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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8831
FEDDERS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-2572390
(State of Incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938-0813
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (908) 604-8686
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange, Inc.
Class A Stock, $1 par value New York Stock Exchange, Inc.
Securities registered pursuant to section 12 (g) of the Act:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of the close of business on October 31, 1998, there were outstanding
16,838,559 shares of the Registrant's Common Stock, 18,490,858 shares of Class A
Stock and 2,266,606 shares of its Class B Stock. The approximate aggregate
market value (based upon the closing price on the New York Stock Exchange) of
these shares held by non-affiliates of the Registrant as of November 16, 1998
was $173,831,733. (The value of a share of Common Stock is used as the value for
a share of Class B Stock as there is no established market for Class B Stock and
it is convertible into Common Stock on a share-for-share basis.)
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FEDDERS CORPORATION
FORM 10-K ANNUAL REPORT
SEPTEMBER 1, 1997 TO AUGUST 31, 1998
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of
Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity
and Related Matters 13
Item 6. Selected Financial and Quarterly Data 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the
Registrant 22
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management 23
Item 13. Certain Relationships and Related
Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 24
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Fedders Corporation (the "Company" or the "Registrant") is a holding company
which the Company believes, through its wholly-owned operating subsidiaries, is
the largest manufacturer of room air conditioners in North America based on
units sold.
Unless otherwise indicated, all references herein to the "Company" or
the "Registrant" include Fedders Corporation and its principal
operating subsidiaries, Fedders North America, Inc. ("Fedders North
America"), Emerson Quiet Kool Corporation, Columbia Specialties, Inc.,
Fedders International, Inc. ("Fedders International"), Rotorex
Company, Inc. ("Rotorex") and Melcor Corporation ("Melcor").
The Company, in a move to enhance its competitiveness, implemented a
restructuring plan (the "Restructuring") during fiscal 1998. The Restructuring
did not result in any factory closings. However, it did involve shifting some
additional production from North America to China and increasing component
outsourcing.
Fedders North America Business
The Company manufactures and sells a full line of room air conditioners and
dehumidifiers, principally for use in U.S. residential markets. The Company's
products are marketed under the FEDDERS, EMERSON QUIET KOOL and AIRTEMP brand
names primarily to national and regional retail chains, home improvement
centers, and buying groups, as well as to distributors and, under private label,
to retailers and other original equipment manufacturers ("OEMs"), including
other room air conditioner manufacturers.
The Company believes its growth and profitability have been primarily
attributable to its: (i) low cost production achieved through continuous
manufacturing improvements and global sourcing; (ii) broad range of high quality
products with strong brand recognition; (iii) strong relationships with leading
retailers; (iv) accurate-response manufacturing and just-in-time delivery
capabilities; and (v) principal focus on one product.
In August 1996, the Company acquired Rotorex, a manufacturer of rotary
compressors principally for use in room air conditioners. Rotorex has been the
primary supplier of compressors to the Company for use in its room air
conditioners for 25 years. The Company believes that a dedicated supply of
compressors is critical to the Company's accurate-response and just-in-time
delivery of its seasonal products.
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Fedders International Business
The Company believes it is well positioned to continue building on its U.S.
market strength while simultaneously directing many of its resources toward
penetration of the much larger and rapidly expanding global market. Industry
sources estimate the worldwide market to be nearly five times as large as the
domestic market, as measured in the number of units shipped annually.
Fedders International opened a research and development center in Singapore in
1994 to focus its efforts on developing products for the international market.
In November 1995, the Company entered into the Fedders Xinle Co., Ltd. ("Fedders
Xinle" or "FX") joint venture with the Ningbo General Air Conditioner Factory of
Ningbo, China. Fedders Xinle is 60% owned by the Company and intends to market
its products both within China and, through Fedders International, to export
markets around the world. FX manufactures split-type units in which the
condensing unit is installed separately outdoors, as well as window air
conditioners. In June 1998, the Company entered into a 50%/50% joint venture
with Bosch-Siemens Hausgerate GmbH("BSH") in Estella, Spain to manufacture room
air conditioners in Spain for the European market and for export. The Spanish
joint venture will manufacture portable room air conditioners, which are the
major room air conditioner product sold in Europe.
The supply of compressors from Rotorex and from its Asian licensees,is also
strategically important for the Company's international growth, since the
Company's largest global competitors also dominate world compressor supplies.
As part of the restructuring described above, all Fedders International
activities, including executive management, were relocated to Singapore.
Melcor
As part of the transaction in which the Company acquired Rotorex, it also
acquired Melcor, a manufacturer of solid state heat pump modules that are used
in specialized cooling applications and for applications requiring precise
temperature control.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment. See Note 8 of the Notes to
Consolidated Financial Statements at page F14 herein.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
Fedders North America
Products
Fedders North America is the Company's operating subsidiary responsible for the
production and sale of products in North America.
Fedders North America manufactures and sells a complete line of window and
through-the-wall room air conditioners domestically, principally for the
residential market. Fedders North America's air conditioners are manufactured in
capacities ranging from 5,000 BTU (British Thermal Units) to 32,000 BTU. These
models comprise distinct product lines marketed by the Company primarily under
the brands FEDDERS, EMERSON QUIET KOOL and AIRTEMP.
Fedders North America markets a line of household dehumidifiers, ranging in
capacity from 20 to 50 pints per 24 hours, and its Rotorex subsidiary
manufactures and sells a broad line of rotary compressors, principally for use
in the Company's room air conditioners but also for sale to other manufacturers
of air conditioners. Third party sales of compressors represent less than 1% of
total sales of the Company.
Markets
Fedders North America markets room air conditioners and dehumidifiers
principally to national and regional retail chains, home improvement centers and
retail buying groups. These retail chains and retail buying groups (comprising
retailers which negotiate as groups the prices at which they will purchase the
Fedders North America's products) represent approximately 10,000 retail outlets
marketing room air conditioners throughout the United States. Fedders North
America also markets its air conditioners under private label to both retailers
and OEMs. Fedders North America has positioned its brands across most price
points, emphasizing quality and value for retailers and consumers.
Fedders North America's sales, marketing, service, research and design and
administrative support functions were relocated to its factory in Effingham,
Illinois as part of the Restructuring. The 19 sales persons, in conjunction with
marketing employees, are proactive in working with customers to assist them in
maximizing their profitability and market share through responsive changes in
product mix and marketing. Utilizing eight regional distribution centers,
Fedders North America provides next-day delivery to all major U.S. markets,
which is critical during heat waves that stimulate retail sales. Additionally,
Fedders North America has instituted computerized systems, including electronic
data interchange (EDI), to accommodate major high-volume retailers that require
suppliers to replenish inventories frequently and on short notice.
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To support and service its customers and the ultimate consumer, Fedders North
America has established a network of more than 3,000 independent servicers
throughout the United States. These independent servicers are local tradespeople
who are screened and monitored by Fedders North America.
Fedders North America promotes its FEDDERS and EMERSON QUIET KOOL brands of air
conditioners through advertising, primarily in trade publications. Many of
Fedders North America's customers advertise and promote Fedders North America's
products at their own expense.
Production
Fedders North America currently manufactures its air conditioners in two owned
facilities in the United States -- a 650,000 square foot facility in Effingham,
Illinois and a 232,000 square foot facility in Columbia, Tennessee -- with a
combined annual capacity of approximately 2,000,000 units. Fedders North America
has sufficient production capacity for domestic needs for the foreseeable
future.
Rotorex currently assembles all of its compressors in its 200,000 square foot
facility in Walkersville, Maryland. As part of the Restructuring, many of the
components previously manufactured by Rotorex were outsourced. Rotorex can now
produce the same number of compressors with 75 percent fewer production
employees. The current capacity of approximately 1,500,000 units is sufficient
to meet compressor requirements of Fedders North America and Rotorex's other
compressor customers.
Fedders International
The Company, through Fedders International, is investing much of its planning
and resources to penetrate the much larger and rapidly growing international
market for room air conditioners. The Company believes that the market, in
units, for room air conditioners outside of North America is approximately five
times the size of the U.S. market. Demand for air conditioners outside of North
America accelerated in recent years and continues to grow rapidly with the
increase in disposable income of populous nations in hot weather climates. The
Company has participated in international markets for nearly 40 years and has
licensees in several countries. Fedders International currently has a joint
venture in China, Fedders Xinle, and a joint venture in Spain ("BSH/FI") and
intends to continue to expand its presence internationally.
Fedders Xinle manufactures split-type room air conditioners in which
the condensing unit is installed separately outdoors, as well as
window air conditioners in capacities from 7,000 to 40,000 BTU, for
both residential and commercial use in international markets. Fedders
Xinle owns a facility in Ningbo, People's Republic of China. Capacity
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of the facility is currently approximately 300,000 air conditioners. BSH/FI will
manufacture portable room air conditioners at a factory in Estella, Spain for
the European market and export.
Management believes that international sales afford greater growth potential
than the U.S. market, while reducing the Company's dependence on summer weather
in North America. As part of the Restructuring, all Fedders International
activities, including executive management located at the Company's headquarters
in New Jersey, were relocated to Singapore. Fedders International also has
offices in the United Kingdom and Miami, and representative offices in China and
India. Fedders International exhibits its products globally at industry trade
shows.
The Company believes it can compete cost-effectively abroad based on its global
sourcing network that currently delivers components from around the world to
three U.S. plants and its joint ventures.
The Company expects to increase its participation overseas through strategic
alliances, including long-term agreements to secure high technology finished
products, as well as under production and joint venture agreements, based in
part on its expertise, technological capability and well-established global
sourcing program. With the establishment of Fedders Xinle, the Company is
strategically positioned to: sell Fedders branded products, provide private
label products for OEMs with established sales and service organizations
worldwide, and establish assembly operations within each major trading block
that has protective duties in order to import subassemblies or semi-finished
goods from the China facility. With the establishment of the Spanish joint
venture, the Company is well positioned to sell portable type units in Europe
and for export, including the United States.
Melcor
Products
Melcor manufactures solid state heat pump modules that utilize electricity to
perform the same cooling and heating functions as refrigerant-based compressors
and absorption refrigerators.
Melcor's modules are typically used in applications with special requirements,
such as limited space, lightweight cooling requirements or a space existing
under special environmental conditions. They are also used for precise
temperature control by reversing the electric current to cycle from cooling to
heating.
Melcor's customers are original equipment manufacturers that primarily use the
modules for cooling purposes in applications such as refrigerators, laboratory,
scientific, medical and restaurant equipment and telecommunications and computer
equipment.
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Melcor's products are sold under the trademarks MELCOR and FRIGICHIPS.
Marketing
Melcor's modules are currently sold by salaried salespeople and a network of
sales representative firms located around the world.
