expense amounted to $8,556, $5,715 and $2,958 in
2003, 2002 and 2001, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components at August 31:
<Table>
<Caption>
2003 2002 2001
------ -------- --------
Current: Federal....................................... $ (465) $(12,101) $ (5,472)
State.................................................. 151 (181) (53)
Foreign................................................ 197 493 531
------ -------- --------
(117) (11,789) (4,994)
------ -------- --------
Charge in lieu of income taxes......................... -- -- 134
------ -------- --------
Deferred: Federal...................................... 4,264 6,497 (5,783)
State.................................................. 77 259 (167)
------ -------- --------
4,341 6,756 (5,950)
------ -------- --------
$4,224 $ (5,033) $(10,810)
====== ======== ========
</Table>
The exercise of stock options to acquire shares of the Company's stock
creates a compensation deduction for income tax purposes for which there is no
corresponding expense required for financial reporting purposes. The tax
benefits related to these deductions are reflected as a charge in lieu of income
taxes and a credit to additional paid-in capital. The Company elected to carry
back its 2001 and 2002 U.S. net operating losses.
F-18
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred tax assets and liabilities result from temporary differences
between assets and liabilities for financial reporting and income tax purposes,
and include the components related to acquired companies. The components are as
follows at August 31:
<Table>
<Caption>
2003 2002
-------- ------
Warranty.................................................... $ 3,453 $2,710
Depreciation................................................ (10,123) (7,114)
Employee benefit programs................................... 7,363 7,256
Inventory................................................... 3,558 2,202
Net operating loss and tax credit carry-forwards............ 820 2,294
Restructuring............................................... 470 509
Other....................................................... (619) 1,405
-------- ------
4,922 9,262
Valuation allowance......................................... (775) (775)
-------- ------
$ 4,147 $8,487
======== ======
</Table>
At August 31,2003, $7,654 of current deferred tax benefit was included in
current assets, $8,224 of long-term deferred benefit was included in non-current
asset, and $11,731 of deferred income tax liability was included in other
long-term liabilities.
The difference between the United States statutory income tax rate and the
consolidated effective income tax rate is due to the following items at August
31:
<Table>
<Caption>
2003 2002 2001
------ ------- --------
Expected tax at statutory rate.......................... $4,557 $ 1,042 $(11,642)
Tax difference on foreign earnings...................... (508) (568) 75
Valuation allowance reflected in current income......... -- 98 (356)
State taxes, less federal income tax benefit............ 120 50 (143)
Prior-year provisions no longer required................ -- (6,048) --
Other................................................... 55 393 1,256
------ ------- --------
$4,224 $(5,033) $(10,810)
====== ======= ========
</Table>
At August 31, 2003, the Company has foreign net operating loss
carry-forwards of approximately $1,300. The valuation allowance reflects the
uncertainty associated with the realization of deferred tax assets. The increase
in the valuation reserve in 2002 was due primarily to foreign net operating
losses. During the fourth quarter of 2002, the Company recorded a tax benefit of
$6,048 to reflect favorable tax audit resolutions and the reduction in
world-wide tax exposures.
8. REPORTABLE SEGMENTS
The Company has two reportable segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. The Company's
reportable segments were determined based upon several factors, including the
nature of the products provided and markets served. Each reportable segment is
managed separately and includes various operating segments which have been
aggregated due to similar economic characteristics.
The HVACR segment designs, manufactures and distributes window, residential
split system condensing units and air handlers, gas furnaces, multi-split
systems, through-the-wall, portable and packaged unit air
F-19
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
conditioners, residential humidifiers, dehumidifiers and air cleaners. HVACR
products are distributed through a variety of sales channels including national
retailers, regional retailers, wholesale distributors, catalog supply houses,
private label/OEM, government direct and the Internet.
The Engineered Products segment designs, manufactures and distributes
commercial and industrial media filters, electronic filters, humidifiers, dust
collectors, fan filter units and solid-state thermoelectric heat pump modules.
These products are sold through manufacturers' representatives, distributors and
direct sales to end-users.
SUMMARY OF BUSINESS BY SEGMENT:
<Table>
<Caption>
NET SALES 2003 2002 2001
- --------- -------- -------- --------
HVACR................................................ $382,219 $332,748 $359,964
Engineered Products.................................. 39,484 40,954 45,733
-------- -------- --------
Net sales............................................ $421,703 $373,702 $405,697
======== ======== ========
Earnings before interest, taxes and cumulative effect
of changes in accounting principle
HVACR................................................ $ 32,934 $ 25,908 $ 7,387
Engineered Products.................................. 194 (1,663) 15
-------- -------- --------
Segment earnings before interest, taxes and goodwill
impairment......................................... 33,128 24,245 7,402
-------- -------- --------
Goodwill impairment, asset impairment, employee
severance and other restructuring charges
(credits).......................................... 11,791 (397) 8,947
Non-allocated expenses............................... 1,677 3,049 13,873
Interest expense, net................................ 18,546 18,617 17,845
Provision (benefit) for income tax expense........... 4,224 (5,033) (10,810)
-------- -------- --------
Net (loss) income.................................... $ (3,110) $ 8,009 $(22,453)
======== ======== ========
</Table>
F-20
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<Table>
<Caption>
2003 2002 2001
-------- -------- --------
Depreciation and Amortization
HVACR................................................ $ 7,175 $ 10,409 $ 10,532
Engineered Products.................................. 2,033 3,779 3,686
Corporate............................................ 335 642 1,213
-------- -------- --------
Consolidated depreciation and amortization......... $ 9,543 $ 14,830 $ 15,431
======== ======== ========
Property, plant and equipment additions
HVACR................................................ $ 6,478 $ 5,955 $ 8,979
Engineered Products.................................. 330 1,796 1,662
Corporate............................................ 463 95 132
-------- -------- --------
Consolidated property, plant and equipment
Additions.......................................... $ 7,271 $ 7,846 $ 10,773
======== ======== ========
Total assets
HVACR................................................ $250,967 $212,931 $224,914
Engineered Products.................................. 53,024 66,173 57,712
Non-allocated assets................................. 88,938 87,024 79,706
-------- -------- --------
Consolidated assets................................ $392,929 $366,128 $362,332
======== ======== ========
</Table>
SUMMARY OF NET SALES BY GEOGRAPHIC AREA(1)
<Table>
<Caption>
U.S. OTHER CONSOLIDATED
-------- ------- ------------
2003................................................. $340,432 $81,271 $421,703
2002................................................. 321,666 52,036 373,702
2001................................................. 336,530 69,167 405,697
</Table>
- ---------------
(1) "Other" includes the Company's net sales principally to Asia, Europe, Canada
and Mexico.
SUMMARY OF LONG-LIVED ASSETS BY GEOGRAPHIC AREA(2)
<Table>
<Caption>
U.S. OTHER CONSOLIDATED
-------- ------- ------------
2003................................................. $110,688 $45,481 $156,169
2002................................................. 128,575 41,238 169,813
2001................................................. 142,434 26,564 168,998
</Table>
- ---------------
(2) "Other" includes long-lived assets located principally in Asia.
In 2003, two customers accounted for 48% of net sales; in 2002 and 2001,
two customers accounted for 49% of net sales.
It is not practical for the Company to report revenues for each product or
group of similar products. A majority of the Company's internal reports provide
detailed information by legal entity, but there is no one uniform customer or
product information management system.
F-21
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. CAPITAL STOCK
On May 16, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the Company's Common and Class B
stockholders. Stockholders received one right for every ten shares of Common
Stock and Class B Stock they held as of July 1, 2003. Each transferable right
represented the right to purchase one share of the Company's Series A Cumulative
Preferred Stock at the subscription price of $23.70, until the expiration date
of August 12, 2003. As of August 12, 2003, 262,316 rights had been subscribed.
In October 2002, the Company's Board of Directors approved a plan pursuant
to which a new class of cumulative Preferred Stock would be offered to
stockholders in exchange for up to 15,000,000 shares of the Company's Common
Stock, with 0.14 shares of Preferred Stock being offered in exchange for every
share of Common Stock. The Series A Cumulative Preferred Stock receives a
cumulative annual dividend of $2.15 and has a liquidation preference of $25.00
plus the amount of any accrued and unpaid dividends. The holders of the Series A
Cumulative Preferred Stock has no right to vote, except in limited
circumstances. The exchange of 2,315,750 shares of Common Stock for 323,947
shares of Series A Cumulative Preferred Stock was completed on December 27,
2002.
On February 14, 2003, the Company announced an exchange offer to exchange
shares of Series A Cumulative Preferred Stock for up to 12,500,000 shares of the
Company's Common Stock, with 0.14 shares of Preferred Stock being offered in
exchange for every share of Common Stock. The exchange of 633,082 shares of
Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was
completed on March 18, 2003.
On March 26, 2002, the Company's stockholders approved a recapitalization
plan (the "Plan") which became effective the same day. Under the Plan, the
holder of each share of Common Stock received 1.1 shares of new Common Stock,
the holder of each share of Class A Stock received 1 share of new Common Stock
and the holder of each share of Class B Stock received 1.1 shares of new Class B
Stock.
The par value of the new Common Stock and the new Class B Stock is $0.01,
while the par value of the old Common Stock and old Class B Stock was $1.00. The
new Common Stock and the new Class B Stock have alternating preferences with
respect to payments or distributions in the event of any dissolution,
liquidation or winding up of the Company. No such liquidation preference existed
previously. Each share of new Class B Stock shares equally with each share of
new Common Stock in payments of dividends while each share of old Class B Stock
received 90% of the dividends paid to each share of old Common Stock. The new
Class B Stock will automatically be converted into shares of new Common Stock if
the number of outstanding shares of new Class B Stock falls below 2.5% of the
aggregate number of issued and outstanding shares of new Common Stock and new
Class B Stock. The old Class B Stock automatically converted into shares of old
Common Stock if the number of outstanding shares of old Class B Stock fell below
5.0% of the aggregate number of issued and outstanding shares of old Common
Stock and old Class B Stock.
Series A Cumulative Preferred Stock (15,000,000 shares authorized): The
Series A Cumulative Preferred Stock receives a cumulative annual dividend of
$2.15 and has a liquidation preference of $25.00 plus the amount of any accrued
and unpaid dividends. The holders of the Series A Cumulative Preferred Stock has
no right to vote, except in limited circumstances.
New Common Stock (70,000,000 shares authorized): 3,741,757 shares of new
Common Stock were reserved for the exercise of stock options and 2,394,046
shares of new Common Stock were reserved for the conversion of shares of new
Class B Stock as of August 31, 2002.
Old Common Stock (80,000,000 shares authorized): During fiscal 2001,
1,932,800 shares were repurchased for $8,985. During fiscal 2000, 567,900 shares
were repurchased for $3,580. 3,747,157 shares of old Common Stock were reserved
for the exercise of stock options, 24,044,773 shares of old Common Stock
F-22
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
were reserved for the conversion of Class A Stock and 2,266,406 shares of old
Common Stock were reserved for the conversion of shares of old Class B Stock as
of August 31, 2001.
Class A Stock (60,000,000 shares authorized): During fiscal 2001,
1,065,600 shares were repurchased for $4,252. An additional 224,259 shares were
received by employees in connection with the exercise of stock options. During
fiscal 2000, 2,200,100 shares were repurchased for $9,904. An additional 154,071
shares were received by employees in connection with the exercise of stock
options. Class A Stock had rights, including dividend rights, substantially
identical to the old Common Stock, except that the Class A Stock was not
entitled to vote except to the extent provided under Delaware law. Class A Stock
was immediately convertible into old Common Stock on a share-for-share basis
upon conversion of all of the Class B Stock.
New Class B Stock (5,000,000 shares authorized): New Class B Stock is
immediately convertible into Common Stock on a share-for-share basis if the
number of outstanding shares of new Class B Stock falls below 2.5% of the
aggregate number of issued and outstanding shares of new Common Stock and new
Class B Stock. New Class B Stock has greater voting power, in certain
circumstances (ten-to-one in the election of directors), and has limited
transferability. New Class B Stock also votes separately, as a class, on certain
significant issues.
Old Class B Stock (7,500,000 shares authorized): Old Class B Stock was
immediately convertible into old Common Stock on a share-for-share basis if the
number of outstanding shares of old Class B Stock fell below 5.0% of the
aggregate number of issued and outstanding shares of old Common Stock and old
Class B Stock. Old Class B Stock had greater voting power, in certain
circumstances (ten-to-one in the election of directors), but received a lower
dividend, if declared, equal to 90% of the dividend on old Common Stock and had
limited transferability. Old Class B Stock also voted separately, as a class, on
certain significant issues.
