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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, 2002
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 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 . [X]
As of the close of business on October 31, 2002, there were outstanding
30,091,065 shares of the Registrant's Common Stock and 2,493,046 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 21, 2002 was $88,954,623. (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, 2001 TO AUGUST 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business............................................................. 1
Item 2. Properties........................................................... 5
Item 3. Legal Proceedings ................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Matters............ 6
Item 6. Selected Financial Data.............................................. 8
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.............................................. 9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk............ 14
Item 8. Financial Statements and Supplementary Data.......................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 14
PART III
Item 10. Directors and Executive Officers of the Registrant................... 15
Item 11. Executive Compensation............................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 17
Item 13. Certain Relationships and Related Transactions....................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 17
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Fedders Corporation (the "Company" or the "Registrant") is a leading
global manufacturer and marketer of air treatment products, including air
conditioners, air cleaners, dehumidifiers and humidifiers, and thermal
technology products. The Company was established more than 100 years ago and has
been in the indoor air treatment business for more than 50 years.
We have been actively pursuing strategic acquisitions and alliances to
support continued growth in new and existing markets. During fiscal year 2002,
highlights of this program were as follows:
- - In October 2001, we entered into a joint venture with Voltas Limited to
produce room air conditioners in India.
- - In October 2001, a new, wholly-owned manufacturing company, Fedders
Shanghai Co., Ltd. began manufacturing air conditioners in China.
- - In November 2001, our Melcor subsidiary formed a joint venture with
Quanzhou Hua Yu Electrical Component Factory which is producing thermoelectric
modules in China.
- - In January 2002, our Rotorex subsidiary entered into an agreement with
Dong Fang Electromechanical to form a joint venture to manufacture rotary
compressors for air conditioners in Xi'an, China.
- - In February 2002, our Indoor Air Quality division leased a facility in
Suzhou Industrial Park in Suzhou, China in which it will produce residential,
commercial and industrial air cleaner products.
Unless otherwise indicated, all references herein to the "Company" or
the "Registrant" include Fedders Corporation and its principal operating
subsidiaries.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two reportable industry segments: Heating, Ventilation,
Air Conditioning and Refrigeration ("HVACR") and Engineered Products. See Note 8
of the Notes to Consolidated Financial Statements at page F-15 herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company manufactures and sells, worldwide, a wide variety of air
treatment products, including air conditioners, air cleaners, humidifiers and
dehumidifiers, and thermal technology products.
With its expanding product line, the Company serves the unique air
treatment demands of various key markets including the residential,
commercial/industrial, communications, medical/biotechnology, optics and
consumer markets.
HVACR
PRODUCTS
The HVACR segment designs, manufactures and markets air conditioners,
including window, split, multi-split, through-the-wall, portable, and packaged
unit air conditioners, humidifiers and dehumidifiers.
1
MARKETS
The Company's products are sold, primarily by the Company's salaried
sales force, through a variety of sales channels, including global retailers,
national retailers, regional retailers, wholesale distributors, catalog supply
houses, private label and original equipment manufacturers, and on the Internet.
PRODUCTION
The Company currently manufactures air conditioners in Effingham,
Illinois; Longview, Texas; Vienna, Georgia; Ningbo and Shanghai, China; Dadra,
India; Estella, Spain and Manila, Philippines.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used for production are steel, copper and
aluminum, which the Company obtains from domestic and foreign suppliers. The
Company also purchases certain components used in its products from other
manufacturers including thermostats, compressors, motors and electrical
controls. The Company endeavors to obtain the lowest possible cost in its
purchases of raw materials and components, which must meet specified quality
standards, through an active global sourcing program.
ENGINEERED PRODUCTS
PRODUCTS
The Engineered Products segment designs, manufactures and distributes
media filters, electronic filters, humidifiers, dust collectors, fan filter
units and solid-state thermoelectric heat pump modules.
MARKETS
The Company's products are sold through manufacturers' representatives,
distributors and direct sales to end-users.
PRODUCTION
The Company produces electronic and media air cleaners and
humidification systems in Sanford, North Carolina. HEPA/ULPA air cleaner
products are produced in Albuquerque, New Mexico. The Company manufactures
residential, commercial and industrial air cleaner products in Suzhou, China.
Thermoelectric modules are produced in Lawrence Township, New Jersey and
Quanzhou, China.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used for production are steel, aluminum,
filter paper, and ceramics, which the Company obtains from domestic and foreign
suppliers. The Company also purchases certain components used in its products,
such as motors and electrical controls, from other manufacturers. 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.
SEASONALITY OF BUSINESS
Results of operations and financial condition are currently 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 9 through 14 herein.
2
See also the discussion under "Working Capital Practices."
WORKING CAPITAL PRACTICES
The Company regularly reviews working capital with a view to
maintaining the lowest level consistent with requirements of anticipated levels
of operation. Sales currently peak in the third fiscal quarter. Production is
weighted towards the selling season, accordingly, the greatest use of credit
lines occurs early in the calendar year. Cash balances peak in August.
Information with respect to the Company's warranty and defective return
policy is provided in Note 1 of the Notes to Consolidated Financial Statements
at page F-5 herein.
See also the information entitled "Management's Discussion and Analysis
of Results of Operations and Financial Condition" at pages 9 through 14 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.
QUALITY ASSURANCE
One of the key elements of the Company's strategy is a commitment to a
single worldwide standard of quality. All of the Company's manufacturing
facilities globally, (with the exception of Eubank Manufacturing Enterprises,
which was acquired in fiscal 2001) have earned the highest level of
certification, ISO 9001, for their quality management systems under the
International Standards Organization. The ISO 9000 program is an internationally
recognized benchmark of quality management systems within a production facility.
The same level of quality will be required at all of the Company's manufacturing
facilities.
As part of its acquisition integration program, the Company implements
programs to obtain ISO certification for newly-acquired facilities.
PATENTS, TRADEMARKS, LICENSES AND CONCESSIONS HELD
The Company owns a number of trademarks and licenses the name MAYTAG
from Maytag Corporation for use on air conditioners and dehumidifiers. While the
Company believes that its trademarks, such as, FEDDERS, EMERSON QUIET KOOL,
AIRTEMP, MELCOR, TRION, SUN, KOPPEL, EUBANK, POLENZ and MAC-10, and the
trademark MAYTAG, 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.
COMPETITION
All of the markets in which the Company does business are very
competitive. Many of the Company's competitors are larger and have greater
resources than the Company. The Company competes principally on the basis of
technology, quality, price and its ability to deliver product and service to its
customers on a just-in-time basis.
RESEARCH AND DEVELOPMENT
The Company's product development activities include ongoing research
and development programs to redesign existing products, reduce manufacturing
cost, increase product efficiencies and to create new products. In fiscal 2002,
2001, and 2000, the Company spent approximately $8.9 million, $9.1 million, and
$9.5 million, respectively, on research and development. Research and
development expenditures are included within selling, general and administrative
expense.