Melcor advertises its products in a variety of national and international
technical and trade publications, principally in the electronics and
electro-optical industries, and participates in international trade exhibitions.
Production
Melcor manufactures its modules in facilities comprising 53,000 square feet
near Lawrence Township, New Jersey. The capacity available is sufficient for
its needs in the foreseeable future.
Quality Assurance
One of the key elements of the Company's strategy is a commitment to a single
worldwide standard of quality. Each of the Company's U.S. manufacturing
facilities have earned the highest level of certification -- ISO 9001 -- for its
quality management system under the International Standards Organization. FX has
earned the ISO 9002 certification. 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 international manufacturing
facilities.
Sources and Availability of Raw Materials
The principal raw materials used for production of room air conditioners are
steel, copper and aluminum, which the Company obtains from domestic and foreign
suppliers. The Company also purchases certain components used in its products
from other domestic and foreign manufacturers including thermostats,
compressors, motors and electrical controls. The Company endeavors to obtain the
lowest possible cost in its purchases of raw materials and components, which
must meet specified quality standards, through an active global sourcing
program.
Patents, Trademarks, Licenses and Concessions Held
The Company owns a number of trademarks. While the Company believes that its
trademarks, such as, FEDDERS, EMERSON QUIET KOOL and AIRTEMP, ROTOREX, MELCOR
and FRIGICHIPS are well known and enhance the
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marketing of its products, the Company does not consider the successful conduct
of its business to be dependent upon such trademarks. The Company aggressively
protects its trademark and intellectual property rights worldwide.
Seasonality of Business
The Company's results of operations and financial condition are principally
dependent on the manufacture and sale of room air conditioners, the demand for
which is highly seasonal in North American markets. Seasonally low volume sales
are not sufficient to offset fixed costs, resulting in operating losses at
certain times of the year. In addition, the Company's working capital needs are
seasonal, with the greatest utilization of lines of credit occurring early in
the calendar year. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition," at pages 16 through 20 herein.
See also the discussion under "Working Capital Practices."
Working Capital Practices
The Company regularly reviews working capital components with a view to
maintaining the lowest level consistent with requirements of anticipated levels
of operations. The Company's sales are predominantly made directly to retailers,
who typically require just-in-time delivery, primarily in April through July.
Production is weighted towards the retail selling season to minimize borrowing
earlier in the fiscal year, although room air conditioners may be produced
throughout much of the rest of the year at a lower rate of production.
Information with respect to the Company's warranty and return policy is provided
in Note 1 of the Notes to Consolidated Financial Statements at page F7 herein.
See also the information entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" at pages 16 through 20 herein.
Backlog
The Company's fiscal year end (August 31) coincides with the end of the seasonal
room air conditioner sales cycle. Accordingly, backlog at this time of the year
is insignificant.
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Competition
Domestically, the Company's 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. Many of the Company's competitors are
substantially larger and have greater resources than the Company. The Company
competes principally on the basis of price, quality and its ability to deliver
product and service to its customers on a just-in-time basis. The Company
believes that it competes effectively with its multiple brand strategy of
providing competitively priced, high quality products on a just-in-time basis.
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., Toshiba Corporation, Hitachi, Ltd.,
Mitsubishi Electric Corporation and Sanyo Electric Trading Co., Ltd., all of
which also manufacture compressors. The Company believes that it can compete
effectively with its strategy of manufacturing low cost air conditioners
locally, controlling its supply of compressors and utilizing its global sourcing
network.
Research and Development
Research and development of room air conditioner technology and design is
conducted at the Effingham, Illinois facility, and compressor research and
development is based at the Frederick, Maryland facility. In fiscal 1998, the
Company spent approximately $6.6 million on research and development, including
activities at its Singapore facility which focuses on products for the
international market.
Environmental Protection
The Company's operations are subject to various United States (federal and
state) and foreign environmental statutes and regulations, including laws and
regulations dealing with storage, treatment, discharge and disposal of hazardous
materials, substances and wastes and that effect the production of chemical
refrigerants used in the operation of some of the Company's 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 that are expected to be available in advance of any
now-proposed phase-out deadlines for the current refrigerant. Modifications to
the design of the Company's 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 the
Company.
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The Company believes it is currently in material compliance with applicable
environmental laws and regulations. The Company did not make capital
expenditures on environmental matters during the year ended August 31, 1998 that
are material to its total capital expenditures, earnings and competitive
position and does not anticipate making material capital expenditures on such
items in the fiscal year ending August 31, 1999.
The Company has been identified as a potentially responsible party ("PRP") by
the federal Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), at the PCB Treatment Inc. Site (the "Site") located in Kansas City,
Kansas and in Kansas City, Missouri, based on the delivery there of certain
materials from its Effingham, Illinois facility. CERCLA imposes strict and, in
certain circumstances, joint and several liability on PRP's for response costs
and natural resource damages at waste sites. In view of the substantial number
of other PRP's at the Site and the relatively small volume of material sent by
the Company to the Site, the Company does not believe it will incur any material
liability for this matter.
The Company has identified a groundwater problem at its Walkersville, Maryland
facility and has been advised of a potential air pollution problem at its
Effingham, Illinois facility. Based upon available information, the Company does
not expect the cost of investigation or any required remediation relating to
these matters to have a material adverse effect on its results of operations.
Employees
The Company has approximately 2,700 employees, including approximately 300
employees at Fedders Xinle. The contract with the union representing
substantially all of the production employees of the Effingham, Illinois plant
is scheduled to expire in October 2001. Another union contract covering Rotorex
employees expires in August 1999. The Company considers its relations with its
employees to be generally satisfactory.
International Sales
For information with respect to international sales of the Company's products,
see Note 8 of the Notes to Consolidated Financial Statements at page F14 herein.
Future sales are subject to the risks inherent in such activities, such as
foreign regulations, unsettled political conditions and exchange rate
fluctuations.
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Item 2. Properties
The Company owns or leases the following primary facilities:
Approximate Square
Location Principal Function Feet of Floor Area
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Liberty Corner, Corporate Headquarters 25,000
New Jersey (Leased)
Effingham, Illinois Manufacturing 650,000
(Owned)
Columbia, Tennessee Manufacturing 232,000
(Owned)
Frederick, Maryland Manufacturing of 200,000
(Owned) rotary compressors
Singapore International Headquarters 14,600
(Leased) and Research and Design Center
Lawrence Township, Manufacture of Melcor 15,000
New Jersey (Owned) components
Lawrence Township, Assembly of Melcor modules 22,400
New Jersey (Leased)
The Effingham, Illinois facility is subject to a mortgage securing a $3.5
million, 1% promissory note payable over the next 10 years to the State of
Illinois. The Company believes that productive capacity at its major
manufacturing facilities is adequate to meet production needs in the foreseeable
future.
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Item 3. Legal Proceedings
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Matters
The Company's Common and Class A Stock are listed on the New York Stock
Exchange. There is no established public trading market for the Company's Class
B Stock, as there are restrictions on its transfer. As of October 31, 1998,
there were 3,121 holders of Common Stock, 3,060 holders of Class A Stock and 14
holders of Class B Stock. For information with respect to the Company's Common
Stock, Class A Stock and Class B Stock, see Notes 9 and 10 on pages F15 and F16
and the stock price data included on page 15, which Notes and data are
incorporated herein by reference.
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Selected Financial Data (1)
(Amounts in thousands, except per share data)
1998 1997 1996 1995 1994
Net sales $322,121 $314,100 $371,772 $316,494 $231,572
Gross profit 69,770 70,076 83,028 67,125 49,263
Percent of net sales 21.7 22.3 22.3 21.2 21.3
Operating income (2) 12,810 31,729 50,988 37,653 23,905
Percent of net sales 4.0 10.1 13.7 11.9 10.3
Pre-tax income 4,603 28,867 50,266 35,691 19,803
Percent of net sales 1.4 9.2 13.5 11.3 8.6
- ------------------------------------------------------------------------------------
Net income (3) $ 2,992 $ 18,764 $ 31,158 $ 29,504 $ 20,989
Net income attributable
to common stockholders 2,992 16,344 31,007 29,504 20,989
Earnings per share (3):
Basic $ 0.07 $ 0.42 $ 0.77 $ 0.74 $ 0.53
Diluted 0.07 0.39 0.74 0.74 0.53
- ------------------------------------------------------------------------------------
Cash dividends declared per share:
Convertible Preferred (4) - $ 0.318 $ 0.050 - -
Common/Class A $ 0.085 0.080 0.080 $ 0.020 -
Class B 0.077 0.072 0.072 0.018 -
- ------------------------------------------------------------------------------------
Cash and cash equivalents $ 90,986 $110,393 $ 90,295 $ 57,707 $ 34,869
Total assets 304,629 329,014 290,220 136,775 100,653
Long-term debt (including
current portion) (5) 111,013 115,380 40,406 5,106 17,943
Stockholders' equity (6) 104,792 145,687 159,751 82,542 49,317
Capital expenditures(7) 8,497 9,236 7,043 9,041 2,634
Depreciation and amortization 9,263 9,935 6,578 7,519 9,374
Earnings before interest,
taxes, depreciation and
amortization(8) 41,757 42,232 57,796 44,143 32,252
- ------------------------------------------------------------------------------------
(1) The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the consolidated financial statements and the notes thereto.
(2) In 1998, operating income reflects a $16,750 restructuring charge relating
to actions taken by the Company to enhance competitiveness in global markets and
a $2,891 provision for the implementation of an early retirement program.
(3) In 1994, the Company adopted SFAS 109, Accounting for Income Taxes, which
resulted in income of $1,780 or $0.04 per share from the cumulative effect of an
accounting change.
(4) In September 1997, the Company redeemed its Convertible Preferred Stock for
1.022 shares of Class A Stock.
(5) In August 1997, a subsidiary of the Company issued $100,000 of 9 3/8% Senior
Subordinated Notes, proceeds of which were utilized, in part, to fully redeem
$22,100 of 8.5% Convertible Subordinated Debentures, including accrued interest.
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(6) During fiscal 1998, the Company repurchased 7,720 shares of Common and Class
A Stock at an average price of $5.93 per share for a total of $45,750. During
fiscal 1997, the Company repurchased 4,335 shares of Class A Stock at an average
price of $5.78 per share for a total of $25,041 and 705 shares of Convertible
Preferred Stock at $6.25 per share for a total of $4,408.
(7) Fiscal 1995 amount includes $1,750 of equipment under capital lease.
(8) For fiscal 1998, the amount shown excludes one-time charges for the
Restructuring ($16,750) and early retirement ($2,891).
