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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8831
FEDDERS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-2572390
(State of Incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938-0813
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (908) 604-8686
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange, Inc.
Class A Stock, $1 par value New York Stock Exchange, Inc.
Securities registered pursuant to section 12 (g) of the Act:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
As of the close of business on October 31, 1997, there were outstanding
18,989,898 shares of the Registrant's Common Stock, 21,850,432 shares of
Class A Stock and 2,266,606 shares of its Class B Stock. The
approximate aggregate market value (based upon the closing price on the
New York Stock Exchange) of these shares held by non-affiliates of the
Registrant as of November 25, 1997 was $209,409,090. (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, 1996 TO AUGUST 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of
Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity
and Related Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the
Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management 20
Item 13. Certain Relationships and Related
Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
PART I
ITEM 1. Business
(a) General Development of Business
Fedders Corporation (the "Company" or the "Registrant") is a holding
company which the Company believes, through its wholly-owned operating
subsidiaries, is the largest manufacturer of room air conditioners in
North America based on units sold. An industry innovator for the past
50 years, the Company has increased its U.S. market share to an
estimated 30% in fiscal 1997 from approximately 20% in fiscal 1993. The
Company manufactures and sells a full line of room air conditioners
(including window, split-type and through-the-wall units) and
dehumidifiers, principally for use in U.S. residential markets. The
Company's products are marketed under the FEDDERS, EMERSON QUIET KOOL
and AIRTEMP brand names primarily to national and regional retail
chains, home improvement centers, and buying groups, as well as to
distributors and, under private label, to retailers and other original
equipment manufacturers ("OEMs"), including other room air conditioner
manufacturers.
The Company believes its market share growth and profitability have been
primarily attributable to its: (i) low cost production achieved through
continuous manufacturing improvements and global sourcing; (ii) broad
range of high quality products with strong brand recognition; (iii)
strong relationships with leading retailers; (iv) accurate-response
manufacturing and just-in-time delivery capabilities; and (v) principal
focus on one product.
In August 1996, the Company merged with NYCOR, Inc. (the "Merger")
which, through its subsidiary Rotorex, manufactured rotary compressors
principally for use in room air conditioners and, through its subsidiary
Melcor, manufactured specialized thermoelectric heating and cooling
modules. Rotorex has been the primary supplier of compressors to the
Company for use in its room air conditioners for 25 years. The Company
believes that a dedicated supply of compressors is critical to the
Company's accurate-response and just-in-time delivery of its seasonal
products. The supply of compressors from Rotorex and from its Asian
licensees, also is strategically important for the Company's
international growth, since the largest global competitors dominate
world compressor supplies.
The Company believes it is well positioned to continue building on its
U.S. market strength while simultaneously directing many of its
resources toward penetration of the much larger and rapidly expanding
global market. Industry sources estimate the worldwide market to be
nearly five times as large as the domestic market, as measured in the
number of units shipped annually. In November 1995, the Company entered
into the Fedders Xinle Co., Ltd. ("Fedders Xinle" or "FX") joint venture
with the Ningbo General Air Conditioner Factory of Ningbo, China.
Fedders Xinle is 60% owned by the Company and intends to market its
products both within China and, through Fedders International, Inc., to
export markets around the world. FX manufactures split-type units, in
which the condensing unit is installed separately outdoors, as well as
window air conditioners.
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. ("FC"), Fedders International, Inc. ("FI"), Rotorex Company, Inc.
("Rotorex") and Melcor Corporation ("Melcor"). EQK, CSI, Rotorex, FC
and a Mexican sales subsidiary, Fedders de Mexico S.A. de C.V., are
wholly owned subsidiaries of Fedders NA. FI has a Singapore subsidiary,
Fedders Asia Pte. Ltd. ("Fedders Asia"), a Chinese trading company
subsidiary, Fedders International Trading Co. ("FIT").
(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 F13 herein.
(c) Narrative Description of Business
Room Air Conditioners and Dehumidifiers
Products and Markets
The Company manufactures and sells a complete line of window and
through-the-wall room air conditioners domestically, principally for the
residential market. The Company's air conditioners are manufactured in
capacities ranging from 5,000 BTU (British Thermal Units) to 32,000 BTU.
These models comprise distinct product lines marketed by the Company
primarily under the brands FEDDERS, EMERSON QUIET KOOL and AIRTEMP. The
Company also manufactures products under various private labels. The
Company has positioned its brands across most price points, emphasizing
quality and value for retailers and consumers.
The Company manufactures and markets a line of household dehumidifiers,
ranging in capacity from 30 to 50 pints per 24 hours, and its Rotorex
subsidiary manufactures and sells a broad line of rotary compressors,
principally for use in the Company's room air conditioners but also for
sale to other manufacturers of air conditioners. Third party sales of
compressors represent less than 1% of total sales of the Company.
Fedders Xinle also manufactures split-type room air conditioners, in
which the condensing unit is installed separately outdoors, as well as
window air conditioners in capacities from 7,000 to 40,000 BTU, for both
residential and commercial use in international markets.
Marketing
In North America, the Company markets room air conditioners and
dehumidifiers principally to national and regional retail chains, home
improvement centers and retail buying groups. These retail chains and
retail buying groups (comprising retailers which negotiate as groups the
prices at which they will purchase the Company's products) represent
approximately 10,000 retail outlets marketing room air conditioners
throughout the United States. The Company also markets its air
conditioners under private label to both retailers and OEMs.
The Company's North American sales, marketing and service departments
are headquartered in Whitehouse, New Jersey. The 25 sales persons, in
conjunction with marketing employees, are proactive in working with
customers to assist them in maximizing their profitability and market
share through responsive changes in product mix and marketing.
Utilizing eight regional distribution centers, the Company provides
next-day delivery to all major U.S. markets, which is critical during
heat waves that stimulate retail sales. Additionally, the Company has
instituted computerized systems, including electronic data interchange
(EDI), to accommodate major high-volume retailers that require suppliers
to replenish inventories frequently and on short notice.
To support and service its customers and the ultimate consumer, the
Company has established a network of more than 3,000 independent
servicers throughout the United States. These independent servicers are
local tradespeople who are screened and monitored by the Company.
The Company promotes its FEDDERS and EMERSON QUIET KOOL brands of air
conditioners through advertising, primarily in trade publications. Many
of the Company's customers advertise and promote the Company's products
at their own expense.
The Company is investing much of its planning and resources to penetrate
the much larger and rapidly growing international market for room air
conditioners. The Company believes that the market, in units, for room
air conditioners outside of North America is approximately five times
the size of the U.S. market. Demand for air conditioners outside of
North America accelerated in recent years and continues to grow rapidly
with the increase in disposable income of populous nations in hot
weather climates. The Company has participated in international markets
for nearly 40 years and has licensees in several countries.
Management believes that international sales afford greater growth
potential than the U.S. market, while reducing the Company's dependence
on summer weather in North America. The Company's international sales
organization is headquartered in Liberty Corner, New Jersey and has
offices in Singapore, the United Kingdom and Miami, and representative
offices in China and Japan. FI exhibits its products globally at
industry trade shows.
The Company believes it can compete cost-effectively abroad based on its
global sourcing network that currently delivers components from around
the world to three U.S. plants and to FX.
The Company expects to increase its participation overseas through
strategic alliances, primarily under production and joint venture
agreements, based in part on its expertise, technological capability and
well-established global sourcing program. With the establishment of
Fedders Xinle, the Company is strategically positioned to: sell FEDDERS
brand products in China and into low-import-duty markets outside of
China; provide private label products for OEMs with established sales
and service organizations worldwide, including China; and establish
assembly operations within each major trading block that has protective
duties in order to import subassemblies or semi-finished goods from the
China facility.
Production
The Company currently manufactures its air conditioners in two owned
facilities in the United States -- a 650,000 square foot facility in
Effingham, Illinois and a 232,000 square foot facility in Columbia,
Tennessee -- with a combined annual capacity of approximately 2,000,000
units. The Company has sufficient production capacity for domestic
needs for the foreseeable future.
The Company also manufactures air conditioners, through Fedders Xinle,
in a facility owned by the joint venture in Ningbo, People's Republic of
China. Capacity of the facility, which currently is approximately
200,000 air conditioners, is being increased to 500,000 units.
Rotorex currently manufactures all of its compressors in a 200,000
square foot facility owned by Rotorex in Walkersville, Maryland.
Rotorex recently made several investments to enhance manufacturing
efficiencies, including automation of the assembly process. The current
capacity of approximately 1,500,000 units is sufficient to meet
compressor requirements of the Company and Rotorex's other compressor
customers.
