EXHIBIT 13
Fedders Corporation
- - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Results of Operations and Financial
Condition
For the second consecutive year, Fedders Corporation significantly improved its
profitability, following a period marked by cool summer weather and
consolidation in the room air conditioner industry in the early 1990's. The
improved profitability in 1994 and 1993 is the result of lower fixed costs,
higher sales and the Company's concentration on flexible manufacturing to
accommodate customers' increasingly seasonal delivery requirements.
The Company's business is affected by summer weather in major markets, with
product now shipped primarily in the second half of the fiscal year. New retail
leaders in room air conditioners prefer frequent, just-in-time deliveries during
their peak selling season (April through July), rather than the past practice of
pre-season inventory build-up. Favorable weather in 1994 and 1993 virtually
depleted industry inventories at manufacturers and retailers. Abnormally cool
summer weather in 1992 and 1990 -- compounded by retailers' credit constraints
and consolidation in that industry -- reduced room air conditioner
manufacturers' sales and created significant excess inventories industrywide
from August 1990 into the 1993 season. Manufacturers' shipments of room air
conditioners during Fedders' fiscal periods totaled 3.8 million units in 1994
and 3.0 million in 1993 and 1992.
Results of Operations
Entering 1994, Fedders carried minimal inventories as a consequence of the
Company's transition to flexible manufacturing. With industry inventories
depleted, Fedders' sales increased 46% in 1994 due to increased orders from
existing customers in addition to orders from new accounts, including heat-
generated orders that were produced and shipped during the retailers' selling
season. Fiscal 1993 sales declined 17.6% from the 1992 level due to the impact
of excess industry inventories carried over from 1992 and a 1.2 million-unit
reduction in those inventories during the 1993 season. Unfavorable weather
affected 1992 sales.
Operating Results as a Percent of Net Sales
1994 1993 1992
---- ---- -----
Gross profit 21.3% 17.5% 13.3%
Selling, general and
administrative expense 11.0 16.3 16.5
Operating income (loss) 10.3 1.2 (4.9)
Interest expense 1.8 2.7 8.1
Pre-tax income (loss) 8.6 (1.5) (13.0)
==== ==== =====
The gross profit margin increased in fiscal 1994 due to efficiencies in
plant utilization due to higher sales and continuous cost reduction. The 1993
gross profit margin reflects lower costs than in prior years as a result of a
1992 restructuring, offset, in part, by low sales volume. The 1992 gross profit
margin was reduced by an extended period of shutdown due to excess industry
inventories.
Selling, general and administrative expense decreased as a percent of net
sales in fiscal 1994 due to the higher sales volume and further consolidation of
the Fedders North America sales and marketing functions during the fourth
quarter of fiscal 1993. Selling, general and administrative expense decreased as
a percent of net sales during fiscal 1993, despite lower sales, as a result of
expense reduction associated with the restructuring. In fiscal 1992, selling,
general and administrative expense included lower marketing costs, reflecting
the shift in the Company's mix of customers, which are now primarily retailers.
Interest expense decreased as a percent of net sales in the past two years
as long-term debt declined, the interest rate on the working capital line of
credit was reduced and just-in-time manufacturing minimized borrowing for
working capital even as sales increased in 1994.
Income before income taxes in 1994 totaled 8.6% of net sales compared with
losses in the two prior years.
The 1992 results included a net restructuring charge of $3.3 million,
reflecting a $10.4 million provision to close two New Jersey plants, offset, in
part, by a $7.1 million profit on the sale of the Company's compressor
operations. The plant closings permanently laid off approximately 600 employees,
and the Company consolidated production into two remaining facilities. The
restructuring reduced costs of production, operating expense and interest
expense.
During fiscal 1994, the Company adopted Financial Accounting Standard
("SFAS") No. 109, "Accounting for Income Taxes," which resulted in a one-time
cumulative effect of an accounting change amounting to $1.8 million. The Company
had a 3% tax rate during fiscal 1994 reflecting utilization of tax loss
carryforwards resulting in a net tax provision of $594,000 in 1994. The Company
had net tax benefits of $565,000 in fiscal 1993 and $34,000 in fiscal 1992 due
to pre-tax losses.