QUARTERLY FINANCIAL DATA (UNAUDITED)
(000'S, EXCEPT PER SHARE AND MARKET PRICE DATA)
FIRST SECOND THIRD FOURTH FISCAL YEAR
----- ------ ----- ------ -----------
1998
Net sales $25,491 $33,580 $172,061 $90,989 $322,121
Gross profit 4,733 7,141 36,986 20,910 69,770
Income (loss) before
income taxes (6,043) (20,817) 24,392 7,071 4,603
Net income (loss) $(3,931) $(13,528) $ 15,854 $ 4,597 $ 2,992
Earnings (loss) per share(a) $ (0.09) $ (0.32) $ 0.38 $ 0.12 $ 0.07
Market price per share:
Common Stock (FJC)
High 6 3/8 6 1/4 6 1/4 7 5/16 7 5/16
Low 5 3/4 5 11/16 5 3/16 5 1/8 5 1/8
Class A Stock (FJA)
High 6 1/4 6 1/8 6 1/16 7 1/16 7 1/16
Low 5 9/16 5 1/16 5 3/16 5 5
1997
Net sales $33,087 $60,593 $143,776 $76,644 $314,100
Gross profit 7,179 14,277 30,842 17,778 70,076
Income (loss) before
income taxes (1,668) 3,584 19,153 7,798 28,867
Net income (loss) $(1,246) $ 2,511 $ 12,640 $ 4,859 $ 18,764
Earnings (loss) per share(a) $ (0.05) $ 0.04 $ 0.32 $ 0.12 $ 0.42
Market price per share:
Preferred Stock (FJAPr)
High 6 1/2 6 1/2 6 3/4 7 7
Low 5 5/8 5 5/8 5 5/8 6 5 5/8
Common Stock (FJC)
High 6 1/2 6 1/2 6 1/2 6 5/8 6 5/8
Low 5 5/8 5 5/8 5 5/8 5 5/8 5 5/8
Class A Stock (FJA)
High 5 7/8 6 1/8 6 1/4 6 3/8 6 3/8
Low 4 5/8 4 5/8 5 1/4 5 1/2 4 5/8
(a) Quarterly earnings per share may not add to earnings per share for the year
due to rounding and changes in the number of weighted average shares
outstanding.
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Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Company is the largest manufacturer of room air conditioners in North
America based on units sold. The Company has strong relationships with
retailers, which it has formed by establishing flexible, accurate-response
manufacturing to accommodate customers' increasingly seasonal delivery
requirements.
The Company's business is currently largely domestic and is affected by summer
weather in major domestic markets. During fiscal 1998, the Company's domestic
sales reflect an increasingly seasonal pattern, with more shipments occurring in
the second half of the fiscal year and fewer in the off season first half since
leading retailers require just-in-time delivery. Favorable summer weather in
southern domestic markets in fiscal 1998 increased in-season sales and depleted
industry inventories in those markets at fiscal year-end (August 31), which
positions U.S. manufacturers for a better year in fiscal 1999, assuming normal
weather. This follows a period affected by cool summer weather in key U.S.
markets in fiscal 1996 that increased industry inventories at some manufacturers
(excluding the Company) and at retailers at the beginning of fiscal 1997 and
reduced fiscal 1997 results all year long. By the end of the fiscal 1997 selling
season, retail inventories declined to more customary levels, which benefitted
U.S. manufacturers in fiscal 1998.
The Company, in a move to enhance its competitiveness, implemented a
restructuring plan (the "Restructuring") during fiscal 1998. The Restructuring
did not result in any factory closings. However, it did involve shifting some
additional production from North America to China and increasing component
outsourcing. As part of the Restructuring, all Fedders International activities,
including executive management located at the Company's headquarters in New
Jersey, were relocated to Singapore. The sales, marketing, service, research and
design and administrative support functions of Fedders North America were
relocated to the Company's factory in Illinois.
During fiscal 1998, the Company's international sales were unfavorably affected
by the international financial crisis. In fiscal 1997, the Company nearly
doubled its international sales, as it did in the prior year.
In June 1998, the Company entered into a joint venture with BSH in Estella,
Spain to manufacture room air conditioners in Spain for the European market and
for export. This adds to the Company's international manufacturing presence,
which began with the 1996 joint venture in Ningbo, China to manufacture air
conditioners for export and for the Chinese market.
In August 1996, the Company merged with NYCOR, Inc. (the "Merger"), which,
through its subsidiary Rotorex Company, Inc., manufactured rotary
compressors principally for use in room air conditioners, and, through
Melcor Corporation, manufactured thermoelectric modules. Rotorex has been
the primary supplier of compressors to the Company for 25 years. The
-16-
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Company believes that a dedicated supply of compressors improves its flexibility
to accurately respond to the just-in-time requirements of its customers. The
supply of compressors from Rotorex, and from its Asian compressor licensees,
also is strategically important for the Company's international growth.
RESULTS OF OPERATIONS
Net sales in fiscal 1998 totaled $322.1 million, an increase of 2.5% from sales
of $314.1 million in fiscal 1997 but down from record sales of $371.8 million in
fiscal 1996. The sales increase in fiscal 1998 reflects lower industry inventory
levels entering fiscal 1998 compared to fiscal 1997 and favorable summer weather
in the domestic southern market, offset in part by a decrease in international
sales as a result of the international financial crisis. The sales decrease in
fiscal 1997 reflects large, end-of-season industry carryover of room air
conditioners from the cool summer of fiscal 1996.
OPERATING RESULTS AS A PERCENT OF NET SALES
1998 1997 1996
- ----------------------------------------------------------------
Gross profit 21.7% 22.3% 22.3%
Selling, general and
administrative expense 12.5 12.2 8.6
Restructuring 5.2 - -
Operating income 4.0 10.1 13.7
Interest expense 2.7 1.1 0.3
Pre-tax income 1.4 9.2 13.5
- ----------------------------------------------------------------
The gross profit in fiscal 1998 changed little from fiscal 1997. The gross
profit as a percent of net sales declined in fiscal 1998 due primarily to a
change in the customer and product mix from fiscal 1997. In fiscal 1997, gross
profit declined by 15.6% from fiscal 1996 due to the sales decline. The gross
profit as a percent of net sales remained unchanged in fiscal 1997, from fiscal
1996, due primarily to changes in customer and product mix offset, in part, by
lower absorption of factory overhead expense due to lower production levels.
Selling, general and administrative expenses ("SG&A") increased as a percent of
net sales in fiscal 1998 as a result of a $2.9 million (0.9% of net sales)
provision for the implementation of an early retirement program. This more than
offset reductions in SG&A that resulted from the Restructuring. SG&A increased
as a percent of net sales in fiscal 1997 from fiscal 1996 due, in part, to lower
sales. SG&A increased by $6.3 million from fiscal 1996 primarily as a result of
expenses related to operations acquired in the Merger, including $1.8 million of
amortization of goodwill and $1.9 million of compressor research and development
expense. SG&A also increased in fiscal 1997 due to infrastructure expansion to
support further growth of international business.
The Restructuring charge in fiscal 1998 of $16.8 million consists of the
write-down of fixed assets ($5.6 million), an amount for lease terminations
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($4.9 million), personnel-related costs ($3.8 million) and administrative
facility closing costs ($2.5 million).
Net interest expense increased in fiscal 1998 by $5.2 million and as a percent
of net sales from fiscal 1997. The increase resulted from interest on the 9 3/8%
Senior Subordinated Notes due in 2007 (the "Notes") issued late in fiscal 1997.
The increase was offset, in part, by a redemption of 8.5% Convertible
Subordinated Debentures due in 2012 (the "Debentures") that were assumed in the
Merger, and lower interest on very limited short-term borrowing in fiscal 1998,
compared to fiscal 1997. Higher interest is also partially offset by the absence
of preferred stock dividends after the redemption of Convertible Preferred Stock
in September 1997. Net interest expense increased in fiscal 1997 by $2.5 million
and as a percent of net sales from fiscal 1996, due to interest paid on the
Debentures.
Including the charges for the Restructuring and early retirement, the Company's
net income decreased to $3.0 million in fiscal 1998 from $18.8 million in fiscal
1997 and a record $31.2 million in fiscal 1996. Net income attributable to
common stockholders, excluding the after-tax effect of charges for the
Restructuring and early retirement, would have been approximately $15.8 million
in fiscal 1998 compared to $16.3 million in fiscal 1997. Net income attributable
to common stockholders in 1997 reflects the dividend requirement of $2.4 million
paid on the Company's Convertible Preferred Stock that was issued in connection
with the Merger and fully redeemed in September 1997. Net income in fiscal 1998
and 1997 reflects an effective tax rate of 35% versus 38% in fiscal 1996,
principally due to a lower effective rate on state taxes and the release of
prior-year tax provisions no longer required.
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements are seasonal. Cash balances peak in August, while
greatest use of credit lines occurs early in the calendar year. The Company
ended fiscal 1998 with cash of $91.0 million compared to $110.4 million at
August 31 a year earlier, even after completing a $50.0 million stock repurchase
program.
Net cash provided by operations in fiscal 1998 amounted to $38.8 million.
Accounts receivable increased by $5.5 million, reflecting higher volume in
fourth quarter sales of fiscal 1998 resulting from the favorable weather
conditions compared to fiscal 1997. Ending inventories decreased by $10.6
million reflecting greater in-season sales. Accounts payable increased by $15.2
million, and primarily reflect the receipt of more raw materials during the
month of August than in the prior year due to greater production requirements.
Accrued expenses increased by $1.3 million and reflect an accrual for early
retirement offset, in part, by lower marketing-related accruals due to changing
customer mix. Accrued income taxes increased $4.4 million.
Net cash used in investing activities by the Company consisted primarily of
capital expenditures of $8.5 million and an investment of $3.3 million in the
Spanish joint venture offset, in part, by the disposal of $1.8 million of fixed
assets, primarily real estate not utilized.
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Net cash used in financing activities in fiscal 1998 amounted to $48.2 million.
The Company repurchased $45.8 million or 7.7 million shares of its Preferred,
Common and Class A Stock under a repurchase program funded in fiscal 1997
through the offering of the Notes. In August 1998, the Company announced an
authorization to repurchase up to an additional $30 million of its outstanding
stock. Dividend payments amounted to $3.5 million in fiscal 1998.
During fiscal 1998, the Company's $50 million, prime rate, revolving credit
facility was utilized for a brief period in February and March with a maximum
outstanding during the year of $8.6 million. Management believes that cash,
earnings and borrowing capacity of the Company are adequate to meet the needs of
its operations and long-term credit requirements, including capital expenditures
and debt maturities.