Melcor
Products
Melcor manufactures solid state heat pump modules that utilize
electricity to perform the same cooling and heating functions as
refrigerant-based compressors and absorption refrigerators.
Melcor's modules are typically used in applications with special
requirements, such as limited space, lightweight cooling requirements or
a space existing under special environmental conditions. They are also
used for precise temperature control by reversing the electric current
to cycle from cooling to heating.
Melcor's customers are original equipment manufacturers that primarily
use the modules for cooling purposes in applications such as
refrigerators, laboratory, scientific, medical and restaurant equipment
and telecommunications and computer equipment.
Melcor's products are sold under the trademarks MELCOR and FRIGICHIPS.
Marketing
Melcor's modules are currently sold by salaried salespeople and a
network of sales representative firms located around the world.
Melcor advertises its products in a variety of national and
international technical and trade publications, principally in the
electronics and electro-optical industries, and participates in
international trade exhibitions.
Production
Melcor manufactures its modules in facilities 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 principal raw materials used for production of room air conditioners
are steel, copper and aluminum, which the Company obtains from domestic
and foreign suppliers. The Company also purchases 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.
Quality Assurance
One of the key elements of the Company's strategy is a commitment to a
single worldwide standard of quality. Each of the Company's U.S.
manufacturing facilities has earned the highest level of certification -
- - ISO 9001 -- for its quality management system under the International
Standards Organization. The ISO 9000 program is an internationally
recognized benchmark of quality management systems within a production
facility. The same level of quality will be required at all
international manufacturing facilities as well, including Fedders Xinle.
The Company's product is backed by a warranty policy that generally
provides five-year coverage for sealed systems including compressors,
two-year coverage on motors and one-year coverage on all other parts and
labor related to air conditioners sold in North America.
Patents, Trademarks, Licenses and Concessions Held
The Company owns a number of trademarks. While the Company believes
that its trademarks, such as, FEDDERS, EMERSON QUIET KOOL and AIRTEMP,
ROTOREX, MELCOR and FRIGICHIPS are well known and enhance the marketing
of its products, the Company does not consider the successful conduct of
its business to be dependent upon such trademarks. The Company
aggressively protects its trademark and intellectual property rights
worldwide.
Seasonality of Business
The Company's results of operations and financial condition are
principally dependent on the manufacture and sale of room air
conditioners, the demand for which is highly seasonal in North American
markets. Seasonally low volume sales are not sufficient to offset fixed
costs, resulting in operating losses at certain times of the year. In
addition, the Company's working capital needs are seasonal, with the
greatest utilization of lines of credit occurring early in the calendar
year. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition," at pages 15 through 17 herein.
See also the discussion under "Working Capital Practices."
Working Capital Practices
The Company regularly reviews working capital components with a view to
maintaining the lowest level consistent with requirements of anticipated
levels of operations. The Company's sales are predominantly made
directly to retailers, who typically require just-in-time delivery,
primarily in April through July. Production is weighted towards the
retail selling season to minimize borrowing earlier in the fiscal year,
although room air conditioners may be produced throughout much of the
rest of the year at a lower rate of production.
Information with respect to the Company's warranty and return policy is
provided in Note 1 of the Notes to Consolidated Financial Statements at
page F7 herein.
See also the information entitled "Management's Discussion and Analysis
of Results of Operations and Financial Condition" at pages 14 through 16
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
Domestically, the Company's competitors include a number of domestic and
foreign manufacturers of air conditioners and appliances, including
Whirlpool Corporation, Frigidaire Company, Matsushita Electric
Industrial Co., Ltd. and Sharp Corporation. Many of the Company's
competitors are substantially larger and have greater resources than the
Company. The Company competes principally on the basis of price,
quality and its ability to deliver product and service to its customers
on a just-in-time basis. The Company believes that it competes
effectively with its multiple brand strategy of providing competitively
priced, high quality products on a just-in-time basis.
Internationally, competitors vary depending on the market. Some
markets, such as China, are served by many local manufacturers. Other
markets are dominated by foreign manufacturers of air conditioners and
electronics products including Matsushita Electric Industrial Co., Ltd.,
Toshiba Corporation, Hitachi, Ltd., Mitsubishi Electric Corporation and
Sanyo Electric Trading Co., Ltd., all of which also manufacture
compressors. The Company believes that it can compete effectively with
its strategy of manufacturing low cost air conditioners locally,
controlling its supply of compressors and utilizing its global sourcing
network.
Research and Development
Research and development of room air conditioner technology and design
is conducted at the Effingham, Illinois facility, and compressor
research and development is based at the Frederick, Maryland facility.
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 domestic
distribution strengths. In fiscal 1997, the Company spent approximately
$6.2 million on research and development, including activities at its
Singapore facility which focuses on products for the international
market.
Environmental Protection
The Company's operations are subject to various United States and
foreign environmental statutes and regulations, including laws and
regulations dealing with storage, treatment, discharge and disposal of
hazardous materials, substances and wastes and that affect the
production of chemical refrigerants used in the operation of some of the
Company's products. The refrigerant used in room air conditioners is an
HCFC that is to be phased out of use in new products on January 1, 2010
in the United States. Chemical producers are currently developing
environmentally acceptable alternative refrigerants for use in room air
conditioners that are expected to be available in advance of any now-
proposed phase-out deadlines for the current refrigerant. Modifications
to the design of the Company's products may be necessary in order to
utilize alternative refrigerants. The cost of the substitution of
alternative refrigerants is not currently expected to have a material
adverse impact on the Company.
The Company believes it is currently in material compliance with
applicable environmental laws and regulations. The Company did not make
capital expenditures on environmental matters during the year ended
August 31, 1997 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, 1998.
The Company has recently been identified as a potentially responsible
part ("PRP") by the federal Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), at the PCB Treatment Inc. Site (the "Site")
located in Kansas City, Kansas and in Kansas City, Missouri, based on
the delivery there of certain materials from its Effingham, Illinois
facility. CERCLA imposes strict and, in certain circumstances, joint
and several liability on PRP's for response costs and natural resource
damages at waste sites. In view of the substantial number of other
PRP's at the Site and the relatively small volume of material sent by
the Company to the Site, the Company does not believe it will incur any
material liability for this matter.
The Company has identified a groundwater problem at its Walkersville,
Maryland facility and has been advised of a potential air pollution
problem at its Effingham, Illinois facility. Based upon available
information, the Company does not expect the cost of investigation or
any required remediation relating to these matters to have a material
adverse effect on its results of operations.
Employees
The Company has approximately 2,700 employees, including approximately
500 employees at Fedders Xinle. Contracts with two unions representing
employees of the Effingham, Illinois plant are scheduled to expire in
October 1998. Another union contract covering Rotorex employees expired
in August 1997. The Company and the union representing employees of
Rotorex were unable to reach agreement prior to the expiration, and the
employees covered by the collective bargaining agreement struck.
Rotorex continues to operate using temporary replacement workers. 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 F13 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 650,000
(Owned)
Columbia, Tennessee Manufacturing 232,000
(Owned)
Frederick, Maryland Manufacturing of 200,000
(Owned) rotary compressors
Whitehouse, Fedders NA 17,000
New Jersey (Leased) Headquarters
Singapore Research and Design 14,600
(Leased) Center
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)
The Effingham, Illinois facility is subject to a mortgage securing a
$3.9 million, 1% promissory note payable over the next 11 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Matters
The Company's Common and Class A Stock are listed on the New York Stock
Exchange. There is no established public trading market for the
Company's Class B Stock, as there are restrictions on its transfer. As
of October 31, 1997, there were 3,464 holders of Common Stock, 3,351
holders of Class A Stock, 98 of Convertible Preferred Stock, which was
fully redeemed in September 1997 and 14 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 F15 and F16, which Notes are incorporated herein by reference.