Earnings per share information was restated to reflect a 50% Class A Stock
dividend distributed in September 1994.
Liquidity and Capital Resources
Working capital requirements of the Company historically have been seasonal with
cash balances peaking in August and the greatest utilization of its lines of
credit occurring early in the calendar year. The Company's cash flow in 1994 was
strong with cash increasing to $34.9 million at August 31, from $8.6 million in
the prior year. Accounts receivable are also seasonal and at August 31 are
typically near the low point of the year as most collections occur prior to
August 31.
Ending inventories were further reduced by $1.2 million from August 31,
1993 to August 31, 1994 as the Company
4
Fedders Corporation
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has increased its manufacturing flexibility to produce in-season to customer
requirements and to minimize its year end inventory. During fiscal 1994, the
Company's accounts payable increased modestly as the Company operated its
factories longer in 1994, into August. Investing activities during fiscal 1994
were for capital expenditures of $2.6 million, excluding a capital lease of
$951,000.
The Company received proceeds of $4.1 million from the exercise of employee
stock options during fiscal 1994.
As a result of strong cash flow, the Company fully redeemed at par $6.7
million of principal, plus accrued interest outstanding, of its 11 7/8% senior
subordinated debentures due in May 1995. The Company also redeemed $1.9 million
of 8 7/8% subordinated debentures during the year. Remaining total long-term
debt of $19.0 million has an average rate of interest of 4.2%.
The Company's revolving credit facility of $30 million is renewable in
December 1995. The credit facility is collateralized by substantially all of the
Company's assets. Management believes that the Company's earnings and borrowing
capacity are adequate to meet the needs of its operation and long-term credit
requirements, including capital expenditures and debt maturities.
- - --------------------------------------------------------------------------------
Selected Financial Data (a)
Eight
Months
Ended Years Ended
Years Ended August 31, August 31, December 31,
------------------------------------ -------- -----------------------
(Amounts in thousands,
except per share data) 1994 1993 1992 1991 (e) 1990 1989 (h)
-------- -------- -------- -------- -------- --------
Net sales $231,572 $158,602 $192,365 $191,423 $241,383 $367,637
Gross profit 49,263 27,744 25,607 27,750 41,037 69,419
Percent of net sales 21.3 17.5 13.3 14.5 17.0 18.9
Operating income (loss) 23,905 1,907 (9,392) (1,883) (4,370) 41,513
Percent of net sales 10.3 1.2 (4.9) (.01) (1.8) 11.3
Pre-tax income (loss) 19,803 (2,340) (24,965) (13,666) (16,980) 35,757
Percent of net sales 8.6 (1.5) (12.7) (7.1) (7.0) 9.7
-------- -------- -------- -------- -------- --------
Net income (loss) $ 20,989 (c) $ (1,775) $(24,931) (d) $(11,178) (f) $(15,566) (g) $ 23,654
Per share (b) $ 0.67 (c) $ (0.06) $ (0.88) $ (0.40) $ (0.56) $ 0.83
======== ======== ======== ======== ======== ========
Cash dividends declared per
share:
Common Stock -- -- -- $ 0.360 $ 0.480 $ 0.400
Class B Stock -- -- -- 0.324 0.432 0.360
======== ======== ======== ======== ======== ========
Cash $ 34,869 $ 8,553 $ 8,738 $ 2,908 -- --
Total assets 100,653 81,285 179,249 197,243 $215,367 $281,275
Short-term borrowing -- -- 40,000 29,900 31,781 43,275
Long-term debt, including
current portion 17,943 25,590 49,588 65,073 90,641 83,654
Stockholders' equity 49,317 24,229 19,039 44,181 61,524 82,616
Capital expenditures 2,634 (i) 2,379 3,599 3,607 7,118 8,879
Depreciation and amortization 9,374 5,646 14,876 10,580 16,481 9,991
Earnings before interest,
taxes, depreciation and
amortization 32,252 6,317 2,675 6,269 10,719 50,758
======== ======== ======== ======== ======== ========
(a) 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.
(b) Per share data are restated to reflect a 50% stock dividend distributed in
September 1994.
(c) In 1994, the Company adopted SFAS No. 109, Accounting for Income Taxes,
which resulted in income of $1,780,000 or $0.06 per share from the
cumulative effect of an accounting change.