3
ENVIRONMENTAL PROTECTION
The Company's operations are subject to various United States (federal
and state) and foreign environmental statutes and regulations, including laws
and regulations dealing with storage, treatment, discharge and disposal of
hazardous materials, substances and wastes and that 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 fiscal year ended August 31,
2002 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, 2003.
The Company has identified a groundwater problem at its Walkersville,
Maryland facility. Based upon available information, the Company does not expect
the cost of investigation or any required remediation relating to this matter to
have a material adverse effect on its results of operations.
EMPLOYEES
The Company has approximately 2,700 employees worldwide. The contract
with the union representing substantially all of the production employees of the
Effingham, Illinois plant expired on October 5, 2002. The union members continue
to work while the parties negotiate. The union contract covering Fedders Koppel
employees expires in March 2005. The Company considers its relations with its
employees to be generally satisfactory.
FOREIGN OPERATIONS
Foreign operations are subject to the risks inherent in such
activities, such as foreign regulations, unsettled political conditions and
exchange rate fluctuations.
Through certain subsidiary companies, the Company has operations in a
number of countries, including China, India, Germany, Spain, the United Kingdom
and the Philippines. Of our fourteen manufacturing facilities, five are in
China.
The Company's foreign operations, at times, may be adversely affected
by changes in government policies such as changes in laws and regulations (or
the interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of additional measures to control
inflation, changes in the rate or method of taxation, the imposition of
additional restrictions on currency conversion and remittances abroad and the
expropriation of private enterprise. In addition, policy concerns particular to
the United States with respect to a country in which the Company has operations
could adversely affect the Company's operations in that country.
The Company monitors its operations with a view to minimizing the
impact on its foreign investments and overall business that could arise as a
result of the risks inherent in maintaining operations in foreign countries as
described above.
4
See Note 1 of the Notes to Consolidated Financial Statements at page F-5 herein.
ITEM 2. PROPERTIES
The Company owns or leases the following primary facilities:
APPROXIMATE SQUARE
FEET
LOCATION PRINCIPAL FUNCTIONS OF FLOOR AREA
- -------- ------------------- -------------
Liberty Corner, Corporate 25,000
New Jersey Headquarters
(Leased)
HVACR
Effingham, Illinois Manufacture of air 650,000
(Owned) conditioners
Columbia, Tennessee Warehouse 232,000
(Owned)
Frederick, Maryland Warehouse 200,000
(Owned)
Longview, Texas Manufacture of air 100,000
(Owned) conditioners
Vienna, Manufacture of air 65,000
Georgia (Owned) conditioners
Manila, Manufacture of air 41,000
Philippines (Leased) conditioners
Ningbo, China Manufacture of air 323,000
(Leased) conditioners
Shanghai, China Manufacture of air 175,000
(Leased) conditioners
Dadra, India Manufacture of air 207,000
(50% owned) conditioners
Xi'an, China Manufacture of 120,000
(Leased) rotary compressors
Estella, Spain Manufacture of air 40,000
(Leased) conditioners
Singapore Regional Headquarters 14,600
(Leased) and Research and Design
Center
5
Engineered Products
Lawrence Township, Manufacture of thermoelectric 22,400
New Jersey (Owned) devices
Quanzhou, China Manufacture of thermoelectric 29,000
(Leased) devices
Sanford, Manufacture of air cleaning 263,000
North Carolina products and humidifiers
(Owned)
Albuquerque, Manufacture of cleanroom 63,000
New Mexico (Leased) products
Suzhou, China Manufacture of cleanroom 41,000
(Leased) products
The Effingham, Illinois facility is subject to a mortgage securing a
$3.5 million, 1% promissory note payable over the next six years to the State of
Illinois. The Sanford, North Carolina and the Lawrence Township, New Jersey
facility are each subject to a mortgage securing repayment of economic
development bonds and the Longview, Texas facility is subject to a mortgage. The
Vienna, Georgia facility is subject to a promissory note and a mortgage securing
repayment of an economic development bond. 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 Stock is 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, 2002, there were
3,809 holders of Common Stock and 14 holders of Class B Stock. For information
with respect to the Company's Common Stock and Class B Stock, see Notes 9 and 10
of the Notes to Consolidated Financial Statements on pages F-17 through F-19.
PRICE RANGE OF COMMON AND CLASS A STOCK
For information regarding the high and low sale prices of the Company's
Common and Class A Stock for each of the quarters in the past two fiscal years,
see Fedders Corporation Quarterly Financial Data (Unaudited) on page F-32.
DIVIDENDS PAID ON COMMON, CLASS A AND CLASS B STOCK
For information regarding the dividends paid by the Company on its
Common, Class A and Class B stock in the past five fiscal years, see Selected
Financial Data on page 8.
6
EQUITY COMPENSATION PLAN INFORMATION
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 granted prior to June 1, 2002 are exercisable one year
after the date of grant. Stock options granted subsequent to June 1, 2002 vest
over a four year period. Options, if not exercised, will expire five years from
the date of grant. Certain options are only exercisable at the end of five years
unless a sales target is achieved prior thereto.
(A) (B) (C)
--- --- ---
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE STOCK OPTIONS PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
STOCK OPTION PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
- -------------------------- ---------------------- ------------------- ------------------------
Stock option plans
approved by stockholders 2,514,000 $3.31 2,486,000
--------- ----- ---------
Total 2,514,000 $3.31 2,486,000
========== ===== =========
7
ITEM 6. SELECTED FINANCIAL DATA(1)
(Amounts in thousands, except percentages, share and per share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales ....................... $ 373,702 $ 405,697 $ 416,181 $ 362,048 $ 327,912
Gross profit .................... 83,050 68,700 104,828 84,591 69,770
Percent of net sales ............ 22.2 16.9 25.2 23.4 21.3
Operating income (loss) ......... 20,339 (15,045) 46,854 40,258 12,810
Percent of net sales ............ 5.4 (3.7) 11.3 11.1 3.9
Income (loss) before
income taxes ................ 2,976 (33,263) 30,474 30,986 4,603
Percent of net sales ............ .8 (8.2) 7.3 8.6 1.4
--------- --------- --------- --------- ---------
Net income (loss) ............... $ 8,009 $ (22,453) $ 20,401 $ 20,724 $ 2,992
Earnings (loss) per share (2):
Basic ....................... $ 0.25 $ (0.71) $ 0.58 $ 0.56 $ 0.07
Diluted ..................... 0.25 (0.71) 0.57 0.56 0.07
--------- --------- --------- --------- ---------
Dividends per share
declared (2):
New Common Stock ................ $ 0.060 -- -- -- --
Old Common/Class A Stock ........ 0.060 $ 0.120 $ 0.120 $ 0.105 $ 0.085
New Class B Stock ............... 0.060 -- -- -- --
Old Class B Stock ............... 0.054 0.108 0.108 0.095 0.077
--------- --------- --------- --------- ---------
Cash and cash equivalents ....... $ 67,379 $ 51,192 $ 87,193 $ 117,509 $ 90,986
Total assets .................... 366,128 362,332 388,175 382,342 304,629
Long-term debt (including
current portion) (3) ........ 167,131 168,455 166,434 161,363 111,013
Stockholders' equity (4) ...... 77,818 73,014 112,260 108,933 104,792
Capital expenditures .......... 7,846 10,773 9,858 9,378 8,497
Depreciation and
amortization ................ 14,830 15,431 13,076 10,279 9,263
--------- --------- --------- --------- ---------
Other financial data:
Adjusted earnings before
interest, taxes,
depreciation and
amortization (5) (6) ........ $ 35,144 $ 24,746 $ 58,786 $ 54,613 $ 41,757
--------- --------- --------- --------- ---------
Cash flow provided by
(used in):
Operating activities ........ $ 34, 134 $ 5,919 $ 4,619 $ 51,989 $ 39,302
Investing activities ........ (14,564) (30,327) (15,037) (48,778) (6,650)
Financing activities ........ (3,383) (11,593) (19,898) 23,312 (52,059)
(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) On March 26, 2002, the Company's stockholders approved a
recapitalization plan (the "Plan") which became effective the same day.