Item 6. Selected Financial Data (1)
(Amounts in thousands, except per share data)
1997 1996 1995 1994 1993
Net sales $314,100 $371,772 $316,494 $231,572 $158,602
Gross profit 70,076 83,028 67,125 49,263 27,744
Percent of net sales 22.3 22.3 21.2 21.3 17.5
Operating income 31,729 50,988 37,653 23,905 1,907
Percent of net sales 10.1 13.7 11.9 10.3 1.2
Pre-tax income (loss) 28,867 50,266 35,691 19,803 (2,340)
Percent of net sales 9.2 13.5 11.3 8.6 (1.5)
Net income (loss)(2) $ 18,764 $ 31,158 $ 29,504 $ 20,989 $ (1,775)
Net income (loss)
attributable to
common stockholders 16,344 31,007 29,504 20,989 (1,775)
Net income (loss)
per share(2) $ 0.40 $ 0.74 $ 0.72 $ 0.53 $ (0.05)
Cash dividends declared
per share:
Preferred $ 0.318 $ 0.050 - - -
Common 0.080 0.080 $ 0.020 - -
Class A 0.080 0.080 0.020 - -
Class B 0.072 0.072 0.018 - -
Cash $110,393 $ 90,295 $ 57,707 $ 34,869 $ 8,553
Total assets 329,014 290,220 136,775 100,653 81,285
Long-term debt(3)
(including current portion) 115,380 40,406 5,106 17,943 25,590
Stockholders' equity(4) 145,687 159,751 82,542 49,317 24,229
Capital expenditures(5) 9,236 7,043 9,041 2,634 2,379
Depreciation and amortization 9,935 6,578 7,519 9,374 5,646
Earnings before interest,
taxes, depreciation and
amortization 42,232 57,796 44,143 32,252 6,317
(1) The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations
and Financial Condition and the consolidated financial statements and
the notes thereto.
(2) In 1994, the Company adopted SFAS 109, Accounting for Income Taxes,
which resulted in income of $1,780 or $0.04 per share from the cumulative
effect of an accounting change.
(3) In August 1997, the Company issued $100,000 of 9 3/8% Senior
Subordinated Notes, proceeds of which were utilized, in part, to fully
redeem $22,100 of 8.5% convertible subordinated debentures, including
accrued interest.
(4) During fiscal 1997, the Company repurchased 4,335 shares of Class A
Stock at an average price of $5.78 per share for a total of $25,041 and 705
shares of Convertible Preferred Stock at $6.25 per share for a total
of $4,408.
(5) Fiscal 1995 amount includes buyout of $1,750 of equipment under lease.
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Fedders Corporation (the "Company") is the largest manufacturer of
room air conditioners in North America based on units sold. The
Company estimates that its share of the domestic market for room air
conditioners increased to approximately 30% in fiscal 1997 from 28.5%
in fiscal 1996 and 26.7% in fiscal 1995. This estimate is based on
general industry information as shipment data is no longer published
by an industry trade association. The Company has strong
relationships with retailers, which it has formed by establishing
flexible, accurate-response manufacturing to accommodate customers'
increasingly seasonal delivery requirements.
Presently, the Company's business is still largely domestic and is
affected by summer weather in major domestic markets. Product is
shipped primarily in the second half of the fiscal year since leading
retailers require just-in-time delivery. Cool summer weather in key
U.S. markets in fiscal 1996 increased industry inventories at some
manufacturers (excluding the Company) and at retailers at the
beginning of fiscal 1997 and reduced fiscal 1997 results all year
long. By the end of the 1997 selling season, retail inventories
declined to more customary levels, which positions U.S. manufacturers
for a better year in fiscal 1998, assuming normal weather.
The Company has taken important steps to enter the rapidly growing
international marketplace. In fiscal 1996, the Company entered into
a joint venture in Ningbo, China to manufacture air conditioners for
export and for the Chinese market. In fiscal 1997, the Company nearly
doubled its international sales, as it did in the prior fiscal year.
In August 1996, the Company merged with NYCOR, Inc., which, through
its subsidiary Rotorex Company, Inc., manufactured rotary compressors
principally for use in room air conditioners, and, through Melcor
Corporation, manufactured thermoelectric modules. Rotorex has been
the primary supplier of compressors to the Company for 25 years. The
Company believes that a dedicated supply of compressors improves its
flexibility to accurately respond to the just-in-time requirements of
its customers. The supply of compressors from Rotorex, and from its
Asian compressor licensees, also is strategically important for the
Company's international growth.
Results of Operations
Net sales in fiscal 1997 totaled $314.1 million, a decline of 15.5%
from record sales of $371.8 million in fiscal 1996 and similar to the
$316.5 million of net sales in fiscal 1995. Sales had increased 17.5%
and 36.7% in 1996 and 1995, respectively. The sales decrease during
fiscal 1997 reflects the large end-of-season industry inventories of
room air conditioners due to the cool summer weather in fiscal 1996.
This contrasted with the beginning of the three previous fiscal years
when Fedders' and U.S. industry inventories were virtually depleted
as a result of three consecutive hot summers. The Company's fiscal
1997 international sales of $45.1 million increased by 84% following
a 90% gain in 1996.
Gross profit declined in 1997 by 15.6% due to the sales decline. The
gross profit margin remained at 22.3% in 1997 due primarily to changes
in customer and product mix offset, in part, by lower absorption of
factory overhead expense due to lower production levels. In fiscal
1996, the gross profit margin increased by more than one full
percentage point to 22.3% from 21.2% in fiscal 1995, primarily as a
result of efficiencies in plant utilization due to higher sales and
to somewhat lower commodity prices.
Selling, general and administrative expenses ("SG&A") increased to
12.2% of net sales in fiscal 1997 from 8.6% in fiscal 1996 due, in
part, to lower sales. SG&A increased by $6.3 million from the prior
year primarily as a result of expenses related to operations acquired
in the Merger, including $1.8 million of amortization of goodwill and
$1.9 million of compressor research and development expense. SG&A
also increased in fiscal 1997 due to infrastructure expansion to
support the future growth of international business. In fiscal 1996,
SG&A increased by $2.6 million, or 9%, including a $2.0 million
provision for an early retirement program. SG&A decreased as a
percentage of sales in 1996, for the third consecutive year, to 8.6%
from 9.3% in 1995.
Net interest expense increased in fiscal 1997 by $2.5 million and as
a percent of sales to 1.1% from 0.3% in fiscal 1996 due to interest
paid on the 8.5% Convertible Subordinated Debentures due 2012 (the
"Debentures") that were assumed in the Merger and were called at the
end of fiscal 1997. Net interest expense in fiscal 1996 decreased by
$1.0 million and as a percent of sales to 0.3% from 0.6% in the prior
year as long-term debt was minimal prior to the Merger and because
cash on hand increased interest income and reduced borrowings compared
to fiscal 1995.
Net income decreased to $18.8 million in fiscal 1997 from a record
$31.2 million in fiscal 1996 and reflects an effective tax rate of 35%
versus 38% in the prior year, principally due to a lower effective
state tax rate and the release of prior-year tax provisions no longer
required in the current year. In fiscal 1995, the Company utilized
its net operating loss carryforwards which contributed to an effective
tax rate of 17.3%.
Net income attributable to common stockholders in 1997 reflects the
dividend requirements of $2.4 million paid on the Company's
Convertible Preferred Stock that was issued in connection with the
Merger and was fully redeemed in September 1997.
Liquidity and Capital Resources
A subsidiary issued $100 millon of 9 3/8% Senior Subordinated Notes
due 2007 (the "Notes") near fiscal year-end, and the Company ended
fiscal 1997 with cash increasing to $110.4 million at August 31, from
$90.3 million a year earlier. Working capital requirements
historically are seasonal. Cash balances peak in August, while the
greatest use of credit lines occurs early in the calendar year.
Net cash used in operations in fiscal 1997 amounted to $8.8 million.
Accounts receivable increased by $1.1 million, still reflecting
normally low end-of-season levels. Ending inventories increased by
$9.4 million reflecting an increase in domestic finished goods, as
retailers ordered conservatively, and in international finished goods
due to increasing volume. Accounts payable decreased by $5.9 million
as less raw material was received in the month of August than in the
prior year. Accrued expenses and accrued income taxes decreased by
$7.0 million and $5.4 million, respectively, as a result of lower
marketing and tax accruals related to lower sales and lower income,
respectively.
Net cash used in investing activities by the Company consisted
primarily of capital expenditures of $9.2 million.
Net cash provided by financing activities in fiscal 1997 amounted to
$37.7 million. This resulted primarily from $96.0 million of net
proceeds from the offering of the Notes, which were used, in part, to
fully redeem the Debentures for $22.1 million, including accrued
interest. The Company completed the repurchase of $25.0 million or
4.3 million shares, of its Class A Stock under a repurchase program
announced in September 1996. In July 1997, the Company announced an
authorization to repurchase up to an additional $50 million of its
outstanding stock. Proceeds from the issuance of the Notes also were
used to repurchase $4.4 million of Preferred Stock. In September
1997, the Company redeemed all outstanding Preferred Stock at the rate
of 1.022 shares of Class A Stock per share of Preferred Stock.