The following table summarizes the number of shares outstanding by class of
stock:
<Table>
<Caption>
NEW COMMON OLD COMMON NEW CLASS B OLD CLASS B PREFERRED
STOCK STOCK CLASS A STOCK STOCK STOCK STOCK
---------- ----------- ------------- ----------- ----------- ---------
Balance at August 31,
2000.................... -- 15,567,559 15,706,892 -- 2,266,406 --
Purchase of treasury
stock................... -- (1,932,800) (1,065,600) -- -- --
Stock options exercised... -- -- 425,055 -- -- --
Other..................... -- -- (176,361) -- -- --
---------- ----------- ----------- --------- ---------- -------
Balance at August 31,
2001.................... -- 13,634,759 14,889,986 -- 2,266,406 --
Stock options exercised... -- -- 400 -- -- --
Recapitalization.......... 29,888,621 (13,634,759) (14,890,386) 2,493,046 (2,266,406) --
Other..................... 202,444 -- -- -- -- --
---------- ----------- ----------- --------- ---------- -------
Balance at August 31,
2002.................... 30,091,065 -- -- 2,493,046 -- --
Stock options exercised... 10,000 -- -- -- -- --
Exchange offer............ (2,948,942) -- -- -- -- 412,521
Stock rights subscribed... -- -- -- -- -- 262,316
Other..................... (32,358) -- -- -- -- --
---------- ----------- ----------- --------- ---------- -------
Balance at August 31,
2003.................... 27,119,765 -- -- 2,493,046 -- 674,837
========== =========== =========== ========= ========== =======
</Table>
10. STOCK OPTION PLANS
The stock option plan, as approved by the stockholders, provides for the
granting to employees and officers of incentive stock options (as defined under
current tax laws) and non-qualified stock options. The plan provides for the
granting of non-qualified stock options to directors who are not employees.
Stock options
F-23
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
granted prior to June 1, 2002 are exercisable one year after the date of grant.
Stock options granted subsequent to June 1, 2002 vest over a four-year period.
Options, if not exercised, will expire five years from the date of grant.
Certain options are only exercisable at the end of five years unless a sales
target is achieved prior thereto.
In October 2000, the Company's Board of Directors approved the repricing of
a majority of unexercised stock options, reducing the exercise price to $3.625
per share, which was the fair market value of the Class A Stock on the date of
repricing. The Company recorded a non-cash charge of $726 due to the repricing
in fiscal 2001. In fiscal 2002, the Company recorded a $339 reduction to
compensation expense to reflect changes in the market price of the Company's
stock. In fiscal 2003, the Company recorded a non-cash charge of $147 to reflect
changes in the market price of the Company's stock.
The stock option plan summary and changes during each year are presented
below:
<Table>
<Caption>
EXERCISE EXERCISE
2003 PRICE(1) 2002 PRICE(1) 2001
---------- -------- ---------- -------- ----------
Options outstanding at beginning of
year................................. 2,514,000 $3.31 1,630,000 $3.66 2,483,000
Granted................................ -- 1,423,000 $3.01 79,000
Canceled/Expired....................... (276,000) $3.48 (539,000) $3.59 (507,000)
Exercised.............................. (10,000) $3.02 -- (425,000)
---------- ----- ---------- ----- ----------
Options outstanding at end of year..... 2,228,000 $3.28 2,514,000 $3.31 1,630,000
Options exercisable at end of year..... 317,000 $3.05 78,000 $3.61 551,000
========== ===== ========== ===== ==========
$ 2.65 $ 2.65 $ 2.84
Exercise price per share............... to 5.00 to 5.00 to 4.63
========== ========== ===== ==========
</Table>
- ---------------
(1) weighted average
Options exercisable at August 31, 2003 have an average exercise price of
$3.05. There were no stock options granted during fiscal 2003. The
weighted-average grant-date fair value of the stock options granted during 2002
and 2001 was $1.47 and $1.46, respectively. The fair value of each option
granted is estimated on the date of grant using the Binomial option pricing
model with the following weighted-average assumptions:
<Table>
<Caption>
2002 2001
---- ----
Expected dividend yield..................................... 3.98% 2.84%
Risk-free rate.............................................. 2.9% 5.7%
Expected life in years...................................... 4 4
Volatility.................................................. 68% 45%
</Table>
The following table summarizes information on stock options outstanding at
August 31, 2003:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE(1) PRICE(1) EXERCISABLE PRICE(1)
- --------------- ----------- ----------- -------- ----------- --------
$2.65 - 2.80...................... 70,000 3.44 $2.74 -- $ --
$3.02 - 3.02...................... 1,242,000 3.87 3.02 303,000 3.02
$3.63 - 3.63...................... 867,000 1.39 3.63 14,000 3.63
$4.50 - 5.00...................... 49,000 2.69 4.53 -- --
--------- ---- ----- ------- -----
2,228,000 2.86 $3.28 317,000 $3.05
========= ==== ===== ======= =====
</Table>
- ---------------
(1) weighted average
F-24
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. PENSION PLANS AND OTHER COMPENSATION ARRANGEMENTS
The Company maintains a 401(k) defined contribution plan covering all U.S.
employees. Company matching contributions under the plan are based on the level
of individual participant contributions and amounted to $649, $1,064 and $1,496,
in 2003, 2002 and 2001, respectively.
In fiscal 2002, the Company entered into an employment agreement with an
officer that has a term that extends through September 2006. The agreement
provides for annual base and incentive compensation, a non-interest bearing,
uncollateralized loan, which the Company expects to collect in six yearly
installments over the six-year period following the officer's termination of
employment (see note 1), a retirement contribution that vests over the life of
the agreement and restricted stock, of which a portion vests in January 2004 and
a portion vests in January 2007. The Company is amortizing the retirement
contribution over the vesting period and the restricted stock, commencing on the
date of grant, over the remaining life of the agreement.
Due to the retirement of another officer in fiscal 2001, the Company
recorded additional compensation of $7,583 to selling, general and
administrative expense as a result of changes in the underlying estimate. This
change in estimate was due primarily to the timing of the executive's decision
to retire, since the compensation formula includes factors based upon prior
year's base salary and bonus. Therefore, the effects of this change in estimate
are not attributable to future periods. This officer or his beneficiary is
required to be paid a monthly benefit for 10 years, commencing upon his
retirement in fiscal 2001. The benefit is based upon his compensation in the
year prior to retirement, pursuant to an employment agreement entered into in
1993.
The Company provides a portion of health care and life insurance benefits
for certain retired employees who elect to participate in the Company's plan.
SFAS 106 requires accrual accounting for all post-retirement benefits other than
pensions. At August 31, 2003 and 2002, post-retirement benefits, although
immaterial, were fully accrued with no significant change between these dates.
12. ACQUISITIONS AND JOINT VENTURES
In March 2003, the Company entered into a joint venture with Nanjing Suning
High & New Technology Industrial Park Co., Ltd. to manufacture split-type air
conditioners in China. The Company has a 2/3 interest in the joint venture,
Fedders Suning Nanjing Co., Ltd. The joint venture is included within the HVACR
reportable segment. The Company's investment in the joint venture amounted to
$1.3 million. This joint venture is consolidated into the Company's financial
statements with Nanjing Suning's 1/3 interest accounted for as a minority
interest. This transaction was accounted for as a business combination.
The Company completed the acquisition, in the first quarter of fiscal 2002,
of a wholly owned air conditioning manufacturing operation in Shanghai, China,
now called Fedders Shanghai Co., Ltd. This subsidiary is included within the
HVACR reportable segment. This plant has fully replaced the production of room
air conditioners previously produced at the Company's Tennessee plant, which
ceased production as part of the 2001 restructuring plan. The purchase price of
$4.6 million was allocated based on the fair market value of the assets
acquired, which consisted primarily of inventory and fixed assets. The excess of
purchase price over the fair market value of the assets acquired was allocated
to goodwill ($0.6 million).
In November 2001, Melcor Corporation ("Melcor"), a subsidiary of the
Company, and Quanzhou Hua Yu Electrical Component Factory formed a joint
venture, Quanzhou Melcor Hua Yu Thermoelectric Co., Ltd., to manufacture
thermoelectric modules in China. This joint venture is included within the
Engineered Products reportable segment. Melcor has a 65% interest in the joint
venture. The Company's investment in the joint venture amounted to $1.8 million.
This joint venture is consolidated into the Company's financial statements with
Quanzhou Hua Yu's 35% interest accounted for as a minority interest. This
transaction was accounted for as a business combination, which resulted in an
intangible asset of $1.2 million. This intangible asset is being amortized over
20 years, which represents the term of the joint venture agreement.
F-25
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In October 2001, the Company entered into a joint venture with Voltas
Limited ("Voltas") to produce room air conditioners in India. Fedders and Voltas
each have a 50% interest in the joint venture, Universal Comfort Products Pvt.
Ltd, which produces room and ductless split system air conditioners. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $2.2 million. The Company reports
the results of the joint venture by the equity method of accounting.
In January 2002, Rotorex Company, Inc. ("Rotorex"), a subsidiary of the
Company, and Dong Fang Electromechanical, a subsidiary of China North Industries
Group Corporation, entered into an agreement to form a joint venture to
manufacture rotary compressors for air conditioners, in Xi'an, China. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $4.0 million. Rotorex has a 50%
interest in Xi'an Fedders Dong Fang Air Conditioner Compressor Co., Ltd. The
Company reports the results of the joint venture by the equity method of
accounting.
The Company's consolidated financial statements include the operating
results of the acquired businesses and joint ventures from the date of
acquisition or the commencement of the joint venture. On a pro forma basis, as
if the businesses had been acquired or the joint ventures entered into at the
beginning of the fiscal year, revenue, net income and earnings per share would
not differ materially from the amounts reported in the consolidated financial
statements for the fiscal year.
13. GUARANTEES
In November 2002, FASB Interpretation ("FIN") 45, "Guarantor's Accounting
And Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", was approved by the FASB. FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in interim and annual financial statements for periods
ending after December 15, 2002. The Company adopted this statement in the second
quarter of fiscal year 2003.
PRODUCT WARRANTY
Certain of the Company's products are covered by standard product warranty
plans that extend from 1 to 5 years. In addition, major retailers have consumer
return policies which allow consumers to return product that may be defective in
lieu of field service. Upon return to the Company, these units are inspected,
repaired as required, reboxed and held for future sale as factory reconditioned
products. A portion of those units returned is not repairable. At the time
revenue is recognized, upon shipment, measurements of those sales are reduced by
estimates of the future costs associated with fulfilling warranty obligations
and for the expense associated with repairing or scrapping defective returns.
The Company uses historical failure and defective return rates, which may
or may not be indicative of future rates. Each quarter, the estimate of warranty
and defective return obligations including the assumptions about estimated
failure and return rates, is reevaluated.
F-26
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table displays the activity and balances of the product
warranty liability from August 31, 2002 to August 31, 2003:
<Table>
<Caption>
TWELVE MONTHS
ENDED
AUGUST 31,
2003
-------------
Warranty balance at August 31, 2002......................... $ 7,458
Accruals for warranties issued during the period............ 12,770
Settlements made during the period.......................... (10,568)
--------
Warranty balance at August 31, 2003......................... $ 9,660
========
</Table>
LOAN GUARANTEES
Guarantees of subsidiary debt by the Parent and subsidiaries consist of the
following at August 31, 2003:
(i) The Parent guarantees the obligations of Fedders North America,
Inc. ("FNA") under its 9 3/8% Senior Subordinated Notes due 2007 (the
"Notes"). This is a guarantee of payment of principal and interest on the
Notes that arose in connection with the issuance and sale of $150 million
in principal amount of the Notes. The Parent would be required to perform
under the guarantee in the event FNA failed to pay principal and interest
when due or to perform its obligations under the indenture pursuant to
which the Notes were issued.
(ii) The Parent and various subsidiaries guarantee the obligations of
certain subsidiaries under a $100 million working capital line of credit.
The line of credit bears interest at LIBOR plus 2% or the prime rate of
Wachovia Bank and expires in February 2006. The Parent and guarantor
subsidiaries would be required to perform under the guarantees in the event
that the borrowing subsidiaries failed to repay amounts borrowed under the
line of credit and interest and other charges associated therewith, or
failed to comply with the provisions of the credit agreement. There is no
outstanding loan balance at August 31, 2003.