Under the Plan the holder of each share of Common Stock received 1.1
shares of new
8
Common Stock, the holder of each share of Class A Stock received 1
share of new Common Stock and the holder of each share of Class B Stock
received 1.1 shares of new Class B Stock.
(3) In August 1999, a subsidiary of the Company issued $50,000 of 9 3/8%
Senior Subordinated Notes, proceeds of which were utilized, in part, to
replenish cash used to acquire Trion.
(4) During fiscal 2001, the Company repurchased 2,998 shares of old Common
and Class A Stock at an average price of $4.39 per share for a total of
$13,169, excluding commissions. During fiscal 2000, the Company
repurchased 2,768 shares of old Common and Class A Stock at an average
price of $4.87 per share for a total of $13,484. During fiscal 1999,
the Company repurchased 2,601 shares of old Common and Class A Stock at
an average price of $5.08 per share for a total of $13,215. During
fiscal 1998, the Company repurchased 7,720 shares of Preferred, old
Common and Class A Stock at an average price of $5.93 per share for a
total of $45,750.
(5) In fiscal 2002, Adjusted EBITDA excludes a $397 asset impairment,
employee severance and other restructuring credit, $350 of operating
losses incurred at the Tennessee and Maryland facilities subsequent to
the announcement that production at these facilities would cease and
$339 of non-cash income to reduce the compensation accrual due to the
re-pricing of a majority of unexercised stock options in fiscal 2001.
In fiscal 2001, Adjusted EBITDA results exclude $8,947 of asset
impairment, employee severance and other restructuring charges, $4,031
of one-time inventory charges, a $7,583 deferred compensation charge
relating to the retirement of an officer of the Company, an additional
$2,283 of other non-recurring inventory write-offs, $1,364 of operating
losses incurred at the Tennessee and Maryland facilities subsequent to
the announcement that production at these facilities would cease, a
$726 non-cash charge for the re-pricing of a majority of unexercised
stock options and $716 of other one-time charges. In fiscal 1999, the
amount shown excludes a charge for the restructuring of $3,100. For
fiscal 1998, the amount shown excludes charges for the 1998
restructuring of $16,750 and the early retirement program of $2,891.
(6) Adjusted EBITDA represents income before income taxes plus net interest
expense, depreciation and amortization (excluding amortization of debt
discounts and deferred financing costs), certain one-time charges and a
certain non-cash charge. Adjusted EBITDA is presented because we
believe it is an indicator of our ability to incur and service debt and
is used by our lenders in determining compliance with financial
covenants. However, Adjusted EBITDA should not be considered as an
alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with generally accepted accounting principles.
Our definition of Adjusted EBITDA may differ from definitions of
Adjusted EBITDA used by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is management's discussion and analysis of certain
significant factors which affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
OPERATING RESULTS AS A PERCENT OF NET SALES
2002 2001 2000
---- ---- ----
Gross profit 22.2% 16.9% 25.2%
Selling, general and administrative expense
16.9 18.4 13.9
Asset impairment, employee severance and other
restructuring charges (credits) -- 2.2 --
Operating income (loss) 5.4 (3.7) 11.3
Interest expense 5.0 4.4 3.7
Pre-tax income (loss) 0.8 (8.2) 7.3
---- ---- ----
9
RESULTS OF OPERATIONS
THE COMPANY'S RESULTS OF OPERATIONS ARE PRESENTED IN TWO REPORTABLE
SEGMENTS: (1) HEATING, VENTILATION, AIR CONDITIONING, AND REFRIGERATION (HVACR),
AND (2) ENGINEERED PRODUCTS. THE HVACR SEGMENT COMPRISES THE COMPANY'S HEATING,
VENTILATION, AIR CONDITIONING, AND REFRIGERATION SYSTEMS OPERATIONS. THE
ENGINEERED PRODUCTS SEGMENT COMPRISES THE COMPANY'S COMMERCIAL AND INDUSTRIAL
AIR CLEANING, HUMIDIFICATION, AND THERMOELECTRIC PRODUCTS OPERATIONS.
Net sales for fiscal 2002 of $373.7 million declined by approximately
7.9% compared to sales of $405.7 million in fiscal 2001. Sales declined in all
segments due to the weak global economic environment. In the HVACR segment,
sales of $332.7 million reflected a decline of 7.6% compared to $360.0 million
in fiscal 2001 due to weak market conditions following two previous cool summers
in the North American market which reduced demand for room air conditioners,
weakness in demand for cooling products in the wireless telecom capital
equipment market and general weakness in international markets particularly in
Europe, as well as continued global deflationary pressures which resulted in a
decline in pricing. In the Engineered Products segment sales of $41.0 million
declined by approximately 10.3% compared to $45.7 million in fiscal 2001. The
decline was primarily the result of a decrease in sales of fan filter units used
in cleanroom applications due to the weak semi-conductor capital equipment
market.
Net sales in fiscal 2001 totaled $405.7 million, a decrease of 2.5%
from sales of $416.2 million in fiscal 2000. The sales decrease in fiscal 2001
reflects a $9.0 million decrease in sales of HVACR products. Specifically, sales
of room air conditioners in North America declined as a result of cool summer
weather, slowing economic growth, and major retailers' and distributors' efforts
to reduce inventory. HVACR sales in 2001 were $360.0 million compared to $369.0
million in fiscal 2000. The decline in sales was partially offset by sales at
companies acquired during fiscal 2001. Engineered Products sales were $45.7
million in fiscal 2001 compared to sales of $47.2 million in fiscal 2000. Sales
declined by 3.2% due to a decline in sales of air cleaners and humidifiers,
partially offset by increased sales of thermoelectric modules.
