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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, 1996
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.
Convertible Preferred 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, 1996, there were
outstanding 18,989,798 shares of the Registrant's Common Stock,
19,443,856 shares of Class A Stock, 2,266,706 shares of its Class B
Stock and 7,643,061 shares of its Convertible Preferred 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 October 31, 1996 was $228,597,399. (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.)
FEDDERS CORPORATION
FORM 10-K ANNUAL REPORT
SEPTEMBER 1, 1995 TO AUGUST 31, 1996
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the
Registrant 15
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial
Owners and Management 22
Item 13. Certain Relationships and Related
Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 27
PART I
ITEM 1. Business
(a) General Development of Business
Fedders Corporation (the "Company" or the "Registrant") is a holding
company which, through its wholly-owned operating subsidiaries, is
engaged in the manufacture and sale of a complete line of room air
conditioners and dehumidifiers, principally for the residential
market. The Company also manufactures, through recently acquired
Rotorex Company, rotary compressors principally for use in room air
conditioners, and through Melcor Corporation, thermoelectric heating
and cooling modules used in a variety of applications in which space
and weight are considerations or precise temperature control is
required. Based upon industry statistics compiled by a trade
association, the Company believes it is the largest manufacturer of
room air conditioners in North America. 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 NA"), Emerson Quiet Kool Corporation
("EQK"), Columbia Specialties, Inc. ("CSI"), Fedders, Inc., Fedders
International, Inc. ("FI"), Rotorex Corporation ("Rotorex") and Melcor
Corporation ("Melcor"). EQK, CSI and Fedders, Inc. are wholly owned
subsidiaries of Fedders NA. Fedders International has a Mexican
sales subsidiary, Fedders de Mexico S.A. de C.V. and a Singapore
subsidiary, Fedders Asia Pte. Ltd. ("Fedders Asia").
In November 1995, the Company entered into a joint venture with the
Ningbo General Air Conditioner Factory of Ningbo, China, Fedders Xinle
Co., Ltd.("Fedders Xinle"), to manufacture and market ductless split
room air conditioners as well as window type air conditioners. The
Company owns 60% of the joint venture which and through Fedders
International, will export approximately 50% of its product to markets
outside of China. Fedders Xinle is a majority-owned subsidiary. See
note 12 of the Notes to Consolidated Financial statements on page F21
herein for a description of the terms of the transaction.
On August 13, 1996, NYCOR, Inc. ("NYCOR") was merged into the Company.
See note 13 of the Notes to the Consolidated Financial Statements on
page F22 for description of the merger. The Company purchased
compressors since 1992 from NYCOR, under a ten year supply agreement.
The agreement required NYCOR to provide up to 800,000 compressors per
year to the Company which would not allow for significant growth. The
merger will provide the Company with a guaranteed supply of
compressors to support international growth of room air conditioners.
(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 F19 herein.
(c) Narrative Description of Business
Room Air Conditioners and Dehumidifiers
Products
The Company manufactures a complete line of window and through-the-
wall room air conditioners, principally for the residential market in
models ranging in capacity from 5,000 BTU (British Thermal Units) per
hour to 32,000 BTU per hour. Fedders also manufactures through
Fedders Xinle, split ductless room air conditioners for international
residential and commercial markets from 7,000 to 40,000 BTU. These
models comprise product lines marketed by the Company under the brands
Fedders, Emerson Quiet Kool and Airtemp. The Company also
manufactures products under various private labels.
The Company manufactures under the EMERSON QUIET KOOL brand, a line of
household dehumidifiers ranging in capacity from 30 to 50 pints per
day.
Room air conditioners are subject to regulations providing for minimum
energy efficiency rating ("EER") requirements. Achieving required
EERs results from a combination of an efficient compressor and the
design of the air conditioning system using the compressor. Current
proposed rule-making by the Energy Department under the National
Appliance Energy Conservation Act would have the effect of increasing
minimum required EERs. In the event the new regulations are adopted,
the efficiency of certain air conditioner models would have to be
increased. It is not certain at present if the proposed regulations
would be adopted and, if they are, when the requirements would become
effective. Regardless of the adoption of these proposed regulations,
the Company is continually seeking to improve the efficiency of its
air conditioners and compressors in order to remain competitive in the
markets it serves.
HCFC22 is used as a refrigerant in the Company's air conditioners and
dehumidifiers. HCFC22 is currently an acceptable substitute for the
CFC refrigerants which have a much more harmful effect on the
environment and are currently being phased out of use. The Company
does not expect that requirements to ultimately phase out of HCFC
refrigerants will have a material effect on its operations or
expenditures, since substitutes are currently being developed.
Marketing
In North America, the Company markets its products to retail chains,
retail buying groups and others representing over 10,000 retail
outlets. The distribution of appliances and electronics in North
America is now principally direct to retailers, in contrast to the
early 1980's when distributors accounted for the majority of the
Company's business.
In recent years the Company's customers have changed their purchasing
patterns to minimize inventories. In response, the Company has
increased its manufacturing flexibility, thereby improving its
capabilities, especially in the area of just-in-time delivery.
All Fedders North America sales, marketing, service management are
located in a Whitehouse, New Jersey headquarters location. Fedders
North America serves many of its customers through regional sales
offices and distribution centers.
To support and service its customers and ultimate consumer, the
Company has a network of third-party service centers throughout the
United States and regional parts depots to expedite repairs by local
service centers.
The Company promotes its Emerson Quiet Kool and Fedders brands of air
conditioners through advertising, primarily in trade publications.
The Company's future business development activities are focused
primarily outside of North America. The Company believes that the
market for room air conditioners outside of North America is
approximately four times the size of the North American market.
Demand for air conditioners outside of North American 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 more than 30
years and has licensees in several countries.
The Company expects to increase its participation overseas through
strategic alliances primarily under production and joint venture
agreements in addition to Fedders Xinle established in Ningbo, China.
The Company plans to participate based in part on its expertise,
technological capability and well established global sourcing program.
The Company is accelerating development activities to further
penetrate international markets. This activity should establish
greater growth potential than is afforded by the mature U.S. market
while reducing its dependence on summer weather in North America.
Fedders International is headquartered in Liberty Corner, New Jersey.
Fedders International has sales offices in Singapore (Fedders Asia),
Miami, Mexico and the United Kingdom. Fedders Asia also does
research, development and testing of product for the international
market. The Company believes it can compete cost-effectively abroad
based on its global sourcing network that currently delivers
components from around the world to two U.S. plants and to Fedders
Xinle. Fedders International exhibits its products at industry trade
shows.
Production
Fedders currently manufactures its air conditioners in two U.S. owned
facilities - a 650,000 square foot facility in Effingham, Illinois and
a 232,000 foot facility in Columbia, Tennessee. Both of these
factories have earned the highest level of certification, ISO 9001,
for their quality management systems under the International Standards
Organization. The ISO 9000 program is an internationally recognized
benchmark of quality management systems within a production facility.
Both factories have sufficient production capacity for domestic needs
for the foreseeable future.
Fedders also manufactures air conditioners, through Fedders Xinle, in
a facility owned by the joint venture in Ningbo, People's Republic of
China. Current capacity of the facility is approximately 200,000 air
conditioners. It is planned to increase the capacity to 500,000 units
over the next few years which will require modest capital
expenditures.
Rotorex
Products
Rotorex manufactures and sells a broad line of rotary compressors,
principally for use in Fedders room air conditioners, but also sold to
other manufacturers of air conditioners and refrigeration products.
Rotorex's product line consists of two basic series of compressors,
designated as the 39 Frame and 48 Frame, with capacities ranging from
5,100 to 18,5000 BTUs. Models within each series, with specific
cooling capacities within the indicated range, are produced by varying
the mechanical pump assembly and motor. By varying the motors,
Rotorex also creates compressors capable of operating with different
voltages for applications in various parts of the world, critical to
international growth.
Marketing
Rotorex compressors are primarily used by the Company. The Company
also believes that growth opportunities exist in the international
market, particularly in Asia. Currently, Rotorex has three licensees
in the People's Republic of China and one in Taiwan. The license
agreements require Rotorex to provide technology to the licensees and
the licensees to pay royalties to Rotorex based upon sales of finished
compressors. Rotorex has a representative office in Beijing and sales
offices in Singapore, United Kingdom and United States.
Rotorex promotes its products through the use of product literature,
catalogs and advertising in the industry publications and exhibits its
products at industry and target market trade shows.
Production
Rotorex currently manufactures all of its compressors in a 200,000
square foot facility owned by the Company in Frederick, Maryland.
Rotorex has also obtained the highest level of certification, ISO
9001, for its quality management system. Rotorex recently made
several investments to enhance manufacturing efficiencies. Currently,
capacity is sufficient to meet compressor requirements of the Company
and compressor customers.
Melcor
Products
Melcor manufactures solid state heat pump modules that utilize the
Peltier effect to perform the same cooling and heating functions as
refrigerant-based compressors and absorption refrigerators.
Melcor's modules are typically used in spaces 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.
Melcor's products are sold under the trademarks MELCOR and FRIGICHIP.
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 near Lawrence Township,
New Jersey, comprising 53,000 square feet. The capacity available is
sufficient for its needs in the foreseeable future.