YEAR 2000
The inventory and assessment phases of the Company's Year 2000 plan are
materially complete with respect to internal information technology ("IT") and
non-IT systems, such as embedded technology and microcontrollers. Testing and
resolution phases of the plan are scheduled to be complete in the 1998 third
fiscal quarter, which ends May 31. The Company has material third-party
relationships with customers and suppliers that would have a material effect on
its business if the customer or supplier were to have significant Year 2000
issues. Assessment of these relationships, in part through on-site audits, is
ongoing and contingency plans are being developed to minimize the effect of any
such issues. Contingency planning includes the use of alternate suppliers, which
the Company has in place for all significant components. The Company's plan is
to be Year 2000 compliant in the third fiscal quarter of 1999. The National
Retail Federation has listed the Company as being a compliant Year 2000 EDI
vendor.
Many of the Company's IT systems are already compliant. Non-compliant IT systems
are being replaced in the normal course of business and are not a cost of Year
2000. Related costs are being expensed as incurred and in fiscal 1998 were
immaterial to the operating results and are not expected to have a material
impact on the Company's future earnings or cash flow.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share,"
which establishes standards for computing and presenting earnings per share.
SFAS 128 replaces the presentation of primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively. Basic earnings
per share are computed by dividing income attributable to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share are computed similarly to fully diluted earnings per share.
The Company adopted the provisions of SFAS 128 in the second fiscal quarter of
1998.
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information," were
-19-
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issued. In February 1998, SFAS 132 "Employers Disclosures about Pensions and
Other Postretirement Benefits" - an amendment of SFAS 87, 88 and 106 was issued.
SFAS 130 addresses standards for reporting and display of comprehensive income
and its components and SFAS 131 requires disclosure of reportable operating
segments. SFAS 132 revises disclosures about pension and other post-retirement
benefits. These statements, which are effective for the Company's 1999 fiscal
year, expand or modify disclosures which will have no material impact on the
Company's consolidated financial position, results of operations, or cash flows.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. Currently SFAS 133 will
not have a material effect on the consolidated financial statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
-20-
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Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company at August 31, 1998 and
1997, and for the years ended August 31, 1998, 1997 and 1996, the notes thereto
and the report of the Company's independent auditors thereon are included at
pages F1 through F25, herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the Company's directors, see the section
entitled "Election of Directors" in the Company's Proxy Statement filed in
connection with the Company's Annual Meeting of Stockholders to be held on
December 22, 1998, which section is incorporated herein by reference.
Name and Age Position Held Executive Officer
- ------------ ------------- -----------------
Salvatore Giordano, 88 Chairman of the Board 1945
Sal Giordano, Jr., 60 (1) Vice Chairman, President 1965
and Chief Executive Officer
Robert L. Laurent, Jr. 43 Executive Vice President, 1989
Finance and Administration
and Chief Financial Officer
Kent E. Hansen, 51 Senior Vice President and 1996
Secretary
Gerald C. Senion, 51 Group Vice President and 1997
President, Fedders North
America, Inc.
Gary J. Nahai, 47 Vice President and 1993
President, Fedders
International, Inc.
Gordon Newman, 52 Vice President and 1995
President, Rotorex
Company, Inc.
Sal Giordano III, 39 Vice President and President 1996
(2) Melcor Corporation
Thomas A. Kroll, 43 Controller 1995
Nancy DiGiovanni, 47 Treasurer 1998
- -----------------------
(1) Son of Salvatore Giordano
(2) Grandson of Salvatore Giordano
Business Experience During Last Five Years
Messrs. Salvatore Giordano, Sal Giordano, Jr., Robert L. Laurent, Jr. and
Gary J. Nahai have been associated in executive capacities with the Company
for more than five years.
-22-
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Mr. Hansen was elected to his position in August 1996. Previously he was
Vice President, Finance, General Counsel and Chief Financial Officer of
NYCOR. Prior thereto, he was Vice President and General Counsel of the
Company from 1990 to 1991.
Mr. Senion became Group Vice President of the Company and Chief Operating
Officer of Fedders North America in July 1997. He was elected to the position
of President of Fedders North America in September 1998. Prior to joining the
Company, Mr. Senion was employed by Frigidaire Corporation for approximately 20
years, most recently as Group Vice President of the Frigidaire Home Products
Company, Home Comfort Division and the Electrolux Global Home Comfort Products
Division.
Mr. Newman was elected to his position in January 1997. He joined Fedders
Corporation in 1991 as Vice President, Corporate Quality. Prior thereto
Mr. Newman was Corporate Director of Quality for Welbilt Corporation.
Mr. Sal Giordano III was elected to his position in August 1996. He has
been President of Melcor since 1995 and was Vice President of Business
Planning and Development of NYCOR, Inc. from 1992 to August, 1996.
Mr. Kroll was elected to his position in April 1995. Previously he was
Controller of Fedders North America since 1992. Prior thereto he was
Controller of Emerson Quiet Kool.
Ms. DiGiovanni was elected to her position in October 1998. Previously she
was Assistant Treasurer of the Company since 1989. Prior thereto she held
various cash management positions with the Company.
Item 11. Executive Compensation
See the section entitled "Executive Compensation" in the Company's Proxy
Statement, filed in connection with the Company's Annual Meeting of Stockholders
to be held on December 22, 1998, which section is incorporated herein by
reference.
Item 12. Security ownership of Certain Beneficial Owners and Management
See the sections entitled "Security Ownership of Directors and Officers" and
"Principal Stockholders" in the Company's Proxy Statement, filed in connection
with the Company's Annual Meeting of Stockholders to be held on December 22,
1998, which sections are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See the section entitled "Election of Directors" in the Company's Proxy
Statement, filed in connection with the Company's Annual Meeting of Stockholders
to be held on December 22, 1998, which section is incorporated herein by
reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
Index to Financial Statements and Financial Statement Schedules
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company and its
subsidiaries are included:
Page #
Consolidated Statements of Operations for the years
ended August 31, 1998, 1997 and 1996 F1
Consolidated Balance Sheets at August 31, 1998 and 1997 F2-F3
Consolidated Statements of Cash Flows for the years
ended August 31, 1998, 1997 and 1996 F4-F5
Stockholders' Equity for the years ended
August 31, 1998, 1997 and 1996 F6
Notes to Consolidated Financial Statements F7-F24
Report of Independent Certified Public Accountants F25
(a) 2. Financial Statement Schedule
Consolidated Schedule as of and for the years ended
August 31, 1998, 1997 and 1996
II. Valuation and Qualifying Accounts S-1
All other schedules have been omitted because of the absence of the conditions
under which they are required or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
-24-
27
(a) 3. Exhibits
(3) (i) 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.
(ii) 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.
(10) (i) Stock Option Plan II, filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for 1984 and incorporated herein by reference.
(ii) Stock Option Plan III, filed as Exhibit 10 (iv) to the Company's Annual
Report on Form 10-K for 1985 and incorporated herein by reference.
(iii) Stock Option Plan IV, filed as Exhibit 10 (iv) to the Company's Annual
Report on Form 10-K for 1987 and incorporated herein by reference.
(iv) Stock Option Plan V, filed as Exhibit 10 (v) to the Company's Annual
Report on Form 10-K for 1988 and incorporated herein by reference.
(v) Stock Option Plan VI, filed as Exhibit 10 (vi) to the Company's Annual
Report on Form 10-K for 1989 and incorporated herein by reference.
(vi) Stock Option Plan VII, filed as Exhibit 10 (vi) to the Company's Annual
Report on Form 10-K for 1990 and incorporated herein by reference.
(vii) Stock Option Plan VIII, filed as Annex F to the Company's Proxy
Statement - Prospectus dated May 10, 1996 and incorporated herein by reference.
(viii) Employment Contract between The Company and Salvatore Giordano dated
March 23, 1993 filed as Exhibit 10 (viii) to the Company's Annual Report on Form
10-K 1993 and incorporated herein by reference.
(ix) Joint Venture Contract between Ningbo General Air Conditioner Factory
and Fedders Investment Corporation for the establishment of Fedders Xinle Co.
Ltd., dated July 31, 1995 filed as Exhibit 10 (viii) on the Form 10-K 1996 and
incorporated herein by reference.
(x) Employment Agreement between the Company and Sal Giordano, Jr. effective
October 1, 1997, filed as Exhibit 10 to the Company's Quarterly Report on From
10-Q for the quarter ended November 30, 1997 and incorporated herein by
reference.
(21) Subsidiaries.
(23) Consents of BDO Seidman, LLP.
(27) Financial data schedule. (EDGAR filing only)
-25-
28
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1998.
-26-
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
FEDDERS CORPORATION
By /s/Robert L. Laurent, Jr.
Robert L. Laurent, Jr.
Executive Vice President, Finance and Administration and
Chief Financial Officer
November 25, 1998
-27-
30
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Salvatore Giordano
Salvatore Giordano Chairman of the Board November 25, 1998
/s/Salvatore Giordano, Jr.
Salvatore Giordano, Jr. Vice Chairman, November 25, 1998
President and Chief Executive
Officer and a Director
(Principal Executive Officer)
/s/Joseph Giordano
Joseph Giordano Director November 25, 1998
/s/Howard S. Modlin
Howard S. Modlin Director November 25, 1998
/s/Clarence Russel Moll
Clarence Russel Moll Director November 25, 1998
/s/William J. Brennan
William J. Brennan Director November 25, 1998
/s/Anthony Puleo
Anthony Puleo Director November 25, 1998
/s/S.A. Muscarnera
S.A. Muscarnera Director November 25, 1998
/s/C.A. Keen
C.A. Keen Director November 25, 1998
/s/David C. Chang
David C. Chang Director November 25, 1998
/s/Robert L. Laurent, Jr.