Despite the decline in sales in fiscal 2002, the gross profit
percentage for the fiscal year improved to 22.2% of net sales from 16.9% in
fiscal 2001. The increase reflects improvements in the Company's cost structure
following the restructuring enacted at the end of fiscal 2001 which resulted in
the transfer of a majority of the production of room air conditioners and all
dehumidifiers and compressors from North America to China.
The gross profit in fiscal 2001 decreased by $36.1 million, to $68.7
million, from $104.8 million in fiscal 2000. The decline in gross profit was
mainly the result of a decline in sales and margins for room air conditioners in
North America within the HVACR segment. In addition, inventory write-downs of
$1.8 million were recorded in connection with the restructuring plan to reduce
the carrying amount of certain component inventory which will not be relocated
as part of the relocation of production to China. The Company was also required
to record a lower of cost or market adjustment of $2.2 million on certain room
air conditioner and dehumidifier products in the fourth quarter of fiscal 2001
due to a decline in selling prices. Fiscal 2001 gross profit also includes $.7
million of other write-downs for unused purchase credits associated primarily
with the discontinuation of certain vendor relationships, $1.4 million in
operating losses incurred at the Tennessee and Maryland facilities subsequent to
the announcement that production at those plants would cease and $2.3 million of
other inventory write-offs due to changes in market conditions. The total charge
for the inventory and other adjustments was $8.4 million and is recorded within
cost of sales.
Selling, general and administrative expenses ("SG&A") for fiscal 2002
were $63.1 million or 16.9% of net sales compared to $74.8 million or 18.4% of
net sales in fiscal 2001. The decline reflects continued cost reduction efforts;
fiscal 2001 expenses included a one-time compensation charge of $7.6 million.
Selling, general and administrative expenses for fiscal 2001 were $74.8
million, or 18.4% of net sales, as compared to $58.0 million, or 13.9% of net
sales in fiscal 2000. The increase was primarily due to a deferred compensation
charge of $7.6 million relating to the retirement of an officer of the Company,
which resulted in a change in the estimate of the compensation cost, and a $.7
million non-cash charge for the re-pricing of a majority of unexercised stock
options.
In fiscal 2002, the Company continued with its previously announced
plan to restructure its existing operations. The remaining work force reductions
were completed in the first quarter of fiscal 2002. In connection with the
restructuring, the Company expended $1.0 million, primarily for severance and
other workforce reduction charges,
10
and recorded a $.4 million dollar reduction to the reserve due to a change in
estimate for accrued medical costs related to terminated employees. The
remaining balance of $1.7 million, which consists primarily of workforce
reduction and facility closing costs, and are expected to be expended during
fiscal 2003 and 2004. The final amounts will be settled upon the expiration
period for workmans' compensation claims and completion of facility clean up and
waste removal.
Asset impairment, employee severance and other restructuring charges
totaled $8.9 million in fiscal 2001. The Company determined that as a result of
the movement of certain production within its HVACR segment, certain machinery
and equipment used at its Illinois, Tennessee and Maryland facilities would be
idled and disposed of. Given the nature of these fixed assets, the Company
intended to scrap these items during fiscal 2002 and has written off the full
carrying amount of these assets of $6.2 million. Employee severance costs of
$1.9 million were recorded due to the elimination of approximately 800 factory
workers in the U.S., primarily within the HVACR segment. As of August 31, 2001
the Company had terminated approximately 675 of the workers and terminated the
remainder through the end of October 2001. Facility closing costs of $.8 million
include charges for clean-up and waste removal at the Company's Illinois,
Tennessee and Maryland facilities.
Operating income was $20.3 million for fiscal 2002, or 5.4% of net
sales, compared to an operating loss of $15.0 million in fiscal 2001 which
included $8.9 million in asset impairment, employee severance, and other
restructuring charges, a $7.6 million compensation charge for the retirement of
an officer of the Company, $4.0 million of one-time inventory charges, $2.3
million of other non-recurring inventory write-offs, $1.4 million of operating
losses incurred at the Tennessee and Maryland facilities subsequent to the
announcement that production at these facilities would cease, and $.7 million of
other one-time charges.
The operating loss for fiscal 2001 was $15.0 million, primarily due to
the restructuring and other charges described above, as compared to operating
income of $46.9 million, or 11.3% of net sales, for fiscal 2000.
Net interest expense increased in fiscal 2002 to $18.6 million or 5.0%
of net sales compared to $17.8 million or 4.4% of net sales in fiscal 2001 due
to lower cash balances at the beginning of the fiscal year and cash used for
acquisitions during the year.
Net interest expense in fiscal 2001 increased by $2.3 million, to $17.8
million, or 4.4% of net sales, from $15.6 million in fiscal 2000 due to lower
cash balances mainly as a result of acquisitions and stock repurchases.
Despite lower sales for the year, net income improved to $8.0 million
or 25 cents per diluted share compared to a net loss of $22.5 million or 71
cents per share in fiscal 2001. Net income in fiscal 2002 benefited from a $6.0
million reduction in accrued tax liabilities; the reduction was due to reserves
no longer required for federal, state and foreign tax purposes primarily due to
favorable audit results and a change in estimate for foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements of the Company are seasonal, with cash
balances peaking in the fourth fiscal quarter and the greatest utilization of
its lines of credit occurring early in the calendar year. The Company ended
fiscal 2002 with $67.4 million in cash and cash equivalents compared to $51.2
million at August 31, 2001. In August 2002, the Company received a federal tax
refund of $8.3 million due to recent changes in U.S. tax laws that allowed the
Company to extend the carry back period for certain federal net operating losses
from 2 to 5 years.
Net cash provided by operations in fiscal 2002 amounted to $34.1
million compared to $5.9 million in the prior year. The improvement in net
earnings, lower net inventories and general improvements in working capital
management were the primary reason for the improvement in operating cash flow
from the prior year. Net inventories at the end of the year were $48.6 million
compared to $72.7 million at the end of the last fiscal year.
Net cash used in investing activities by the Company in fiscal 2002 was
$14.6 million versus $30.3 million in the prior year. Investments in
acquisitions and joint ventures for the year amounted to $8.0 million. The
Company completed the acquisition, in the first quarter, of a wholly-owned air
conditioning manufacturing operation in Shanghai, China, now called Fedders
Shanghai Co., Ltd. This plant has fully replaced the production of room air
conditioners previously produced at the Company's Tennessee plant, which ceased
production as part of the 2001 restructuring plan. The Company also completed
two joint ventures this fiscal year during the first quarter.