Sources and Availability of Raw Materials
The most important materials purchased by the Company are steel,
copper and aluminum, which are obtained from domestic and foreign
suppliers. The Company also purchases from other domestic and foreign
manufacturers certain components, including thermostats, compressors,
motors and electrical controls, used in its products. 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. Following the merger of
NYCOR into Fedders, the Company is less dependent upon any one source
for major components of its manufactured products. See note 13 of the
Notes to the Consolidated Financial Statements on page F22.
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, AIRTEMP,
ROTOREX, MELCOR and FRIGICHIPS are well known and enhance the
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 almost
entirely dependent on the manufacture and sale of room air
conditioners and dehumidifiers, the demand for which is highly
seasonal. Seasonally low volume sales are not sufficient to offset
fixed costs, resulting in seasonal operating losses at certain times
of the year. In addition, the Company's working capital needs are
seasonal, with the Company's greatest utilization of its lines of
credit occurring early in the calendar year. See "Management`s
Discussion and Analysis of Results of Operations and Financial
Condition," at pages F1 through F3 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 F12 herein.
See also the information entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition" at pages F1
through F3 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.
Competition
The Company's competitors include a number of domestic and foreign
manufacturers of air conditioners and appliances, including Frigidaire
Company, Whirlpool Corporation, Matsushita Electric Industrial
Company, Ltd. and Sharp. 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. Competitive factors could require price reductions or
increased spending on product development, marketing and sales that
could adversely affect the Company's profit margins.
Research and Development
Information with respect to amounts spent on research and development
is provided in Note 1 of the Notes to Consolidated Financial
Statements at page F12 herein. During fiscal 1996, the Company
established a research and design center in Princeton, New Jersey for
the development of innovative, non-vapor compression products, that
will take advantage of the Company's distribution strengths.
Environmental Protection
It is the Company's policy to take all practical measures to minimize
air and water pollution resulting from its operations. The Company
did not make capital expenditures on environmental protection-related
items during the year ended August 31, 1996 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, 1997.
Employees
The Company has approximately 3,000 employees, not including 500 joint
venture employees in Ningbo, China. The current contracts with two
unions representing employees of the Effingham, Illinois plant are
scheduled to expire in October 1998. Another union contract
representing Rotorex employees expires in August 1997. 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 F19 herein. Future sales are subject to the risks inherent in
such activities, such as foreign regulations, unsettled political
conditions and exchange rate fluctuations.
Item 2. Properties
The Company owns or leases the following primary facilities:
Approximate Square
Location Principal Function Feet of Floor Area
Liberty Corner, Corporate and 25,000
New Jersey International
(Leased) Headquarters
Effingham, Illinois Manufacturing of 650,000
(Owned) air conditioners
Columbia, Tennessee Manufacturing of 232,000
(Owned) air conditioners
Frederick, Maryland Manufacturing of 200,000
(Owned) rotary compressors
Orangeville, (1) 106,000
Ontario (Owned)
Whitehouse, Fedders NA 17,000
New Jersey (Leased) Headquarters
Singapore Research and Design 14,600
(Leased) Center
Basking Ridge, (2) 7,395
New Jersey (Owned)
Lawrence Township, Manufacture of Melcor 15,000
New Jersey (Owned) components
Lawrence Township, Assembly of Melcor modules 22,400
New Jersey (Leased)
Princeton, New Jersey Research and Design Center 6,000
(Leased)
(1) Facility available for sale and currently being leased.
(2) Facility available for sale.
The Effingham, Illinois facility is subject to a mortgage securing a
$4.2 million, 1% promissory note payable over the next 12 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.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
First Became an
Name and Age Position Held Executive Officer
Salvatore Giordano, 86 Chairman of the Board 1945
Sal Giordano, Jr., Vice Chairman, President 1965
58 (1) and Chief Executive Officer
Robert L. Laurent, Jr., Executive Vice President, 1989
41 Finance and Administration
and Chief Financial Officer
Kent E. Hansen, 48 Senior Vice President and 1996
Secretary
Gordon Newman, 51 Senior Vice President, 1995
Supply Chain
Gary J. Nahai, 45 Vice President and 1993
President, Fedders
International, Inc.
Sal Giordano III, 37 Vice President and President, 1996
(2) Melcor Corporation
Thomas Kroll, 41 Controller 1995
________________________
(1) Son of Salvatore Giordano
(2) Grandson of Salvatore Giordano
Business Experience During Last Five Years
Messrs. Salvatore Giordano, Sal Giordano, Jr. and Robert L. Laurent,
Jr. have been associated in executive capacities with the Company for
more than five years.
Mr. Hansen was elected to his position in August 1996. Previously he
was Vice President, Finance and General Counsel, Chief Financial
Officer of NYCOR. Prior thereto, he was Vice President and General
Council of the Company from 1990 to 1991.
Mr. Newman was elected to his position in April 1995. He joined
Fedders Corporation in 1991 as Vice President, Corporate Quality.
Prior thereto Mr. Newman was Corporate Director of Quality for Welbilt
Corporation.
Mr. Nahai was elected to his position in March 1993. Previously he
was Vice President of Sales - New York Metro Region and, prior
thereto, was Manager of International Sales and Licenses. Mr. Nahai
has been with the Company for more than five years.
Mr. Sal Giordano III was elected to his position in August 1996.
Previously he had the same position with NYCOR, Inc.
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.
PART II
Item 5. Market for Registrant's Common Equity and
Related Matters
The Company's Common, Class A Stock and Convertible Preferred 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, 1996, there were
4,595 holders of Common Stock, 4,625 holders of Class A Stock, 2,438
holders of Convertible Preferred Stock and 15 holders of Class B
Stock. For information with respect to the Company's Common Stock,
Class A Stock, Convertible Preferred Stock and Class B Stock, see
Notes 9 and 10 on pages F18 and F19, which Notes are incorporated herein by
reference.
Item 6. Selected Financial Data
See the table entitled "Selected Financial Data" at page F4, herein.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
See the information entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" at pages F1 through F3,
herein.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company at August 31,
1996 and 1995, and for the years ended August 31, 1996, 1995 and 1994,
the notes thereto and the report of the Company's independent auditors
thereon are included at pages F5 through F23, herein.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
In May 1995, the Company dismissed Ernst & Young LLP ("E & Y") as its
independent accountants. The Company has engaged BDO Seidman, LLP as
its new independent accountants.
The reports of E & Y on the Company's financial statements for the
year ended August 31, 1994 did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. During the last
three fiscal years, the Company has not had any disagreements with E &
Y on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth opposite the name of each director is his age, principal
occupation for the past five years, the name and principal business of
any corporation or other organization in which such employment is
carried on and other business directorships held by the nominee or
director. The Company is not presently aware of any circumstance
which would prevent any nominee from fulfilling his duties as a
director of the Company. For additional information with respect to
the Company's executive officers, see Page 12 herein.
Director
Name Principal Occupation and Age Since
NOMINEES - THREE YEAR TERM
Salvatore Giordano Chairman of the Board of the Company 1945
(1)(2); 86
Howard S. Modlin Partner, Weisman, Celler, Spett & Modlin 1977
(3); 65
William J. Brennan Financial Consultant(1)(4); 68 1980
DIRECTORS - TWO YEARS REMAINING TERM
Joseph Giordano President, NYCOR, Inc. (1)(5); 63 1961
Clarence Russel Moll President Emeritus, Widener University 1967
(6); 83
Anthony E. Puleo President, Puleo Tree Co. (7); 61 1994
DIRECTORS - ONE YEAR REMAINING TERM
Sal Giordano, Jr. Vice Chairman, President and Chief 1965
Executive Officer of the Company
(1)(2); 58
S. A. Muscarnera Retired (8); 56 1982
C. A. Keen Retired (9); 71 1996
(1) Messrs. Sal Giordano, Jr. and Joseph Giordano are sons, and Mr.
Muscarnera is the nephew, of Mr. Salvatore Giordano. Messrs.
Salvatore Giordano, and Sal Giordano, Jr., were also formerly
executive officers and (along with Joseph Giordano, William J. Brennan
and S. A. Muscarnera) directors of NYCOR, Inc.
(2) Messrs. Salvatore Giordano, Sal Giordano, Jr. and S.A.
Muscarnera, have been associated in executive capacities with the
Company for more than five years.
(3) Principal occupation during the past five years. The law firm of
Weisman, Celler Spett & Modlin renders legal services to the Company.
Mr. Modlin is also a director of General DataComm Industries, Inc. and
Trans-Lux Corporation.
(4) Principal occupation during the past five years. Mr. Brennan
served as a director of the Company from 1980 to 1987, and was again
elected a director in 1989. He is also Chairman of the Board of CSM
Environmental Systems, Inc.
(5) Principal occupation during the past two years. NYCOR, Inc. was
a holding company comprising two operating companies, one
manufacturing rotary compressors and the other thermoelectric heating
and cooling modules. NYCOR was merged into the Company on August 13,
1996. Mr. Giordano was a Senior Vice President of the Company for
more than five years prior to his retirement August 31, 1992.
(6) Principal occupation during the past five years. Dr. Moll is
also a director of Ironworkers Savings Bank.
(7) Principal occupation during the past two and one half years.