(iii) The Parent guarantees the obligations of its subsidiary, Melcor
Corporation ("Melcor"), under a $1.3 million New Jersey Economic
Development Authority Economic Development Bond. The bond bears interest at
the rate of 6.6% per annum and matures in July 2010. The Parent would be
required to perform under the guaranty in the event that Melcor fails to
pay the principal of and interest on the bond or fails to comply with the
provisions of the bond agreement pursuant to which the bond was issued. The
outstanding loan balance at August 31, 2003 is $0.9 million.
(iv) The Parent and Melcor Corporation guarantee the obligations of a
subsidiary, Eubank Manufacturing Enterprises, Inc. ("Eubank"), under an
equipment financing lease in the amount of $3.1 million. The lease bears
interest at the rate of 7.16% per annum and expires in December 2007. The
Parent and Melcor Corporation would be required to perform under the
guarantee in the event Eubank fails to pay rent when due or fails to comply
with the provisions of the lease agreement. The outstanding loan balance at
August 31, 2003 is $2.4 million.
(v) The Parent and a subsidiary, NYCOR North America, Inc., guarantee
the obligations of Eubank Manufacturing Enterprises, Inc., a subsidiary,
under a $2 million Development Authority of Dooly County, Georgia Economic
Development Bond. The bond bears interest at the floating rate of 75% of
the sum of LIBOR plus 1.75% per annum and matures in December 2008. The
Parent and NYCOR North America would be required to perform under the
guarantee in the event Eubank fails to pay the principal of and interest on
the bond, when due, or fails to comply with the provisions of the bond
agreement. The outstanding loan balance at August 31, 2003 is $1.5 million,
which was paid in October 2003.
F-27
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(vi) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a loan agreement providing for a
loan of $2.0 million. The loan bears interest at the prime rate of Flag
Bank and matures in February 2007. The Parent would be required to perform
under the guaranty in the event Eubank fails to pay the principal of and
interest on the loan or fails to comply with the provisions of the loan
agreement. The outstanding loan balance at August 31, 2003 is $0.6 million.
(vii) The Parent guarantees the obligations of a subsidiary, Fedders
Shanghai Co., Ltd. ("FSC") under a working capital line of credit totaling
$6 million. The line of credit bears interest at the rate of SIBOR+ 1.5%
per annum and matures at various dates. The Parent would be obligated to
perform under the guarantee in the event that FSC fails to pay the
principal of and interest on the loan or fails to comply with the
provisions of the loan agreement. There is no outstanding loan balance at
August 31, 2003.
(viii) The Parent guarantees the obligations of a subsidiary, Polenz
GmbH ("Polenz"), under a Euro 6 million working capital line of credit. The
line of credit bears interest at the rate of LIBOR+ 2.5% per annum and
matures June 2004. The Parent would be obligated to perform under the
guarantee in the event Polenz fails to pay the principal of and interest on
the loan or fails to comply with the provisions of the loan agreement.
There is no outstanding loan balance at August 31, 2003.
(ix) The Parent guarantees the obligations of a subsidiary, Fedders
Koppel, Inc. ("FK"), under a Ph peso 320 million term loan. The loan bears
interest at the rate of PHIBOR+ 3% per annum and matures May 2005. The
Parent would be obligated to perform under the guarantee in the event that
FK fails to pay the principal of and interest on the loan or fails to
comply with the provisions of the loan agreement. The outstanding loan
balance at August 31, 2003 is $2.1 million.
The Company also provides loan guarantees to two joint ventures which are
not consolidated in the Company's financial statements:
(i) Fedders International, Inc., ("FI") a subsidiary of the Company,
guarantees up to 50% of the obligations of a 50%-owned joint venture,
Universal Comfort Products Pvt., Ltd., ("UCPL"), under a Rupees 230 million
term loan. The loan bears interest at the rate of State Bank Mid Term Loan
Rate and matures November 2006. FI would be obligated to perform under the
guaranty in the event UCPL fails to pay the principal of and interest on
the loan or fails to comply with the terms of the loan agreement. FI's
exposure under the guarantee at August 31, 2003 is approximately $2.4
million.
(ii) Fedders Indoor Air Quality (Suzhou) Co., Ltd., ("FIAQ"), a
subsidiary of the Company, guarantees up to RMB 5 million of the
obligations of Xi'an Fedders Dong Fang Air Conditioner Compressor Co.,
Ltd., ("FDF"), a 50%-owned joint venture of the Company, under a working
capital line of credit. The line of credit bears interest at rate set by
the People's Bank of China and matures in January 2004. FIAQ would be
obligated to perform its obligations under the guaranty in the event FDF
fails to pay the principal of and interest on the loan or fails to comply
with the provisions of the loan agreement. FIAQ's maximum exposure under
the guarantee is approximately $0.6 million as of August 31, 2003.
14. ASSETS HELD FOR SALE
In October 2001, FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003.
In connection with a restructuring of the Company's operations in 2001
(note 2), the Company ceased production at its Walkersville, Maryland facility,
part of the Company's HVACR reportable segment. In December 2002, the Company
began the process of actively marketing the sale of the Walkersville facility.
F-28
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The sale is expected to be completed no later than December 2003. The Company
anticipates the selling price of the facility will exceed its net book value
after consideration of selling expenses associated with marketing the facility
for sale. A vacant property belonging to the Company in Ningbo, China is also
being marketed for sale and the sale is expected to be completed no later than
June 2004. At August 31, 2003, assets totaling $8,564, which consist of land,
land improvements, buildings, and building improvements have been classified as
"Assets Held for Sale" and are no longer being depreciated in accordance with
SFAS 144.
The following table presents the carrying amount, by asset class, of the
"Assets Held for Sale" at August 31:
<Table>
<Caption>
2003
------
Land and land improvements.................................. $2,181
Building, net............................................... 4,587
Building improvements, net.................................. 1,796
------
Assets Held for Sale........................................ $8,564
======
</Table>
15. SUBSEQUENT EVENTS
On October 21, 2003, the Company entered into a joint venture with Jiangsu
Xingrong Hi-Tech Company ("Xingrong") to design, produce and market heat
exchangers used in air conditioners. The Company and Xingrong each have a 50%
interest in the joint venture, Changzhou Fedders Xingrong Air Conditioner
Components Co., Ltd.
The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been
paid in October 2003.
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following presentation of the supplemental condensed consolidating
financial statements has been prepared on a historical basis taking into account
the guarantor/non-guarantor structure that resulted from the issuance of the
Senior Notes due 2014. FNA and the Company are the issuer and a guarantor,
respectively, of the Senior Notes due 2014. In addition, the subsidiaries of FNA
are also guarantors of the notes. The Company's and the subsidiaries' guarantees
are full and unconditional. The following condensed consolidating financial
statements present separate information for FNA and its subsidiary guarantors,
the Company, and the non-guarantor subsidiaries, and should be read in
conjunction with the consolidated financial statements of the Company.
F-29
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2003
----------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
Net sales........................... $382,228 $278,624 -- $(239,149) $421,703
Cost of sales....................... 314,574 253,410 -- (239,149) 328,835
Selling, general and administrative
expense(a)........................ 41,839 19,339 $ 726 -- 61,904
Asset impairment, employee
severance, and other restructuring
credits........................... (115) -- -- -- (115)
-------- -------- ------- --------- --------
Operating income (loss)............. 25,930 5,875 (726) -- 31,079
Partners' net interest in joint
venture results................... -- (14) -- -- (14)
Equity income in investment......... -- -- (2,402) 2,402 --
Interest expense, net(b)............ (16,010) (2,263) (273) -- (18,546)
Other (expense) income.............. (224) 737 (12) -- 501
-------- -------- ------- --------- --------
Income (loss) before income taxes
and cumulative effect of a change
in accounting principle........... 9,696 4,335 (3,413) 2,402 13,020
Provision (benefit) for income
taxes............................. 2,863 1,664 (303) -- 4,224
-------- -------- ------- --------- --------
Net income (loss) before cumulative
effect of a change in accounting
principle......................... 6,833 2,671 (3,110) 2,402 8,796
Cumulative effect of a change in
accounting principle.............. 11,906 -- -- -- 11,906
-------- -------- ------- --------- --------
Net (loss) income................... (5,073) 2,671 (3,110) 2,402 (3,110)
Preferred stock dividends........... -- -- (618) (618)
-------- -------- ------- --------- --------
Net (loss) income applicable to
common stockholders............... (5,073) 2,671 (3,728) 2,402 (3,728)
Foreign currency translation, net of
tax............................... (804) (138) (933) 942 (933)
-------- -------- ------- --------- --------
Comprehensive (loss) income......... $ (5,877) $ 2,533 $(4,661) $ 3,344 $ (4,661)
======== ======== ======= ========= ========
</Table>
F-30
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2002
----------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
Net sales............................ $337,293 $133,908 -- $(97,499) $373,702
Cost of sales........................ 272,088 116,063 -- (97,499) 290,652
Selling, general and administrative
expense (a)........................ 44,095 18,196 $ 817 -- 63,108
Asset impairment, employee severance,
and other restructuring credits.... (397) -- -- -- (397)
-------- -------- ------- -------- --------
Operating income (loss).............. 21,507 (351) (817) -- 20,339
Partners' net interest in joint
venture results.................... -- 713 -- -- 713
Equity income in investment.......... -- -- 2,348 (2,348) --
Interest expense, net (b)............ (16,653) (1,964) -- -- (18,617)
Other income......................... 133 96 312 -- 541
-------- -------- ------- -------- --------
Income (loss) before income taxes.... 4,987 (1,506) 1,843 (2,348) 2,976
Provision (benefit) for income
taxes.............................. 1,622 (489) (6,166) -- (5,033)
-------- -------- ------- -------- --------
Net income (loss).................... 3,365 (1,017) 8,009 (2,348) 8,009
Foreign currency translation, net of
tax................................ 223 630 853 (853) 853
-------- -------- ------- -------- --------
Comprehensive income (loss).......... $ 3,588 $ (387) $ 8,862 $ (3,201) $ 8,862
======== ======== ======= ======== ========
</Table>
F-31
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2001
---------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- ------- --------- ----------- -----------
Net sales............................ $356,727 $82,988 -- $(34,018) $405,697
Cost of sales........................ 301,869 69,146 -- (34,018) 336,997
Selling, general and administrative
expense(a)......................... 46,522 16,777 $ 11,499 -- 74,798
Asset impairment, employee severance,
and other restructuring charges.... 8,947 -- -- -- 8,947
-------- ------- -------- -------- --------