During fiscal 1997, the Company's revolving credit facility was
increased to $50 million from $40 million, the rate of interest on the
facility decreased to the prime rate from the prime rate plus 1.5% and
the maturity was extended to February 2000. Dividend payments
amounted to $5.6 million in fiscal 1997.
Management believes that the cash, earnings and borrowing capacity of
the Company are adequate to meet the needs of its operations and long-
term credit requirements, including capital expenditures and debt
maturities.
See note 1 of the notes to consolidated financial statements for
information pertaining to recent accounting standards.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company at August 31,
1997 and 1996, and for the years ended August 31, 1997, 1996 and 1995,
the notes thereto and the report of the Company's independent auditors
thereon are included at pages F1 through F26, herein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the Company's directors, see the
section entitled "Election of Directors" in the Company's Proxy
Statement filed in connection with the Company's Annual Meeting of
Stockholders to be held on December 16, 1997, which section is
incorporated herein by reference.
First Became an
Name and Age Position Held Executive Officer
Salvatore Giordano, 87 Chairman of the Board 1945
Sal Giordano, Jr., 59 (1) Vice Chairman, President 1965
and Chief Executive Officer
Robert L. Laurent, Jr. Executive Vice President, 1989
42 Finance and Administration
and Chief Financial officer
Kent Hansen, 50 Senior Vice President and 1996
Secretary
Gerald C. Senion, 50 Group Vice President and 1997
Chief Operating Officer,
Fedders North America
Gary J. Nahai, 46 Vice President and 1993
President, Fedders
International
Gordon Newman, 51 Vice President and 1995
President, Rotorex Co.
Sal Giordano III, 38 Vice President and President 1996
(2) Melcor Corproation
Thomas A. Kroll, 43 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
Counsel of the Company from 1990 to 1991.
Mr. Senion became Group Vice President and Chief Operating Officer of
the Company in July 1997. Prior to joining the Company, Mr. Senion
was employed by Frigidaire Corporation for approximately 20 years,
most recently as Group Vice President of the Frigidaire Home Products
Company, Home Comfort Division and the Electrolux Global Home Comfort
Products Division.
Mr. Newman was elected to his position in 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 Vice President of the Company in August 1996.
He has been President of Melcor since 1995 and was Vice President of Business
Planning and Development of NYCOR, Inc. from 1992 to August 1996.
Mr. Kroll was elected to his position in April 1995. Previously he
was Controller of Fedders North America since 1992. Prior thereto he
was Controller of Emerson Quiet Kool.
Item 11. Executive Compensation
See the section entitled "Executive Compensation" in the Company's
Proxy Statement, filed in connection with the Company's Annual Meeting
of Stockholders to be held on December 16, 1997, which section is
incorporated herein by reference.
Item 12. Security ownership of Certain Beneficial Owners and
Management
See the sections entitled "Security Ownership of Directors and
Officers" and "Principal Stockholders" in the Company's Proxy
Statement, filed in connection with the Company's Annual Meeting of
Stockholders to be held on December 16, 1997, which sections are
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See the section entitled "Election of Directors" in the Company's
Proxy Statement, filed in connection with the Company's Annual Meeting
of Stockholders to be held on December 16, 1997, which section is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
Index to Financial Statements and Financial Statement Schedules
(a) 1. Financial Statements
The following Consolidated Financial Statements of the Company and its
subsidiaries are included:
Page #
Consolidated Statements of Operations F1
Consolidated Balance Sheets at August 31, 1997 and 1996 F2-F3
Consolidated Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995 F4-F5
Stockholders' Equity for the years ended
August 31, 1997, 1996 and 1995 F6
Notes to Consolidated Financial Statements F7-F25
Report of Independent Certified Public Accountants F26
Quarterly Financial Data F27
(a) 2. Financial Statement Schedule
Consolidated Schedule as of and for the years ended August 31, 1997,
1996 and 1995
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 of the Company dated
November 18, 1997.
(ii) By-Laws, amended through January 16, 1988, filed as Exhibit
(3) (vii) to the Company's Annual Report on Form 10-K for 1987 and
incorporated herein by reference.
(10) (i) Stock Option Plan II, filed as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for 1984 and incorporated herein by
reference.
(ii) Stock Option Plan III, filed as Exhibit 10 (iv) to the
Company's Annual Report on Form 10-K for 1985 and incorporated herein
by reference.
(iii) Stock Option Plan IV, filed as Exhibit 10 (iv) to the
Company's Annual Report on Form 10-K for 1987 and incorporated herein
by reference.
(iv) Stock Option Plan V, filed as Exhibit 10 (v) to the
Company's Annual Report on Form 10-K for 1988 and incorporated herein
by reference.
(v) Stock Option Plan VI, filed as Exhibit 10 (vi) to the
Company's Annual Report on Form 10-K for 1989 and incorporated herein
by reference.
(vi) Stock Option Plan VII, filed as Exhibit 10 (vi) to the
Company's Annual Report on Form 10-K for 1990 and incorporated herein
by reference.
(vii) Stock Option Plan VIII, filed as Annex F to the Company's
Proxy Statement - Prospectus dated May 10, 1996 and incorporated
herein by reference.
(viii) Employment Contract between The Company and Salvatore
Giordano dated March 23, 1993 filed as Exhibit 10 (viii) to the
Company's Annual Report on Form 10-K 1993 and incorporated herein by
reference.
(ix) Joint Venture Contract between Ningbo General Air Conditioner
Factory and Fedders Investment Corporation for the establishment of
Fedders Xinle Co. Ltd., dated July 31, 1995 filed as Exhibit 10 (viii)
on the Form 10-K 1996 and incorporated herein by reference.
(x) 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.
(27) Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1997.
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 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Salvatore Giordano
Salvatore Giordano Chairman of the Board November 26, 1997
/s/Salvatore Giordano, Jr.
Salvatore Giordano, Jr. Vice Chairman, President November 26, 1997
and Chief Executive Officer and a
Director (Principal Executive Officer)
/s/Joseph Giordano
Joseph Giordano Director November 26, 1997
/s/Howard S. Modlin
Howard S. Modlin Director November 26, 1997
/s/Clarence Russel Moll
Clarence Russel Moll Director November 26, 1997
/s/William J. Brennan
William J. Brennan Director November 26, 1997
/s/Anthony Puleo
Anthony Puleo Director November 26, 1997
/s/S.A. Muscarnera
S.A. Muscarnera Director November 26, 1997
/s/C.A. Keen
C.A. Keen Director November 26, 1997
/s/Robert L. Laurent, Jr.