Puleo Tree Co. is an importer of Christmas items and garden furniture.
Prior to that Mr. Puleo was President of Boulderwood Corporation.
(8) Mr. Muscarnera was Senior Vice President of Fedders for many
years before his retirement on August 31, 1996, with responsibilities
in a number of areas during that time, including Secretary, human
resources and legal.
(9) Mr. Keen was a Vice President of Fedders for more than 20 years
until his retirement in August 1992, with responsibilities in a number
of areas during that time, including marketing, treasury and
international sales and sourcing. Since his retirement he had been a
Director of NYCOR.
Item 11. Executive Compensation
The following information is furnished as to all cash compensation
paid by the Company and its subsidiaries during the Fiscal Year to
each of the five highest paid executive officers of the Company whose
aggregate direct compensation exceeded $100,000.
Long-Term
Compensation
Summary Compensation Table Annual Compensation Awards
(a) (b) (c) (d) (g) (i)
All Other
Fiscal Salary Bonus Options Compensation (1)
Name and Principal Position Year $ # $
Salvatore Giordano 1994 252,150 282,045 150,000 15,753
Chairman of the 1995 245,354 520,365 77,314 3,097,691 (2)
Board of Directors 1996 268,258 492,660 120,000 22,827
Sal Giordano, Jr. 1994 335,375 282,045 180,000 17,548
Vice Chairman, 1995 341,530 520,365 139,066 32,424
President and 1996 352,007 492,660 120,000 42,514
Chief ExecutiveOfficer
Robert L. Laurent, Jr. 1994 209,725 141,023 95,000 8,425
Executive Vice President, 1995 226,489 260,183 50,590 15,281
Finance and Administration 1996 250,000 246,330 30,000 16,003
and Chief Financial Officer
S. A. Muscarnera 1994 181,875 141,023 15,000 7,641
Senior Vice President and 1995 191,144 260,183 18,750 16,726
Secretary 1996 186,000 153,956 35,000 13,590
Gordon Newman 1994 100,016 21,456 - 3,205
Senior Vice President, 1995 122,498 48,072 22,782 5,123
Supply Chain 1996 140,000 61,583 10,000 7,570
(1) Includes the Company contribution to savings and investment
retirement plans up to the 3% offered to all employees of the Company
in 1996, the dollar value of the benefit of premiums paid for split-
dollar life insurance policies projected on an actuarial basis which
cost is recovered by the Company from the proceeds of such policies
(Mr. Sal Giordano, Jr. $17,174; Mr. Robert L. Laurent, Jr. $1,114; Mr.
S. A. Muscarnera $3,391; Mr. Gordon Newman $1,523).
(2) Includes a special award granted to Mr. Giordano in fiscal 1995,
in recognition of over fifty years of extraordinary and exemplary
service to the Company as its President or Chairman, overseeing the
growth of the Company from a $7,000,000 radiator manufacturer to the
leading manufacturer of room air conditioners in North America.
Options/SAR Grant Tables
The following table sets forth information concerning the grant of
stock options and/or stock appreciation rights (SAR's) during the
Fiscal Year to the individual executive officers named in the Summary
Compensation Table.
The table shows the number of options granted to each named executive
officer, the number of options granted as a percentage of options
granted to all employees during the Fiscal Year, the exercise price of
each option, the expiration date for each option, and a presentation
of the potential realizable value for each option assuming annual
rates of stock appreciation of 5% and 10% over each option term.
Options/SAR Grants Last Fiscal Year
% of Total
Options Granted Exercise or Expira-
Options to Employees Base Price tion
Name Granted # In Fiscal Year ($/SH) Date 5% ($) 10% ($)
Salvatore
Giordano 60,000 4.50 10/25/00 74,596 164,838
30,000 (1) 3.25 2/31/98 21,012 45,250
30,000 (1) 1.88 12/31/98 12,122 26,106
120,000 16.0%
Sal
Giordano, Jr.60,000 4.50 10/25/00 74,596 164,838
30,000 (1) 3.25 12/31/98 21,012 45,250
30,000 (1) 1.88 12/31/98 12,122 26,106
120,000 16.0%
Robert L.
Laurent, Jr. 30,000 4.0% 4.50 10/25/00 37,298 82,419
S. A.
Muscarnera 20,000 4.50 10/25/00 24,865 54,946
50,000 4.87 08/27/01 67,344 148,812
7,500 (1) 3.25 12/31/98 5,253 11,312
7,500 (1) 1.88 12/31/98 3,031 6,526
85,000 11.3%
Gordon
Newman 10,000 1.3% 4.50 10/25/00 12,433 27,473
(1) Replacement options were issued to take into account the
terms of the merger agreement which stated that the employees and
directors of NYCOR were to be placed in the same economic position
following the merger as they were immediately prior to the date of the
execution of the merger
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
The following table sets forth the number of shares exercised during
the Fiscal Year, the value realized upon exercise, the number of
unexercised options at the end of the Fiscal Year, and the value of
unexercised in-the-money options at the end of the Fiscal Year.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Value of
Unexercised
Number of In-the-Money
Unexercised Options at
Shares Options at FY-end FY-end ($)(1)
Acquired on Value (#) Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
Salvatore Giordano - - 587,314 E $ 841,165 E
102,686 U 30,000 U
Sal Giordano, Jr. - - 658,066 E 879,544 E
997,000 U 2,216,958 U
Robert L. Laurent, Jr. - - 350,590 E 482,171 E
30,000 U 15,000 U
S. A. Muscarnera - - 258,750 E 387,234 E
70,000 U 16,250 U
Gordon Newman - 35,050 22,782 E 11,391 E
10,000 U 5,000 U
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of three directors who are not
officers or employees of the Company (Howard S. Modlin, William J.
Brennan and Anthony E. Puleo). The Committee submitted a plan to the
Company's Board of Directors (the "Board") for the Fiscal Year 1996
which was approved by the Board on October 25, 1995.
Report of the Compensation Committee on Executive Compensation
In determining the total compensation package for the chief executive
officer and all other executive officers for the Fiscal Year, the
Committee considered several factors including: the performance of
the Company; the individual contribution of each executive officer;
the need to attract and retain highly qualified executives in the air
conditioning industry necessary to build long-term stockholder value;
and the need to link a portion of each executive officer's long-term
capital accumulation to the growth in the market value of the
Company's Stock. Executive compensation was broken down into three
major components (i) cash compensation, (ii) incentive bonuses, and
(iii) stock options.
Cash compensation for the Fiscal Year is shown on the Summary
Compensation Table. For the Fiscal Year, the Committee recommended
and the Board adopted a modified version of prior years' plans, by
establishing significantly lower percentages to apply against
consolidated pre-tax income of the Company minus $1,000,000 ("Adjusted
Pre-Tax Income"). The awards under the plan are based heavily upon
the performance of the Company (the "Executive Plan"). In accordance
with the terms of the Executive Plan, the executive officers designed
by the Board may receive incentive awards based upon a prescribed
formula. The amount of the awards for the Fiscal Year range from
0.13% to 1.0% of Adjusted Pre-Tax Income, compared to 0.5% to 1.5% in
prior years. With respect to the individuals named in the Summary
Compensation table, the following percentages of Fiscal 1996 Adjusted
Pre-Tax Income have been designated: Mr. Salvatore Giordano 1.0%
(previously 1.5%); Mr. Sal Giordano, Jr. 1.0% (previously 1.5%); Mr.
Robert L. Laurent, Jr. 0.5% (previously 0.75%); Mr. S. A. Muscarnera
0.31% (previously 0.75%); and Mr. Gordon Newman 0.13% (previously
under a separate plan). Under the Executive Plan, the following
awards were made for Fiscal Year performance: Mr. Salvatore Giordano
$492,660 (compared to $520,365 for fiscal 1995); Mr. Sal Giordano, Jr.
$492,660 (compared to $520,365 for fiscal 1995); Mr. Robert L.
Laurent, Jr. $246,330 (compared to $260,183 in fiscal 1995), Mr. S. A.
Muscarnera $153,956 (compared to $260,183 in fiscal 1995), and Mr.
Gordon Newman $61,583 (compared to $48,072 in fiscal 1995). As shown,
the actual bonus amounts were less in this fiscal year, which was a year of
record breaking performance.
Respectfully submitted,
Compensation Committee
Howard S. Modlin - Chairman
William J. Brennan
Anthony E. Puleo
Employment Contract
Mr. Salvatore Giordano has an Employment Agreement with the Company,
which became effective on March 23, 1993. The material provisions of
the Agreement include: (1) an annual base salary of at least
$238,000, payable in equal semi-monthly installments; (2) annual
participation in all compensatory plans and arrangements of the
Company no less favorable than the current fiscal year plans
including, but not limited to, a bonus not less than the amount of the
latest fiscal year bonus, and continuing eligibility to be awarded
stock options; (3) reimbursement for all expenses incurred while on
Company related business; and (4) annual consideration for base salary
and plan participation increases, if deemed justified by the Company.
The Agreement has a stated expiration date of March 23, 2003, but the
term of the Agreement automatically extends and has a remaining term
of ten years from any point in time, until the term is finally fixed
at a period of ten years from an intervening event, as provided in the
Agreement, such as permanent disability or death. During the Fiscal
Year, the Company amortized the estimated present value of future non-
salary benefits payable under the Agreement based upon certain
assumptions, in the amount of $356,000.