Robert L. Laurent, Jr. Executive Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer) November 25, 1998
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31
Fedders Corporation
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Year Ended August 31, 1998 1997 1996
----------------------------
Net sales $322,121 $314,100 $371,772
Costs and expenses:
Cost of sales 252,351 244,024 288,744
Selling, general and administrative 40,210 38,347 32,040
Restructuring 16,750 - -
---------------------------
309,311 282,371 320,784
---------------------------
Operating income 12,810 31,729 50,988
Minority interest in joint venture 403 568 230
Interest expense (net of interest
income of $2,599, $920 and $1,410 in
1998, 1997 and 1996, respectively) (8,610) (3,430) (952)
-----------------------------
Income before income taxes 4,603 28,867 50,266
Federal, state and foreign
income taxes 1,611 10,103 19,108
----------------------------
Net income 2,992 18,764 31,158
Preferred stock dividend
requirement - 2,420 151
----------------------------
Net income attributable to
common stockholders $ 2,992 $ 16,344 $ 31,007
============================
Earnings per share:
Basic $ 0.07 $ 0.42 $ 0.77
Diluted 0.07 0.39 0.74
============================
Dividends per share declared:
Preferred - $ 0.318 $ 0.050
Common/Class A $ 0.085 0.080 0.080
Class B 0.077 0.072 0.072
See accompanying notes
F1
32
Fedders Corporation
Consolidated Balance Sheets
(Amounts in thousands)
August 31, 1998 1997
--------------------
Assets
Current assets:
Cash and cash equivalents $ 90,986 $110,393
Accounts receivable (less allowances of
$2,032 and $1,834 in 1998 and 1997) 14,520 9,060
Inventories 52,261 62,887
Deferred income taxes 5,902 4,070
Other current assets 4,308 8,917
--------------------
Total current assets 167,977 195,327
Net property, plant and equipment 56,318 63,994
Deferred income taxes 8,838 6,374
Goodwill 55,159 56,858
Other assets 16,337 6,461
--------------------
$ 304,629 $ 329,014
====================
See accompanying notes
F2
33
Fedders Corporation
Consolidated Balance Sheets
(Amounts in thousands, except par data)
August 31, 1998 1997
------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,065 $ 1,891
Accounts payable 25,769 10,591
Income taxes payable 14,406 10,027
Accrued expenses 32,101 31,082
-------------------
Total current liabilities 74,341 53,591
Long-term debt 108,948 113,489
Other long-term liabilities:
Warranty 2,556 2,780
Other 9,355 8,427
Minority interest in joint venture 4,637 5,040
Commitments and contingencies
Stockholders' equity (all classes $1 par value):
Preferred Stock, 6,809 issued
at August 31, 1997 - 6,809
Common Stock, 16,972 and 18,990 issued 16,972 18,990
Class A Stock, 19,381 and 20,074 issued 19,381 20,074
Class B Stock, 2,267 issued 2,267 2,267
Additional paid-in capital 31,619 85,702
Retained earnings 36,496 37,024
Cumulative translation adjustment (430) (138)
--------------------
106,305 170,728
Less deferred compensation (1998) and
Treasury Stock, at cost, 4,335 shares
of Class A Stock (1997) (1,513) (25,041)
--------------------
Total stockholders' equity 104,792 145,687
-------------------
$ 304,629 $ 329,014
=====================
See accompanying notes
F3
34
Fedders Corporation
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year Ended August 31, 1998 1997 1996
---------------------------
Operating activities:
Net income $ 2,992 $ 18,764 $31,158
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 9,263 9,935 6,578
Deferred income taxes (4,296) 504 (1,717)
Restructuring charge -
fixed asset write-down 5,590 - -
Changes in operating assets and liabilities:
Accounts receivable (5,460) (1,085) 4,402
Inventories 10,626 (9,441) (7,856)
Other current assets 6,263 (5,551) (628)
Other assets (7,281) (335) (568)
Income taxes payable 4,379 (5,364) 6,243
Accounts payable 15,178 (5,923) (2,887)
Accrued expenses 1,269 (6,973) 3,784
Other long-term liabilities 704 (3,288) 3,151
Other - net (403) (548) (825)
----------------------------
Net cash provided by
(used in) operations 38,824 (9,305) 40,835
----------------------------
Investing activities:
Additions to property, plant
and equipment (8,497) (9,236) (7,043)
Disposal of property, plant
and equipment 1,847 428 535
Investment in joint venture (3,347) - -
----------------------------
Net cash used in investing
activities (9,997) (8,808) (6,508)
----------------------------
Financing activities:
Net proceeds from issuance of 9 3/8%
Senior Subordinated Notes - 96,025 -
Repayment and redemption of 8 1/2%
Convertible Subordinated Debentures - (22,806) -
Repayments of NYCOR, Inc.
short-term borrowing - - (3,000)
Repayments of long-term debt (1,903) (1,992) (695)
Proceeds from stock options exercised 5,289 1,727 1,868
Tax benefit related to stock
options exercised 3,825 479 437
Net (repayment of) proceeds from
Fedders Xinle financing (2,517) (168) 6,299
Repayment of Fedders Xinle short-
term debt - - (3,396)
Cash dividends (3,520) (5,605) (3,252)
Repurchases of capital stock (49,408) (29,449) -
F4
35
Fedders Corporation
Consolidated Statements of Cash Flows - continued
(Amounts in thousands)
Year Ended August 31, 1998 1997 1996
----------------------------
Net cash provided by (used in)
financing activities (48,234) 38,211 (1,739)
Net (decrease) increase in cash and
cash equivalents (19,407) 20,098 32,588
Cash and cash equivalents at
beginning of year 110,393 90,295 57,707
------------------------------
Cash and cash equivalents at
end of year $ 90,986 $110,393 $ 90,295
==============================
Supplemental disclosure:
Net interest paid $ 10,654 $ 3,406 $ 2,249
Net income taxes (refunded) paid (2,788) 14,090 13,513
See accompanying notes
F5
36
Fedders Corporation
Consolidated Statements of Stockholders' Equity
For the Years Ended August 31, 1998, 1997 and 1996
(Amounts in thousands)
1998 1997 1996
-----------------------------
Convertible Preferred Stock
Balance at beginning of year $ 6,809 $ 7,643 -
Issuance of stock - - $ 7,643
Redemption for Class A Stock (6,754) - -
Conversion to Class A Stock - (129) -
Repurchase and retirement of stock (55) (705) -
------------------------------
Balance at end of year - $ 6,809 $ 7,643
==============================
Common Stock
Balance at beginning of year $ 18,990 $ 18,990 $ 18,990
Shares relinquished or purchased (100) - -
Repurchase and retirement of stock (1,918) - -
------------------------------
Balance at end of year $ 16,972 $ 18,990 $ 18,990
==============================
Class A Stock
Balance at beginning of year $ 20,074 $ 19,416 $ 18,831
Redemption of Convertible Preferred Stock 6,904 - -
Conversion of Convertible Preferred Stock - 129 -
Stock options exercised 4,251 529 585
Issuance of restricted stock 300 - -
Retirement of Class A treasury shares (12,148) - -
------------------------------
Balance at end of year $ 19,381 $ 20,074 $ 19,416
==============================
Class B Stock
Balance at beginning of year $ 2,267 $ 2,267 $ 2,267
------------------------------
Balance at end of year $ 2,267 $ 2,267 $ 2,267
==============================
Additional paid-in capital
Balance at beginning of year $ 85,702 $ 87,728 $ 46,481
Issuance of stock - - 40,126
Stock options exercised 10,287 1,198 1,283
Tax benefit related to stock
option exercised 3,825 479 437
Repurchase of stock (9,917) (3,703) -
Retirement of treasury shares (59,591) - -
Issuance of restricted stock 1,463 - -
Expenses related to NYCOR merger - - (599)
Redemption of Convertible Preferred Stock (150) - -
--------------------------------
Balance at end of year $ 31,619 $ 85,702 $ 87,728
================================
Retained earnings
Balance at beginning of year $ 37,024 $ 23,865 $ (4,041)
Net income 2,992 18,764 31,158
Dividends (3,520) (5,605) (3,252)
--------------------------------
Balance at end of year $ 36,496 $ 37,024 $ 23,865
================================
Foreign currency translation
Balance at beginning of year $ (138) $ (158) $ 15
Translation adjustment (292) 20 (173)
---------------------------------
Balance at end of year $ (430) $ (138) $ (158)
=================================
Deferred Compensation/Treasury Stock
Balance at beginning of year $(25,041) - -
Repurchase of stock (37,504) $(25,041) -
Issuance of restricted stock
- deferred compensation (1,763) - -
Amortization of deferred compensation 250 - -
Shares relinquished or purchased (9,194) - -
Retirement of treasury shares 71,739 - -
--------------------------------
Balance at end of year $ (1,513) $(25,041) -
================================
See accompanying notes
F6
37
Fedders Corporation
Notes to Consolidated Financial Statements
(Years ended August 31, 1998, 1997 and 1996; amounts in thousands, except per
share, share and market data)
1. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Fedders Corporation and all of its wholly-owned and majority-owned subsidiaries
(the "Company"). All significant intercompany accounts and transactions are
eliminated in consolidation.
Net sales
Sales are recorded, at time of shipment, net of provisions for sales allowances,
warranty and similar items.
Warranty and return policy
The Company's warranty policy 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.
The Company's policy is to accrue the estimated cost of warranty coverage and
returns at the time the sale is recorded. The policy with respect to sales
returns generally provides that a customer may not return inventory except at
the Company's option.
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 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.
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, which have historically been insignificant, are recorded in
the period in which they are identified. Inventories consist of the following at
August 31:
F7
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1998 1997
---- ----
Finished goods $ 25,553 $ 32,233
Work-in-process 4,132 6,631
Raw materials and supplies 22,576 24,023
-----------------------
$ 52,261 $ 62,887
=======================
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 income. Property, plant and
equipment at cost consist of the following at August 31:
Estimated Useful Life 1998 1997
------------------------------------------
Land and improvements $ 2,994 $ 3,924
Buildings 20 to 30 years 22,326 24,349
Machinery and equipment 5 to 12 years 79,454 87,421
Machinery and equipment
under capital leases 12 years 8,647 8,647
-------------------
Property, plant and equipment 113,421 124,341
Accumulated depreciation 57,103 60,347
-------------------
$ 56,318 $ 63,994
===================
Depreciation is provided on the straight-line basis over the estimated useful
life of each asset as noted above. Accumulated depreciation includes $1,287 and
$1,005 of depreciation related to equipment under capital leases in 1998 and
1997, respectively.
Goodwill
Goodwill is amortized over 40 years using the straight-line method and
recoverability is evaluated periodically based on the expected undiscounted net
cash flows of the related businesses. Goodwill and other assets are net of
accumulated amortization of $12,171 and $10,472 at August 31, 1998 and 1997,
respectively.
Other assets
On June 3, 1998, the Company entered into a joint venture with Bosch-Siemens
Hausgerate GmbH ("BSH") in Estella, Spain to manufacture room air conditioners
in Spain. The Company contributed $3,347 of cash for its 50% interest in the BSH
and Fedders International Air Conditioning, S.A. joint venture. The Company's
investment in the joint venture is accounted for under the equity method.
Other assets consist of the following at August 31:
F8
39
1998 1997
---------------------------
Note due from an executive officer
(note 11) $ 4,000 -
Unamortized deferred finance costs 3,284 $ 3,498
Cash surrender value of life insurance 3,192 2,102
Investment in joint venture 3,078 -
Other 2,783 861
--------------------------
$16,337 $ 6,461
==========================
Accrued expenses
Accrued expenses consist of the following at August 31:
1998 1997
---------------------------
Warranty $ 3,271 $ 4,047
Marketing programs 9,508 11,686
Salaries and benefits 8,465 7,876
Restructuring 4,768 -
Other 6,089 7,473
---------------------------
$32,101 $31,082
===========================
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).