11
In October 2001, the Company entered into a joint venture with Voltas
Limited ("Voltas") to produce room air conditioners in India. Fedders and Voltas
each have a 50 percent interest in the joint venture, Universal Comfort Products
Pvt. Ltd., which produces room and ductless split system air conditioners. In
November 2001, Melcor Corporation ("Melcor"), a subsidiary of the Company, and
Quanzhou Hua Yu Electrical Component Factory formed a joint venture, Quanzhou
Melcor Hua Yu Thermoelectric Company Ltd., to manufacture thermoelectric modules
in China. Melcor has a 65% interest in the joint venture. Capital expenditures
for the year were $7.8 million compared to $10.8 million in fiscal 2001, and
were primarily related to investments in tooling, machinery and equipment to
support production in Asia.
Net cash used in financing activities in fiscal 2002 amounted to $3.4
million and consisted primarily of $3.7 million of cash dividends. Net cash used
in financing activities in the prior year was $11.6 million and consisted
primarily of $13.2 million of cash used to repurchase 3.0 million shares of
stock. The Company did not repurchase any shares in fiscal 2002.
During fiscal 2002, the Company's $100 million, prime rate, revolving
credit facility was utilized during the six-month period from December through
May with a maximum outstanding balance during the fiscal year of $62.7 million.
Management believes that the Company's cash, earnings and borrowing
capacity are adequate to meet the demands of its operations and its long-term
credit requirements.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires the use of a non-amortization
approach to account for purchased goodwill and certain intangibles. Under the
non-amortization approach, goodwill and certain intangibles will not be
amortized but instead would be reviewed for impairment and written down with a
resulting charge to operations only in the period in which the recorded value of
goodwill and certain intangibles is more than their fair value. SFAS 142
requires the Company to perform an evaluation of whether goodwill is impaired as
of September 1, 2002, the effective date of the statement for the Company.
Additionally, SFAS 142 requires the Company to reassess the useful lives and
residual values of all intangible assets and make any necessary amortization
adjustments. Any transitional impairment loss resulting from the adoption of
SFAS 142 will be recognized as a cumulative effect of a change in accounting
principle in the Company's statement of operations. The Company is in the
process of evaluating the effect that adopting this statement will have on its
financial position, results of operations, and its cash flow.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company is required to adopt the provisions of SFAS
143 at the beginning of its fiscal year 2003. The Company has determined the
adoption of this statement will not have a material effect on its financial
position, results of operations, and its cash flow.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions of
this statement are required to be adopted by the Company at the beginning of its
fiscal year 2003. The Company is in the process of evaluating the effect that
adopting this statement will have on its financial position, results of
operations, and its cash flow.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS
12
145"). The adoption of this statement did not have a material effect on the
Company's financial position, results of operations, and its cash flow.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146").
SFAS 146 will be effective for the Company for disposal activities initiated
after December 31, 2002, and therefore, the effect of adopting this statement on
the Company's financial position, results of operations, and its cash flows is
prospective.
CRITICAL ACCOUNTING POLICIES
Estimates
In preparing financial statements in accordance with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts and disclosures of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Deferred Tax Assets
At August 31, 2002, the Company has Federal net operating loss
carry-forwards of approximately $4.0 million and foreign net operating loss
carry-forwards of approximately $1.3 million, for which the Company has recorded
a deferred tax asset. For the Company to realize the benefit of its deferred tax
asset, the Company must achieve future earnings prior to the expiration of its
net operating loss carry-forwards. The Company has established a valuation
allowance against the future tax benefit of a portion of its net operating loss
carry-forwards. The Company may need to further adjust that valuation allowance
if future earnings are, or are projected to be, significantly different from
future estimates. The valuation allowance reflects the uncertainty associated
with the realization of deferred tax assets. The increase in the valuation
reserve was due primarily to foreign net operating losses.
Stock Options (SFAS 123)
Options granted to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, "Accounting
for Stock Issued to Employees" ("APB 25"). In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which defines a fair value based method of
accounting for stock options. The accounting standards prescribed by SFAS 123
are optional and the Company has continued to account for stock options under
the intrinsic value method specified in APB 25. Pro forma disclosures of net
earnings and earnings per share have been made in accordance with SFAS 123 (note
10).
Warranty and Defective Returns
Fedders air conditioner products are covered by standard product
warranty plans that extend from 1 to 5 years. In addition, major retailers have
consumer return policies which allow consumers the ability to return product
that may be defective in lieu of field service. Upon return to the Company,
these units are inspected, repaired as required, reboxed and held for future
sale as factory reconditioned products. A portion of those units returned are
not repairable. At the time revenue is recognized, upon shipment, measurements
of those sales are reduced by estimates of the future costs associated with
fulfilling warranty obligations and for the expense associated with repairing or
scrapping defective returns.
The Company believes the accounting estimate related to warranty costs
and defective returns is a "critical accounting estimate" because: changes in it
can materially affect net income; it requires the Company to use historical
failure and defective return rates, which may or may not be indicative of future
rates. The estimate for warranty obligations and defective returns is a critical
accounting estimate for the HVACR segment.
13
Over the past 3 years, warranty and defective return costs represented
approximately 5.5% of sales for the HVACR segment. Each quarter, the estimate of
warranty and defective return obligations is reevaluated, including the
assumptions about estimated failure and return rates.
The Company's has discussed the development and selection of this
critical accounting estimate with the audit committee of the board of directors
and the audit committee has reviewed the Company's disclosure relating to it in
this MD&A.
RISK FACTORS
Foreign operations are subject to the risks inherent in such
activities, such as foreign regulations, unsettled political conditions and
exchange rate fluctuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company at August 31, 2002
and 2001, and for the years ended August 31, 2002, 2001 and 2000, the notes
thereto and the report of the Company's independent auditors thereon are
included at pages F-1 through F-34, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
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 to be
filed in connection with the Company's Annual Meeting of Stockholders to be held
on January 28, 2003, which section is incorporated herein by reference.
NAME AND AGE POSITION HELD EXECUTIVE OFFICER
- ------------ ------------- -----------------
Sal Giordano, Jr., 64 Chairman and 1965
Chief Executive Officer
Jordan Bruno, 51 Vice President, Taxes 2000
Michael W. Carr, 49 Senior Vice President, 2002
Human Resources
Nancy DiGiovanni, 51 Treasurer 1998
Robert N. Edwards, 56 Vice President and 2000
General Counsel
Daryl G. Erbs, 45 Group Vice President, 1999
International and Unitary Products
Michael B. Etter, 47 President and Chief 1997
Operating Officer
Michael Giordano, 38 (1) Executive Vice President, 1999
Finance and Administration and
Chief Financial Officer
Sal Giordano III, 43 (1) Group Vice President, 1996
Chairman and CEO, Melcor Corporation
Kent E. Hansen, 55 Executive Vice President 1996
and Secretary
Judy A. Katz, 51 Vice President, 2000
Strategic Planning
Robert L. Laurent, Jr., 47 Executive Vice President, 1989
Acquisitions and Alliances
Joseph B. Noselli, 46 Corporate Controller 2000
(1) Son of Sal Giordano, Jr.