(d) Includes a net restructuring charge of $3,300,000 for costs associated with
the shutdown of the Company's New Jersey production facilities offset, in
part, by the benefit from the sale of its compressor business.
(e) In 1991, the Company changed to a fiscal year ending August 31 in order to
conform financial reporting to the room air conditioner season.
(f) Includes a pre-tax provision of $5,000,000 for a product recall.
(g) Includes a restructuring charge of $14,311,000 related to the shutdown of
assembly operations at the Ontario facility, including a write-off of $10.1
million of intangible assets.
(h) The 1989 net income includes $1,516,000 of extraordinary income from the
utilization of tax loss carryforwards. The cash dividends do not reflect
Preferred Stock dividends of $0.438 per share paid in 1989 prior to
conversion of the Convertible Exchangeable Preferred Stock into Common
Stock.
(i) Excludes $951,000 of equipment under capital lease.
5
Fedders Corporation
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Consolidated Statements of Operations
Years Ended August 31,
------------------------------
(Amounts in thousands, except per share data) 1994 1993 1992
-------- -------- --------
Net sales $231,572 $158,602 $192,365
Costs and expenses:
Cost of sales 182,309 130,858 166,758
Selling, general and administrative
expense 25,358 25,837 31,699
Restructuring charge (note 12) -- -- 3,300
-------- -------- --------
207,667 156,695 201,757
-------- -------- --------
Operating income (loss) 23,905 1,907 (9,392)
Interest expense (4,102) (4,247) (15,573)
-------- -------- --------
Income (loss) before income taxes 19,803 (2,340) (24,965)
Federal, state and foreign income tax
(benefit) (note 7) 594 (565) (34)
-------- -------- --------
Income (loss) before cumulative effect of an
accounting change 19,209 (1,775) (24,931)
Cumulative effect of an accounting change
(note 7) 1,780 -- --
-------- -------- --------
Net income (loss) $ 20,989 $ (1,775) $(24,931)
======== ======== ========
Earnings per share:
Income (loss) before cumulative effect
of an accounting change $ 0.61 $ (0.06) $ (0.88)
Cumulative effect of an accounting change 0.06 -- --
-------- -------- --------
Net income (loss) per share $ 0.67 $ (0.06) $ (0.88)
======== ======== ========
See accompanying notes
6
Fedders Corporation
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Consolidated Balance Sheets
August 31,
-------------------
(Amounts in thousands, except per share data) 1994 1993
-------- --------
Assets
Current assets:
Cash $ 34,869 $ 8,553
Accounts receivable (less allowance of $744 in 1994
and $1,078 in 1993) 12,840 8,901
Inventories 18,048 19,270
Deferred income taxes (note 7) -- 3,882
Other current assets 674 917
-------- --------
Total current assets 66,431 41,523
Net property, plant and equipment 27,372 31,637
Other assets 6,850 8,125
-------- --------
$100,653 $ 81,285
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (note 5) $ 616 $ 2,206
Accounts payable 5,315 5,174
Accrued expenses 22,127 17,184
-------- --------
Total current liabilities 28,058 24,564
Long-term debt (note 5) 17,327 23,384
Deferred income taxes (note 7) 1,175 6,019
Other long-term liabilities:
Warranty 2,852 2,473
Other 1,924 616
Commitments and contingencies (notes 3, 4, 6 and 11)
Stockholders' equity (notes 9 and 10):
Common Stock, $1 par value, 60,000,000 shares
authorized, 19,641,659 and 18,613,559 issued at
August 31, 1994 and 1993, respectively 19,642 18,614
Class A Stock, $1 par value, 30,000,000 shares
authorized, 10,625,029 shares issued on September
9, 1994 10,625 --
Class B Stock, $1 par value, 7,500,000 shares
authorized, 2,268,206 issued and outstanding at
August 31, 1994 and 1993, respectively 2,268 2,268
Additional paid-in capital 51,423 47,571
Accumulated deficit (24,764) (35,128)
Cumulative translation adjustment (169) (130)
Notes due on Common Stock purchases (note 10) (742) --
-------- --------
58,283 33,195
Less treasury stock, at cost, 654,410 shares of Common
Stock (8,966) (8,966)
-------- --------
Total stockholders' equity 49,317 24,229
-------- --------
$100,653 $ 81,285
======== ========