Following the merger of NYCOR into the Company on August 13, 1996, the
employment agreement was adjusted to take into account the terms of
the merger agreement which stated that the employees and directors of
NYCOR were to be placed in the same economic position with respect to
salaries and other benefits provided by NYCOR.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS OF FEDDERS
As of October 31, 1996, each director of the Company and all directors and
executive officers of the Company owned beneficially the number of shares of
the Company's equity securities set forth in the following table. Shares
subject to acquisition within 60 days pursuant to stock options are shown
separately. Unless otherwise indicated, the owners listed have sole voting
and investment power. Fedders Class A Stock has no voting rights except as
provided under Delaware Law.
Amount
Name of and Nature Shares Subject Percent
Title Individual or of Beneficial to Acquisition of Class
of Class Persons in Group Ownership Within 60 days (15) Owned (16)
Common Salvatore Giordano 1,100 (1) 0 Less than 1%
Stock Sal Giordano, Jr. 1,100 (1) 0 Less than 1%
Joseph Giordano 13,910 (1) 0 Less than 1%
Howard S. Modlin 256,800 (2) 0 1.35%
Clarence Russel Moll 61,400 (3) 0 Less than 1%
William J. Brennan 5,000 0 Less than 1%
Anthony E. Puleo 2,000 0 Less than 1%
S. A. Muscarnera 55,000 0 Less than 1%
C. A. Keen 10,700
Robert L. Laurent, Jr. 115,000 0 Less than 1%
All directors and executive
officers as a group 525,310 0 2.77%
Class A
Stock Salvatore Giordano 1,210,815 (4)(5) 647,314 9.25%
Sal Giordano, Jr. 694,864 (4)(6)(7) 709,066 6.97%
Joseph Giordano 879,689 (4)(7)(8) 301,875 5.98%
Howard S. Modlin 224,701 (9) 171,564 2.02%
Clarence Russel Moll 29,225 (10) 96,563 Less than 1%
William J. Brennan 4,375 144,376 Less than 1%
Anthony E. Puleo 0 9,375 Less than 1%
S. A. Muscarnera 48,125 278,750 1.66%
C. A. Keen 400 127,500 Less than 1%
Robert L. Laurent, Jr. 100,625 350,590 2.28%
Gordon Newman 0 46,845 Less than 1%
All directors and executive
officers as a group 2,470,257 3,179,335 24.97%
Class B
Stock Salvatore Giordano 2,262,566 (11) 0 99.82%
(16) Sal Giordano, Jr. 2,262,566 (11) 0 99.82%
Joseph Giordano 2,262,566 (11) 0 99.82%
All directors and executive
officers as a group 2,262,566 0 99.82%
Convertible
Preferred
Stock Salvatore Giordano 1,248,823 (12)(13) 0 16.34%
Sal Giordano, Jr. 1,107,317 (12)(14) 0 14.48%
Joseph Giordano 839,902 (12)(15) 0 10.99%
Howard S. Modlin 84,024 0 1.1%
Clarence Russel Moll 30,410 0 Less than 1%
William J. Brennan 129,402 0 1.7%
S. A. Muscarnera 56,500 0 Less than 1%
C. A. Keen 28,000 0 Less than 1%
All directors and executive
officers as a group 2,040,059 0 26.7%
Ownership of Common
Stock, Class A Stock,
Class B and Convertible
Preferred Stock combined,
by all directors and
executive officers as
a group 7,298,192 3,179,335 20.34%
(1) The amount shown includes 1,100 shares which are held by a
corporation in which Messrs. Salvatore Giordano, Sal Giordano, Jr. and
Joseph Giordano are officers, directors and stockholders, and share
voting and investment power over such shares.
(2) Includes 3,100 shares owned by members of Mr. Modlin's family as
to which Mr. Modlin disclaims beneficial ownership.
(3) Includes 15,000 shares owned by Dr. Moll's wife, as to which Dr.
Moll disclaims beneficial ownership.
(4) Includes 190,875 shares which are held by corporations in which
Messrs. Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano are
officers, directors and stockholders, and share voting and investment
power.
(5) Includes 117,548 shares held of record by Mr. Giordano's wife,
and 148,904 shares held of record by Mr. Giordano's wife in trust for
their grandchildren, as to which Mr. Giordano disclaims beneficial
ownership.
(6) Includes 10,462 shares held of record by Mr. Giordano's wife, as
to which Mr. Giordano disclaims beneficial ownership, and 56,328
shares held by Mr. Giordano in trust as trustee for himself.
(7) Includes 345,625 shares held in trust, as to which Messrs. Sal
Giordano, Jr. and Joseph Giordano share voting and investment power.
(8) Includes 56,328 shares held by Mr. Giordano in trust as trustee
for himself.
(9) Includes 2,713 shares owned by members of Mr. Modlin's family as
to which Mr. Modlin disclaims beneficial ownership.
(10) Includes 13,125 shares owned by Dr. Moll's wife as to which Dr.
Moll disclaims beneficial ownership.
(11) Shares owned by Giordano Holding Corporation as to which Messrs.
Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano share voting
and investment power.
(12) Includes 753,757 shares which are held by corporation in which
Messrs. Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano are
officers, directors and stockholders and share voting and investment
power over such shares.
(13) Includes 39,264 shares owned by Mr. Giordano's wife, as to which
he disclaims beneficial ownership, and 80,201 shares held of record by
Mr. Giordano's wife in trust for their grandchildren, as to which Mr.
Giordano disclaims beneficial ownership.
(14) Includes 7,493 shares held of record by Mr. Giordano's wife;
28,811 shares held of record by Mr. Giordano's wife in trust for their
grandchildren, for both of which Mr. Giordano disclaims beneficial
ownership, and 14,974 shares held by self as trustee for self. Also
includes 2,220 shares which would be realized upon conversion of
Fedders Convertible Subordinated Debentures held by Mr. Giordano.
(15) Includes 23,200 shares held in trust by Mr. Giordano for his
grandchildren for which he disclaims beneficial ownership, and 14,974
shares held by self as trustee for self.
(16) The amounts shown are the number of shares held under options
exercisable within 60 days.
(17) The Fedders Class B Stock is convertible into Fedders Common
Stock at any time on a share-for-share basis. In the event that the
individuals named as owning Fedders Class B Stock converted their
shares into Fedders Common Stock, less than 5% of the class would
remain outstanding, and pursuant to the terms of the Fedders Charter,
all remaining Fedders Class B Stock and all outstanding Fedders Class
A Stock would automatically be converted into Fedders Common Stock.
If such conversion took place, and the named individuals exercised all
of the options indicated, such individuals and the group would
beneficially own the following number of shares constituting the
indicated percentage of Fedders Common Stock outstanding: Mr.
Salvatore Giordano, 5,370,618 shares constituting 10.96%; Mr. Sal
Giordano, Jr., 4,774,913 shares constituting 9.73%; Mr. Joseph
Giordano, 4,297,942 shares constituting 8.84%; and all directors and
executive officers as a group 10,477,527 shares constituting 20.34%.
The share totals for Messrs. Salvatore Giordano, Sal Giordano, Jr. and
Joseph Giordano include 3,208,204 shares which are held by corporation
in which they are officers, directors and stockholders and share
voting and investment power over such shares. In the event that the
individuals named as owning Fedders Class B Stock also converted their
shares of Fedders Convertible Preferred Stock, they would receive
Common Stock, as the Class A Stock into which the Fedders Convertible
Preferred Stock is currently convertible would no longer exist, and
their percentage of ownership of Common Stock would increase in
proportion to their holdings of Fedders Convertible Preferred Stock.
The same would be true for the conversion of any Fedders Convertible
Subordinated Debentures.
PRINCIPAL STOCKHOLDERS
The following table sets forth information at October 31, 1996 with
respect to the beneficial ownership of the Company's voting securities
by all persons known by the Company to own more than 5% of the
Company's outstanding voting securities. Unless otherwise indicated,
the owners listed have sole voting and investment power.
Name and Address Amount Beneficially Percent
Title of Class of Beneficial Owner (1) Owned of Class
[S] [C] [C] [C]
Class B Stock Salvatore Giordano 2,262,566 99.82%
Joseph Giordano and
Sal Giordano, Jr.
c/o Fedders Corporation
Liberty Corner, NJ 07938
Common Stock Strong Capital 2,185,500 11.51%
Management, Inc. (2)
100 Heritage Reserve
P. O. Box 2936
Milwaukee, WI 53201
(1) See footnotes (11) and (17) to the previous table for more detailed
information with respect to the security ownership of the named individuals.
(2) Strong Capital Management, Inc. is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940.
The information provided is based upon a Schedule 13G filed by this
Stockholder with the Commission on February 13, 1996.
Item 13. Certain Relationships and Related Transactions
See the information included under Part III. Item 10 herein.