Robert L. Laurent, Jr. Executive Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer) November 26, 1997
Fedders Corporation
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Years Ended August 31, 1997 1996 1995
Net sales $314,100 $371,772 $316,494
Costs and expenses:
Cost of sales 244,024 288,744 249,369
Selling, general and
administrative 38,347 32,040 29,472
282,371 320,784 278,841
Operating income 31,729 50,988 37,653
Minority interest in joint venture 568 230 -
Interest expense (net of interest
income of $920, $1,410 and $751 in
1997, 1996 and 1995, respectively) (3,430) (952) (1,962)
Income before income taxes 28,867 50,266 35,691
Federal, state and foreign
income taxes 10,103 19,108 6,187
Net income 18,764 31,158 29,504
Preferred stock dividend
requirement 2,420 151 -
Net income attributable to
common stockholders $ 16,344 $ 31,007 $ 29,504
Primary earnings per share $ 0.40 $ 0.74 $ 0.72
Dividends per share declared:
Preferred $ 0.318 $ 0.050 -
Common 0.080 0.080 $ 0.020
Class A 0.080 0.080 0.020
Class B 0.072 0.072 0.018
See accompanying notes
Fedders Corporation
Consolidated Balance Sheets
(Amounts in thousands, except share data)
August 31, 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 110,393 $ 90,295
Accounts receivable (less allowances of
$1,834 in 1997 and $1,952 in 1996) 9,060 7,975
Inventories 62,887 53,446
Deferred income taxes 4,070 3,584
Other current assets 8,917 3,366
Total current assets 195,327 158,666
Net property, plant and equipment 63,994 62,872
Deferred income taxes 6,374 7,364
Goodwill 56,858 58,556
Other assets 6,461 2,762
$ 329,014 290,220
Fedders Corporation
Consolidated Balance Sheets
(Amounts in thousands, except share data)
August 31, 1997 1996
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,891 $ 1,889
Accounts payable 10,591 16,514
Income taxes payable 10,027 15,391
Accrued expenses 31,082 38,055
Total current liabilities 53,591 71,849
Long-term debt 113,489 38,517
Other long-term liabilities:
Warranty 2,780 3,679
Other 8,427 10,816
Minority interest in joint venture 5,040 5,608
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value, 15,000,000
shares authorized, 6,809,184 and 7,643,061
issued at August 31, 1997 and 1996,
respectively 6,809 7,643
Common Stock, $1 par value, 80,000,000
shares authorized, 18,989,898 and 18,989,798
issued at August 31, 1997 and 1996,
respectively 18,990 18,990
Class A Stock, $1 par value, 60,000,000
shares authorized, 20,074,281 and
19,415,916 shares issued at August 31,
1997 and 1996, respectively 20,074 19,416
Class B Stock, $1 par value, 7,500,000
shares authorized, 2,266,606 and
2,266,706 issued at August 31, 1997
and 1996, respectively 2,267 2,267
Additional paid-in capital 85,702 87,728
Retained earnings 37,024 23,865
Cumulative translation adjustment (138) (158)
170,728 159,751
Less treasury stock, at cost, 4,334,800
shares of Class A stock at August 31, 1997 (25,041) -
Total stockholders' equity 145,687 159,751
$ 329,014 $ 290,220
See accompanying notes
Fedders Corporation - Consolidated Statements of Cash Flows
(Amounts in thousands, except per share data)
Years Ended August 31, 1997 1996 1995
Operating activities:
Net income $ 18,764 $31,158 $ 29,504
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 9,935 6,578 7,519
Tax benefit related to stock
options exercised 479 437 2,900
Deferred income taxes 504 (1,717) (5,406)
Changes in operating assets and liabilities:
Accounts receivable (1,085) 4,402 3,993
Inventories (9,441) (7,856) (10,972)
Other current assets (5,551) (628) (219)
Other assets (335) (568) 175
Income taxes payable (5,364) 6,243 8,373
Accounts payable (5,923) (2,887) 276
Accrued expenses (6,973) 3,784 6,617
Other long-term liabilities (3,288) 3,151 1,643
Other (548) (226) 184
Net cash (used in) provided by operations (8,826) 41,871 44,587
Investing activities:
Additions to property, plant and equipment (9,236) (7,043) (9,041)
Disposal of property, plant and equipment 428 535 521
Net cash used in investing activities (8,808) (6,508) (8,520)
Financing activities:
Net proceeds from issuance of 9 3/8%
senior subordinated notes 96,025 - -
Repayment and redemption of 8 1/2%
Convertible Subordinated Debentures (22,806) - -
Repayments of NYCOR, Inc.
short-term borrowing - (3,000) -
Repayments of long-term debt (1,992) (695) (13,866)
Proceeds from stock options exercised 1,727 1,868 692
Net proceeds from (repayment of)
Fedders Xinle financing (168) 6,299 -
Repayment of Fedders Xinle short-term debt - (3,396) -
Cash dividends (5,605) (3,252) (797)
Purchase of Class A Stock (25,041) - -
Purchase of Preferred Stock (4,408) - -
Expenses related to NYCOR, Inc. merger - (599) -
Proceeds from notes due on
common stock purchases - - 742
Net cash provided by (used in)
financing activities 37,732 (2,775) (13,229)
Net increase in cash and cash equivalents 20,098 32,588 22,838
Cash and cash equivalents at
beginning of year 90,295 57,707 34,869
Cash and cash equivalents at end of year $ 110,393 $90,295 $57,707
Supplemental disclosure:
Net interest paid $ 3,406 $ 2,249 $ 1,904
Net income taxes paid (refunded) 14,090 13,513 492
Fedders Corporation - Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended August 31, 1997 1996 1995
Non-cash investing and financing activities:
The issuance of 7,643 shares of
Convertible Preferred Stock at a
price of $6.25 in exchange for all
the outstanding shares outstanding
shares of Common, Class A and
Class B stock of NYCOR (note 13) - 47,769 -
See accompanying notes
Fedders Corporation
Consolidated Statements of Stockholders' Equity
(Amounts in thousands)
Cumu-
lative Notes
Trans- Due on
Class Class Add'l Retained lation Common
Preferred Common A B Paid-in Earnings Adjust- Stock Treasury
Stock Stock Stock Stock Capital (Deficit) ments Purchaes Stock
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) - -
Net income - - - - - 18,764 - - -
Conversion
of Preferred
to
Class A (129) - 129 - - - - - -
Purchase of
Preferred
Stock (705) - - - (3,703) - - - -
Tax benefit
related to
stock options
exercised - - - - 479 - - - -
Dividends
declared - - - - - (5,605) - - -
Stock
options
exercised - - 529 - 1,198 - - - -
Purchase of
Class A
stock - - - - - - - - (25,041)
Foreign
currency
translation - - - - - - 20 - -
August 31,
1997 $6,809 $18,990 $20,074 $2,267 $85,702 $37,024 $(138) - $(25,041)
See accompanying notes
Fedders Corporation
Notes to Consolidated Financial Statements
(Years ended August 31, 1997, 1996 and 1995; amounts in thousands,
except per share, share and market data)
1. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of 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:
1997 1996
Finished goods $ 32,233 $ 21,711
Work in process 6,631 6,652
Raw materials and supplies 24,023 25,083
$ 62,887 $ 53,446
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 1997 1996
Land and improvements $ 3,924 $ 3,830
Buildings 20 to 30 years 24,349 23,915
Machinery and equipment 5 to 12 years 87,421 84,887
Machinery and equipment
under capital leases 12 years 8,647 8,191
Property, plant and equipment 124,341 120,823
Accumulated depreciation 60,347 57,951
$ 63,994 $ 62,872
Depreciation is provided on the straight-line basis over the
estimated useful life of each asset as noted above. In 1996,
depreciation expense includes a $2,694 write down of certain idle
fixed assets to estimated realizable value. Accumulated
depreciation includes $1,005 and $297 of depreciation related to
equipment under capital leases in 1997 and 1996, respectively.
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 $10,472 and $8,640 at August 31, 1997
and 1996, respectively. Goodwill resulting from the merger with
NYCOR, Inc. ("NYCOR") on August 13, 1996 amounted to $53,192 (note
13).
Accrued expenses
Accrued expenses consist of the following at August 31:
1997 1996
Warranty $ 4,047 $ 4,019
Marketing programs 11,686 16,345
Salaries and benefits 7,876 7,964
Other 7,473 9,727
$31,082 $38,055
Income taxes
Deferred income taxes are provided to reflect the tax effects of
"temporary differences" between assets and liabilities for
financial reporting purposes and income tax purposes. Provisions
are also made for U.S. income taxes on undistributed earnings of
foreign subsidiaries not considered to be indefinitely reinvested
(note 7).
Research and development costs
All research and development costs are charged to expense as
incurred and amount to $6,268, $3,891 and $2,742 in 1997, 1996 and
1995, 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 were covered by a
three-year collective bargaining agreement, which expired in August
1997. The Company and the union representing employees of Rotorex
were unable to reach agreement prior to the expiration and the
employees covered by the collective bargaining agreement struck.
Rotorex continues to operate using temporary replacement workers.
The Company believes that this strike will not have a material
adverse effect on its financial condition or results of operations.
Another 34% of the employees are covered by another collective
bargaining agreement, which expires in October 1998.
Effect of new accounting pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 adoption of this
pronouncement on September 1, 1996 did not have a material effect
on the Company's consolidated financial statements.
In October 1995, the FASB issued Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation." On September 1,
1996, the Company adopted SFAS No. 123 and chose to continue the
application of APB Opinion 25 and related interpretation in
accounting for its stock options. As a result, the adoption of
SFAS No. 123 did not have a material effect on the Company's
consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per
Share," which establishes standards for computing and presenting
earnings per share. SFAS No. 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Basic earnings per share are
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share are computed similarly to fully
diluted earnings per share. The standard is effective for
financial statements for periods ending after December 15, 1997,
with earlier application not permitted.
Under the provisions of SFAS No. 128 pro forma basic earnings per
share would have been $0.42, $0.77 and $0.74 in 1997, 1996 and
1995, respectively and pro forma diluted earnings per share would
have been $0.39, $0.74 and $0.72 in 1997, 1996 and 1995,
respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," were issued. SFAS No. 130 addresses
standards for reporting and display of comprehensive income and its
components and SFAS No. 131 requires disclosure of reportable
operating segments. Both statements are effective for the
Company's 1999 fiscal year. The Company will review these
pronouncements to determine their applicability, if any.
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: 40,888,000,
41,997,000 and 41,001,000 in 1997, 1996, and 1995, respectively.