See accompanying notes
7
Fedders Corporation
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Consolidated Statements of Cash Flow
Years Ended August 31,
------------------------------
(Amounts in thousands) 1994 1993 1992
------- -------- ---------
Cash flows from operations:
Net income (loss) $20,989 $ (1,775) $ (24,931)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 9,374 5,646 14,876
Deferred income taxes (962) 566 1,781
Changes in operating assets and liabilities:
Accounts receivable (3,939) 5,574 (534)
Current income tax receivable -- -- 2,291
Inventory 1,222 25,864 11,994
Other current assets 243 (832) 1,611
Other assets (59) (1,156) (2,642)
Accounts payable 141 (23,051) 14,376
Accrued expenses 4,943 (15,439) (2,852)
Other long-term liabilities 1,687 272 (373)
Other (39) (778) (342)
------- -------- ---------
Net cash provided by (used in) operations 33,600 (5,109) 15,255
------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment
(excludes $951 of equipment acquired
under capital lease in 1994) (2,634) (2,379) (3,599)
Disposal of property, plant and equipment 441 89 674
------- -------- ---------
Net cash used in investing activities (2,193) (2,290) (2,925)
------- -------- ---------
Cash flows from financing activities:
Increase in short-term borrowing -- -- 40,000
Proceeds from long-term debt -- -- 107,167
Repayments of long-term debt (9,229) (529) (153,798)
Proceeds from stock options exercised 4,138 7,743 131
------- -------- ---------
Net cash (used in) provided by financing
activities (5,091) 7,214 (6,500)
------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 26,316 (185) 5,830
Cash and cash equivalents at beginning of year 8,553 8,738 2,908
------- -------- ---------
Cash and cash equivalents at end of year $34,869 $ (8,553) $ 8,738
======= ======== =========
Supplemental disclosure:
Interest paid $ 3,766 $ (3,248) $ 12,781
Income taxes refunded (1,196) (1,155) (4,166)
See accompanying notes
8
Fedders Corporation
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Consolidated Statements of Stockholders' Equity
Notes Due
Additional Retained Cumulative on Com-
Common Class A Class B Paid-in Earnings Translation mon Stock Treasury
(Amounts in thousands) Stock Stock Stock Capital (Deficit) Adjustment Purchases Stock
------- ------- ------- ---------- --------- ----------- ---------- --------
August 31, 1991 $16,836 -- $2,270 $41,657 $ (8,422) $990 -- $(9,150)
======= ======= ======= ========== ========= =========== ========== ========
Net loss -- -- -- -- (24,931) -- -- --
Conversion of Class B Stock
to Common Stock 2 -- (2) -- -- -- -- --
Stock options exercised -- -- -- (74) -- -- -- 205
Foreign currency translation -- -- -- -- -- (342) -- --
------- ------- ------- ---------- --------- ----------- ---------- --------
August 31, 1992 $16,838 -- $2,268 $41,583 $(33,353) $648 -- $(8,945)
======= ======= ======= ========== ========= =========== ========== ========
Net loss -- -- -- -- (1,775) -- -- --
Stock options exercised 1,776 -- -- 5,988 -- -- -- (21)
Foreign currency translation -- -- -- -- -- (778) -- --
------- ------- ------- ---------- --------- ----------- ---------- --------
August 31, 1993 $18,614 -- $2,268 $47,571 $(35,128) $(130) -- $(8,966)
======= ======= ======= ========== ========= =========== ========== ========
Net income -- -- -- -- 20,989 -- -- --
Stock dividend -- $10,625 -- -- (10,625) -- -- --
Stock options exercised 1,028 -- -- 3,852 -- -- $(742) --
Foreign currency translation -- -- -- -- -- (39) -- --
------- ------- ------- ---------- --------- ----------- ---------- --------
August 31, 1994 $19,642 $10,625 $2,268 $51,423 $(24,764) $(169) $(742) $(8,966)
======= ======= ======= ========== ========= =========== ========== ========
See accompanying notes
9
Fedders Corporation
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Notes to Consolidated Financial Statements
(Dollar amounts in tables, except per share, stock option and market data, are
in thousands)
1. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Net sales
Sales are recorded net of provisions for sales allowances, warranty and similar
items.