Research and development costs
All research and development costs are charged to expense as incurred and amount
to $6,557, $6,268 and $3,891 in 1998, 1997 and 1996, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Risks and uncertainties
Approximately 4% of the Company's employees are covered by a one-year collective
bargaining agreement, which expires in August 1999. Another 33% of the Company's
employees are covered by a separate collective bargaining agreement which
expires in October 2001.
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Non-cash investing and financing activities
The Company had non-cash investing and financing activities as follows:
1998 1997 1996
----------------------
Issuance of 7,643,000 shares of
Preferred Stock at a price of $6.25
in exchange for all the outstanding
shares of capital stock of NYCOR, Inc. - - $47,769
Exchange of 6,754,000 shares of Preferred
Stock for Class A Stock on a 1 for
1.022 basis $6,904 - -
Effect of new accounting pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share,"
which establishes standards for computing and presenting earnings per share.
SFAS 128 replaces the presentation of primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively. Basic earnings
per share are computed by dividing income attributable to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share are computed similarly to fully diluted earnings per share.
The Company adopted the provisions of SFAS 128 in the second fiscal quarter of
1998.
Earnings per share amounts for prior periods have been restated to conform to
the requirements of SFAS 128. The computation of basic earnings per share and
diluted earnings per share is as follows:
1998 1997 1996
--------------------------
Net income $ 2,992 $18,764 $31,158
Preferred Stock dividends - (2,420) (151)
------------------------------
Income attributable to common
stockholders for basic earnings
per share $ 2,992 $16,344 $31,007
Convertible Preferred Stock
dividends - 2,420 151
-----------------------------
Income attributable to common
stockholders after assumed
conversion $ 2,992 $18,764 $31,158
-----------------------------
Basic weighted average shares
outstanding 41,355 38,931 40,351
Dilutive effect of potential
Common Stock:
Stock option plans 1,202 1,957 1,646
Convertible Preferred Stock - 6,959 385
-----------------------------
Dilutive potential shares
outstanding 42,557 47,847 42,382
-----------------------------
F10
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Earnings per share:
Basic $ 0.07 $ 0.42 $ 0.77
Diluted 0.07 0.39 0.74
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information," were
issued. In February 1998, SFAS 132 "Employers Disclosures about Pensions and
Other Postretirement Benefits" - an amendment of SFAS 87, 88 and 106 was issued.
SFAS 130 addresses standards for reporting and display of comprehensive income
and its components and SFAS 131 requires disclosure of reportable operating
segments. SFAS 132 revises disclosures about pension and other post-retirement
benefits. These statements, which are effective for the Company's 1999 fiscal
year, expand or modify disclosures which will have no material impact on the
Company's consolidated financial position, results of operations or cash flows.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. Currently SFAS 133 will
not have a material effect on the Company's consolidated financial statements.
2. Restructuring
In January 1998, the Company announced a plan to restructure its operations,
which resulted in the Company recording a one-time expense totaling $16,750 in
the second fiscal quarter ending February 28, 1998. The charge consisted of
machinery and equipment write-downs ($5,590) an amount for machinery and
equipment and other lease terminations, primarily related to outsourcing
($4,856), personnel-related costs, primarily related to outsourcing ($3,803)
and administrative facility closing costs ($2,501).
The restructuring did not result in factory closings. However, it did involve
shifting some additional production from North America to China and increasing
component outsourcing. As part of the restructuring, all Fedders International
activities, including executive management located at the Company's headquarters
in New Jersey, were relocated to Singapore. The sales, marketing, research and
design, service and administrative support functions of Fedders North America
were relocated to the Company's facility in Illinois.
3. Litigation
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 the accompanying financial statements.
F11
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4. Short-term Borrowing
At August 31, 1998 and 1997, the Company had no short-term borrowing under its
revolving credit facility with a commercial finance company. Availability under
the facility of $50,000 at August 31, 1998 and 1997 is based on accounts
receivable and inventory and requires maintenance of certain financial
covenants. The maximum amount outstanding under the credit facility was $8,593
and $50,000 during fiscal 1998 and 1997, respectively. The average amount
outstanding and average rate of interest charged on outstanding borrowings under
the credit facility were $460 and 8.5% in fiscal 1998 and $14,974 and 8.6% in
fiscal 1997. The credit facility is collateralized by substantially all of the
Company's assets and is in effect until February 2000. The rate of interest on
the facility is the prime rate.
5. Long-term Debt
Long-term debt consists of the following at August 31:
1998 1997
---- ----
9 3/8% Senior Subordinated Notes due
in 2007: $100,000 principal amount
less unamortized discount of $429 and $477 $ 99,571 $ 99,523
Fedders Xinle 8% promissory note 3,614 6,131
Promissory note payable to the State of
Illinois, interest at 1% 3,521 3,859
Capital lease obligations 4,307 5,867
---------------------
111,013 115,380
Less current maturities 2,065 1,891
---------------------
$108,948 $113,489
======================
Aggregate amounts of long-term debt, excluding capital leases of $4,307 maturing
in each of the years ending August 31 are: 1999-$342, 2000 - $346, 2001-$349,
2002 - $352, 2003 - $356, and thereafter $105,390.
In August 1997, a subsidiary of the Company issued $100,000 principal amount of
9 3/8% Senior Subordinated Notes due 2007. The notes are guaranteed by the
Company on a senior subordinated basis. The notes may be redeemed by Fedders
North America 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 long-term promissory note of Fedders Xinle is payable to a People's Republic
of China bank and matures in 2008. The loan is secured by certain joint venture
assets and is not guaranteed by the Company or its other subsidiaries. Fedders
Xinle made payments of $2,517 during fiscal 1998.
The loan from the State of Illinois has an interest rate of 1%, is to be paid
over the next ten years, and is collateralized by a mortgage on the Illinois
facility.
F12
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6. Leases
Capital Leases
Aggregate future minimum rental payments under capital leases primarily assumed
in conjunction with the NYCOR merger (note 12) for the years ended August 31 are
as follows: $2,055, $1,696, $177, $191 and $170 in 1999, 2000, 2001, 2002 and
2003, respectively, and $18 thereafter. The present value of net minimum lease
payments is $4,307, excluding the interest portion of $638.
Operating Leases
The Company leases certain property and equipment under operating leases, which
expire over the next four years. 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 rental value for a period of one month to four
years. Minimum payments for operating leases having non-cancelable terms are as
follows: $3,502, $2,138, $1,449, $1,255 and $570 in 1999, 2000, 2001, 2002 and
2003, respectively, and $665 thereafter. Minimum lease payments total $9,579.
Total rent expense for all operating leases amounted to $3,940, $3,749 and
$2,025 in 1998, 1997 and 1996, respectively.
7. Income Taxes
The provision for income tax (benefit) consists of the following components:
1998 1997 1996
--------------------------
Current:
Federal $ 1,854 $ 8,005 $18,047
State 170 714 2,253
Foreign 58 401 88
---------------------------
2,082 9,120 20,388
---------------------------
Charge in lieu of income taxes 3,825 479 437
---------------------------
Deferred:
Federal (3,970) 380 (1,530)
State (326) 124 (187)
----------------------------
(4,296) 504 (1,717)
----------------------------
$ 1,611 $10,103 $19,108
============================
The exercise of stock options to acquire shares of the Company's Class A 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.
F13
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Deferred income taxes result from "temporary differences" between assets and
liabilities for financial reporting and income tax purposes. The components of
which are as follows at August 31:
1998 1997
------------------
Warranty $ 2,011 $ 2,498
Depreciation 2,190 (1,263)
Employee benefit programs 4,697 4,560
Inventory 2,553 2,249
Net operating loss carryforwards 5,575 8,221
Restructuring 1,907 -
Other 2,543 915
------------------
21,476 17,180
Valuation allowance (6,736) (6,736)
------------------
$14,740 $10,444
==================
The difference between the United States statutory income tax rate and the
consolidated effective income tax rate is due to the following items:
1998 1997 1996
-------------------------
Expected tax at statutory rate $ 1,611 $10,103 $17,593
Valuation allowance reflected
in current income - (289) (325)
State taxes, less federal
income tax benefit 95 545 1,343
Prior year provisions no longer required (297) (675) -
Other 202 419 497
-------------------------
$ 1,611 $10,103 $19,108
==========================
At August 31, 1998, the Company has Canadian net operating loss carryforwards of
approximately $464 that expire in the years 2002 through 2003, and U.S. net
operating loss and tax credit carryforwards of approximately $12,000 and $1,000,
respectively, which are restricted as to use and expire in the years 2001
through 2010. Due to the uncertainty of recoverability of these amounts, the
Company established a valuation allowance.
8. Industry Segment
The Company operates in one industry segment and sells its room air conditioners
primarily direct to retailers and also through private label arrangements and
distributors. In 1998, one customer accounted for 30% of net sales and a second
customer accounted for 27% of net sales. In 1997, one customer accounted for 27%
of net sales and a second customer accounted for 19% of net sales. In 1996, one
customer accounted for 30% of net sales.
International sales were $38,078 in 1998, $45,012 in 1997, and $24,458 in 1996
and were made principally to Canada, Mexico, Europe and Asia.
F14
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9. Capital Stock
Preferred Stock (15,000,000 shares authorized): In August 1997, the Company
called its Preferred Stock for redemption. In September 1997, each share of
Preferred Stock was redeemed for 1.022 shares of Class A Stock based on the
average closing price of the Class A Stock of $6.113. Fractional shares and all
accounts holding 100 shares or less were paid in cash at the rate of $6.25 per
share. During fiscal 1998 and 1997, 52,153 and 705,233 shares, respectively, of
Preferred Stock were repurchased for $326 and $4,408, respectively, under the
Company's $50,000 stock repurchase program (the "$50 Million Plan") and were
retired.
Common Stock (80,000,000 shares authorized): During fiscal 1998, 1,917,500
shares were repurchased for $11,487 and retired under the $50 Million Plan. An
additional 100,139 shares were received from employees and retired in connection
with the exercise of stock options under the Company's stock option plans and
amounted to $563. Shares of Common Stock are reserved for the conversion of
Class A and Class B Stock as indicated herein.