Fully diluted earnings per share were not materially dilutive for
all years and, accordingly, are not presented.
2. Transactions With NYCOR
On August 13, 1996 and upon receiving more than a two-thirds
majority approval of all Common and Class B stockholders, the
Company merged with NYCOR. One share of Fedders Convertible
Preferred Stock was issued for each share of NYCOR Common, Class A
and Class B stock (note 13). Prior to the merger, 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 and $52,381
in 1996 and 1995, respectively. Certain officers and directors of
the Company were also officers and/or directors of NYCOR and had
significant stockholdings in both companies.
3. Litigation
The Company is involved in litigation, both as plaintiff and
defendant, incidental to the conduct of its business. It is the
opinion of management, after consultation with counsel, that the
outcome of such litigation will not have a material adverse effect
on the accompanying financial statements.
4. Short-term Borrowing
At August 31, 1997 and 1996, the Company had no short-term
borrowing under its revolving credit facility with a commercial
finance company. Availability under the facility of $50,000 and
$40,000 at August 31, 1997 and 1996, respectively is based on
accounts receivable and inventory and requires maintenance of
certain financial covenants. The maximum amount outstanding under
the credit facility was $50,000 and $37,877 during fiscal 1997 and
1996, respectively. The average amount outstanding and average rate
of interest charged on outstanding borrowings under the credit
facility were $14,974 and 8.6% in fiscal 1997 and $5,596 at 9.8% in
fiscal 1996. The credit facility is collateralized by substantially
all of the Company's assets and is in effect until February 2000.
The rate of interest on the facility is the prime rate.
5. Long-term Debt
Long-term debt consists of the following at August 31:
1997 1996
9 3/8% senior subordinated notes due
in 2007: $100,000 principal amount
less unamortized discount of $477 $99,523 -
8.5% convertible subordinated debentures
due in 2012 - $22,806
Fedders Xinle 15.175% promissory note 6,131 6,299
Promissory note payable to the State of
Illinois, interest at 1% 3,859 4,196
Capital lease obligations and other 5,867 7,105
115,380 40,406
Less current maturities 1,891 1,889
$113,489 $ 38,517
Aggregate amounts of long-term debt, excluding capital leases and
other of $5,867 maturing in each of the years ending August 31 are:
1998-$339, 1999-$342, 2000-$346, 2001 - $349, 2002 - $352, and
thereafter $107,785.
In August, 1997, a subsidiary of the Company issued $100,000
principal amount of 9 3/8% senior subordinated notes due 2007. The
notes are guaranteed by the Company on a senior subordinated basis.
The notes may be redeemed by Fedders North America after August
2002 at a redemption price of 104.688% of principal amount. The
provisions of the notes limit, among other things, the payment of
dividends by the subsidiary.
In August 1997, the Company satisfied its obligation on the 8.5%
convertible subordinated debentures due 2012 which were convertible
into the Company's Preferred Stock.
The $6,131 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 11 years, and is collateralized by a
mortgage on the Illinois facility.
6. Leases
Capital Leases
Aggregate future minimum rental payments under capital leases
primarily assumed in conjunction with the NYCOR merger (note 13)
for the years ended August 31 are as follows: $2,103, $2,086,
$2,232, $214, $214 and $189 in 1998, 1999, 2000, 2001, 2002 and
thereafter, respectively. The present value of net minimum lease
payments is $5,867, excluding interest portion of $1,171.
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: $3,473, $3,065,
$1,978, $1,742 and $895 in 1998, 1999, 2000, 2001 and 2002,
respectively. Minimum lease payments total $11,153. Total rent
expense for all operating leases amounted to $3,749, $2,025 and
$2,083 in 1997, 1996 and 1995, respectively.
7. Income Taxes
The provision for income tax (benefit) consists of the following
components:
1997 1996 1995
Current:
Federal $ 8,005 $18,047 $6,258
State 714 2,253 2,378
Foreign 401 88 57
9,120 20,388 8,693
Charge in lieu of income taxes 479 437 2,900
Deferred:
Federal 380 (1,530) (4,392)
State 124 (187) (1,014)
504 (1,717) (5,406)
$10,103 $19,108 $6,187
The exercise of stock options to acquire shares of the Company's
Class A Stock creates a compensation deduction for income tax
purposes for which no corresponding expense was required for
financial reporting purposes. The tax benefits related to these
deductions are reflected as a charge in lieu of income taxes and a
credit to additional paid-in capital.
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:
1997 1996
Warranty $ 2,498 $ 3,065
Depreciation (1,263) 392
Employee benefit programs 4,560 3,525
Inventory 2,249 1,710
Net operating loss carryforwards 8,221 7,598
Other 915 1,683
17,180 17,973
Valuation allowance (6,736) (7,025)
$10,444 $10,948
In connection with the NYCOR merger in August 1996, net deferred
tax assets were increased by $5,000 net of a valuation allowance of
$6,584, attributable to temporary differences and to tax loss and
tax credit carryforwards of NYCOR and its subsidiaries which the
Company expects to utilize over the carryforward periods.
The decrease in the deferred tax asset valuation allowance resulted
from the utilization of net operating loss carryforwards 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:
1997 1996 1995
Expected tax at statutory rate $10,103 $17,593 $12,492
Valuation allowance reflected
in current income (289) (325) (7,851)
State taxes, less federal
income tax benefit 545 1,343 887
Prior year provisions
no longer required (675) - -
Other 419 497 659
$10,103 $19,108 $ 6,187
At August 31, 1997, the Company has Canadian net operating loss
carryforwards of approximately $556 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 and $1,000,
respectively, which are restricted as to use and expire in the
years 2001 through 2010. All prior U.S. net operating losses and
credit carryforwards were utilized at August 31, 1995.
8. Industry Segment
The Company operates in one industry segment and sells its room air
conditioners primarily direct to retailers and also through private
label arrangements and distributors. One customer accounted for
27% of net sales in 1997, 30% of net sales in 1996 and 26% in 1995.
A second customer accounted for 19% of net sales in 1997 and a
third customer for 10% in 1995.
International sales were approximately $45,012 in 1997, $24,458 in
1996 and $12,892 in 1995 and were made principally to Canada,
Mexico, Europe and Asia.
9. Capital Stock
Preferred Stock: In fiscal 1996, 7,643,036 shares of Convertible
Preferred Stock (the "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). In August 1997, the Company called for the
redemption of its Preferred Stock. In September 1997, each share
of Preferred Stock was redeemed for 1.022 shares of Class A Stock
based on the average closing price of $6.113 of the Class A Stock.
Fractional shares and all accounts holding 100 shares or less will
be paid in cash at the rate of $6.25 per share. During fiscal
1997, 705,233 shares of Preferred Stock were repurchased under the
Company's stock repurchase program and were retired.
Common Stock: Shares of Common Stock are reserved for the
conversion of Class A Stock and Class B Stock as indicated herein.
Class A Stock: In 1995 the Company issued 7,984,000 shares of Class
A Stock through a stock dividend. During fiscal 1997, 4,334,800
shares were repurchased under the Company's stock repurchase
program and are held in treasury. At August 31, 1997, 6,959,000
shares are reserved for conversion of the Company's Convertible
Preferred Stock. At August 31, 1997, 10,138,000 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, 1997, 37,171,281
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,
1997, 2,266,606 shares of Common Stock are reserved for such
conversion. Class B Stock has greater voting power, in certain
circumstances, ten-to-one, in the election of directors but
receives a lower dividend, if declared, equal to 90% of the
dividend on Common Stock and has limited transferability. Class B
Stock also votes separately, as a class, on certain significant
issues.
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 Company applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans. Had compensation
cost for the Company's stock option plans been determined
consistent with FASB No. 123, the Company's net income and earning
per share would have been reduced to the pro forma amounts
indicated below.
1997 1996
Net income attributable to
common stockholders: As reported $16,344 $31,007
Pro forma 14,801 30,642
Primary earning per share: As reported $ 0.40 $ 0.74
Pro forma 0.36 0.73
The stock option plan summary and changes during each year is
presented below:
(000's) 1997 1996 1995
Options outstanding beginning
of year 4,852 4,715 3,903
Granted 1,761 752 403
Canceled (92) (30) (300)
Exercised (529) (585) (218)
Dividend-related adjustments (a) - - 927
Options outstanding at end of year 5,992 4,852 4,715
Options exercisable at end
of year 3,385 3,682 3,336
Exercise price $1.87 $1.69 $2.33
per share to 5.50 to 4.87 to 4.70
(a) In connection with stock dividends distributed in 1995, all
options were adjusted to reflect a 25% increase.