Restructuring charge
In 1992, the Company recorded a net restructuring charge of $3,300,000 for costs
associated with the shutdown of its two New Jersey manufacturing facilities
offset, in part, by the benefit from the sale of its compressor business to
NYCOR, Inc. (note 12).
Warranty and return policy
The Company's warranty policy 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
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 with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of the first-in, first-out (FIFO) cost or
market. Inventories consist of the following at August 31:
1994 1993
------- -------
Finished goods $ 9,596 $11,597
Work in process 1,242 842
Raw materials and supplies 7,210 6,831
------- -------
$18,048 $19,270
======= =======
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:
1994 1993
------- -------
Land and improvements $ 1,363 $ 1,393
Buildings 12,005 11,844
Machinery and equipment 47,146 44,799
------- -------
Property, plant and equipment 60,514 58,036
Accumulated depreciation 33,142 26,399
------- -------
$27,372 $31,637
======= =======
Depreciation is provided on the straight-line basis over the estimated
useful life of each item. In 1994, depreciation includes $3,902,000 related to a
write down of certain idle fixed assets to estimated realizable value.
Other assets
Other assets consist primarily of intangible assets which, other than goodwill,
are amortized over periods from one to nine years using the straight-line
method. Goodwill is amortized over 40 years using the straight-line method.
Long-term receivables include receivables from employees including an officer.
Other assets are net of accumulated amortization of $8,072,000 and $6,738,000 at
August 31, 1994 and 1993, respectively, and consist of the following at August
31:
1994 1993
------ ------
Goodwill $5,669 $5,823
Other 631 1,345
------ ------
Intangible assets 6,300 7,168
Long-term receivables 550 957
------ ------
$6,850 $8,125
====== ======
Accrued expenses
Accrued expenses consist of the following at August 31:
1994 1993
------- -------
Warranty $ 6,393 $ 5,016
Marketing programs 5,946 4,482
Salaries and benefits 3,082 2,430
Other 6,706 5,256
------- -------
$22,127 $17,184
======= =======
10
Fedders Corporation
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Income taxes
During the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes."
The cumulative effect of adopting the new standard as of September 1, 1993
resulted in a tax benefit of $1,780,000. Prior years' financial statements have
not been restated to apply the provisions of SFAS No. 109. Deferred income taxes
for fiscal 1994 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 $2,233,000, $2,164,000 and $2,995,000 in 1994, 1993 and 1992, respectively.
Amounts per share
Earnings per share are computed by dividing net income by the weighted average
number of shares of Common, Class A and Class B Stock and other common stock
equivalents outstanding during the year: 31,509,000, 29,838,000, and 28,313,000
in 1994, 1993, and 1992, respectively. Prior-period earnings per share have been
restated to reflect the Class A Stock dividend distributed in September 1994
(notes 9 and 10).
2. Transactions with NYCOR
On September 28, 1992, the Company sold the assets and business related to its
rotary compressor operations to NYCOR, Inc. ("NYCOR"). In conjunction with the
sale, $60,000,000 of notes due to NYCOR from the Company were eliminated (note
12). Interest paid to NYCOR under these notes amounted to $6,025,000 in 1992.
The Company has an agreement with NYCOR for the supply of compressors. Total
purchases from NYCOR amounted to $52,108,000 and $28,801,000 in 1994 and 1993,
respectively. Certain officers and directors of the Company are also officers
and/or directors of NYCOR and have significant stockholdings in both companies.
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.
4. Short-term Borrowing
At August 31, 1994 and 1993, the Company had no short-term borrowing under its
$30,000,000 revolving credit facility with a commercial finance company.
Availability under the facility is based on accounts receivable and inventory
and requires maintenance of certain financial covenants. The maximum amount
outstanding under the credit facility was $28,404,000 during fiscal 1994. The
credit facility is collateralized by substantially all of the Company's assets
and is in effect until December 1995. The rate of interest on the facility is at
the prime rate plus 2.5%.
5. Long-term Debt
Aggregate amounts of long-term debt, excluding capital leases of $712,000,
maturing in each of the four years after August 31, 1995 are: 1996-$13,569,000,
1997-$363,000, 1998-$369,000 and 1999-$370,000.