PART IV
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K
Index to Financial Statements and Financial Statement Schedule
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company and its
subsidiaries are included:
Page #
Report of Independent Certified Public Accountants F5
Report of Independent Auditors F6
Consolidated Statements of Operations for the years F7
ended August
Consolidated Balance Sheets at August 31, 1996 and 1995 F8
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1995 and 1994 F9-F10
Consolidated Statements of Stockholders' Equity for
the years ended August 31, 1996, 1995 and 1994 F11
Notes to Consolidated Financial Statements F12-F23
(a) 2. Financial Statement Schedule
Consolidated Schedule for the years ended August 31, 1996
Report of Independent Certified Public Accountants S-1
II. Valuation and Qualifying Accounts S-2
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.
(a) 3. Exhibits
(Note: With respect to incorporation by reference to exhibits filed
by RTXX Corporation (formerly Rotorex Corporation), reference is
hereby made to Commission File No. 1-2150)
(3) (i) Restated Certificate of Incorporation, filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for 1984 and incorporated
herein by reference.
(ii) Amendment to Restated Certificate of Incorporation, filed as
Exhibit 4a to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1985 and incorporated herein by reference.
(iii) Correction of Restated Certificate of Incorporation, filed as
Exhibit 4b to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1985 and incorporated herein by reference.
(iv) Amendment of Certificate of Incorporation, filed as Exhibit
(3) (i) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1987 and incorporated herein by reference.
(v) Amendment of Certificate of Incorporation, filed as Exhibit
(3) (ii) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1987 and incorporated herein by reference.
(vi) Amendment to Certificate of Incorporation, filed as Exhibit
(3) (vi) to the Company's Annual Report on Form 10-K for the year
ended August 31, 1992 and incorporated herein by reference.
(vii) Amendments to Certificate of Incorporation dated August 13,
1996.
(viii) 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 tot he Company's
Proxy Statement - Prospectus dated May 10, 1996 and incorporated
herein by reference.
(viii) Employment Contract between The Corporation 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) Agreement and Plan of Merger Between Fedders Corporation and
NYCOR, Inc. filed as Annex A to the Company's Proxy Statement -
Prospectus dated May 10, 1996 and incorporated herein by reference.
(11) Statement re computation of per share earnings.
(16) (i) Letter referencing change in certifying accountants filed as
Exhibit 16 (i) to the Company's Annual Report on Form 10-K 1996 and
incorporated herein by reference.
(21) Subsidiaries.
(23) Consents of BDO Seidman, LLP and Ernst & Young.
(27) Financial data schedule.
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 29, 1996, an 8-KA was
filed on October 25, 1996 and are incorporated herein by
reference.
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 27, 1996
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 Chairman of the Board November 27, 1996
Salvatore Giordano
/s/Salvatore Giordano, Jr. Vice Chairman, November 27, 1996
Salvatore Giordano, Jr. President and Chief
Executive Officer and a Director
(Principal Executive Officer)
/s/Joseph Giordano Director November 27, 1996
Joseph Giordano
/s/Howard S. Modlin Director November 27, 1996
Howard S. Modlin
/s/Clarence Russel Moll Director November 27, 1996
Clarence Russel Moll
/s/William J. Brennan Director November 27, 1996
William J. Brennan
/s/Anthony Puleo Director November 27, 1996
Anthony Puleo
/s/S.A. Muscarnera Director November 27, 1996
S.A. Muscarnera
/s/C.A. Keen Director November 27, 1996
C. A. Keen
/s/Robert L. Laurent, Jr. Executive Vice November 27, 1996
Robert L. Laurent, Jr. President, Finance
Administration
(Principal Financial & Accounting Officer)
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Fedders Corporation recognized record net sales and income in fiscal
1996 after also realizing significant revenue and earnings growth in
the two previous years. The growth trend reflects strong
relationships with retailers resulting from the Company's
concentration on flexible manufacturing to accommodate customers'
increasingly seasonal delivery requirements and in fiscal 1996,
additional international sales.
The Company has taken important steps to take strategic advantage of
its experience in room air conditioners within the rapidly growing,
international marketplace. In November 1995, the Company entered into
a joint venture in Ningbo, China to manufacture air conditioners for
sale in the Chinese market and for export.
In August 1996, following shareholder approval, NYCOR, Inc. ("NYCOR"),
a manufacturer of rotary compressors at Rotorex and thermoelectric
modules at Melcor, was merged into the Company. The supply of
compressors from Rotorex, as well as its four Asian compressor
licensees is strategically important to international growth.
Presently, the Company's business is still largely domestic and the
business is affected by summer weather in major markets, with product
shipped primarily in the second half of the fiscal year. Just-in-time
delivery is a requirement of retail leaders in the room air
conditioner industry. Cool summer weather in key U.S. markets in
fiscal 1996 has increased industry inventories entering fiscal 1997.
This is expected to result in a reduction in first half revenues,
offset in part by additional international sales of room air
conditioners and sales of compressors and thermoelectric modules.
This follows favorable weather in the prior three consecutive years
that depleted industry inventories at manufacturers and retailers
entering fiscal 1996. Manufacturers' shipments of room air
conditioners in the U.S. during Fedders' fiscal periods totaled 4.6
million units in 1996, 4.1 million units in 1995 and 3.8 million units
in 1994.
Results of Operations
With Fedders and U.S. industry inventories at minimal levels entering
each of the last three fiscal years, Fedders increased its domestic
unit sales by 22%, 30% and 55% in 1996, 1995 and 1994, respectively.
During these same periods, industry unit shipments in the U.S.,
excluding Fedders' increased by only 11%, 12% and 27%, respectively.
The Company's international sales increased by 90% and 56% in fiscal
1996 and 1995, respectively.
The gross profit margin increased to 22.3% in fiscal 1996 from 21.2%
in 1995, primarily as a result of efficiency in plant utilization due
to higher sales and to somewhat lower commodity prices. The gross
profit margin changed little from fiscal 1994 to 1995. However,
fiscal 1995 included a favorable $3.5 million reduction in warranty
provisions, an outgrowth of continuing improvements in quality, offset
in part, by a $2.8 million write down of idle equipment and by
inflationary pressure, primarily related to copper. The gross profit
margin increased from 17.5% in fiscal 1993 to 21.3% in fiscal 1994 due
to efficiencies in plant utilization, due to higher sales and cost
reduction.
Selling, general and administrative expense decreased to 8.6% of net
sales in fiscal 1996 from 9.3% in fiscal 1995 and from 11.0% in fiscal
1994 due to higher sales volumes that was offset in part, in fiscal
1995, by a $2.0 million provision for the implementation of an early
retirement program.
Net interest expense decreased as a percent of sales to .3% from .6%
in fiscal 1995 and 1.8% in fiscal 1994 as long-term debt was decreased
and cash-on-hand increased.
In fiscal 1996, the Company returned to a full federal tax rate after
utilizing its net operating loss carryforwards during fiscal 1995. As
a result, the effective tax rate was 38.0% in fiscal 1996 compared
with 17.3% in fiscal 1995 and 3% in fiscal 1994. During 1994, the
Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which resulted in a one-time
cumulative effect of an accounting change amounting to $1.8 million.
Liquidity and Capital Resources
Working capital requirements of the Company historically are 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 1996 continued strong with cash increasing to
$90.3 million at August 31 from $57.7 million a year earlier.
Net cash provided by operations in fiscal 1996 amounted to $41.9
million. Accounts receivable changed little from year to year, even
with the increase in sales, as August 31 is the low point of the
fiscal year. Ending inventories increased by $24.4 million, with
$12.3 million of the increase related to the Chinese joint venture and
$13.3 million related to Rotorex and Melcor. Excluding the
inventories of these acquired entities, inventories decreased by $1.2
million, in a colder than normal summer. Accounts payable, excluding
accounts payables from acquired operations, changed little. Accrued
expenses increased in fiscal 1995 as a result of higher marketing
accruals related to higher sales and in 1996 from acquired operations.
Net cash used in investing activities during 1996 included capital
expenditures of $7.0 million. Fedders also made an investment in a
joint venture to manufacture room air conditioners in Ningbo, China
with the Ningbo General Air Conditioner Factory. Fedders has a 60%
interest in Fedders Xinle Co., Ltd. which was initially capitalized on
November 7, 1995. Fedders' cash contribution to the venture was
approximately $8.4 million. The factory's present capacity is 200,000
units and is planned to be increased to 500,000 units by fiscal 1999.
The venture is expected to sell 50% of its product in China and export
50%.
As discussed, in August 1996, the Company merged with NYCOR. The
Company had a supply agreement with NYCOR for the supply of up to
800,000 compressors annually, through the year 2003 (note 2). The
Company's rotary compressor requirements were nearly 1.4 million in
fiscal 1996 and it will need many more to grow its international
business. The merger will provide a guaranteed supply of compressors
to support the Company's international growth which will lessen the
dependency on weather in the North American market.
Net cash used in financing activities amounted to $2.8 million.
Fedders Xinle borrowed $10.3 million from a People's Republic of China
bank for expansion. The long-term loan is not guaranteed by Fedders
or its subsidiaries. Fedders Xinle repaid $4.0 million during fiscal
1996. The Company assumed a total of $28.9 million of debt in its
merger with NYCOR.
The Company's revolving credit facility of $40.0 million is renewable
in December 1997. The credit facility is collateralized by
substantially all of the Company's assets. Management believes that
the Company's cash, earnings and borrowing capacity are adequate to
meet the needs of its operations and long-term credit requirements,
including capital expenditures and its debt maturities.