15
BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS
Mr. Sal Giordano, Jr. has been Chief Executive Officer of the Company
for more than five years.
Mr. Bruno was elected Vice President, Taxes in December 2000.
Previously, he was Director, Taxes for more than five years.
Mr. Carr was elected Senior Vice President, Human Resources in June
2002. Previously, he was Vice President, Human Resources and Administration with
Otsuka America Pharmaceutical, Inc. from August 2000 and, prior thereto, Vice
President, Human Resources-Intercontinental Region with Wyeth Global
Pharmaceuticals, Inc. from August 1996.
Ms. DiGiovanni was elected to her position in October 1998. Previously
she was Assistant Treasurer of the Company from 1989.
Mr. Edwards was elected to his present position in June 2000. He has
been General Counsel of the Company for more than five years.
Mr. Erbs was elected to his present position in June 2002. Prior
thereto, he was Senior Vice President, International from March 2001.
Previously, he was Senior Vice President, Technology and Vice President,
Technology of the Company since August 1999. Prior to his joining the Company in
February 1999, Mr. Erbs was with Carrier Corporation for many years, serving in
a variety of engineering management positions.
Mr. Etter was elected President and Chief Operating Officer in June
2000. Previously, he was Senior Vice President of the Company and Chairman and
Chief Executive Officer of Fedders Air Conditioning since May 1, 1999. He served
as Vice President of Global Purchasing for the Company from December 1997 to May
1999 and, prior thereto, Vice President, Purchasing of Fedders North America.
Mr. Michael Giordano was elected Executive Vice President, Finance and
Administration and Chief Financial Officer in June 2000. Previously, he was Vice
President, Finance and Chief Financial Officer of the Company since July 1,
1999. Mr. Giordano also served as Senior Vice President of Fedders
International, Inc. from 1998 until being elected to his current position and,
prior thereto, Managing Director of the Singapore office of Fedders
International.
Mr. Sal Giordano III was elected to his present position in March 2002.
Previously, he was Group Vice President, Engineered Products from December 1999
and a Vice President of the Company since August 1996.
Mr. Hansen was elected to his present position in June 2000. Previously
he was Senior Vice President and Secretary from August 1996.
Ms. Katz was elected Vice President, Strategic Planning in June 2000.
Previously, she held the position of Vice President, Communications and Planning
for more than five years.
Mr. Robert L. Laurent, Jr. has been Executive Vice President,
Acquisitions and Alliances since January 1999. Previously, he was Executive Vice
President, Finance and Administration of the Company.
Mr. Noselli was elected Corporate Controller in June 2000. Previously,
he was with Ingersoll-Rand Co. from 1978, most recently as Vice President and
Controller of its production equipment group.
ITEM 11. EXECUTIVE COMPENSATION
See the section entitled "Executive Compensation" in the Company's
Proxy Statement, to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on January 28, 2003, which section is incorporated
herein by reference.
16
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, to be
filed in connection with the Company's Annual Meeting of Stockholders to be held
on January 28, 2003, 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, to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on January 28, 2003, 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 and Comprehensive
Income for the years ended August 31, 2002, 2001 and 2000....... F-1
Consolidated Balance Sheets at August 31, 2002 and 2001......... F-2
Consolidated Statements of Cash Flows for the years ended
August 31, 2002, 2001 and 2000.................................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 2002, 2001 and 2000...................... F-4
Notes to Consolidated Financial Statements...................... F-5-F-30
Independent Auditors' Reports................................... F-31 & F-34
(a) 2. Financial Statement Schedule
Consolidated Schedule as of and for the years ended
August 31, 2002, 2001 and 2000
II. Valuation and Qualifying Accounts...................... F-33
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
(3) (i) Restated Certificate of Incorporation of the Company filed as
Exhibit (A) to Annex (A) of the Company's Proxy
Statement/Prospectus dated January 9, 2002 and incorporated
herein by reference.
17
(ii) By-Laws of the Company.
(4) (i) Registration statement on Form S-4 filed with the Securities
and Exchange Commission on September 10, 1997 and incorporated
herein by reference.
(ii) Registration statement on Form S-4 filed with the Securities
and Exchange Commission on January 24, 2000 and incorporated
herein by reference.
(10) (i) Stock Option Plan VIII, filed as Annex F to the Company's
Proxy Statement - Prospectus dated May 10, 1996 and
incorporated herein by reference.
(ii) Employment Agreement between the Company and Sal Giordano, Jr.
effective December 14, 2001.
(21) Subsidiaries.
(23) Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated October 18, 2002, reporting the Company's year-
end results for fiscal year 2002.
(99) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
18
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/ MICHAEL GIORDANO
------------------------------------------
Michael Giordano
Executive Vice President, Finance
and Administration and Chief Financial Officer
November 27, 2002
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, JR. Chairman November 27, 2002
- ----------------------------------------- and Chief Executive
Salvatore Giordano, Jr. Officer and a Director
(Principal Executive Officer)
/s/ WILLIAM J. BRENNAN Director November 27, 2002
- -----------------------------------------
William J. Brennan
/s/ DAVID C. CHANG Director November 27, 2002
- -----------------------------------------
David C. Chang
/s/ MICHAEL L. DUCKER Director November 27, 2002
- -----------------------------------------
Michael L. Ducker
/s/ JOSEPH GIORDANO Director November 27, 2002
- -----------------------------------------
Joseph Giordano
/s/ C. A. KEEN Director November 27, 2002
- -----------------------------------------
C. A. Keen
/s/ HOWARD S. MODLIN Director November 27, 2002
- -----------------------------------------
Howard S. Modlin
/s/ S. A. MUSCARNERA Director November 27, 2002
- -----------------------------------------
S. A. Muscarnera
/s/ ANTHONY E. PULEO Director November 27, 2002
- -----------------------------------------
Anthony E. Puleo
/s/ MICHAEL GIORDANO Executive Vice November 27, 2002
- ----------------------------------------- President, Finance
Michael Giordano and Administration
(Principal Financial
Officer)
19
CERTIFICATIONS
I, Sal Giordano, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Fedders Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 27, 2002
/s/ Sal Giordano, Jr.
- --------------------
Sal Giordano, Jr.