The 5% convertible subordinated debentures due in 1996 are convertible into
the Company's Common Stock at $34.00 per share and may be redeemed by the
Company at 100% of principal, at any time. Upon conversion, bondholders are
entitled to an additional half-share of Class A Stock for each share of Common
Stock received.
The loan from the State of Illinois has an interest rate of 1%, is to be
paid over the next 14 years, and is collateralized by a mortgage on the Illinois
facility. The loan from the State of Tennessee and Maury County, Tennessee is
to be repaid over the next six years bearing interest at 8% through 1995 and 9%
through 2000.
The 11 7/8% senior subordinated debentures due May 1995 were prepaid by the
Company on August 30, 1994 at 100% of principal. The unamortized debt discount
related to the 11 7/8% debentures was not material at August 30, 1994. The 8
7/8% subordinated debentures were paid at maturity in May 1994.
The provisions of certain long-term debt arrangements of one of the
Company's subsidiaries limit, among other things, the payment of cash dividends
on the subsidiary's common stock.
In 1994, the Company acquired equipment under a capital lease. The
aggregate future minimum lease payments for the years ending August 31 are as
follows: $347,000, $256,000 and $196,000 in 1995, 1996 and 1997, respectively.
The present value of minimum lease payments is $712,000 excluding $87,000 of
interest.
11
Fedders Corporation
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Long-term debt consists of the following at August 31:
1994 1993
------- -------
5% convertible subordinated debentures due in 1996: $13,211
principal amount less unamortized discount of $1,029 and
$1,600 at August 31, 1994 and 1993, respectively (note 9) $12,182 $11,611
Promissory note payable to the State of Illinois, interest
at 1% 4,856 5,181
Capital lease obligation 712 --
Promissory note payable to the State of Tennessee and Maury
County, Tennessee, at 8% 193 216
11 7/8% senior subordinated debentures due in 1995 -- 6,701
8 7/8% subordinated debentures due in 1994 -- 1,881
------- -------
17,943 25,590
Less current maturities 616 2,206
------- -------
$17,327 $23,384
======= =======
6. Operating Leases
The Company leases certain property and equipment under operating leases which
expire over the next five 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 initial or remaining non-
cancelable terms in excess of one year are as follows: $3,132,000, $2,030,000
$953,000, $854,000 and $866,000 in 1995, 1996, 1997, 1998 and 1999,
respectively. Minimum lease payments total $7,834,000. Total rent expense for
all operating leases amounted to $3,559,000, $3,783,000 and $3,486,000 in 1994,
1993 and 1992, respectively.
7. Income Taxes
The provision for income tax (benefit) consists of the following components:
1994 1993 1992
---- ----- -----
Current:
Federal $396 -- --
State 198 -- --
Foreign -- $(870) $(248)
---- ----- -----
594 (870) (248)
Deferred:
Foreign -- 305 214
---- ----- -----
-- 305 214
---- ----- -----
$594 $(565) $ (34)
==== ===== =====
Deferred income taxes result from "temporary differences" between assets
and liabilities for financial reporting purposes and income tax purposes. These
temporary differences are determined in accordance with SFAS No. 109 and are
more inclusive in nature than "timing differences" as determined under
previously applicable accounting principles. The principal temporary differences
and carryforwards giving rise to deferred tax assets and liabilities at August
31 are as follows:
1994
--------
Net operating loss and tax credit
carryforwards $ 12,800
Depreciation (4,400)
Warranty 3,100
All other 125
--------
11,625
Valuation allowance (12,800)
--------
Total deferred taxes $ (1,175)
========
The difference between the United States statutory income tax rate and the
Company's consolidated effective income tax rate is as follows:
1994 1993 1992
------- ----- -------
Expected tax (benefit)
at statutory rate $ 6,733 $(796) $(8,488)
Effect of Canadian
operations -- (123) (37)
Change in valuation
reserve (6,799) -- --
Alternative minimum
tax 396 -- --
State and local taxes 198 -- --
Losses for which no
benefits can be
provided -- 295 8,303
Other 66 59 188
------- ----- -------
Consolidated income
tax (benefit) $ 594 $(565) $ (34)
======= ===== =======
12
Fedders Corporation
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At August 31, 1994, the Company has U.S. net operating loss carryforwards
of approximately $29,000,000. The U.S. net operating loss carryforwards expire
in the years 2006 through 2008. The Company has investment tax credit
carryforwards of approximately $370,000 that expire in the years 1994 through
2001. The Company has alternative minimum tax credit carryforwards of
approximately $1,400,000.