Selected Financial Data (a)
(Amounts in thousands, except per share data)
1996 1995 1994 1993 1992
Net sales $371,772 $316,494 $231,572 $158,602 $192,365
Gross profit 83,028 67,125 49,263 27,744 25,607
Percent of net sales 22.3 21.2 21.3 17.5 13.3
Operating income
(loss) 50,988 37,653 23,905 1,907 (9,392)
Percent of net sales 13.7 11.9 10.3 1.2 (4.9)
Pre-tax income
(loss) 50,266 35,691 19,803 (2,340) (24,965)
Percent of net sales 13.5 11.3 8.6 (1.5) (12.7)
Net income (loss) $31,158 $ 29,504 $ 20,989(c) $ (1,775) $(24,931)(d)
Net income attributable
to common
stockholders $ 31,007 $ 29,504 $ 20,989 $ (1,775) $(24,931)
Net income (loss)
per share $ 0.74 $ 0.72 $ 0.53(c) $ (0.05) $ (0.67)
Cash dividends declared per share:
Preferred $ 0.050 - - - -
Common 0.080 $ 0.020 - - -
Class A 0.080 0.020 - - -
Class B 0.072 0.018 - - -
Cash $ 90,295 $ 57,707 $ 34,869 $ 8,553 $ 8,738
Total assets 290,220 136,775 100,653 81,285 179,249
Long-term debt (including
current portion) 40,406 5,106 17,943 25,590 89,588
Stockholders'
equity 159,751 82,542 49,317 24,229 19,039
Capital
expenditures 7,043 9,041(b) 2,634 2,379 3,599
Depreciation and
amortization 6,578 7,519 9,374 5,646 14,876
Earnings before interest,
taxes, depreciation and
amortization 57,796 44,143 32,252 6,317 2,675
(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) Includes buyout of $1,750,000 of equipment under lease.
(c) In 1994, the Company adopted SFAS 109, "Accounting for Income Taxes,"
which resulted in income of $1,780,000 or $0.04 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.
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, 1996 and 1995, and the related
consolidated statements of operations, cash flows and stockholders'
equity for the years then ended. 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, 1996 and 1995, and
the consolidated results of its operations and its cash flows for
the years then ended, in conformity with generally accepted
accounting principles.
/s/BDO Seidman, LLP
Woodbridge, New Jersey
September 30, 1996
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FEDDERS CORPORATION
We have audited the accompanying consolidated statements of
operations, cash flows and stockholders' equity of Fedders
Corporation for the year ended August 31, 1994. Our audit also
included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule
based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
results of operations and cash flow of Fedders Corporation for the
year ended August 31, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1994
the Company changed its method of accounting for income taxes.
/s/Ernst & Young, LLP
Metro Park, New Jersey
October 6, 1996
Fedders Corporation
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Years Ended August 31, 1996 1995 1994
Net sales $371,772 $316,494 $231,572
Costs and expenses:
Cost of sales 288,744 249,369 182,309
Selling, general and
administrative 32,040 29,472 25,358
320,784 278,841 207,667
Operating income 50,988 37,653 23,905
Minority interest in joint venture 230 - -
Interest expense (net of interest
income of $1,410, $751 and $223 in
1996, 1995 and 1994, respectively) (952) (1,962) (4,102)
Income before income taxes 50,266 35,691 19,803
Federal, state and foreign
income taxes 19,108 6,187 594
Income before cumulative
effect of an accounting change 31,158 29,504 19,209
Cumulative effect of an accounting
change - - 1,780
Net income 31,158 29,504 20,989
Preferred stock dividend
requirement 151 - -
Net income attributable to
common stockholders $ 31,007 $29,504 $20,989
Primary earnings per share:
Income before cumulative
effect of an accounting change $ 0.74 $ 0.72 $ 0.49
Cumulative effect of an accounting
change - - 0.04
Net income per share $ 0.74 $ 0.72 $ 0.53
Dividends per share declared:
Preferred $ 0.050 - -
Common 0.080 $ 0.020 -
Class A 0.080 0.020 -
Class B 0.072 0.018 -
See accompanying notes
Fedders Corporation - Consolidated Balance Sheets
(Amounts in thousands, except share data)
August 31, 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 90,295 $57,707
Accounts receivable (less allowances of
$1,952 in 1996 and $872 in 1995) 7,975 8,847
Inventories 53,446 29,020
Deferred income taxes 3,584 2,954
Other current assets 3,366 893
Total current assets 158,666 99,421
Net property, plant and equipment 62,872 29,803
Deferred income taxes 7,364 1,277
Goodwill 58,556 5,517
Other assets 2,762 757
$290,220 $136,775
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,889 $ 590
Accounts payable 16,514 5,591
Income taxes payable 15,391 9,131
Accrued expenses 38,055 27,986
Total current liabilities 71,849 43,298
Long-term debt 38,517 4,516
Other long-term liabilities:
Warranty 3,679 3,962
Other 10,816 2,457
Minority interest in joint venture 5,608 -
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value, 15,000,000
shares authorized, 7,643,061 issued
at August 31, 1996 7,643 -
Common Stock, $1 par value, 80,000,000
shares authorized, 18,989,798 and
18,988,598 issued at August 31, 1996
and 1995, respectively 18,990 18,989
Class A Stock, $1 par value, 60,000,000
shares authorized, 19,415,916 and
18,831,376 shares issued at August 31,
1996 and 1995, respectively 19,416 18,831
Class B Stock, $1 par value, 7,500,000
shares authorized, 2,266,706 and
2,267,206 issued and outstanding at
August 31, 1996 and 1995, respectively 2,267 2,267
Additional paid-in capital 87,728 46,481
Retained earnings (deficit) 23,865 (4,041)
Cumulative translation adjustments (158) 15
Total stockholders' equity 159,751 82,542
$290,220 $136,775
See accompanying notes
Fedders Corporation - Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended August 31, 1996 1995 1994
Operating activities:
Net income $ 31,158 $29,504 $20,989
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 6,578 7,519 9,374
Tax benefit related to stock
options exercised 437 2,900 -
Deferred income taxes (1,717) (5,406) (962)
Changes in operating assets and
liabilities (excluding the effect of
the merger):
Accounts receivable, net 4,402 3,993 (3,939)
Inventories (7,856) (10,972) 1,222
Other current assets (628) (219) 243
Other assets (568) 175 (59)
Income taxes payable 6,243 8,373 573
Accounts payable (2,887) 276 141
Accrued expenses 3,784 6,617 4,370
Other long-term liabilities 3,151 1,643 1,687
Other (226) 184 (39)
Net cash provided by operations $ 41,871 44,587 33,600
Investing activities:
Additions to property, plant and
equipment (7,043) (9,041) (2,634)
Disposal of property, plant and
equipment 535 521 441
Net cash used in investing activities $ (6,508) (8,520) (2,193)
Financing activities:
Repayments of NYCOR
short-term borrowing (3,000) - -
Repayments of long-term debt (695) (13,866) (9,229)
Proceeds from stock options exercised 1,868 692 4,138
Net proceeds from Fedders Xinle
long-term financing 6,299 - -
Repayment of Fedders Xinle
short-term debt (3,396) - -
Cash dividends (3,252) (797) -
Expenses related to the NYCOR merger (599) - -
Proceeds from notes due on
common stock purchases - 742 -
Net cash used in
financing activities $ (2,775) (13,229) (5,091)
Net increase in cash and
cash equivalents 32,588 22,838 26,316
Cash and cash equivalents at
beginning of year 57,707 34,869 8,553
Cash and cash equivalents at end
of year $ 90,295 $57,707 $34,869
Fedders Corporation - Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended August 31, 1996 1995 1994
Supplemental disclosure:
Cash paid (refunded) during the year for:
Interest $ 2,249 $ 1,904 $ 3,766
Net income taxes 13,513 492 (1,196)
Noncash investing and financing activities:
The issuance of 7,643 shares of
Convertible Preferred Stock
in exchange for all
the outstanding shares of Common,
Class A and Class B shares of NYCOR $ 47,769 - -
See accompanying notes
Fedders Corporation
Consolidated Statements of Stockholders' Equity
(Amounts in thousands)
Cumu- Notes
Add'l Retained lative Due on
Class Class Paid- Earnings Trans- Common Trea-
Preferred Common A B in (Deficit)Adjust- Stock sury
Stock Stock Stock Stock Capital ments Purchases Stock
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)
Net income - - - - - 29,504 - - -
Stock
dividend - - 7,984 - - (7,984) - - -
Conversion
of Class B
to Common
Stock - 1 - (1) - - - - -
Dividends
declared - - - - - (797) - - -
Stock
options
exercised - - 222 - 470 - - - -
Tax benefit
related
to stock
options
exercised - - - - 2,900 - - - -
Repayment of
common stock
notes - - - - - - - 742 -
Retirement of
treasury
stock - (654) - - (8,312) - - - 8,966
Foreign
currency
translation - - - - - - 184 - -
August 31,
1995 - $18,989 $18,831 $2,267 $46,481 $(4,041) $ 15 - -
Net income - - - - - 31,158 - - -
Issuance of
Preferred
Stock $7,643 - - - 40,126 - - - -
Expenses
related
to NYCOR
merger - - - - (599) - - - -
Tax benefit
related
to stock
options
exercised - - - - 437 - - - -
Conversion of
Class B to
Common
Stock - 1 - - - - - - -
Dividends
declared - - - - - (3,252) - - -
Stock options
exercised - - 585 - 1,283 - - - -
Foreign currency
translation - - - - - - (173) - -
August 31,
1996 $7,643 $18,990 $19,416 $2,267 $87,728 $23,865 $(158) - -
See accompanying notes
Fedders Corporation
Notes to Consolidated Financial Statements
(Years ended August 31, 1996, 1995 and 1994; dollar and stock
option amounts in tables, except per share 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 wholly-owned and majority-
owned subsidiaries. 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:
1996 1995
Finished goods $21,711 $14,592
Work in process 6,652 2,540
Raw materials and supplies 25,083 11,888
$53,446 $29,020
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 1996
1995
Land and improvements - $ 3,830 $ 1,369
Buildings 20 to 30 years 23,915 12,888
Machinery and equipment 5 to 12 years 84,887 53,302
Machinery and equipment
under capital lease 12 years 8,191 -
Property, plant and equipment - 120,823 67,559
Accumulated depreciation - 57,951 37,756
- $ 62,872 $29,803
Depreciation is provided on the straight-line basis over the
estimated useful life of each asset as noted above. Depreciation
expense includes a write down of certain idle fixed assets to
estimated realizable value amounting to $2,694,000 and $2,860,000
in 1996 and 1995, respectively. Accumulated depreciation
includes $297,000 of depreciation related to equipment under
capital leases.