Chief Executive Officer
20
CERTIFICATIONS
I, Michael Giordano, certify that:
1. I have reviewed this annual report on Form 10-K of Fedders Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 27, 2002
/s/ Michael Giordano
- --------------------
Michael Giordano
Chief Financial Officer
21
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED AUGUST 31,
---------------------
2002 2001 2000
--------- --------- ---------
Net sales ........................................ $ 373,702 $ 405,697 $ 416,181
Costs and expenses:
Cost of sales ................................. 290,652 336,997 311,353
Selling, general and administrative expense .. 63,108 74,798 57,974
Asset impairment, employee severance and other
restructuring (credits) charges ............... (397) 8,947 --
--------- --------- ---------
353,363 420,742 369,327
--------- --------- ---------
Operating income (loss) .......................... 20,339 (15,045) 46,854
Partners' net interest in joint venture results .. 713 (160) (796)
Interest expense (net of interest income of
$1,232, $2,934, and $2,316, in 2002, 2001 and
2000, respectively) .......................... (18,617) (17,845) (15,584)
Other income (expense) ........................... 541 (213) --
--------- --------- ---------
Income (loss) before income taxes ................ 2,976 (33,263) 30,474
(Benefit) provision for income taxes ............. (5,033) (10,810) 10,073
--------- --------- ---------
Net income (loss) ................................ $ 8,009 $ (22,453) $ 20,401
Other comprehensive income (loss):
Foreign currency translation, net of tax ......... 853 (1,037) (562)
--------- --------- ---------
Comprehensive income (loss) ...................... $ 8,862 $ (23,490) $ 19,839
========= ========= =========
Earnings (loss) per share:
Basic ......................................... $ 0.25 $ (0.71) $ 0.58
Diluted ....................................... 0.25 (0.71) 0.57
--------- --------- ---------
Weighted average shares:
Basic ......................................... 31,492 31,808 35,325
Diluted ....................................... 31,494 31,808 35,490
--------- --------- ---------
Dividends per share declared:
New Common Stock .............................. $ 0.060 -- --
Old Common/Class A Stock ...................... 0.060 $ 0.120 $ 0.120
New Class B Stock ............................. 0.060 -- --
Old Class B Stock ............................. 0.054 0.108 0.108
========= ========= =========
See accompanying notes to the consolidated financial statements
F-1
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
AUGUST 31,
----------
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 67,379 $ 51,192
Accounts receivable (less allowances of $2,613 and $2,494
in 2002 and 2001, respectively) .................................... 31,768 24,703
Net inventories ....................................................... 48,580 72,746
Deferred income taxes ................................................. 5,620 8,819
Other current assets .................................................. 13,564 6,747
--------- ---------
Total current assets ..................................................... 166,911 164,207
Net property, plant and equipment ........................................ 66,846 71,751
Deferred income taxes .................................................... 2,867 6,424
Goodwill and other intangible assets ..................................... 92,092 93,496
Other assets ............................................................. 37,412 26,454
--------- ---------
TOTAL ASSETS ............................................................. $ 366,128 $ 362,332
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes ...................................................... $ 9,829 $ 7,470
Current portion of long-term debt ..................................... 3,362 3,055
Accounts payable ...................................................... 41,888 40,689
Income taxes payable .................................................. 5,955 6,327
Accrued expenses ...................................................... 37,099 41,023
--------- ---------
Total current liabilities ................................................ 98,133 98,564
Long-term debt ........................................................... 163,769 165,400
OTHER LONG-TERM LIABILITIES:
Warranty .............................................................. 1,285 1,254
Other ................................................................. 20,940 21,256
Partners' interest in joint ventures ..................................... 4,183 2,844
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value, 15,000 shares authorized, none issued at
August 31, 2002 and 2001 ............................................ -- --
New Common Stock, $0.01 par value, 70,000 shares authorized,
38,249 and none issued at August 31, 2002 and 2001, respectively .... 382 --
Old Common Stock, $1 par value, 80,000 shares authorized,
none and 16,135 shares issued at August 31, 2002 and 2001,
respectively ........................................................ -- 16,135
Class A Stock, $1 par value, 60,000 shares authorized,
none and 20,298 shares issued at August 31, 2002 and 2001,
respectively .......................................................... -- 20,298
New Class B Stock, $0.01 par value, 5,000 shares
authorized, 2,493 and none issued at August 31, 2002 and
2001, respectively .................................................. 25 --
Old Class B Stock, $1 par value, 7,500 shares
authorized, none and 2,266 shares issued at August 31, 2002
and 2001, respectively ............................................... -- 2,267
Additional paid-in capital ............................................... 68,870 31,146
Retained earnings ........................................................ 47,551 43,313
Accumulated other comprehensive loss ..................................... (1,312) (2,165)
--------- ---------
115,516 110,994
Deferred compensation .................................................... (376) (658)
Treasury stock, at cost, 8,158 shares of New Common Stock at
August 31, 2002 and 7,908 shares of Old Common and Class A Stock at
August 31, 2001 ...................................................... (37,322) (37,322)
--------- ---------
Total stockholders' equity ............................................... 77,818 73,014
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 366,128 $ 362,332
========= =========
See accompanying notes to the consolidated financial statements
F-2
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED AUGUST 31,
---------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 8,009 $ (22,453) $ 20,401
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................................. 14,830 15,431 13,076
Deferred income taxes ......................................... 6,756 (5,950) 8,544
Tax benefit related to stock options exercised ................ -- 134 109
Stock option repricing charge ................................. (339) 726 --
Fixed asset impairment ........................................ -- 6,206 --
Partners' net interest in joint venture results ............... (713) 160 (1,883)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ........................................... (6,667) 3,639 (1,119)
Inventories ................................................... 25,557 8,215 (9,535)
Other current assets .......................................... (6,755) (812) (3,819)
Other assets .................................................. (4,238) (704) (601)
Income taxes payable .......................................... (471) (4,631) (2,091)
Accounts payable .............................................. 673 665 (1,318)
Accrued expenses .............................................. (2,858) 1,434 (12,893)
Other long-term liabilities ................................... (285) 4,320 (3,412)
Other - net ................................................... 635 (461) (840)
--------- --------- ---------
Net cash provided by operating activities ........................ 34,134 5,919 4,619
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ....................... (7,846) (10,773) (9,858)
Disposal of property, plant and equipment ........................ 1,290 140 2,237
Acquisition of businesses, net of cash acquired .................. (8,008) (19,694) (7,416)
--------- --------- ---------
Net cash (used in) investing activities .......................... (14,564) (30,327) (15,037)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term notes ................................... 2,238 3,717 3,753
Repayments of long-term debt ..................................... (3,666) (2,826) (7,021)
Proceeds from long-term borrowing ................................ 2,000 4,519 --
Proceeds from stock options exercised ............................ 1 526 1,059
Cash dividends ................................................... (3,725) (3,914) (4,205)
Repurchases of capital stock ..................................... -- (13,237) (13,484)
Other ............................................................ (231) (378) --
--------- --------- ---------