8. Industry Segments
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. One customer accounted for 28% of net sales in 1994 and 1993.
Another customer accounted for 11% of net sales in 1994. Two customers each
accounted for more than 10% of net sales in 1992. International sales were
approximately $8,250,000 in 1994, $5,769,000 in 1993, and $14,743,000 in 1992,
and were made principally to Canada, the Far East and Mexico.
9. Capital Stock
Common Stock: Shares of Common Stock are reserved for the conversion of Class A
and Class B Stock as indicated herein. At August 31, 1994, 757,000 shares are
also reserved under the Company's stock option plans (note 10). In addition, at
August 31, 1994, 388,000 shares of Common Stock are reserved for issuance upon
conversion of the Company's 5% convertible subordinated debentures due in 1996
(note 5).
Class A Stock: In fiscal year 1992, 30,000,000 shares of Class A Stock were
authorized. On September 9, 1994, 10,625,029 shares of Class A were issued to
stockholders through a stock dividend of one share of Class A Stock for each two
shares of either Common or Class B Stock held. At August 31, 1994, 5,358,000
shares of Class A Stock are reserved under the Company's stock option plans. In
addition, 194,000 shares of Class A Stock are reserved for issuance upon
conversion of the Company's 5% convertible subordinated debentures due in 1996
(note 5). Class A Stock has 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, at August 31, 1994, 16,177,000 shares of Common Stock
are reserved for such conversion.
Class B Stock: Class B Stock is immediately convertible into Common Stock
on a share-for-share basis and accordingly, at August 31, 1994, 2,268,206 shares
of Common Stock are reserved for such conversion. Class B Stock has, in certain
circumstances, greater voting power in the election of directors but receives a
lower dividend, if declared, than Common Stock and has limited transferability.
Class B Stock also votes separately, as a class, on certain significant issues.
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 when certain financial goals are met or at the end of five
years.
For options exercised during a six-week period in early 1994, optionees
were given the opportunity to pay two-thirds of the exercise price upon exercise
and to defer the remaining balance until the earlier of July 31, 1995 or upon
the sale of such stock. Such optionees executed non-recourse interest-bearing
notes.
The stock option plan summary is as follows:
1994 1993 1992
------- ------- ------
Options outstanding
beginning of year 2,987 3,200 3,401
Granted 752 2,299 12
Canceled (109) (736) (197)
Exercised (1,028) (1,776) (16)
------- ------- ------
Options outstanding prior to
dividend-related adjustment 2,602 2,987 3,200
Dividend-related adjustment (a) 1,301 -- --
------- ------- ------
Options outstanding
at end of year 3,903 2,987 3,200
Options exercisable
at end of year 1,862 688 1,493
------- ------- ------
Exercise price $2.90(a) $4.36 $4.38
per share to 5.66 to 7.63
======= ======= ======
(a) In conjunction with the stock dividend (note 9), substantially all Common
Stock options were converted to Class A Stock options and increased by 50%
with a corresponding reduction in exercise price to 67% of the original
price in order to maintain the equivalent economic position of optionees.
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Fedders Corporation
- - --------------------------------------------------------------------------------
11. Pension Plans and Other Retirement Benefits
The Company maintains defined benefit pension plans, which were curtailed in
1993, covering its union employees, which plans pay benefits to retirees based
upon the length of continuous service.
At July 31, 1994, the assumed discount rate (the estimated rate at which
the pension plans could have settled their liabilities) and the expected long-
term rate of return on plan assets were estimated to be 8% and 9%, respectively,
per year.
The majority of the trust assets are invested in cash equivalents. The
Company's funding policy is to satisfy the minimum statutory funding
requirements.