Options, exercisable at August 31, 1997, have an average exercise
price of $3.64. The fair value of the stock options granted during
1997 and 1996 was $2,478 and $821, respectively, on the date of
grant using the Black Scholes option-pricing model. The weighted-
average assumptions used were: 1997 -expected dividend yield of
$.08 per share, risk-free interest rate of 6.1%, an expected life
of 4 years and an expected volatility of 32%; 1996 - expected
dividend yield of $.08 per share, risk-free interest rate of 6.3%,
an expected life of 4.7 years and an expected volatility of 32%.
The following table summarizes information on stock options
outstanding at August 31, 1997:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices August 31, 1997 Life Price August 31, 1997 Price
$1.87-2.93 1,178 4.6 $2.68 241 $2.34
$3.00-3.53 688 2.9 3.29 688 3.29
$3.60-3.93 1,820 2.6 3.63 1,820 3.63
$4.00-4.50 471 4.0 4.41 471 4.41
$4.75-4.57 1,685 5.5 4.75 65 4.87
$5.13-5.50 159 5.7 5.25 100 5.13
5,992 4.1 3.80 3,385 3.64
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 $1,340 in 1997, $1,171 in 1996 and $756 in 1995. In
1996, the Company terminated its defined benefit pension plan that
was curtailed in 1993 with no material gain or loss recognized.
The Company has an agreement with an officer that has a term of ten
years from any point in time and provides for salary during the
employment period, a disability program, postretirement benefits
and a death benefit in an amount equal to ten times the prior
year's compensation, payable by the Company over ten years. The
estimated present value of future non-salary benefits payable under
the agreement has been determined based upon certain assumptions
and is being amortized over the expected remaining years of service
to the Company. The agreement was adjusted in 1996 to include the
terms of the NYCOR merger (note 13) to maintain employees and
directors of NYCOR in the same economic position as immediately
prior to the merger.
The Company provides a portion of health care and life insurance
benefits for retired employees who elect to participate in the
Company's plan. SFAS No. 106 requires accrual accounting for all
postretirement benefits other than pension. At August 31, 1997 and
1996 postretirement benefits were fully accrued.
12. Joint Venture
On November 7, 1996, the Company entered into a joint venture with
the Ningbo General Air Conditioner Factory ("Ningbo"), Ningbo City,
Zhejiang 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 Company contribution
approximately $8,400 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 for a 40% interest. The equivalent of
approximately $10,300 in long-term financing was provided by a
P.R.C. bank for the joint venture and is not guaranteed by the
Company. At August 31, 1997, $6,131 was outstanding under this
long-term financing. 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. Consideration consisted of 7,643,000 shares of Preferred
Stock with a value of approximately $47,769. The merger was
accounted for using the purchase method, with the consideration
allocated to the assets acquired based on their estimated fair
values as of the merger date. The purchase price plus the fair
value of net liabilities assumed was allocated to goodwill which is
being amortized on a straight line basis over 40 years.
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 for years ended August 31 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 26,742
Income per share:
Primary $ 0.51 $ 0.57
Fully diluted 0.47 0.54
14. Supplemental Condensed Consolidating Financial Statements
Fedders North America, Inc. ("FNA") is a wholly owned subsidiary of
the Company. FNA and the Company are the Issuer and the Guarantor,
respectively, of the senior subordinated notes due 2007 which were
issued in August 1997 (the "Offering" note 5). The Company's
guarantee is full, unconditional, and joint and several. The
following condensed consolidating financial statements present
separate information for FNA ("Fedders") and for the Company and its
subsidiaries other than FNA and should be read in
connection with the consolidated financial statements of the
Company. The non-guarantor subsidiaries of the Company are
inconsequential individually and in the aggregate, to the
consolidated financial statements and management has determined
that separate financials of the Guarantor would not be meaningful.
The amounts shown for FNA (presented under the caption "Fedders
North America") in the following historical condensed consolidating
financial statements include the accounts of Rotorex Company, Inc.
("Rotorex") since August 13, 1996. The amounts shown for Fedders
presented under the caption ("Other Fedders") include the accounts of
NYCOR and its subsidiaries other than Rotorex since August 13,
1996. August 13, 1996 was the date of the merger between Fedders
Corporation and NYCOR (note 13). The amounts shown for Fedders and
FNA reflect the elimination of the $20,000, 10% note payable by
Rotorex to NYCOR as a contribution to the capital of Rotorex
retroactive to August 13, 1996, since this amount was contributed
to Rotorex's capital in connection with the Offering. The amounts
also present the intercompany receivable by FNA from
Fedders for all periods prior to August 31, 1997 as a reduction of
stockholders' equity since the balance in this account was forgiven
at the time of completing the Offering.
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Supplemental Condensed Consolidated Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Fiscal Year Ended August 31, 1997
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $271,874 $ 42,226 - $314,100
Cost of sales 206,870 37,154 - 244,024
Selling, general and
administrative expenses(a) 26,130 12,217 - 38,347
Operating income (loss) 38,874 (7,145) - 31,729
Minority interest in joint venture - 568 - 568
Net interest income (expense)(b) (4,341) 911 - 3,430
Income (loss) before income taxes 34,533 (5,666) - 28,867
Income taxes (benefit) 12,087 (1,984) - 10,103
Net income (loss) 22,446 (3,682) - 18,764
Intercompany dividend income (f) - 72,300 (72,300) -
Preferred stock dividend requirement - 2,420 - 2,420
Net income (loss) attributable to
common stockholders $ 22,446 $ 66,198 $(72,300) $ 16,344
Fiscal Year Ended August 31, 1996
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $356,392 $ 15,380 - $371,772
Cost of sales 276,917 11,827 - 288,744
Selling, general and
administrative expenses(a) 25,267 6,773 - 32,040
Operating income (loss) 54,208 (3,220) - 50,988
Minority interest in joint venture - 230 - 230
Net interest income (expense)(b) (3,941) 2,989 - (952)
Income (loss) before income taxes 50,267 (1) - 50,266
Income taxes (benefit) 19,108 - - 19,108
Net income (loss) 31,159 (1) - 31,158
Preferred stock dividend requirement - 151 - 151
Net income (loss) attributable to
common stockholders $31,159 $ (152) - $ 31,007
Fiscal Year Ended August 31, 1995
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
Net sales $311,363 $ 5,131 - $316,494
Cost of sales 245,593 3,776 - 249,369
Selling, general and
administrative expenses(a) 26,515 2,957 - 29,472
Operating income (loss) 39,255 (1,602) - 37,653
Minority interest in joint venture - - - -
Net interest income (expense)(b) (2,608) 646 - (1,962)
Income (loss) before income taxes 36,647 (956) - 35,691
Income taxes (benefit) 6,340 (153) - 6,187
Net income (loss) 30,307 (803) - 29,504
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Supplemental Condensed Consolidated Financial Statements - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 1997
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
ASSETS
Current assets:
Cash - $110,393 - $110,393
Net accounts receivable $ 5,461 3,599 - 9,060
Inventories 50,303 12,584 - 62,887
Other current assets 584 12,403 - 12,987
Total current assets 56,348 138,979 - 195,327
Investments in subsidiaries - 104,306 $(104,306) -
Net property, plant and equipment 51,466 12,528 - 63,994
Goodwill 50,284 6,574 - 56,858
Other long-term assets 7,794 5,041 - 12,835
$165,892 $267,428 $(104,306) $329,014
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 1,870 $ 21 - $ 1,891
Accounts and income taxes payable 20,747 (129) - 20,618
Accrued expenses 22,752 8,330 - 31,082
Total current liabilities 45,369 8,222 - 53,591
Net due to/(from) affiliate (10,758) 10,758 - -
Long-term debt 107,346 6,143 - 113,489
Other long-term liabilities 2,780 13,467 - 16,247