Operating loss....................... (611) (2,935) (11,499) -- (15,045)
Partners' net interest in joint
venture results.................... -- (160) -- -- (160)
Equity income in investment.......... -- -- (16,192) 16,192 --
Interest expense (income), net (b)... (17,599) (2,469) 2,223 -- (17,845)
Other expense........................ (213) -- -- -- (213)
-------- ------- -------- -------- --------
Loss before income taxes............. (18,423) (5,564) (25,468) 16,192 (33,263)
Benefit for income taxes............. (5,987) (1,808) (3,015) -- (10,810)
-------- ------- -------- -------- --------
Net loss............................. (12,436) (3,756) (22,453) 16,192 (22,453)
-------- ------- -------- -------- --------
Foreign currency translation, net of
tax................................ 12 (1,049) -- -- (1,037)
-------- ------- -------- -------- --------
Comprehensive loss................... $(12,424) $(4,805) $(22,453) $ 16,192 $(23,490)
======== ======= ======== ======== ========
</Table>
F-32
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
AS OF AUGUST 31, 2003
----------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents......... $ 53,731 $ 7,171 -- -- $ 60,902
Net accounts receivable........... 35,850 15,328 -- -- 51,178
Net inventories................... 61,150 17,798 -- -- 78,948
Assets held for sale.............. 8,249 315 -- -- 8,564
Other current assets.............. 1,829 18,941 $ 15,370 $ (7,023) 29,117
-------- -------- -------- -------- --------
Total current assets................ 160,809 59,553 15,370 (7,023) 228,709
Investment in subsidiaries.......... -- -- 17,139 (17,139) --
Net property, plant and equipment... 40,528 14,678 654 -- 55,860
Goodwill............................ 62,870 15,760 -- -- 78,630
Other intangible assets............. 1,788 -- -- -- 1,788
Other assets........................ 7,836 5,680 30,426 -- 43,942
-------- -------- -------- -------- --------
Total assets........................ $273,831 $ 95,671 $ 63,589 $(24,162) $408,929
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes.................. -- $ 7,520 -- -- $ 7,520
Current portion of long-term
debt........................... $ 3,295 1,341 $ 16 -- 4,652
Accounts and income taxes
payable........................ 22,759 32,294 7,211 -- 62,264
Accrued expenses.................. 46,774 8,539 9,239 -- 64,552
-------- -------- -------- -------- --------
Total current liabilities........... 72,828 49,694 16,466 -- 138,988
Long-term debt...................... 156,909 2,483 -- -- 159,392
Other long-term liabilities......... 1,135 11,745 29,764 $ (7,023) 35,621
Net due (from) to affiliates........ 18,999 38,570 (57,569) -- --
Stockholders' equity:
Preferred Stock................... -- -- 7 -- 7
Common and Class B Stock.......... 5 -- 378 (5) 378
Additional paid-in capital........ 20,292 25,542 74,025 (45,834) 74,025
Retained earnings (deficit)(f).... 4,455 (30,901) 40,179 26,446 40,179
Deferred compensation and treasury
stock.......................... -- (37,416) -- (37,416)
Accumulated other comprehensive
loss........................... (792) (1,462) (2,245) 2,254 (2,245)
-------- -------- -------- -------- --------
Total stockholders' equity.......... 23,960 (6,821) 74,928 (17,139) 74,928
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................ $273,831 $ 95,671 $ 63,589 $(24,162) $408,929
======== ======== ======== ======== ========
</Table>
F-33
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
AS OF AUGUST 31, 2002
----------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents......... $ 64,502 $ 2,877 -- -- $ 67,379
Net accounts receivable........... 22,691 9,077 -- -- 31,768
Net inventories................... 34,552 14,028 -- -- 48,580
Other current assets.............. 3,129 10,601 $ 12,477 $ (7,023) 19,184
-------- -------- -------- -------- --------
Total current assets........... 124,874 36,583 12,477 (7,023) 166,911
Investment in subsidiaries.......... -- -- 20,583 (20,583) --
Net property, plant and equipment... 52,207 13,799 840 -- 66,846
Goodwill............................ 74,776 15,760 -- -- 90,536
Other intangible assets............. 1,556 -- -- -- 1,556
Other assets........................ 8,673 5,619 25,987 -- 40,279
-------- -------- -------- -------- --------
Total assets................... $262,086 $ 71,761 $ 59,887 $(27,606) $366,128
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes.................. -- $ 9,829 -- -- $ 9,829
Current portion of long-term
debt........................... $ 1,863 1,392 $ 107 -- 3,362
Accounts and income taxes
payable........................ 23,220 15,602 9,021 -- 47,843
Accrued expenses.................. 22,947 8,228 5,924 -- 37,099
-------- -------- -------- -------- --------
Total current liabilities...... 48,030 35,051 15,052 -- 98,133
Long-term debt...................... 159,803 3,950 16 -- 163,769
Other long-term liabilities......... 2,082 11,206 20,143 $ (7,023) 26,408
Net due to (from) affiliates........ 22,334 30,808 (53,142) -- --
Stockholders' equity:
Common and Class B Stock.......... 5 -- 407 (5) 407
Additional paid-in capital........ 20,292 25,642 68,870 (45,934) 68,870
Retained earnings (deficit)(f).... 9,528 (33,572) 47,551 24,044 47,551
Deferred compensation and treasury
stock.......................... -- -- (37,698) -- (37,698)
Accumulated other comprehensive
loss........................... 12 (1,324) (1,312) 1,312 (1,312)
-------- -------- -------- -------- --------
Total stockholders' equity..... 29,837 (9,254) 77,818 (20,583) 77,818
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity......... $262,086 $ 71,761 $ 59,887 $(27,606) $366,128
======== ======== ======== ======== ========
</Table>
F-34
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2003
----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
-------- ------- --------- ----------- -----------
Net cash (used in) provided by operating
activities............................. $ (3,527) $ 5,673 $ 3,471 -- $ 5,617
-------- ------- ------- ---- -------
Net additions to property, plant and
equipment.............................. (2,447) (3,980) 392 -- (6,035)
Acquisition of businesses................ -- (1,333) -- -- (1,333)
-------- ------- ------- ---- -------
Net cash (used in) provided by investing
activities............................. (2,447) (5,313) 392 -- (7,368)
-------- ------- ------- ---- -------
Net repayments of short-term notes....... -- (2,309) -- -- (2,309)
Net repayments of long-term debt......... (1,462) (1,518) (107) -- (3,087)
Proceeds from stock options exercised.... -- -- 30 -- 30
Cash dividends........................... -- -- (4,126) -- (4,126)
Proceeds from stock rights subscribed.... -- -- 6,167 -- 6,167
Other.................................... -- -- (1,401) -- (1,401)
Change in net due (from) to affiliate.... (3,335) 7,761 (4,426) -- --
-------- ------- ------- ---- -------
Net cash (used in) provided by financing
activities............................. (4,797) 3,934 (3,863) -- (4,726)
-------- ------- ------- ---- -------
Net (decrease) increase in cash and cash
equivalents............................ (10,771) 4,294 -- -- (6,477)
Cash and cash equivalents at beginning of
year................................... 64,502 2,877 -- -- 67,379
-------- ------- ------- ---- -------
Cash and cash equivalents at end of
year................................... $ 53,731 $ 7,171 -- -- $60,902
======== ======= ======= ==== =======
</Table>
F-35
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2002
----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- -------- --------- ----------- -----------
Net cash provided by (used in) operating
activities............................ $20,516 $ 2,096 $ 11,522 -- $ 34,134
------- -------- -------- ---- --------
Net additions to property, plant and
equipment............................. (3,410) (3,051) (95) -- (6,556)
Acquisition of businesses............... -- (8,008) -- -- (8,008)
------- -------- -------- ---- --------
Net cash used in investing activities... (3,410) (11,059) (95) -- (14,564)
------- -------- -------- ---- --------
Proceeds from short-term notes.......... 1,896 -- -- 1,896
Proceeds from (repayments of) long-term
debt.................................. 222 (1,444) (102) -- (1,324)
Proceeds from stock options exercised... -- 1 -- 1
Cash dividends.......................... -- (3,725) -- (3,725)
Other................................... -- (231) -- (231)
Change in net due to (from) affiliate... 2,234 7,786 (10,020) -- --
------- -------- -------- ---- --------
Net cash provided by (used in) financing
activities............................ 2,456 8,238 (14,077) -- (3,383)
Net increase (decrease) in cash and cash
equivalents........................... 19,562 (725) (2,650) -- 16,187
Cash and cash equivalents at beginning
of year............................... 44,940 3,602 2,650 -- 51,192
------- -------- -------- ---- --------
Cash and cash equivalents at end of
year.................................. $64,502 $ 2,877 $ -- -- $ 67,379
======= ======== ======== ==== ========
</Table>
F-36
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED AUGUST 31, 2001
-----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
-------- -------- --------- ----------- -----------
Net cash (used in) provided by
operating activities................. $ (5,370) $ 14,116 $ (2,827) -- $ 5,919
-------- -------- -------- ---- --------
Net additions to property, plant and
equipment............................ (7,347) (3,154) (132) -- (10,633)
Acquisition of businesses.............. (12,694) (7,000) -- -- (19,694)
-------- -------- -------- ---- --------
Net cash used in investing
activities........................... (20,041) (10,154) (132) -- (30,327)
-------- -------- -------- ---- --------
Proceeds from short-term notes......... -- 3,717 -- -- 3,717
Proceeds from (repayments of) long-term
debt................................. 5,197 (3,729) 225 -- 1,693
Proceeds from stock options
exercised............................ -- -- 526 -- 526
Cash dividends......................... -- -- (3,914) -- (3,914)
Repurchase of capital stock............ -- -- (13,237) -- (13,237)
Other.................................. -- -- (378) -- (378)
Change in net due to (from)
affiliate............................ 3,416 (4,645) 1,229 -- --
-------- -------- -------- ---- --------
Net cash provided by (used in)
financing activities................. 8,613 (4,657) (15,549) -- (11,593)
-------- -------- -------- ---- --------
Net decrease in cash and cash
equivalents.......................... (16,798) (695) (18,508) -- (36,001)
Cash and cash equivalents at beginning
of year.............................. 61,737 4,298 21,158 -- 87,193
-------- -------- -------- ---- --------
Cash and cash equivalents at end of
year................................. $ 44,939 $ 3,603 $ 2,650 -- $ 51,192
======== ======== ======== ==== ========
</Table>
INTERCOMPANY TRANSACTIONS
The historical condensed consolidating financial statements presented above
include the following transactions between FNA and the Company:
a) The Company charges corporate overhead to FNA essentially on a cost
basis allocated in proportion to sales. Such charges to FNA amounted to
$13,143, $11,483 and $12,409 for the years ended August 31, 2003, 2002 and
2001, respectively.
b) FNA's interest expense reflects actual interest charges on the
93/8% Senior Subordinated Notes due 2007, State of Illinois Promissory
Note, Trion Industrial Revenue Bond, capital lease obligations, and a
revolving line of credit.
c) FNA's depreciation and amortization for the years ended August 31,
2003, 2002 and 2001, amounted to $6,469, $12,255 and $11,003, respectively.
Capital expenditures for the years ended August 31, 2003, 2002 and 2001,
amounted to $3,142, $3,410 and $7,347, respectively.
d) The Company guarantees FNA's obligations under FNA's revolving
credit facility.
e) The Company's stock option plan includes FNA's employees.
f) In fiscal 2003, 2002 and 2001, FNA did not declare a dividend.