Net periodic pension cost for the Company's pension plan consists of the
following:
1994 1993 1992
----- ------- -------
Normal service cost -- $ 241 $ 384
Interest cost on
projected benefit
obligation $ 745 738 785
Actual gain on plan
assets (741) (1,511) (1,602)
Actual gain (under)
over expected gain (305) 601 712
Amortization of
unrecognized
net obligation -- (54) 87
----- ------- -------
Net periodic pension
(benefit) cost $(301) $ 15 $ 366
===== ======= =======
The reconciliation of the funded status of the plans to the amount on the
Company's balance sheet is as follows:
1994 1993
------- -------
Actuarial present value of
accumulated and projected
vested benefit obligation $(9,900) $(9,556)
Market value of plan assets 11,354 11,186
------- -------
Excess of plan assets over
the projected benefit
obligation 1,454 1,630
Unrecognized gain (1,239) (1,820)
------- -------
Pension benefit (accrual)
on balance sheet $ 215 $ (190)
======= =======
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, postretirement 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.
In addition to providing pension benefits, the Company provides a portion
of health care and life insurance benefits for retired employees who elect to
participate in the Company's plan. During fiscal 1994, the Company adopted SFAS
No. 106, which requires accrual accounting for all postretirement benefits other
than pension. At August 31, 1994 postretirement benefits were fully accrued. The
effect of adoption of SFAS No. 106 was not material.
12. Restructuring Charge
In August 1992, the Company undertook a restructuring program whereby its two
New Jersey manufacturing facilities were permanently closed and the compressor
operations were sold. On September 28, 1992, the Company completed the sale of
the assets and business related to the rotary compressor operations to NYCOR for
approximately $72,800,000. In consideration of the purchase price, two
outstanding promissory notes due NYCOR in the total amount of $60,000,000 plus
accrued interest of $1,226,000 were eliminated. Additionally, the Company
transferred a capital lease obligation and certain operating liabilities to
NYCOR. The Company realized a gain of approximately $7,100,000 on the sale. The
Company recorded a net restructuring charge of $3,300,000, reflecting a
$10,400,000 provision in connection with the closing of the manufacturing
facilities, offset, in part, by the gain on the sale.
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Fedders Corporation
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13. Quarterly Financial Data (unaudited)
First Second Third Fourth Fiscal Year
------------------ ------------------ ----------------- ----------------- -------------------
1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
------- -------- -------- ------- ------- ------- ------- ------- -------- --------
Net sales $10,527 $ 13,277 $ 36,959 $36,625 $95,812 $50,464 $88,274 $58,236 $231,572 $158,602
Gross profit 2,074 2,390 7,710 5,502 19,869 8,326 19,610 11,526 49,263 27,744
------- -------- -------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before
cumulative effect of
accounting change (3,891) (2,561) 1,128 (886) 11,640 480 10,332 1,192 19,209 (1,775)
Cumulative effect
of accounting change 1,780 -- -- -- -- -- -- -- 1,780 --
------- -------- -------- ------- ------- ------- ------- ------- -------- --------
Net income (loss) $(2,111) $ (2,561) $ 1,128 $ (886) $11,640 $ 480 $10,332 $ 1,192 $ 20,989 $ (1,775)
Per share (a)(b) (0.07) $ (0.09) $ 0.04 $ (0.03) $ 0.37 $ 0.02 $ 0.32 $ 0.04 $ 0.67 $ (0.06)
======= ======== ======== ======= ======= ======= ======= ======= ======== ========
Market price (a) per share:
High 4 1/8 4 1/4 5 1/8 4 5/8 5 7/8 5 1/8 5 1/2 4 1/2 5 7/8 5 1/8
Low 3 1/8 2 1/4 3 7/8 3 3/8 4 3/8 3 5/8 4 3/8 2 7/8 3 1/8 2 1/4
------- -------- -------- ------- ------- ------- ------- ------- -------- --------
(a) Restated to reflect a 50% stock dividend distributed on September 9, 1994.
(b) 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 number of
shares outstanding during the year.
- - --------------------------------------------------------------------------------
Report of Independent Auditors
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, 1994 and 1993, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended August 31, 1994. 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 the 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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fedders
Corporation as of August 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 7 to the consolidated financial statements, in
1994 the Company changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
MetroPark, New Jersey
October 6, 1994
15