Stockholders' equity:
Preferred Stock - 6,809 - 6,809
Common, Class A and
Class B Stock 5 41,326 - 41,331
Paid-in capital (f) 21,292 237,634 (173,224) 85,702
Retained earnings (deficit) (f) - (31,894) 68,918 37,024
Treasury Stock - (25,041) - (25,041)
Cumulative translation adjustments (142) 4 - (138)
Total stockholders' equity 21,155 228,838 (104,306) 145,687
$165,892 $267,428 $(104,306) $329,014
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Supplemental Condensed Consolidated Financial Statements - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 1996
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
ASSETS
Current assets:
Cash - $ 90,295 - $ 90,295
Net accounts receivable $ 3,464 4,511 - 7,975
Inventories 38,998 14,448 - 53,446
Other current assets 1,020 5,930 - 6,950
Total current assets 43,482 115,184 - 158,666
Investments in subsidiaries - 104,306 (104,306) -
Net property, plant and equipment 52,041 10,831 - 62,872
Goodwill 51,704 6,852 - 58,556
Other long-term assets 4,597 5,529 - 10,126
$151,824 $242,702 (104,306) $290,220
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 1,670 $ 219 - $ 1,889
Accounts and income taxes payable 15,924 15,981 - 31,905
Accrued expenses 29,431 8,624 - 38,055
Total current liabilities 47,025 24,824 - 71,849
Net due to affiliate - 133,286 (133,286) -
Long-term debt 9,322 29,195 - 38,517
Other long-term liabilities 4,309 15,794 - 20,103
Stockholders' equity:
Preferred Stock - 7,643 - 7,643
Common, Class A and
Class B Stock 5 40,668 - 40,673
Paid-in capital 109,637 87,563 (109,472) 87,728
Retained earnings (deficit) 114,935 (96,236) 5,166 23,865
Treasury Stock
Net due from affiliate (133,286) - 133,286 -
Cumulative translation adjustment (123) (35) - (158)
Total stockholders' equity 91,168 39,603 28,980 $159,751
$151,824 $242,702 $(104,306) $290,220
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Supplemental Condensed Consolidated Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Fiscal Year Ended August 31, 1997
Fedders Other Fedders
North America Fedders Corporation
Net cash provided by operations $ 12,694 $(21,520) $ (8,826)
Net additions to property, plant and
equipment, being cash used in investing
activities (6,750) (2,058) (8,808)
Net (repayments) proceeds from short
and long-term borrowings (1,716) (276) (1,992)
Cash dividends - (5,605) (5,605)
Proceeds from stock options exercised - 1,727 1,727
Proceeds from bond offering 96,025 - 96,025
Redemption of 8 1/2%
convertible subordinated debentures - (22,806) (22,806)
Purchase of Class A Stock - (25,041) (25,041)
Purchase of Preferred Stock - (4,408) (4,408)
Other - (168) (168)
Intercompany dividend (72,300) 72,300 -
Change in net due to (from) affiliate (27,953) 27,953 -
Net cash (used in) provided by financing
activities (5,944) 43,676 37,732
Net increase in cash and cash equivalents - 20,098 20,098
Cash and cash equivalents at
beginning of year - 90,295 90,295
Cash and cash equivalents at end of year - $110,393 $110,393
Fiscal Year Ended August 31, 1996
Net cash provided by operations $ 36,073 $ 5,798 $ 41,871
Net additions to property, plant and
equipment, being cash used in investing
activities (4,448) (2,060) (6,508)
Net (repayments) proceeds from short
and long-term borrowings (398) (394) (792)
Cash dividends - (3,252) (3,252)
Proceeds from stock options exercised - 1,868 1,868
Other - (599) (599)
Change in net due to (from) affiliate (31,227) 31,227 -
Net cash (used in) provided by
financing activities 31,625) 28,850 (2,775)
Net increase in cash and cash equivalents - 32,588 32,588
Cash and cash equivalents at
beginning of year - 57,707 57,707
Cash and cash equivalents at end of year - $ 90,295 $ 90,295
Fiscal Year Ended August 31, 1995
Net cash provided by operations $ 41,805 $ 2,782 $ 44,587
Net additions to property, plant and
equipment, being cash used in investing
activities (4,807) (3,713) (8,520)
Net (repayments) proceeds from short
and long-term borrowings (522) (13,344) (13,866)
Cash dividends - (797) (797)
Proceeds from stock options exercised - 692 692
Other - 742 742
Change in net due to (from) affiliate (36,476) 36,476 -
Net cash (used in) provided by
financing activities (36,998) 23,769 (13,229)
Net increase in cash and cash equivalents - 22,838 22,838
Cash and cash equivalents at
beginning of year - 34,869 34,869
Cash and cash equivalents at end of year - $ 57,707 $ 57,707
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. Supplemental Condensed Consolidating Financial Statements
- - (Continued)
Intercompany transactions
The historical condensed consolidating financial statements
presented above include the following transactions between FNA and
the Company;
a) The Company charges corporate overhead to FNA essentially on a
cost basis allocated in proportion to sales. Such charges to FNA
amounted to $9,747, $10,247 and $9,294 for the years ended August
31, 1997, 1996 and 1995, respectively.
b) The Company allocates interest expense to FNA based upon the
level of the FNA's working capital at the prime rate of interest.
Such interest charges amounted to $3,953, $2,751 and $1,627 for the
years ended August 31, 1997, 1996 and 1995, respectively.
c) FNA's depreciation and amortization for the years ended August
31, 1997, 1996 and 1995 amounted to $7,847, $6,071 and $6,061,
respectively. Capital expenditures of FNA for the same periods
amounted to $7,131, $4,983 and $4,286, respectively.
d) The Company guarantees FNA's obligations under FNA's revolving
credit facility.
e) The Company's stock option plans include FNA's employees.
f) In connection with the completion of the offering on August 13,
1997, FNA declared a dividend of $72,300 to the Company.
In addition, the intercompany receivable from Fedders Corporation
on August 13, 1997 of $152,097 was forgiven and has been reflected
as an adjustment to stockholders equity of both companies in the
accompanying condensed consolidated balance sheet on page F22.
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, 1997 and 1996, and the related
consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended August 31,
1997. 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, 1997 and 1996, and
the consolidated results of its operations and its cash flows for
each of the three years in the period ended August 31, 1997, in
conformity with generally accepted accounting principles.
/s/BDO Seidman, LLP
Woodbridge, New Jersey
September 29, 1997
Quarterly Financial Data (unaudited)
(000's, except per share and market price data)
First Second Third Fourth Fiscal Year
1997 1997 1997 1997 1997
Net sales $33,087 $60,593 $143,776 $76,644 $314,100
Gross profit 7,179 14,277 30,842 17,778 70,076
Income (loss) before
income taxes (1,668) 3,584 19,153 7,798 28,867
Net income (loss) $(1,246) $ 2,511 $ 12,640 $ 4,859 $ 18,764
Net income (loss)
per share (a) $ 0.05 $ 0.04 $ 0.30 $ 0.12 $ 0.40
Market price
per share:
Preferred Stock (FJAPr)
High 6 1/2 6 1/2 6 3/4 7 7
Low 5 5/8 5 5/8 5 5/8 6 5 5/8
Common Stock (FJC)
High 6 1/2 6 1/2 6 1/2 6 5/8 6 5/8
Low 5 5/8 5 5/8 5 5/8 5 5/8 5 5/8
Class A Stock (FJA)
High 5 7/8 6 1/8 6 1/4 6 3/8 6 3/8
Low 4 5/8 4 5/8 5 1/4 5 1/2 4 5/8
First Second Third Fourth Fiscal Year
1996 1996 1996 1996 1996
Net sales $27,809 $88,327 $173,868 $81,768 $371,772
Gross profit 6,777 18,005 37,859 20,387 83,028
Income (loss) before
income taxes 554 10,274 28,200 11,238 50,266
Net income (loss) $ 343 $ 6,370 $ 17,430 $ 7,015 $ 31,158
Net income (loss)
per share (a) $ 0.01 $ 0.15 $ 0.42 $ 0.16 $ 0.74
Market price
per share:
Preferred Stock (FJAPr)
High - - - 5 7/8 5 7/8
Low - - - 5 1/8 5 1/8
Common Stock (FJC)
High 6 3/4 6 3/4 7 7 1/4 7 1/4
Low 5 1/4 5 6 5 1/2 5
Class A Stock (FJA)
High 5 5 5/8 6 1/4 6 3/8 6 3/8
Low 3 3/4 3 7/8 5 3/8 4 7/8 3 3/4
(a) Quarterly earnings per share may not add to earnings per share for the
year due to rounding and changes in the number of weighted average
shares outstanding.
FEDDERS CORPORATION
VALUATION & QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
For The Years Ended August 31, 1997, 1996 and 1995
(Amounts in Thousands)
Balance Additions Balance
at beginning charged to at end
of period expense Deductions Other of period
Allowance for Doubtful
Accounts:
Year Ended:
August 31, 1997 $1,952 $(116) $ 2 - $ 1,834
August 31, 1996 $ 872 $ 580 - $ 500(1) $ 1,952
August 31, 1995 $ 744 $286 $158 - $ 872
(1) Includes $500 related to joint venture (see note 12 of the Notes to the
Consolidated Financial Statements)