F-37
FEDDERS UNAUDITED INTERIM FINANCIAL STATEMENTS
AS OF AND FOR THE FOUR MONTHS ENDED DECEMBER 31, 2003 AND 2002
F-38
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<Table>
<Caption>
FOUR MONTHS ENDED
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
Net sales................................................... $ 55,554 $ 49,303
Costs and expenses:
Cost of sales............................................. 48,253 40,332
Selling, general and administrative expense............... 23,508 18,654
Gain on sale of joint venture interest.................... (638) --
-------- --------
71,123 58,986
-------- --------
Operating loss.............................................. (15,569) (9,683)
Partners' net interest in joint venture results............. (1,355) (526)
Interest expense, net....................................... (6,003) (5,964)
Other income (expense)...................................... 265 101
-------- --------
Loss before income taxes and cumulative effect of a change
in accounting principle................................... (22,662) (16,072)
Benefit for income taxes.................................... (7,361) (5,222)
-------- --------
Loss before cumulative effect of a change in accounting
principle................................................. (15,301) (10,850)
Cumulative effect of a change in accounting principle....... -- 11,906
-------- --------
Net loss.................................................... (15,301) (22,756)
Preferred stock dividends................................... (484) --
-------- --------
Net loss applicable to common stockholders.................. (15,785) (22,756)
Other comprehensive (loss) income:
Foreign currency translation, net of tax.................. 493 66
-------- --------
Comprehensive loss.......................................... $(15,292) $(22,690)
-------- --------
Loss per common share:
Basic/diluted loss per common share before cumulative
effect of a change in accounting principle, less
preferred stock dividends.............................. $ (0.52) $ (0.33)
Cumulative effect of a change in accounting principle..... -- (0.37)
-------- --------
Basic/diluted loss per common shares...................... (0.52) (0.70)
======== ========
Weighted averages shares:
Basic..................................................... 30,179 32,489
Diluted................................................... 30,179 32,489
Dividends per share declared:
Common Stock.............................................. $ 0.03 $ 0.03
Class B Stock............................................. 0.03 0.03
Preferred Stock........................................... 0.538 --
</Table>
See accompanying notes to the consolidated financial statements
F-39
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, AUGUST 31, DECEMBER 31,
2003 2003 2002
------------ ---------- ------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,043 $ 60,902 $ 22,819
Accounts receivable (net of allowance of $1,888, $2,032
and $2,157 at December 31, 2003, August 31, 2003 and
December 31, 2002, respectively)........................ 29,718 51,178 21,626
Inventories:
Finished goods.......................................... 113,659 52,226 75,285
Work-in-process......................................... 4,487 5,114 3,617
Raw materials and supplies.............................. 27,340 21,608 24,794
-------- -------- --------
Net inventories........................................... 145,486 78,948 103,696
Deferred income taxes..................................... 7,652 7,654 5,607
Assets held for sale...................................... 8,564 8,564 8,249
Other current assets...................................... 28,352 21,463 18,939
-------- -------- --------
Total current assets........................................ 241,815 228,709 180,936
Net property, plant and equipment:
Land and improvements..................................... 1,508 1,508 1,524
Buildings and leasehold improvements...................... 31,880 31,423 34,770
Machinery and equipment................................... 102,815 100,581 96,925
-------- -------- --------
Gross property, plant and equipment....................... 136,203 133,512 133,219
Less accumulated depreciation............................. 81,541 77,652 74,881
-------- -------- --------
Net property, plant and equipment........................... 54,662 55,860 58,338
Deferred income taxes....................................... 8,224 8,224 2,867
Goodwill.................................................... 78,630 78,630 78,630
Other intangible assets..................................... 1,685 1,788 1,510
Other assets................................................ 31,232 35,718 35,392
-------- -------- --------
Total assets................................................ $416,248 $408,929 $357,673
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes.......................................... $ 30,446 $ 7,520 $ 24,304
Current portion of long-term debt......................... 2,779 4,652 3,105
Accounts payable.......................................... 86,313 56,812 56,249
Income taxes payable...................................... -- 5,452 1,161
Accrued expenses.......................................... 39,032 64,552 29,807
-------- -------- --------
Total current liabilities................................... 158,570 138,988 114,626
Long-term debt.............................................. 158,965 159,392 162,891
Other long-term liabilities................................. 31,528 31,037 21,858
Partners' net interest in joint venture..................... 4,235 4,584 4,087
Stockholders' equity:
Preferred Stock, $0.01 par value, 15,000 shares authorized,
675, 675 and 324 issued at December 31, 2003, August 31,
2003 and December 31, 2002, respectively.................. 7 7 3
Common Stock, $0.01 par value, 70,000 shares authorized,
36,444, 35,278 and 35,934 issued at December 31, 2003,
August 31, 2003 and December 31, 2002, respectively....... 364 353 359
Class B Stock, $0.01 par value, 5,000 shares authorized,
2,493 issued at December 31, 2003, August 31, 2003 and
December 31, 2002, respectively........................... 25 25 25
Additional paid-in capital.................................. 80,680 74,025 68,851
Retained earnings........................................... 23,603 40,179 23,823
Accumulated other comprehensive loss........................ (1,752) (2,245) (1,246)
-------- -------- --------
102,927 112,344 91,815
Treasury stock, at cost, 8,521 shares of Common Stock at
December 31, 2003, 8,158 shares of Common Stock at August
31, 2003 and December 31, 2002, respectively.............. (39,188) (37,322) (37,322)
Deferred compensation....................................... (789) (94) (282)
-------- -------- --------
Total stockholders' equity.................................. 62,950 74,928 54,211
-------- -------- --------
Total liabilities and stockholders' equity.................. $416,248 $408,929 $357,673
======== ======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-40
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOUR MONTHS ENDED
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................... $(15,301) $(22,756)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 3,413 3,071
Deferred income taxes..................................... 2 13
Stock option repricing.................................... 2,256 (339)
Cumulative effect of a change in accounting principle..... -- 11,906
Gain on sale of joint venture interest.................... (638) --
Partners' net interest in joint venture results........... 1,355 526
Changes in operating assets and liabilities:
Accounts receivable....................................... 21,417 10,142
Inventories............................................... (66,538) (55,116)
Other current assets...................................... (5,993) (5,375)
Other assets.............................................. 115 1,389
Accounts payable.......................................... 30,395 14,361
Accrued expenses.......................................... (24,412) (6,320)
Income taxes payable...................................... (5,452) (4,794)
Other long-term liabilities............................... 984 (301)
Other -- net.............................................. 165 609
-------- --------
Net cash used in operating activities....................... (58,232) (52,984)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment................ (2,116) (2,947)
Disposal of property, plant and equipment................. -- 15
Sale of joint venture interest............................ 1,561 --
-------- --------
Net cash used in investing activities....................... (555) (2,932)
-------- --------
Cash flows from financing activities:
Proceeds from short-term notes............................ 22,926 14,475
Proceeds from stock options exercised..................... 1,709 --
Repayments of long-term debt.............................. (2,300) (1,135)
Cash dividends............................................ (2,383) (1,944)
Preferred stock exchange offer expenses................... (24) (40)
-------- --------
Net cash provided by financing activities................... 19,928 11,356
-------- --------
Net decrease in cash and cash equivalents................... (38,859) (44,560)
Cash and cash equivalents at beginning of period............ 60,902 67,379
-------- --------
Cash and cash equivalents at end of period.................. $ 22,043 $ 22,819
======== ========
Supplemental disclosure:
Interest paid............................................. $ 881 $ 768
Income taxes paid......................................... 223 633
======== ========
</Table>
See accompanying notes to the consolidated financial statements
F-41
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited and prepared in
accordance with the instructions for Form 10-Q; however, such information
reflects all adjustments, which consist solely of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Reference should be made to the annual
financial statements, including footnotes thereto, included in Fedders
Corporation's (the "Company") Annual Report on Form 10-K for the fiscal year
ended August 31, 2003. The Company's fiscal year end through the 2003 fiscal
year was August 31. However, on August 26, 2003 the Board of Directors decided
to change the Company's fiscal year end from August 31, to December 31.
Reference to a "fiscal year" period throughout the notes refer to the Company's
August 31 fiscal year basis of reporting. The financial statements and notes
included herein provide unaudited results of the Company for the four month
transition period from September 1, 2003 through December 31, 2003. The prior
unaudited four month period ended December 31, 2002 has been provided for
comparison purposes.
Certain reclassifications have been made in prior-year amounts to conform
to the current-year presentation.
2. STOCK COMPENSATION
On October 28, 2003, the Board of Directors granted options to purchase
approximately 791,000 shares of the Common Stock of the Company to 25 employees
under a stock option plan approved by stockholders in 1996. The exercise price
of the options is equal to the fair market value of the Common Stock of the
Company on the date of the grant. These options have a term of 5 years and vest
in increments of 25% per year over a four-year period on the anniversary date of
the grant.
The Company accounts for stock options issued to its employees under the
recognition and measurement principles of APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying Common Stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
<Table>
<Caption>
FOUR MONTHS ENDED
DECEMBER 31,
-------------------
2003 2002
-------- --------
Net loss applicable to common stockholders-as reported...... $(15,785) $(22,756)
Add: Stock-based employee compensation expense (income)
included in reported net loss, net of related tax
effects................................................... 1,523 (229)
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects................................ 64 120
-------- --------
Pro forma net loss.......................................... $(14,326) $(23,105)
======== ========
Net loss per common share:
Basic and diluted -- as reported.......................... $ (0.52) $ (0.70)
Basic and diluted -- pro forma............................ $ (0.47) $ (0.71)
</Table>
3. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES
In the fourth quarter of fiscal year 2001, the Company announced a plan to
restructure its existing operations, which included the transfer of a majority
of the Company's room air conditioner production, as
F-42
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
well as all production of dehumidifiers and compressors, from its Illinois,
Tennessee and Maryland facilities to facilities in China in order to lower costs
and improve profitability. The Company's plan resulted in charges for
fixed-asset impairments, employee severance costs, inventory write-downs, and
other restructuring charges directly related to the restructuring plan,
including facility closing costs and lease termination costs. In conjunction
with the restructuring plan, the Company recorded $13,694 of charges in the
fourth quarter of fiscal year 2001. In the four months ended December 31, 2003,
the Company expended $137, primarily for facility closing costs.
The following table displays the activity and balances of the restructuring
reserve account from August 31, 2003 to December 31, 2003.
<Table>
<Caption>
AUGUST 31,
2003 DECEMBER 31,
BALANCE ADDITIONS DEDUCTIONS 2003 BALANCE
---------- --------- ---------- ------------
Workforce reductions...................... $ 586 -- -- $ 586
Facility closing costs.................... 477 -- 137 340
Other costs............................... 214 -- -- 214
------ ---- --- ------
Total................................... $1,277 -- 137 $1,140
====== ==== === ======
</Table>
The remaining balance of $1,140, which consists primarily of workforce
reduction and facility closing costs, is expected to be expended during the
twelve months ended December 31, 2004. The final amounts will be settled upon
the expiration period for workers' compensation claims and completion of
facility clean up and waste removal.
4. STOCKHOLDERS' EQUITY
In October 2002, the Company's Board of Directors approved a plan pursuant
to which a new class of cumulative Preferred Stock would be offered to
stockholders in exchange for up to 15,000,000 shares of the Company's Common
Stock, with 0.14 shares of Preferred Stock being offered in exchange for every
share of Common Stock. The Series A Cumulative Preferred Stock receives a
cumulative annual dividend of $2.15 and has a liquidation preference of $25.00
plus the amount of any accrued and unpaid dividends. The holders of the Series A
Cumulative Preferred Stock have no right to vote, except in limited
circumstances. The exchange of 2,315,750 shares of Common Stock for 323,947
shares of Series A Cumulative Preferred Stock was completed on December 27, 2002
and is reflected in the Company's financial statements as of December 31, 2002.
On October 1, 2003, the Company granted an officer 150,000 shares of
restricted Common Stock of the Company pursuant to the officer's employment
agreement. The officer is not permitted to sell, assign, transfer, pledge or
otherwise encumber these shares prior to January 1, 2007. The Company recorded
$0.9 million of deferred compensation expense to be amortized over the vesting
period.
On December 5, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the holders of the Company's Common and
Class B stock. In the rights offering, holders of Common Stock and Class B Stock
as of December 22, 2003 received subscription rights to purchase shares of
Series A Cumulative Preferred Stock. Every 20 rights entitled the holder to
purchase one share of Cumulative Preferred Stock at the subscription price of
$23.70 per share, and carried with it a basic subscription right and an
over-subscription right. The rights offering expired at 5:00 p.m. New York City
time on January 16, 2004. (see NOTE 13)
F-43
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EARNINGS PER SHARE
For the four months ended December 31, 2003 and 2002, net loss per share
was computed using the weighted average number of shares of Common and Class B
stock outstanding, which amounted to approximately 30,179,359 and 32,489,203
shares, respectively. Due to their anti-dilutive effect, 736,567 and zero
options were excluded from the computation of diluted earnings per share for the
four months ended December 31, 2003 and 2002, respectively.
6. STOCK OPTION REPRICING
In October 2000, the Company's Board of Directors approved the repricing of
a majority of unexercised stock options, reducing the exercise price to $3.625
per share, which was the fair market value of the Class A Stock on the date of
repricing. For the four months ended December 31, 2003, the Company recorded a
$2.3 million charge to compensation expense due to the variable accounting
treatment associated with the value of re-priced stock options to reflect the
increase in the market price of Fedders Stock. As a result of the exercise of
851,769 options during the four month period ended December 31, 2003, the
Company's additional paid in capital increased by $5,794. For the four months
ended December 31, 2002, the Company recorded a $339 reduction to compensation
expense to reflect changes in the market price of the Company's stock.
7. GOODWILL AND INTANGIBLE ASSETS
The Company records the excess purchase price of net tangible and
intangible assets acquired over their estimated fair value as goodwill. The
Company adopted the provisions of SFAS 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"), as of September 1, 2002. Under SFAS 142, the Company is
required to test goodwill for impairment at least annually. The Company has
elected to perform its annual test for indications of goodwill impairment as of
September 1 of each year. The Company identifies potential goodwill impairment
by comparing the fair value of a reporting segment with its carrying amount,
including goodwill. The Company determines fair value using a discounted cash
flow and market-multiple approach. If the fair value of a reporting segment
exceeds its carrying amount, goodwill of the reporting segment is not considered
impaired. If the carrying amount of a segment exceeds its fair value, the amount
of goodwill impairment loss, if any, must be measured. The Company measures the
amount of goodwill impairment loss by comparing the implied fair value of
reporting segment goodwill with the carrying amount of that goodwill. If the
carrying amount of the segment goodwill exceeds the implied fair value of
goodwill, an impairment loss is recognized as an operating expense.
The Company completed the transitional goodwill impairment test during the
fourth quarter of fiscal year 2003 and recognized a non-cash goodwill impairment
charge of $11.9 million within its Engineered Products reporting segment. As
required, the transitional goodwill impairment charge was recorded as a
cumulative effect of a change in accounting principle as of September 1, 2002.
In accordance with SFAS No. 142, the Company ceased amortization of goodwill as
of September 1, 2002.