Class A Stock (60,000,000 shares authorized): During fiscal 1998, 5,750,132
shares were repurchased for $33,937 under the $50 Million Plan. An additional
2,063,173 shares were received from employees and retired in connection with the
exercise of stock options under the Company's stock option plans and amounted to
$12,772. During fiscal 1997, 4,334,800 shares were repurchased under the
Company's $25 million stock repurchase plan and were held in treasury as of
August 31, 1997. All Class A shares that were repurchased during fiscal 1997 and
1998 have been retired as of August 31, 1998. Shares of Class A Stock reserved
under the Company's stock option plans amounted to 5,819,933 and 10,138,000 at
August 31, 1998 and 1997, respectively. Class A Stock has rights, including
dividend rights, substantially identical to the Common Stock, except that the
Class A Stock will not be entitled to vote except to the extent provided under
Delaware law. Class A Stock is immediately convertible into Common Stock on a
share-for-share basis upon conversion of all of the Class B Stock and
accordingly, 22,792,082 and 37,171,281 shares of Common Stock are reserved for
such conversion at August 31, 1998 and 1997, respectively. In 1998, the Company
granted 300,000 shares of restricted stock to an executive officer, the value of
which is $1,763 (note 11).
Class B Stock (7,500,000 shares authorized): Class B Stock is immediately
convertible into Common Stock on a share-for-share basis and accordingly, at
August 31, 1998 and 1997, 2,266,606 shares of Common Stock are reserved for such
conversion. Class B Stock has greater voting power, in certain circumstances,
ten-to-one, in the election of directors but receives a lower dividend, if
declared, equal to 90% of the dividend on Common Stock, and has limited
transferability. Class B Stock also votes separately, as a class, on certain
significant issues.
F15
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In August 1998, the Company's Board of Directors authorized a $30,000 stock
repurchase plan for the Company's Common and Class A Stock.
10. Stock Option Plans
All stock option plans, as approved by the stockholders, provide for the
granting to employees and officers of incentive stock options (as defined under
current tax laws) and non-qualified stock options. All of the plans provide for
the granting of non-qualified stock options to directors who are not employees.
Stock options are exercisable one year after the date of grant and, if not
exercised, will expire five years from the date of grant. Certain options are
only exercisable at the end of five years.
On September 1, 1996, the Company adopted SFAS 123 "Accounting for Stocks-Based
Compensation" and chose to continue the application of APB Opinion 25 and
related interpretations in accounting for its stock options issued to employees.
Accordingly, the adoption of SFAS 123 did not have a material effect on the
Company's consolidated financial statements. Had compensation cost for the
Company's stock option plans been determined consistent with SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
1998 1997
-------------------
Net income attributable to
common stockholders: As reported $ 2,992 $16,344
Pro forma 2,553 14,801
Basic earnings per share: As reported $ 0.07 $ 0.42
Pro forma 0.06 0.38
Diluted earnings per share: As reported $ 0.07 $ 0.39
Pro forma 0.06 0.31
The stock option plan summary and changes during each year are presented below:
1998 1997 1996
------------------------
Options outstanding beginning of year 5,992 4,852 4,715
Granted 21 1,761 752
Canceled (91) (92) (30)
Exercised (4,247) (529) (585)
-------------------------
Options outstanding at end of year 1,675 5,992 4,852
Options exercisable at end of year 1,655 3,385 3,682
=========================
Exercise price per share $2.67 $1.87 $1.69
to 5.75 to 5.50 to 4.87
Options exercisable at August 31, 1998 have an average exercise price of $4.49.
The fair value of the stock options granted during 1998, 1997 and 1996 was
$1.71, $1.41 and $1.09, respectively. The fair value of each option granted is
estimated on the date of granting using the Black-Scholes option pricing model
with the following weighted-average assumptions:
F16
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1998 1997 1996
--------------------------
Expected dividend yield $ .085 $ .080 $ .080
Risk free rate 6.1% 6.1% 6.3%
Expected life in years 4 4 4
Volatility 32% 32% 32%
The following table summarizes information on stock options outstanding at
August 31, 1998:
Options Outstanding Options Exercisable
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (1) Price (1) Exercisable Price (1)
- ----------------------------------------------------------------------------------
$2.67-2.93 28 3.6 $2.79 28 $2.79
$3.00-3.53 169 1.9 3.27 169 3.27
$3.60-3.93 33 1.6 3.70 33 3.70
$4.00-4.50 319 3.0 4.49 319 4.49
$4.75-4.87 956 4.5 4.76 956 4.76
$5.13-5.75 170 4.7 5.31 150 4.63
========= ======= ======= ========= ========
1,675 3.1 4.56 1,655 4.49
-------------------------------------------------------------------
(1) weighted average
11. Pension Plans and Other Compensation Arrangements
The Company maintains a 401(k) defined contribution plan covering all U.S.
employees except union employees at one subsidiary. Company matching
contributions under the plan are based on the level of individual participant
contributions and amounted to $1,328, $1,340 and $1,171 in 1998, 1997 and 1996,
respectively. In 1996, the Company terminated its defined benefit pension plan
that was curtailed in 1993 with no material gain or loss recognized.
The Company has an agreement with an officer that has a term of ten years from
any point in time and provides for salary during the employment period, a
disability program, post-retirement benefits and a death benefit in an amount
equal to ten times the prior year's compensation, payable by the Company over
ten years. The estimated present value of future non-salary benefits payable
under the agreement has been determined based upon certain assumptions and is
being amortized over the expected remaining years of service to the Company.
The Company has an agreement with another officer that has a term that extends
through September 2003. The agreement provides for annual base and incentive
compensation, a non-interest bearing uncollateralized loan maturing in September
2004 (note 1), a retirement contribution that vests over the life of the
agreement and restricted stock that vests in January 2004 (note 9). The Company
is amortizing the retirement contribution and the restricted stock over the life
of the agreement.
The Company provides a portion of health care and life insurance benefits for
retired employees who elect to participate in the Company's plan. SFAS 106
requires accrual accounting for all post-
F17
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retirement benefits other than pension. At August 31, 1998 and 1997,
post-retirement benefits were fully accrued with no material change between
these dates.
12. Merger
On August 13, 1996 and upon receiving more than a two-thirds majority approval
of all Common and Class B Stockholders, the Company merged with NYCOR, a
manufacturer of rotary compressors and thermoelectric heating and cooling
modules. Consideration consisted of 7,643,000 shares of Preferred Stock with a
value of approximately $47,769. The merger was accounted for using the purchase
method, with the consideration allocated to the assets acquired based on their
estimated fair values as of the merger date. The purchase price plus the fair
value of net liabilities assumed was allocated to goodwill, which is being
amortized on a straight line basis over 40 years. One share of Fedders
Convertible Preferred Stock was issued for each share of NYCOR Common, Class A
and Class B Stock.
Purchases from NYCOR at negotiated market prices, amounted to $53,878 in 1996.
Certain officers and directors of the Company were also officers and/or
directors of NYCOR and had significant stockholdings in both companies.
F18
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13. Supplemental Condensed Consolidating Financial Statements
Fedders North America, Inc. ("FNA") is a wholly owned subsidiary of the Company.
FNA and the Company are the Issuer and the Guarantor, respectively, of the
senior subordinated notes due 2007 which were issued in August 1997 (the
"Offering") (note 5). The Company's guarantee is full, unconditional, and joint
and several. The following condensed consolidating financial statements present
separate information for FNA and for the Company and its subsidiaries other than
FNA and should be read in connection with the consolidated financial statements
of the Company. The non-guarantor subsidiaries of the Company are
inconsequential individually and in the aggregate, to the consolidated financial
statements and management has determined that separate financials of the
Guarantor would not be meaningful.
The amounts shown for FNA (presented under the caption "Fedders North America")
in the following historical condensed consolidating financial statements include
the accounts of Rotorex Company, Inc. ("Rotorex") since August 13, 1996. The
amounts presented under the caption "Other Fedders" include the parent and the
accounts of NYCOR and its subsidiaries other than Rotorex since August 13, 1996.
August 13, 1996 was the date of the merger between Fedders Corporation and NYCOR
(note 12). The amounts shown for "Other Fedders" and FNA reflect the elimination
of the $20,000, 10% note payable by Rotorex to NYCOR as a contribution to the
capital of Rotorex retroactive to August 13, 1996, since this amount was
contributed to Rotorex's capital in connection with the Offering. The amounts
also present the intercompany receivable by FNA from "Other Fedders" for all
periods prior to August 31, 1997 as a reduction of stockholders' equity since
the balance in this account was forgiven at the time of completing the Offering.
Certain prior year amounts have been reclassified to conform to current year
presentation.