Goodwill and other assets
Other assets consist primarily of intangible assets which, other
than goodwill, are amortized over periods from one to eight years
using the straight-line method. 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 $8,640,000 and $8,473,000
at August 31, 1996 and 1995, respectively. Goodwill included
$53,192,000 resulting from the merger with NYCOR, Inc. ("NYCOR")
on August 13, 1996 (note 13).
Accrued expenses
Accrued expenses consist of the following at August 31:
1996 1995
Warranty $ 4,019 $ 3,442
Marketing programs 16,345 10,685
Salaries and benefits 7,964 7,143
Other 9,727 6,716
$38,055 $27,986
Income taxes
During the first quarter of fiscal 1994, the Company adopted
Statement of Financial Accounting Standards ("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. 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 $3,891,000, $2,742,000 and $2,233,000 in
1996, 1995 and 1994, 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 15% of the Company's employees are covered by a
three year collective bargaining agreement, which expires in
August 1997. Another 34% of the employees are covered by
collective bargaining agreements which expire in October 1998.
Effect of new accounting pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which
establishes accounting standards for, among other things, the
impairment of long-lived
assets and certain identifiable intangibles. The Company believes
that this pronouncement will not have a material effect on the
Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company is studying SFAS No. 123
but does not currently plan to adopt the fair value based method
of accounting for stock options or similar equity instruments.
However, the adoption of SFAS No. 123 would not be expected to
have a material effect on the Company's consolidated financial
statements.
Amounts per share
Primary earnings per share are computed by dividing net income
attributable to common stockholders by the weighted average
number of shares of Common, Class A and Class B Stock and other
common stock equivalents outstanding during the year: 41,997,000,
41,001,000 and 39,386,000 in 1996, 1995, and 1994, respectively.
Fully diluted earnings per share were not materially dilutive
and, accordingly, are not presented.
Reclassifications
Certain items in the 1995 financial statements have been
reclassified to conform to the 1996 presentation.
2. Transactions With NYCOR
The Company had an agreement with NYCOR for the supply of up to
800,000 compressors annually through 2003 with two renewable
options. Purchases from NYCOR, at negotiated market prices,
amounted to $53,878,000, $52,381,000 and $52,108,000 in 1996,
1995 and 1994, respectively. Certain officers and directors of
the Company were also officers and/or directors of NYCOR and had
significant stockholdings in both companies. On August 13, 1996,
upon receiving over two-thirds majority approval of all Common
and Class B Stockholders, the Company merged with NYCOR. One
share of Fedders Convertible Preferred Stock was issued for each
share of NYCOR Common, Class A and Class B stock (note 13).
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, 1996 and 1995, the Company had no short-term
borrowing under its $40,000,000 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 $37,877,000 and
$21,512,000 during fiscal 1996 and 1995, respectively. The
average amount outstanding and average rate of interest charged
on outstanding borrowings under the credit facility were
$5,596,000 at 9.8% in fiscal 1996 and $4,602,000 at 11% in fiscal
1995. The credit facility is collateralized by substantially all
of the Company's assets and is in effect until December 1997. The
rate of interest on the facility is at the prime rate plus 1.5%.
5. Long-term Debt
The recorded value of long-term debt approximates the fair value
based on current rates available to the Company for debt of the
same remaining maturities and consists of the following at August
31:
1996 1995
8.5% convertible subordinated debentures $22,806 -
Fedders Xinle 15.175% promissory note 6,299 -
Promissory note payable to the State of
Illinois, interest at 1% 4,196 $4,527
Capital lease obligations and other 7,105 579
40,406 5,106
Less current maturities 1,889 590
$38,517 $4,516
Aggregate amounts of long-term debt, excluding capital leases and
other of $7,105,000, maturing in each of the years ended August
31 are: 1997-$335,000, 1998-$338,000, 1999-$342,000,
2000-$346,000, 2001 - $349,000, thereafter $31,591,000.
The 8.5% convertible subordinated debentures due in 2012, assumed
in connection with the NYCOR merger are convertible into the
Company's Convertible Preferred Stock at any time prior to
maturity at 2.22 shares per $20 principal amount of debenture
(note 13).
The $6,299,000 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.
The loan from the State of Illinois has an interest rate of 1%,
is to be paid over the next 12 years, and is collateralized by a
mortgage on the Illinois facility.
6. Leases
Capital Leases
Aggregate future minimum rental payments under capital leases
assumed primarily in connection with the NYCOR merger (note 13)
for the years ended August 31 are as follows: 1997 - $2,288,000,
1998 - $2,017,000, 1999 - $2,139,000, 2000 - $2,162,000, 2001 -
$144,000 and thereafter $215,000. The present value of net
minimum lease payments is $7,105,000 excluding the interest
portion of $1,860,000.
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 are as follows:
$3,896,000, $3,507,000, $3,247,000, $2,016,000 and $1,752,000 in
1997, 1998, 1999, 2000 and 2001, respectively, and total
$14,418,000. Total rent expense for all operating leases amounted
to $2,025,000, $2,083,000 and $3,559,000 in 1996, 1995 and 1994,
respectively. In 1995, an equipment lease expiring in February
1996 was bought out by the Company for $3,000,000, of which
$1,250,000 related to the prepayment of rental and interest
expense.
7. Income Taxes
The provision for income tax (benefit) consists of the following
components:
1996 1995 1994
Current:
Federal $18,047 $6,258 $396
State 2,253 2,378 198
Foreign 88 57 -
20,388 8,693 594
Charge in lieu of income taxes 437 2,900 -
Deferred:
Federal (1,530) (4,392) -
State (187) (1,014) -
(1,717) (5,406) -
$19,108 $6,187 $594
In 1996 and prior years, the exercise of stock options to acquire
shares of the Company's Common and Class A Stock resulted in a
compensation deduction for income tax purposes for which no
corresponding expense was required for financial reporting
purposes. The tax benefits related to these deductions, which
were realized in 1996 and 1995, are reflected as a charge in lieu
of income taxes and a credit to additional paid-in capital.
Deferred income taxes result from "temporary differences" between
assets and liabilities for financial reporting purposes and
income tax purposes. The principal temporary differences and
carryforwards giving rise to deferred tax assets and liabilities
at August 31 are as follows:
1996 1995
Warranty $ 3,065 $2,822
Depreciation 392 (1,826)
Employee benefit programs 3,525 1,550
Inventory 1,710 854
Net operating loss carryforwards 7,598 1,500
Other 1,683 1,556
17,973 6,456
Valuation allowance (7,025) (2,225)
$10,948 $4,231
Net deferred tax assets include $5,000,000, net of a valuation
allowance of $6,584,000, attributable to temporary differences,
tax loss, and tax credit carryforwards of NYCOR which the Company
expects to utilize over the carryforward periods.
The decrease in the deferred tax asset valuation allowance in
1995 resulted from the utilization of net operating loss carry
forwards and a change in the Company's estimate of the
utilization of temporary differences based primarily on improved
operating results.
The difference between the United States statutory income tax
rate and the consolidated effective income tax rate is due to the
following items:
1996 1995 1994
Expected tax at statutory rate $17,593 $12,492 $6,733
Valuation allowance reflected
in current income (325) (7,851) (6,799)
Alternative minimum tax - - 396
State taxes, less federal income
tax benefit 1,343 887 198
Other 497 659 66
$19,108 $6,187 $594
At August 31, 1996, the Company has Canadian net operating loss
carryforwards of approximately $726,000 that expire in the years
2002 through 2003, and U.S. net operating loss and tax credit
carryforwards related to NYCOR of approximately $17,000,000 and
$1,400,00, respectively, which are restricted as to use and
expire in the years 2001 through 2011. All prior U.S. net
operating loss and credit carryforwards were utilized at August
31, 1995.