Goodwill and other intangible assets consist of the following:
<Table>
<Caption>
DECEMBER 31, AUGUST 31,
2003 2003
------------ ----------
Goodwill.................................................... $78,630 $78,630
======= =======
Gross other amortizable intangibles......................... $ 3,178 $ 3,189
Accumulated amortization.................................... (1,493) (1,401)
------- -------
Other intangible assets..................................... $ 1,685 $ 1,788
======= =======
</Table>
F-44
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2003 and August 31, 2003, the Company had goodwill of
$70,133 and $8,497 reflected in its HVACR and Engineered Products reportable
segments, respectively. Other intangible assets primarily include a right
associated with a joint venture that is being amortized over 20 years.
Amortization expense for the four months ended December 31, 2003 and 2002 is $63
and $60, respectively. Estimated amortization expense for other intangible
assets will be approximately $180 for each of the next five years.
8. ASSETS HELD FOR SALE
In connection with a restructuring of the Company's operations in 2001
(Note 3), the Company ceased production at its Walkersville, Maryland facility,
part of the Company's HVACR reportable segment. In December 2002, the Company
began the process of actively marketing the sale of the Walkersville facility.
The Company anticipates the selling price of the facility will exceed its net
book value after consideration of selling expenses associated with marketing the
facility for sale. A vacant property belonging to the Company in Ningbo, China
is also being marketed for sale. The sale of both properties is expected to be
completed no later than June 2004. At December 31, 2003, assets totaling $8,564,
which consist of land, land improvements, buildings, and building improvements
have been classified as "Assets Held for Sale" and are no longer being
depreciated in accordance with SFAS 144.
The following table presents the carrying amount, by asset class, of the
"Assets Held for Sale" at December 31:
<Table>
<Caption>
2003
------
Land and land improvements.................................. $2,181
Building, net............................................... 4,587
Building improvements, net.................................. 1,796
------
Assets Held for Sale........................................ $8,564
======
</Table>
9. INDUSTRY SEGMENTS
The Company has two reportable segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. The Company's
reportable segments were determined based upon several factors, including the
nature of the products provided and markets served. Each reportable segment is
managed separately and includes various operating segments that have been
aggregated due to similar economic characteristics.
The HVACR segment designs, manufactures and distributes window, split,
multi-split, through-the wall, portable and vertical packaged unit air
conditioners and dehumidifiers. HVACR products are distributed through a variety
of sales channels, including national retailers, regional retailers, wholesale
distributors, catalog supply houses, private label/OEM, government direct and
the Internet.
The Engineered Products segment designs, manufactures and distributes media
filters, electronic filters, humidifiers, dust collectors, fan filter units, and
solid-state thermoelectric heat pump modules. These products are sold through
manufacturers' representatives, distributors and direct sales to end-users.
F-45
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF BUSINESS BY SEGMENT:
<Table>
<Caption>
FOUR MONTHS ENDED
DECEMBER 31,
-------------------
2003 2002
-------- --------
Net sales:
HVACR..................................................... $ 42,814 $ 36,555
Engineered Products....................................... 12,740 12,748
-------- --------
Net sales................................................. $ 55,554 $ 49,303
======== ========
Loss before interest, taxes and cumulative effect of a
change in accounting principle:
HVACR..................................................... $ (9,749) $ (8,246)
Engineered Products....................................... 947 (53)
-------- --------
Segment income before interest and taxes.................. (8,802) (8,299)
Cumulative effect of a change in accounting principle..... -- 11,906
Non-allocated expenses.................................... 7,857 1,809
Interest expense, net..................................... 6,003 5,964
Benefit for income taxes.................................. (7,361) (5,222)
-------- --------
Net loss.................................................. $(15,301) $(22,756)
======== ========
</Table>
<Table>
<Caption>
DECEMBER 31, AUGUST 31, DECEMBER 31,
2003 2003 2002
------------ ---------- ------------
Total assets:
HVACR............................................. $310,646 $266,967 $255,747
Engineered Products............................... 52,826 53,024 54,957
Non-allocated assets.............................. 52,776 88,938 46,969
-------- -------- --------
$416,248 $408,929 $357,673
======== ======== ========
</Table>
10. GUARANTEES
PRODUCT WARRANTY
Certain of the Company's products are covered by standard product warranty
plans that extend from 1 to 5 years. In addition, major retailers have consumer
return policies which allow consumers to return product that may be defective in
lieu of field service. Upon return to the Company, these units are inspected,
repaired as required, reboxed and held for future sale as factory reconditioned
products. A portion of those units returned is not repairable. At the time
revenue is recognized, upon shipment, measurements of those sales are reduced by
estimates of the future costs associated with fulfilling warranty obligations
and for the expense associated with repairing or scrapping defective returns.
The Company uses historical failure and defective return rates, which may
or may not be indicative of future rates. Each quarter, the estimate of warranty
and defective return obligations including the assumptions about estimated
failure and return rates, is reevaluated.
F-46
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the activity and balances of the product
warranty liability from August 31, 2003 to December 31, 2003:
<Table>
<Caption>
FOUR MONTHS ENDED
DECEMBER 31, 2003
-----------------
Warranty balance at August 31, 2003......................... $ 9,660
Accruals for warranties issued during the period............ 690
Settlements made during the period.......................... (4,709)
-------
Warranty balance at December 31, 2003....................... $ 5,641
=======
</Table>
LOAN GUARANTEES
Guarantees of subsidiary debt by Fedders Corporation ("the Parent") and
subsidiaries consist of the following at December 31, 2003:
(i) The Parent guarantees the obligations of Fedders North America,
Inc. ("FNA") under its 9 3/8% Senior Subordinated Notes due 2007 (the
"Notes"). This is a guarantee of payment of principal and interest on the
Notes that arose in connection with the issuance and sale of $150 million
in principal amount of the Notes. The Parent would be required to perform
under the guarantee in the event FNA failed to pay principal and interest
when due or to perform its obligations under the indenture pursuant to
which the Notes were issued.
(ii) The Parent and various subsidiaries guarantee the obligations of
certain subsidiaries under a $100 million working capital line of credit.
The line of credit bears interest at LIBOR +2% or the prime rate of
Wachovia Bank and expires in February 2006. The Parent and guarantor
subsidiaries would be required to perform under the guarantees in the event
that the borrowing subsidiaries failed to repay amounts borrowed under the
line of credit and interest and other charges associated therewith, or
failed to comply with the provisions of the credit agreement. There is no
outstanding loan balance at December 31, 2003.
(iii) The Parent guarantees the obligations of its subsidiary, Melcor
Corporation, under a $1.3 million New Jersey Economic Development Authority
Economic Development Bond. The bond bears interest at the rate of 6.6% per
annum and matures in July 2010. The Parent would be required to perform
under the guaranty in the event that Melcor fails to pay the principal of
and interest on the bond or fails to comply with the provisions of the bond
agreement pursuant to which the bond was issued. The outstanding loan
balance at December 31, 2003 is $0.9 million.
(iv) The Parent and Melcor Corporation guarantee the obligations of a
subsidiary, Eubank Manufacturing Enterprises, Inc., under an equipment
financing lease in the amount of $3.1 million. The lease bears interest at
the rate of 7.16% per annum and expires in December 2007. The Parent and
Melcor Corporation would be required to perform under the guarantee in the
event Eubank fails to pay rent when due or fails to comply with the
provisions of the lease agreement. The outstanding loan balance at December
31, 2003 is $2.1 million.
(v) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a loan agreement providing for a
loan of $2.0 million. The loan bears interest at the prime rate of Flag
Bank and matures in February 2007. The Parent would be required to perform
under the guaranty in the event Eubank fails to pay the principal of and
interest on the loan or fails to comply with the provisions of the loan
agreement. The outstanding loan balance at December 31, 2003 is $0.5
million.
(vi) The Parent guarantees the obligations of a subsidiary, Fedders
Shanghai Co., Ltd. ("FSC") under a working capital line of credit totaling
$6.0 million. The line of credit bears interest at the rate of
F-47
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIBOR +1.5% per annum and matures at various dates. The Parent would be
obligated to perform under the guarantee in the event that FSC fails to pay
the principal of and interest on the loan or fails to comply with the
provisions of the loan agreement. The outstanding loan balance at December
31, 2003 is $1.2 million.
(vii) The Parent guarantees the obligations of a subsidiary, Polenz
GmbH ("Polenz"), under a Euro 6.0 million working capital line of credit.
The line of credit bears interest at the rate of LIBOR +2.5% per annum and
matures June 2004. The Parent would be obligated to perform under the
guarantee in the event Polenz fails to pay the principal of and interest on
the loan or fails to comply with the provisions of the loan agreement.
There is no outstanding loan balance at December 31, 2003.
(viii) The Parent guarantees the obligations of a subsidiary, Fedders
Koppel, Inc. ("FK"), under a Ph peso 320 million term loan. The loan bears
interest at the rate of Phibor +3% per annum and matures May 2005. The
Parent would be obligated to perform under the guarantee in the event that
FK fails to pay the principal of and interest on the loan or fails to
comply with the provisions of the loan agreement. The outstanding loan
balance at December 31, 2003 is $1.8 million.
(ix) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a mortgage agreement providing for a
loan of $1.0 million. The loan has an interest rate of 4.25% and matures in
June 2008. The Parent would be required to perform under the guaranty in
the event Eubank fails to pay the principal of and interest on the loan or
fails to comply with the provisions of the loan agreement. The outstanding
loan balance at December 31, 2003 is $0.9 million.
The Company also provides loan guarantees to two joint ventures which are
not consolidated in the Company's financial statements:
(i) Fedders International, Inc., ("FI") a subsidiary of the Company,
guarantees up to 50% of the obligations of a 50%-owned joint venture,
Universal Comfort Products Pvt., Ltd., ("UCPL"), under a Rupees 230 million
term loan. The loan bears interest at the rate of State Bank Mid Term Loan
Rate and matures November 2006. FI would be obligated to perform under the
guaranty in the event UCPL fails to pay the principal of and interest on
the loan or fails to comply with the terms of the loan agreement. FI's
exposure under the guarantee at December 31, 2003 is $2.3 million.
(ii) Fedders Indoor Air Quality (Suzhou) Co., Ltd., ("FIAQ"), a
subsidiary of the Company, guarantees up to RMB 5 million of the
obligations of Xi'an Fedders Dong Fang Air Conditioner Compressor Co.,
Ltd., ("FDF"), a 50%-owned joint venture of the Company, under a working
capital line of credit. The line of credit bears interest at the rate set
by the Peoples Bank of China and matures December 2004. FIAQ would be
obligated to perform its obligations under the guaranty in the event FDF
fails to pay the principal of and interest on the loan or fails to comply
with the provisions of the loan agreement. FIAQ's maximum exposure under
the guarantee is $0.6 million as of December 31, 2003.
11. ACQUISITIONS AND JOINT VENTURES
On October 21, 2003, the Company entered into a joint venture with Jiangsu
Xingrong Hi-Tech Company ("Xingrong") to design, produce and market heat
exchangers used in air conditioners. The Company and Xingrong each have a 50%
interest in the joint venture, Changzhou Fedders Xingrong Air Conditioner
Components Co., Ltd. This joint venture is included within the HVACR reportable
segment. The Company reports the results of the joint venture by the equity
method of accounting.
On December 9, 2003, the Company and BSH Bosch und Siemens Hausgerate GmbH
terminated their joint venture named BSH and Fedders International Air
Conditioning, S.A., as of November 2003. This joint venture was established on
March 24, 1998. The Company agreed to sell its interest for the sum of 3.6
million
F-48
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Euros, approximately $4.4 million. The two parties also settled other various
claims. Net proceeds received from the sale were $1.6 million. The Company
realized a gain of $0.6 million on the sale.
On December 29, 2003 the Company entered into a strategic alliance with WFI
Industries Ltd. ("WFI") to produce water source heat pumps in China. These units
will be sold in China and Korea by WFI under the WaterFurnace brand.
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 23, 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and
106, and a revision of FASB Statement No. 132." This Statement requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The new disclosures are generally effective for 2003
calendar year-end financial statements of public companies, with a delayed
effective date for certain disclosures for foreign plans. The Company does not
provide defined pension and postretirement benefits and therefore is not subject
to the additional disclosure requirements of this revised statement.