F19
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FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Supplemental Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Fiscal Year Ended August 31, 1998
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $289,412 $ 32,709 - $322,121
Cost of sales 226,180 26,171 - 252,351
Selling, general and administrative expense (a) 26,393 13,817 - 40,210
Restructuring charge 15,360 1,390 - 16,750
-------- -------- ------- --------
Operating income (loss) 21,479 (8,669) - 12,810
Minority interest in joint venture - 403 - 403
Net interest income (expense) (b) (10,354) 1,744 - (8,610)
--------- -------- ------- ---------
Income (loss) before income taxes 11,125 (6,522) - 4,603
Income taxes (benefit) 3,894 (2,283) - 1,611
--------- --------- ------- ---------
Net income (loss) attributable to common stockholders $ 7,231 $ (4,239) - $ 2,992
========= ========= ======= =========
Fiscal Year Ended August 31, 1997
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $271,874 $ 42,226 - $314,100
Cost of sales 206,870 37,154 - 244,024
Selling, general and administrative expense (a) 26,130 12,217 - 38,347
-------- -------- -------- --------
Operating income (loss) 38,874 (7,145) - 31,729
Minority interest in joint venture - 568 - 568
Net interest income (expense)(b) (4,341) 911 - (3,430)
--------- --------- -------- ---------
Income (loss) before income taxes 34,533 (5,666) - 28,867
Income taxes (benefit) 12,087 (1,984) - 10,103
-------- --------- -------- --------
Net income (loss) 22,446 (3,682) - 18,764
Dividend income (f) - 72,300 $(72,300) -
Preferred stock dividend requirement - 2,420 - 2,420
-------- --------- --------- --------
Net income (loss) attributable to
common stockholders $ 22,446 $ 66,198 $(72,300) $ 16,344
========= ========= ========= ========
Fiscal Year Ended August 31, 1996
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $356,392 $ 15,380 - $371,772
Cost of sales 276,917 11,827 - 288,744
Selling, general and administrative expense (a) 25,267 6,773 - 32,040
-------- -------- -------- --------
Operating income (loss) 54,208 (3,220) - 50,988
Minority interest in joint venture - 230 - 230
Net interest income (expense)(b) (3,941) 2,989 - (952)
--------- ------- -------- ---------
Income (loss) before income taxes 50,267 (1) - 50,266
Income taxes (benefit) 19,108 - - 19,108
-------- -------- -------- --------
Net income (loss) 31,159 (1) - 31,158
Preferred stock dividend requirement - 151 - 151
-------- -------- -------- --------
Net income (loss) attributable to
common stockholders $31,159 $ (152) - $ 31,007
======== ========= ======== ========
F20
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FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Supplemental Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 1998
---------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
ASSETS
Current assets:
Cash $ 6,014 $ 84,972 - $ 90,986
Net accounts receivable 11,328 3,192 - 14,520
Inventories 39,335 12,926 - 52,261
Other current assets 6,952 3,258 - 10,210
------- -------- --------
Total current assets 63,629 104,348 - 167,977
Investments in subsidiaries - 104,306 $(104,306) -
Property, plant and equipment, net 45,446 10,872 - 56,318
Goodwill 48,873 6,286 - 55,159
Other long-term assets 7,460 17,715 - 25,175
------- -------- ---------- -------
$165,408 $243,527 $(104,306) $304,629
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,060 $ 5 - $ 2,065
Accounts and income taxes payable 38,773 1,402 - 40,175
Accrued expenses 28,571 3,530 - 32,101
------- ------- ---------
Total current liabilities 69,404 4,937 - 74,341
Net due to (from) affiliates (40,891) 40,891 - -
Long-term debt 105,334 3,614 - 108,948
Other long-term liabilities 3,391 13,157 - 16,548
Stockholders' equity:
Preferred Stock - - - -
Common, Class A and Class B Stock 5 38,620 $ (5) 38,620
Paid-in capital (f) 21,292 183,546 (173,219) 31,619
Retained earnings (deficit) (f) 7,231 (39,653) 68,918 36,496
Deferred compensation - (1,513) - (1,513)
Cumulative translation adjustment (358) (72) - (430)
--------- --------- ---------- --------
Total stockholders' equity 28,170 180,928 (104,306) 104,792
-------- -------- ---------- --------
$165,408 $243,527 $(104,306) $304,629
=====================================================
F21
52
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Supplemental Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 1997
---------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
ASSETS
Current assets:
Cash - $110,393 - $110,393
Net accounts receivable $ 5,461 3,599 - 9,060
Inventories 50,303 12,584 - 62,887
Other current assets 584 12,403 - 12,987
------- -------- --------
Total current assets 56,348 138,979 - 195,327
Investments in subsidiaries - 104,306 $(104,306) -
Net property, plant and equipment 51,466 12,528 - 63,994
Goodwill 50,284 6,574 - 56,858
Other long-term assets 7,794 5,041 - 12,835
------- -------- ---------- -------
$165,892 $267,428 $(104,306) $329,014
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,870 $ 21 - $ 1,891
Accounts and income taxes payable 20,747 (129) - 20,618
Accrued expenses 22,752 8,330 - 31,082
------- ------- ---------
Total current liabilities 45,369 8,222 - 53,591
Net due to (from) affiliate (10,758) 10,758 - -
Long-term debt 107,346 6,143 - 113,489
Other long-term liabilities 2,780 13,467 - 16,247
Stockholders' equity:
Preferred Stock - 6,809 - 6,809
Common, Class A and Class B Stock 5 41,331 (5) 41,331
Paid-in capital (f) 21,292 237,629 $(173,219) 85,702
Retained earnings (deficit) (f) - (31,894) 68,918 37,024
Treasury Stock - (25,041) - (25,041)
Cumulative translation adjustments (142) 4 - (138)
-------- -------- ---------- --------
Total stockholders' equity 21,155 228,838 (104,306) 145,687
-------- -------- ---------- --------
$165,892 $267,428 $(104,306) $329,014
=====================================================
F22
53
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Supplemental Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Fiscal Year Ended August 31, 1998
Fedders North America Other Fedders Fedders Corp
Net cash provided by (used in) operations $ 43,320 $ (4,496) $ 38,824
-------- --------- ---------
Net additions to property, plant and
equipment, being cash used in investing
activities (5,351) (4,646) (9,997)
--------- --------- --------
Net repayments of short and long-term
borrowings (1,822) (2,598) (4,420)
Cash dividends - (3,520) (3,520)
Proceeds from stock options exercised - 5,289 5,289
Tax benefit related to stock options exercised - 3,825 3,825
Repurchase of capital stock - (49,408) (49,408)
Change in net due to (from) affiliate (30,133) 30,133 -
--------- -------- --------
Net cash used in financing activities (31,955) (16,279) (48,234)
--------- --------- --------
Net increase (decrease) in cash and
cash equivalents 6,014 (25,421) (19,407)
Cash and cash equivalents at beginning of year - 110,393 110,393
--------- --------- --------
Cash and cash equivalents at end of year $ 6,014 $ 84,972 $ 90,986
===============================================
Fiscal Year Ended August 31, 1997
Net cash provided by (used in) operations $ 12,694 $(21,999) $ (9,305)
-------- --------- ---------
Net additions to property, plant and
equipment, being cash used in investing
activities (6,750) (2,058) (8,808)
--------- --------- ---------
Net repayments of short and long-term borrowings (1,716) (276) (1,992)
Cash dividends - (5,605) (5,605)
Proceeds from stock options exercised - 1,727 1,727
Tax benefit related to stock options exercised - 479 479
Proceeds from bond offering 96,025 - 96,025
Redemption of 8 1/2%
convertible subordinated debentures - (22,806) (22,806)
Repurchase of capital stock - (29,449) (29,449)
Other - (168) (168)
Intercompany dividend (72,300) 72,300 -
Change in net due to (from) affiliate (27,953) 27,953 -
--------- -------- --------
Net cash (used in) provided by financing
activities (5,944) 44,155 38,211
--------- --------- --------
Net increase in cash and cash equivalents - 20,098 20,098
Cash and cash equivalents at beginning of year - 90,295 90,295
--------- --------- --------
Cash and cash equivalents at end of year - $110,393 $110,393
================================================
Fiscal Year Ended August 31, 1996
Net cash provided by operations $ 36,073 $ 4,762 $ 40,835
-------- --------- ---------
Net additions to property, plant and
equipment, being cash used in investing
activities (4,448) (2,060) (6,508)
--------- --------- ---------
Net repayments of short and long-term borrowings (398) (394) (792)
Cash dividends - (3,252) (3,252)
Proceeds from stock options exercised - 1,868 1,868
Tax benefit related to stock options exercised - 437 437
Change in net due to (from) affiliate (31,227) 31,227 -
--------- --------- --------
Net cash (used in) provided by financing
activities (31,625) 29,886 (1,739)
--------- --------- --------
Net increase in cash and cash equivalents - 32,588 32,588
Cash and cash equivalents at beginning of year - 57,707 57,707
--------- --------- --------
Cash and cash equivalents at end of year - $ 90,295 $ 90,295
================================================
F23
54
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Supplemental Condensed Consolidating Financial Statements -
(Continued)
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 $9,383, $9,747
and $10,247 for the years ended August 31, 1998, 1997 and 1996, respectively.
b) In 1998, FNA's interest expense reflects actual interest charges on the 9
3/8% Senior Subordinated Notes due 2007, the State of Illinois Promissory Note
and capital lease obligations. In 1997 and 1996, the Company allocated interest
expense to FNA based upon the level of FNA's working capital at the prime rate
of interest. Such interest charges amounted to $3,953 and $2,751 for the years
ended August 31, 1997 and 1996, respectively.
c) FNA's depreciation and amortization for the years ended August 31, 1998, 1997
and 1996 amounted to $7,500, $7,847 and $6,071, respectively. Capital
expenditures of FNA for the same periods amounted to $8,083, $7,131 and $4,983,
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) In connection with the completion of the offering on August 13, 1997, FNA
declared a dividend of $72,300 to the Company. In addition, the intercompany
receivable from Fedders Corporation on August 13, 1997 of $152,097 was forgiven
and has been reflected as an adjustment to stockholders equity of both companies
in the accompanying condensed consolidating balance sheets.
F24
55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FEDDERS CORPORATION
We have audited the accompanying consolidated balance sheets of Fedders
Corporation as of August 31, 1998 and 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended August 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fedders
Corporation as of August 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1998, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
October 19, 1998
F25
56
FEDDERS CORPORATION
VALUATION & QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
For The Years Ended
August 31, 1998, 1997 and 1996
(Amounts in thousands)
Balance Additions Balance
at beginning charged to at end
Allowance for Doubtful Accounts: of period expense Deductions Other of period
----------------------------------------------------------------
Year ended: August 31, 1998 $ 1,834 $ 1,812 $ 1,614 - $ 2,032
===============================================================
August 31, 1997 $ 1,952 $ (116) $ 2 - $ 1,834
===============================================================
August 31, 1996 $ 872 $ 580 - $ 500(1) $ 1,952
===============================================================
(1) Includes $500 related to joint venture (see note 12 of the Notes to
Consolidated Financial Statements)
S1
57
EXHIBIT INDEX
-------------
(3) (i) 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.
(ii) 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.
(10) (i) Stock Option Plan II, filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for 1984 and incorporated herein by reference.
(ii) Stock Option Plan III, filed as Exhibit 10 (iv) to the Company's Annual
Report on Form 10-K for 1985 and incorporated herein by reference.
(iii) Stock Option Plan IV, filed as Exhibit 10 (iv) to the Company's Annual
Report on Form 10-K for 1987 and incorporated herein by reference.
(iv) Stock Option Plan V, filed as Exhibit 10 (v) to the Company's Annual
Report on Form 10-K for 1988 and incorporated herein by reference.
(v) Stock Option Plan VI, filed as Exhibit 10 (vi) to the Company's Annual
Report on Form 10-K for 1989 and incorporated herein by reference.
(vi) Stock Option Plan VII, filed as Exhibit 10 (vi) to the Company's Annual
Report on Form 10-K for 1990 and incorporated herein by reference.
(vii) Stock Option Plan VIII, filed as Annex F to the Company's Proxy
Statement - Prospectus dated May 10, 1996 and incorporated herein by reference.
(viii) Employment Contract between The Company and Salvatore Giordano dated
March 23, 1993 filed as Exhibit 10 (viii) to the Company's Annual Report on Form
10-K 1993 and incorporated herein by reference.
(ix) Joint Venture Contract between Ningbo General Air Conditioner Factory
and Fedders Investment Corporation for the establishment of Fedders Xinle Co.
Ltd., dated July 31, 1995 filed as Exhibit 10 (viii) on the Form 10-K 1996 and
incorporated herein by reference.
(x) Employment Agreement between the Company and Sal Giordano, Jr. effective
October 1, 1997, filed as Exhibit 10 to the Company's Quarterly Report on From
10-Q for the quarter ended November 30, 1997 and incorporated herein by
reference.
(21) Subsidiaries.
(23) Consents of BDO Seidman, LLP.
(27) Financial data schedule.