8. Segment Information
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 30% of net sales in 1996, 26% of net sales in 1995
and 28% in 1994. No other customer accounted for more than 10% of
net sales in 1996. Two other customers accounted for 10% and 11%
of net sales in 1995 and 1994, respectively.
International sales were approximately $24,458,000 in 1996,
$12,892,000 in 1995 and $8,250,000 in 1994 and were made
principally to Canada, Mexico and China.
9. Capital Stock
Preferred Stock: On August 13, 1996, 7,643,036 shares of
Convertible Preferred Stock ("Preferred Stock") were issued to
NYCOR's stockholders on a share-for-share basis in exchange for
their Common, Class A and Class B Stock to consummate the merger
with NYCOR (notes 2 and 13). The Preferred Stock is convertible
into Class A Stock on a share-for-share basis at any time subject
to certain adjustments. The Preferred Stock is redeemable in
whole or in part, at the sole option of the Company at the price
of $6.25 in cash or equivalent value of Class A Stock. The
holders of Preferred Stock are entitled to receive upon
liquidation, $6.25 per share, plus unpaid dividends to the date
of distribution, before any distribution is made on the Common,
Class A or Class B Stock. At August 31, 1996, 2,534,000 shares
of Preferred Stock are reserved for conversion of the convertible
subordinated debentures.
Common Stock: Shares of Common Stock are reserved for the
conversion of Class A and Class B Stock as indicated herein. At
August 31, 1996, 1,050,000 shares of Common Stock are reserved
under the Company's stock option plans.
Class A Stock: In 1995 and 1994, the Company issued 7,984,000 and
10,625,029 shares, respectively, of Class A Stock through a stock
dividend. At August 31, 1996, 10,177,036 shares are reserved for
conversion of the Company's Preferred Stock and convertible
subordinated debentures. At August 31, 1996, 10,631,000 shares of
Class A Stock are reserved under the Company's stock option
plans. 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, at August
31, 1996, 40,223,952 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, 1996, 2,266,706 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, 90%, 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 at the end of five
years.
The stock option plan summary is as follows:
1996 1995 1994
Options outstanding beginning of year 4,715 3,903 2,987
Granted 752 403 752
Canceled (30) (300) (109)
Exercised (585) (218) (1,028)
Options outstanding prior to
dividend-related adjustments 4,852 3,788 2,602
Stock dividend-related adjustments(a) - 927 1,301
Options outstanding at end of year 4,852 4,715 3,903
Options exercisable at end
of year 3,682 3,336 1,862
Exercise price $1.69 $2.33 $2.90
per share to 4.87 to 4.70 to 5.66
(a) In connection with stock dividends distributed in 1995 and
1994, all Class A options were adjusted to reflect a 25% and 50%
increase, respectively.
11. Pension Plans and Other Retirement Benefits
The Company maintains a 401(k) defined contribution plan covering
all U.S. employees. Company matching contributions under the plan
are based on the level of individual participant contributions
and amounted to $1,171,000 in 1996, $756,000 in 1995 and $726,000
in 1994. The Company terminated its defined 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, 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.
Following the merger of NYCOR into the Company on August 13, 1996
(note 13) the agreement was adjusted to take into account the
terms of the merger agreement which stated that the employees and
directors of NYCOR were to be placed in the same economic
position following the Merger as they were immediately prior to
the date of the execution of the merger agreement with respect to
salaries and all other benefits provided by NYCOR. 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 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, 1996 and 1995
postretirement benefits were fully accrued. The effect of
adoption in 1994 of SFAS No. 106 was not material.
12. Joint Venture
On November 7, 1995, the Company entered into a joint venture
with the Ningbo General Air Conditioner Factory ("Ningbo"),
Ningbo City, Zheijang Province, People's Republic of China
("P.R.C.") to manufacture room air conditioners in China. The
joint venture, Fedders Xinle Co., Ltd., was capitalized with the
Company's contribution of approximately $8,400,000 of cash plus
know-how for a 60% interest in the joint venture. Ningbo
contributed the factory, equipment and other assets valued at
$5,600,000 for a 40% interest. The equivalent of approximately
$10,300,000 in long-term financing was provided by a P.R.C. bank
for the joint venture which is not guaranteed by the Company. Of
this long-term financing, $4,000,000 was repaid during fiscal
1996. The financial statements of the joint venture are
consolidated herein.
13. Merger
On August 13, 1996, the Company merged with NYCOR, a manufacturer
of rotary compressors and thermoelectric heating and cooling
modules. Considerations consisted of 7,643,000 shares of
Convertible Preferred Stock with a total value of approximately
$47,769,000. 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.
The Company's consolidated financial statements include the
operating results of NYCOR since August 13, 1996. The following
table presents the unaudited pro forma results of operations as
if these transactions occurred on September 1, 1994. The pro
forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have actually
occurred had the merger been consummated at the beginning of
fiscal 1995 or of results which may occur in the future.
(Unaudited) 1996 1995
Net sales $390,349 $329,516
Operating income 42,168 35,747
Net income 23,574 26,472
Income per share:
Primary 0.51 0.57
Fully diluted 0.47 0.54
14. Quarterly Financial Data (unaudited)
(000's, except per share and market price data)
First Second Third Fourth
1996 1995 1996 1995 1996 1995 1996 1995
Net sales $27,809 $20,125 $88,327 $72,357 $173,868 $145,869 $81,768 $78,143
Gross profit 6,777 4,306 18,005 13,686 37,859 30,489 20,387 18,644(a)
Income (loss)
before income
taxes 554 (1,440) 10,274 6,694 28,200 21,536 11,238 8,901
Net income
(loss) $ 343 $(1,217) $6,370 $5,567 $17,430 $17,806 $ 7,015 $7,348
Net income
(loss) per
share (b) $ 0.01 $ (0.03) $ 0.15 $ 0.13 $ 0.42 $ 0.44 $ 0.16 $ 0.18
Market price per share:
Preferred Stock (FJAPr)
High - - - - - - 5 7/8 -
Low - - - - - - 5 1/8 -
Common Stock (FJC)
High 6 3/4 6 1/4 6 3/4 6 1/8 7 6 1/8 7 1/4 7 7/8
Low 5 1/4 3 7/8 5 5 6 5 1/4 5 1/2 5 3/8
Class A Stock (FJA)
High 5 4 3/8 5 5/8 4 3/4 6 1/4 4 3/4 6 3/8 5 3/8
Low 3 3/4 3 1/4 3 7/8 3 5/8 5 3/8 4 4 7/8 4 1/8
(a) Includes a $3.5 million reduction in warranty provision and a $2.8 million
write down of idle equipment.
(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 shares
outstanding.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Fedders Corporation
The audit referred to in our report dated September 30, 1996,
relating to the consolidated financial statements of Fedders
Corporation, which is contained in Item 8 of this Form 10-K,
included the audit of the financial statement schedule listed in
the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule
based upon our audit.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth
therein.
/s/BDO Seidman, LLP
Woodbridge, New Jersey
September 30, 1996
FEDDERS CORPORATION
VALUATION & QUALIFYING ACCOUNTS
SCHEDULE II
For The Years Ended August 31, 1995, 1994 and 1993
(Amounts in Thousands)
Balance Additions Balance
Allowance for at beginning charged to at emd
Doubtful Accounts: of period expense Deductions Other of period
Year ended:
August 31, 1996 $ 872 $580 - $500(1) $1,952
August 31, 1995 $ 744 $286 $ 158 - $ 872
August 31, 1994 $1,078 $666 1,000 - $ 744
Exhibit Index
(3) (i) Restated Certificate of Incorporation, filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for 1984
and incorporated hereby reference.
(ii) Amendment to Restated Certificate of
Incorporation, filed as Exhibit 4a to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1985 and
incorporated herein by reference.
(iii) Correction of Restated Certificate of
Incorporation, filed as Exhibit 4b to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1985 and
incorporated herein by reference.
(iv) Amendment of Certificate of Incorporation, filed
as Exhibit (3) (i) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1987 and incorporated herein by
reference.
(v) Amendment of Certificate of Incorporation, filed
as Exhibit (3) (ii) to the Company's Quarterly Report on Form 10-
Q for the quarter ended June 30, 1987 and incorporated herein by
reference.
(vi) Amendment to Certificate of Incorporation, filed
as Exhibit (3) (vi) to the Company's Annual Report on Form 10-K
for the year ended August 31, 1992 and incorporated herein by
reference.
(vii) Amendments to Certification of Incorporation dated
August 13, 1996.
(viii) 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 Corporation 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 13, 1995 filed
as Exhibit 10 (viii) on Form 10-K 1996 and incorporated herein by
reference.
(11) Statement re computation of per share earnings.
(16) (i) Letter referencing change in certifying accountants
filed as Exhibit 16 (i) to the Company's Annual Report on Form 10-K
and incorporated herein by reference.
(21) Subsidiaries.
(23) Consent of BDO Seidman, LLP.
(27) Financial data schedule.
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 29, 1996, an 8-KA was
filed on October 25, 1996 and incorporated herein by reference.