13. SUBSEQUENT EVENTS
On December 5, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the Company's Common and Class B
stockholders. Stockholders received one right for every share of Common Stock
and Class B Stock they held as of December 22, 2003. Every 20 rights entitled
the holder to purchase one share of Cumulative Preferred Stock at the
subscription price of $23.70 per share, and carried with it a basic subscription
right and an over-subscription right. As of January 16, 2004, 1,195,092 shares
of Cumulative Preferred Stock had been issued as a result of the offering for
gross proceeds of $28.3 million.
In January 2004, the Company announced that it is establishing a research
and development center in China and the existing engineering facility in
Singapore will be closed at the end of 2004.
On February 6, 2004, the Company announced the commencement by its wholly
owned subsidiary, Fedders North America, Inc. ("FNA"), of a cash tender offer
for any and all of FNA's outstanding 9 3/8% Senior Subordinated Notes due 2007,
issued August 24, 1999, and any and all of FNA's outstanding 9 3/8% Senior
Subordinated Notes due 2007, issued August 18, 1997 (collectively, the "Notes").
In connection with the tender offer, FNA is also soliciting consents to the
adoption of certain proposed amendments to the Notes and the related indentures
governing the Notes. The total consideration offered in the tender is comprised
of the tender offer consideration and a consent payment. The tender offer
consideration is equal to $1,012.50 per $1,000 principal amount of Notes plus
accrued and unpaid interest from the last interest payment up to, but not
including, the settlement date. The consent payment, made to holders who
effectively consent to amend the Notes, is $20.00 per $1,000 principal amount of
Notes.
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following presentation of the supplemental condensed consolidating
financial statements has been prepared on a historical basis taking into account
the guarantor/non-guarantor structure that resulted from the issuance of the
Senior Notes due 2014. Fedders North America, Inc. ("FNA") is a wholly owned
subsidiary of Fedders Corporation (the "Company"). FNA and the Company are the
issuer and a guarantor, respectively, of the Senior Notes due 2014. In addition,
the subsidiaries of FNA are also guarantors of the notes. The Company's and the
subsidiaries' guarantees are full and unconditional. The following condensed
consolidating financial statements present separate information for FNA and its
subsidiary guarantors, the Company, and the non-guarantor subsidiaries, and
should be read in conjunction with the consolidated financial statements of the
Company.
F-49
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FOUR MONTHS ENDED DECEMBER 31, 2003
----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
-------- ------- --------- ----------- -----------
Net sales............................... $ 44,481 $73,671 -- $(62,598) $ 55,554
Cost of sales........................... 45,324 65,527 -- (62,598) 48,253
Selling, general and administrative
expense(a)............................ 12,141 6,635 $ 4,732 -- 23,508
Gain on sale of joint venture
interest.............................. -- (638) -- -- (638)
-------- ------- -------- -------- --------
Operating (loss) income................. (12,984) 2,147 (4,732) -- (15,569)
Partners' net interest in joint venture
results............................... 126 (1,481) -- -- (1,355)
Equity income in investment............. -- -- (12,135) 12,135 --
Interest expense, net(b)................ (5,236) (689) (78) -- (6,003)
Other income (expense).................. (125) 172 218 -- 265
-------- ------- -------- -------- --------
(Loss) income before income taxes....... (18,219) 149 (16,727) 12,135 (22,662)
(Benefit) provision for income taxes.... (6,023) 88 (1,426) -- (7,361)
-------- ------- -------- -------- --------
Net (loss) income....................... (12,196) 61 (15,301) 12,135 (15,301)
Preferred stock dividends............... -- -- (484) -- (484)
-------- ------- -------- -------- --------
Net (loss) income applicable to common
stockholders.......................... (12,196) 61 (15,785) 12,135 (15,785)
Foreign currency translation, net of
tax................................... (121) 621 493 (500) 493
-------- ------- -------- -------- --------
Comprehensive (loss) income............. $(12,317) $ 682 $(15,292) $ 11,635 $(15,292)
======== ======= ======== ======== ========
</Table>
F-50
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FOUR MONTHS ENDED DECEMBER 31, 2002
----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
-------- ------- --------- ----------- -----------
Net sales............................... $ 41,868 $51,341 -- $(43,906) $ 49,303
Cost of sales........................... 38,865 45,373 -- (43,906) 40,332
Selling, general and administrative
expense(a)............................ 12,441 5,729 $ 484 -- 18,654
-------- ------- -------- -------- --------
Operating (loss) income................. (9,438) 239 (484) -- (9,683)
Partners' net interest in joint venture
results............................... -- (526) -- -- (526)
Equity income in investment............. -- -- (22,592) 22,592 --
Interest (expense) income, net(b)....... (5,576) (642) 254 -- (5,964)
Other income............................ 74 22 5 -- 101
-------- ------- -------- -------- --------
Loss before income taxes and cumulative
effect of a change in accounting
principle............................. (14,940) (907) (22,817) 22,592 (16,072)
Benefit for income taxes................ (4,966) (195) (61) -- (5,222)
-------- ------- -------- -------- --------
Net loss before cumulative effect of a
change in accounting principle........ (9,974) (712) (22,756) 22,592 (10,850)
Cumulative effect of a change in
accounting principle.................. 11,906 -- -- -- 11,906
-------- ------- -------- -------- --------
Net loss................................ (21,880) (712) (22,756) 22,592 (22,756)
Foreign currency translation, net of
tax................................... (1) 68 66 (67) 66
-------- ------- -------- -------- --------
Comprehensive loss...................... $(21,881) $ (644) $(22,690) $ 22,525 $(22,690)
======== ======= ======== ======== ========
</Table>
F-51
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31, 2003
-----------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
-------- -------- --------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............ $ 13,657 $ 8,386 -- -- $ 22,043
Net accounts receivable.............. 18,646 11,072 -- -- 29,718
Net inventories...................... 111,587 33,899 -- -- 145,486
Assets held for sale................. 8,249 315 -- -- 8,564
Other current assets................. 2,864 23,266 $ 16,897 $ (7,023) 36,004
-------- -------- -------- -------- --------
Total current assets................... 155,003 76,938 16,897 (7,023) 241,815
Investments in subsidiaries............ -- -- (11,047) 11,047 --
Net property, plant and equipment...... 38,911 15,160 591 -- 54,662
Goodwill............................... 62,870 15,760 -- -- 78,630
Other intangible assets................ 1,685 -- -- -- 1,685
Other assets........................... 8,035 624 30,797 -- 39,456
-------- -------- -------- -------- --------
Total assets........................... $266,504 $108,482 $ 37,238 $ 4,024 $416,248
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes..................... -- $ 30,446 -- -- $ 30,446
Current portion of long-term debt.... $ 1,446 1,331 $ 2 -- 2,779
Accounts and income taxes payable.... 27,983 57,084 1,246 -- 86,313
Accrued expenses..................... 21,497 9,492 8,043 -- 39,032
-------- -------- -------- -------- --------
Total current liabilities.............. 50,926 98,353 9,291 -- 158,570
Long-term debt......................... 157,027 1,938 -- -- 158,965
Other long-term liabilities............ 630 11,630 30,526 $ (7,023) 35,763
Net due to (from) affiliates........... 62,829 2,700 (65,529) -- --
Stockholders' equity:
Preferred Stock...................... -- -- 7 -- 7
Common and Class B Stock............. 5 -- 389 (5) 389
Additional paid-in capital........... 20,292 25,542 80,680 (45,834) 80,680
Retained earnings (deficit).......... (24,292) (30,840) 23,603 55,132 23,603
Deferred compensation and treasury
stock............................. -- -- (39,977) -- (39,977)
Accumulated other comprehensive
loss.............................. (913) (841) (1,752) 1,754 (1,752)
-------- -------- -------- -------- --------
Total stockholders' equity............. (4,908) (6,139) 62,950 11,047 62,950
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................... $266,504 $108,482 $ 37,238 $ 4,024 $416,248
======== ======== ======== ======== ========
</Table>
F-52
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
AS OF AUGUST 31, 2003
------------------------------------------------------------------------
FEDDERS NORTH OTHER FEDDERS
AMERICA FEDDERS CORPORATE ELIMINATING ENTRIES CORPORATION
------------- -------- --------- ------------------- -----------
ASSETS
Current assets:
Cash and cash equivalents.... $ 53,731 $ 7,171 -- -- $ 60,902
Net accounts receivable...... 35,850 15,328 -- -- 51,178
Net inventories.............. 61,150 17,798 -- -- 78,948
Assets held for sale......... 8,249 315 -- -- 8,564
Other current assets......... 1,829 18,941 $ 15,370 $ (7,023) 29,117
-------- -------- -------- -------- --------
Total current assets........... 160,809 59,553 15,370 (7,023) 228,709
Investments in subsidiaries.... -- -- 17,139 (17,139) --
Net property, plant and
equipment.................... 40,528 14,678 654 -- 55,860
Goodwill....................... 62,870 15,760 -- -- 78,630
Other intangible assets........ 1,788 -- -- -- 1,788
Other assets................... 7,836 5,680 30,426 -- 43,942
-------- -------- -------- -------- --------
Total assets................... $273,831 $ 95,671 $ 63,589 $(24,162) $408,929
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes............. -- $ 7,520 -- -- $ 7,520
Current portion of long-term
debt...................... $ 3,295 1,341 $ 16 -- 4,652
Accounts and income taxes
payable................... 22,759 32,294 7,211 -- 62,264
Accrued expenses............. 46,774 8,539 9,239 -- 64,552
-------- -------- -------- -------- --------
Total current liabilities...... 72,828 49,694 16,466 -- 138,988
Long-term debt................. 156,909 2,483 -- -- 159,392
Other long-term liabilities.... 1,135 11,745 29,764 $ (7,023) 35,621
Net due to (from) affiliates... 18,999 38,570 (57,569) -- --
Stockholders' equity:.......... -- -- -- -- --
Preferred Stock.............. -- -- 7 -- 7
Common and Class B Stock..... 5 -- 378 (5) 378
Additional paid-in capital... 20,292 25,542 74,025 (45,834) 74,025
Retained earnings
(deficit)(f).............. 4,455 (30,901) 40,179 26,446 40,179
Deferred compensation and
treasury stock............ -- -- (37,416) -- (37,416)
Accumulated other
comprehensive loss........ (792) (1,462) (2,245) 2,254 (2,245)
-------- -------- -------- -------- --------
Total stockholders' equity..... 23,960 (6,821) 74,928 (17,139) 74,928
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity......... $273,831 $ 95,671 $ 63,589 $(24,162) $408,929
======== ======== ======== ======== ========
</Table>
F-53
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31, 2002
----------------------------------------------------------------
FEDDERS NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents......... $ 17,426 $ 5,393 -- -- $ 22,819
Net accounts receivable........... 13,292 8,334 -- -- 21,626
Net inventories................... 60,284 43,412 -- -- 103,696
Assets held for sale.............. 8,249 -- -- -- 8,249
Other current assets.............. 4,568 13,354 $ 13,647 $ (7,023) 24,546
-------- -------- -------- -------- --------
Total current assets................ 103,819 70,493 13,647 (7,023) 180,936
Investments in subsidiaries......... -- -- (1,942) 1,942 --
Net property, plant and equipment... 43,187 14,399 752 -- 58,338
Goodwill............................ 62,870 15,760 -- -- 78,630
Other intangible assets............. 1,510 -- -- -- 1,510
Other assets........................ 8,443 4,624 25,192 -- 38,259
-------- -------- -------- -------- --------
Total assets........................ $219,829 $105,276 $ 37,649 $ (5,081) $357,673
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes.................. -- $ 24,304 -- -- $ 24,304
Current portion of long-term
debt........................... $ 1,814 1,385 (94) -- 3,105
Accounts and income taxes
payable........................ 11,278 44,372 $ 1,760 -- 57,410
Accrued expenses.................. 17,261 7,680 4,866 -- 29,807
-------- -------- -------- -------- --------
Total current liabilities........... 30,353 77,741 6,532 -- 114,626
Long-term debt...................... 159,223 3,682 (14) -- 162,891
Other long-term liabilities......... 2,008 11,110 19,850 $ (7,023) 25,945
Net due to (from) affiliates........ 20,289 22,641 (42,930) -- --
Stockholders' equity:
Preferred Stock................... -- -- 3 -- 3
Common and Class B Stock.......... 5 -- 384 (5) 384
Additional paid-in capital........ 20,292 25,642 68,851 (45,934) 68,851
Retained earnings (deficit)....... (12,352) (34,284) 23,823 46,636 23,823
Deferred compensation and treasury
stock.......................... -- -- (37,604) -- (37,604)
Accumulated other comprehensive
loss........................... 11 (1,256) (1,246) 1,245 (1,246)
-------- -------- -------- -------- --------
Total stockholders' equity.......... 7,956 (9,898) 54,211 1,942 54,211
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................ $219,829 $105,276 $ 37,649 $ (5,081) $357,673
======== ======== ======== ======== ========
</Table>
F-54
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOUR MONTHS ENDED DECEMBER 31, 2003
----------------------------------------------------------------
FEDDERS NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- -------- --------- ----------- -----------
Net cash (used in) provided by
operating activities............... $(64,808) $ 14,417 $ 8,710 $(16,551) $(58,232)
-------- -------- ------- -------- --------
Net additions to property, plant and
equipment.......................... (814) (1,264) (38) -- (2,116)
Sale of joint venture interest....... -- 1,561 -- -- 1,561
-------- -------- ------- -------- --------
Net cash (used in) provided by
investing activities............... (814) 297 (38) -- (555)
-------- -------- ------- -------- --------
Proceeds from short-term notes....... -- 22,926 -- -- 22,926
Net repayments of long-term debt..... (1,731) (555) (14) -- (2,300)
Proceeds from stock options
exercised.......................... -- -- 1,709 -- 1,709
Cash dividends....................... (16,551) -- (2,383) 16,551 (2,383)
Preferred stock exchange offer....... -- -- (24) -- (24)
Change in net due to (from)
affiliate.......................... 43,830 (35,870) (7,960) -- --
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities............... 25,548 (13,499) (8,672) 16,551 19,928
-------- -------- ------- -------- --------
Net (decrease) increase in cash and
cash equivalents................... (40,074) 1,215 -- -- (38,859)
Cash and cash equivalents at
beginning of period................ 53,731 7,171 -- -- 60,902
-------- -------- ------- -------- --------
Cash and cash equivalents at end of
period............................. $ 13,657 $ 8,386 $ -- $ -- $ 22,043
======== ======== ======= ======== ========
</Table>
F-55
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOUR MONTHS ENDED DECEMBER 31, 2002
---------------------------------------------------------------
FEDDERS OTHER ELIMINATING FEDDERS
NORTH AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------------- ------- --------- ----------- -----------
Net cash used in operating
activities.......................... $(43,189) $(1,802) $(7,993) -- $(52,984)
-------- ------- ------- -- --------
Net additions to property, plant and
equipment........................... (1,213) (1,714) (5) -- (2,932)
-------- ------- ------- -- --------
Net cash used in investing
activities.......................... (1,213) (1,714) (5) -- (2,932)
-------- ------- ------- -- --------
Proceeds from short-term notes........ -- 14,475 -- -- 14,475
Net repayments of long-term debt...... (629) (275) (231) -- (1,135)
Cash dividends........................ -- -- (1,944) -- (1,944)
Other................................. -- -- (40) -- (40)
Change in net due to (from)
affiliate........................... (2,045) (8,168) 10,213 -- --
-------- ------- ------- -- --------
Net cash (used in) provided by
financing activities................ (2,674) 6,032 7,998 -- 11,356
-------- ------- ------- -- --------
Net (decrease) increase in cash and
cash equivalents.................... (47,076) 2,516 -- -- (44,560)
Cash and cash equivalents at beginning
of period........................... 64,502 2,877 -- -- 67,379
-------- ------- ------- -- --------
Cash and cash equivalents at end of
period.............................. $ 17,426 $ 5,393 $ -- -- $ 22,819
======== ======= ======= == ========
</Table>
INTERCOMPANY TRANSACTIONS:
The historical condensed consolidating financial statements presented above
include the following transactions between the Company and FNA:
a) The Company charges corporate overhead essentially on a cost basis
allocated in proportion to sales. Such charges to FNA amounted to
approximately $3.4 million and $3.1 million for the four months ended
December 31, 2003 and 2002, respectively.
b) FNA's interest expense reflects actual interest charges on the
9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory
Note, Trion Industrial Revenue Bond, capital lease obligations and a
revolving line of credit.
c) FNA's depreciation and amortization for the four months ended
December 31, 2003 and 2002 amounted to approximately $2.5 million and $1.8
million, respectively. Capital expenditures of FNA amounted to $0.8 million
and $1.2 million in the four months ended December 31, 2003 and 2002,
respectively.
d) The Company guarantees FNA's obligations under FNA's revolving
credit facility.
e) The Company's stock option plans include FNA's employees.
f) Certain reclassifications have been made in the prior year to
conform to the current year presentation.
g) In the four months ended December 31, 2003, FNA declared a dividend
of $16,551 to the Company. In Fiscal 2003, FNA did not declare a dividend.
F-56
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following presentation of the supplemental condensed consolidating
financial statements has been prepared on a historical basis taking into account
the guarantor/non-guarantor structure that will result from the issuance of new
Senior Notes due 2014 to be issued in this offering. FNA and the Company are the
issuer and a guarantor, respectively, of the Senior Notes due 2014 to be issued
in this offering. In addition, the subsidiaries of FNA are also guarantors of
the notes. The Company's and the subsidiaries' guarantees are full and
unconditional. The following condensed consolidating financial statements
present separate information for FNA and its subsidiary guarantors, the Company,
and the non-guarantor subsidiaries, and should be read in conjunction with the
consolidated financial statements of the Company.
F-57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fedders logo
$155,000,000
9 7/8% SENIOR NOTES DUE 2014
-------------------------
PROSPECTUS
-------------------------
June 15, 2004
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") empowers a Delaware corporation to indemnify any person who was or is a
party or witness or is threatened to be made a party to any threatened, pending
or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that he or she is or was an officer,
director, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Depending on
the character of the proceeding, a corporation may indemnify against expenses,
costs and fees (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding if the person indemnified acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
or her conduct was unlawful. If the person indemnified is not wholly successful
in such action, suit or proceeding, but is successful, on the merits or
otherwise, in one or more but less than all claims, issues or matters in such
proceeding, he or she may be indemnified against expenses actually and
reasonably incurred in connection with each successfully resolved claim, issue
or matter. In the case of an action or suit by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery, or the
court in which such action or suit is brought, shall determine that despite the
adjudication of liability, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
provides that, to the extent a director, officer, employee or agent of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or manner therein, he or
she shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection therewith.
Article V of the By-laws of the Guarantor provides for indemnification by
the Guarantor of its directors and officers to the fullest extent permitted by
the DGCL. The Guarantor has purchased insurance on behalf of the present and
former directors and officers of the Guarantor and its subsidiaries against
liabilities asserted against or incurred by them in such capacity or arising out
of their status as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Company, dated
November 18, 1997, filed as Exhibit (3)(i) to the Company's
Annual report on form 10-K for 1997 and incorporated herein
by reference.
3.2 By-Laws, amended through January 16, 1988, filed as Exhibit
(3)(vii) to the Company's Annual Report on Form 10-K for
1987 and incorporated herein by reference.
4.1 Indenture, dated March 8, 2004, between Fedders North
America, Inc., Fedders Corporation and U.S. Bank National
Association, as Trustee, filed as Exhibit 99.2 to the
Current Report on Form 8-K filed with the SEC on March 9,
2004 and incorporated herein by reference.
4.2 Form of Senior Note (included as Exhibit 2 to Exhibit 4.1 to
this registration statement, which was filed as Exhibit 99.2
to the Current Report on Form 8-K filed with the SEC on
March 9, 2004 and incorporated herein by reference).
4.3* Registration Rights Agreement, dated March 8, 2004, by and
among Fedders North America, Inc., Fedders Corporation and
Credit Suisse First Boston LLC.
</Table>
II-1
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
5.1* Opinion of Robert N. Edwards, Esq., Vice President and
General Counsel of Fedders.
10.1 Stock Option Plan VIII, filed as Annex F to the Company's
Proxy Statement--Prospectus dated May 10, 1996 and
incorporated herein by reference.
10.2 Employment Agreement between the Company and Sal Giordano,
Jr. effective December 14, 2001, filed as Exhibit 10 (ii) to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 2002 and incorporated herein by reference.
12.1* Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1* Subsidiaries of Fedders Corporation.
23.1+ Consent of Deloitte & Touche LLP.
24.1* Powers of attorney (included on signature pages to the
Registration Statement).
25.1* Statement of Eligibility and Qualification on Form T-1 of
U.S. Bank National Association as Trustee under the
Indenture relating to the Company's 9 7/8% Senior Notes due
2014.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers, Commercial Bankers,
Trust Companies and Other Nominees.
99.4* Form of Letter to Clients.
99.5* Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9
</Table>
- ---------------
* Incorporated by reference to the Registration Statement (File No. 333-116013),
filed on May 28, 2004
+ Filed with this Amendment No. 1 to the Registration Statement
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more that 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that the undertakings set forth in paragraphs
(a)(1)(i) and (a)(1)(ii) above do not apply if the information required to
be included in a post-effective amendment by those paragraphs is contained
in periodic reports filed by the Guarantor pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
II-2
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus in sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(e) The undersigned Registrant hereby undertakes as follows:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
(f) For purposes of determining any liability under the Securities Act of
1933:
(1) the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
(g) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the town of Liberty Corner, New
Jersey, on the 15th day of June, 2004.
FEDDERS NORTH AMERICA, INC.
By: *
------------------------------------
Michael Giordano
Executive Vice President, Finance
and Administration
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman, Chief Executive Officer June 15, 2004
------------------------------------------------ and Director (Principal Executive
Sal Giordano, Jr. Officer)
* Executive Vice President, Finance June 15, 2004
------------------------------------------------ and Administration and Chief
Michael Giordano Financial Officer (Principal
Financial and Accounting Officer)
* Director June 15, 2004
------------------------------------------------
William J. Brennan
* Director June 15, 2004
------------------------------------------------
David C. Chang
* Director June 15, 2004
------------------------------------------------
Michael L. Ducker
</Table>
II-5
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director June 15, 2004
------------------------------------------------
Joseph Giordano
* Director June 15, 2004
------------------------------------------------
Howard S. Modlin
* Director June 15, 2004
------------------------------------------------
S.A. Muscarnera
* Director June 15, 2004
------------------------------------------------
Anthony Puleo
*By: /s/ KENT E. HANSEN June 15, 2004
------------------------------------------
Name: Kent E. Hansen
Title: Executive Vice President and
Secretary
</Table>
II-6
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company, dated
November 18, 1997, filed as Exhibit (3)(i) to the Company's
Annual report on form 10-K for 1997 and incorporated herein
by reference.
3.2 By-Laws, amended through January 16, 1988, filed as Exhibit
(3)(vii) to the Company's Annual Report on Form 10-K for
1987 and incorporated herein by reference.
4.1 Indenture, dated March 8, 2004, between Fedders North
America, Inc., Fedders Corporation and U.S. Bank National
Association, as Trustee, filed as Exhibit 99.2 to the
Current Report on Form 8-K filed with the SEC on March 9,
2004 and incorporated herein by reference.
4.2 Form of Senior Note (included as Exhibit 2 to Exhibit 4.1 to
this registration statement, which was filed as Exhibit 99.2
to the Current Report on Form 8-K filed with the SEC on
March 9, 2004 and incorporated herein by reference).
4.3* Registration Rights Agreement, dated March 8, 2004, by and
among Fedders North America, Inc., Fedders Corporation and
Credit Suisse First Boston LLC.
5.1* Opinion of Robert N. Edwards, Esq., Vice President and
General Counsel of Fedders.
10.1 Stock Option Plan VIII, filed as Annex F to the Company's
Proxy Statement -- Prospectus dated May 10, 1996 and
incorporated herein by reference.
10.2 Employment Agreement between the Company and Sal Giordano,
Jr. effective December 14, 2001, filed as Exhibit 10(ii) to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 2002 and incorporated herein by reference.
12.1* Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1* Subsidiaries of Fedders Corporation.
23.1+ Consent of Deloitte & Touche LLP.
24.1* Powers of attorney (included on signature pages to the
Registration Statement).
25.1* Statement of Eligibility and Qualification on Form T-1 of
U.S. Bank National Association as Trustee under the
Indenture relating to the Company's 9 7/8% Senior Notes due
2014.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers, Dealers, Commercial Bankers,
Trust Companies and Other Nominees.
99.4* Form of Letter to Clients.
99.5* Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
</Table>
- ---------------
* Incorporated by reference to the Registration Statement (File No. 333-116013)
filed on May 28, 2004
+ Filed with this Amendment No. 1 to the Registration Statement
II-7