Net cash (used in) financing activities .......................... (3,383) (11,593) (19,898)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. 16,187 (36,001) (30,316)
Cash and cash equivalents at beginning of year ................... 51,192 87,193 117,509
--------- --------- ---------
Cash and cash equivalents at end of year ......................... $ 67,379 $ 51,192 $ 87,193
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Net interest paid ............................................. $ 16,880 $ 16,857 $ 16,610
Net income taxes (refunded) paid .............................. (12,585) (705) 5,201
--------- --------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment acquired under capital leases ... $ -- $ 826 $ 2,002
========= ========= =========
Property, plant and equipment contributed to joint ventures .. $ 4,908 $ -- $ --
========= ========= =========
See accompanying notes to the consolidated financial statements
F-3
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
YEAR ENDED AUGUST 31,
---------------------
2002 2001 2000
-------- -------- --------
NEW COMMON STOCK
Balance at beginning of year ....................... -- $ -- $ --
Stock options exercised ............................ $ 1 -- --
Issuance of shares upon recapitalization ........... 381 -- --
-------- -------- --------
Balance at end of year ............................. $ 382 $ -- $ --
======== ======== ========
OLD COMMON STOCK
Balance at beginning of year ......................... $ 16,135 $ 16,135 $ 16,135
Exchange of shares upon recapitalization ............. (16,135) -- --
-------- -------- --------
Balance at end of year ............................... $ -- $ 16,135 $ 16,135
======== ======== ========
CLASS A STOCK
Balance at beginning of year ......................... $ 20,298 $ 19,825 $ 19,400
Stock options exercised .............................. -- 425 385
Exchange of shares upon recapitalization ............. (20,298) -- --
Other ................................................ -- 48 40
-------- -------- --------
Balance at end of year ............................... $ -- $ 20,298 $ 19,825
======== ======== ========
NEW CLASS B STOCK
Balance at beginning of year ......................... -- $ -- $ --
Issuance of shares upon recapitalization ............. $ 25 -- --
-------- -------- --------
Balance at end of year ............................... $ 25 $ -- $ --
======== ======== ========
OLD CLASS B STOCK
Balance at beginning of year ......................... $ 2,267 $ 2,267 $ 2,267
Exchange of shares upon recapitalization ............. (2,267) -- --
-------- -------- --------
Balance at end of year ............................... $ -- $ 2,267 $ 2,267
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ......................... $ 31,146 $ 29,591 $ 28,069
Stock options exercised .............................. 1 1,114 1,413
Tax benefit related to stock options exercised ....... -- 134 109
Cost of recapitalization ............................. (428) (587) --
Stock option repricing ............................... (339) 726 --
Effect of recapitalization ........................... 38,294 -- --
Other ................................................ 196 168 --
-------- -------- --------
Balance at end of year ............................... $ 68,870 $ 31,146 $ 29,591
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year ......................... $ 43,313 $ 69,575 $ 53,379
Net income (loss) .................................... 8,009 (22,453) 20,401
Dividends ............................................ (3,771) (3,809) (4,205)
-------- -------- --------
Balance at end of year ............................... $ 47,551 $ 43,313 $ 69,575
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year ......................... $ (2,165) $ (1,128) $ (288)
Foreign currency translation adjustment, net of tax .. 853 (1,037) (840)
-------- -------- --------
Balance at end of year ............................... $ (1,312) $ (2,165) $ (1,128)
======== ======== ========
DEFERRED COMPENSATION
Balance at beginning of year ......................... $ (658) $ (940) $ (1,227)
Amortization of deferred compensation ................ 282 282 287
-------- -------- --------
Balance at end of year ............................... $ (376) $ (658) $ (940)
======== ======== ========
TREASURY STOCK
Balance at beginning of year ......................... $(37,322) $(23,065) $ (8,802)
Repurchase of stock .................................. -- (13,237) (13,484)
Shares relinquished or purchased ..................... -- (1,020) (779)
-------- -------- --------
Balance at end of year ............................... $(37,322) $(37,322) $(23,065)
======== ======== ========
See accompanying notes to the consolidated financial statements
F-4
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fedders Corporation (the "Company") is a leading global manufacturer and
marketer of air treatment products, including air conditioners, air cleaners,
dehumidifiers, humidifiers, and thermal technology products.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned and majority-owned subsidiaries and
joint ventures. Joint ventures which are not majority owned, but over which the
Company shares joint control, are accounted for by the equity method. All
significant intercompany accounts and transactions are eliminated in
consolidation.
REVENUE RECOGNITION
Sales are recorded consistent with their related shipping terms upon the
passing of the title and the risks and rewards of ownership to the customer. For
a majority of the Company's customers, title and the risks and rewards of
ownership pass at the time of shipment. However, certain of the Company's sales
are recorded at the time the products are delivered to the customers. Sales are
recorded net of a provision for sales allowances and warranties and defective
returns.
WARRANTY AND DEFECTIVE RETURN POLICY
The Company's policy is to accrue the estimated cost of warranty coverage
and defective returns at the time the sale is recorded.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are
translated at the rate of exchange in effect at the end of the period. Net sales
and expenses are translated at the average rate of exchange for the period.
Translation adjustments are reflected in other comprehensive loss as a separate
component of stockholders' equity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of the first-in, first-out (FIFO) cost
or market. The Company reviews inventory periodically for slow-moving and
obsolete items. Write-downs are recorded in the period in which they are
identified. Inventories consist of the following at August 31:
2002 2001
------- -------
Finished goods ........................... $25,364 $48,929
Work-in-process .......................... 3,042 3,865
Raw materials and supplies ............... 20,174 19,952
------- -------
$48,580 $72,746
======= =======
F-5
PROPERTY, PLANT AND EQUIPMENT
Replacements, betterments and additions to property, plant and equipment
are capitalized at cost. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon sale or retirement of property, plant and equipment,
the cost and related accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in cost of sales or selling, general
and administrative expense, as appropriate. Property, plant and equipment at
cost consist of the following at August 31:
ESTIMATED
USEFUL LIFE 2002 2001
-------------- --------- ---------
Land and improvements ................................................... $ 3,770 $ 3,770
Buildings and leasehold improvements .................................... 10 to 30 years 40,246 39,661
Machinery and equipment ................................................. 3 to 12 years 98,271 103,294
--------- ---------
Property, plant and equipment ........................................... 142,287 146,725
Accumulated depreciation ................................................ (75,441) (74,974)
--------- ---------
$ 66,846 $ 71,751
========= =========
The Company, using estimates based on reasonable assumptions and
projections, reviews for impairment long-lived assets and certain identifiable
intangibles to be held and used whenever events or changes in circumstances
indicate the carrying amount of its assets might not be recoverable and
appropriately records any necessary adjustments.
Depreciation is provided on the straight-line basis over the estimated
useful life of each asset as noted above. See note 2 for a discussion of certain
fixed asset impairments recorded in fiscal 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of accumulated amortization,
consist of the following at August 31:
2002 2001
--------- ---------
Goodwill, net .......................................................... $90,536 $92,798
Other intangible assets, net ........................................... 1,556 698
--------- ---------
$92,092 $93,496
========= =========
Goodwill is amortized over 40 years using the straight-line method. Other
intangible assets, which are primarily related to an intangible asset acquired
with the formation of a joint venture in China (note 12), and trademarks and
patents, are amortized over periods ranging from 2 to 20 years using the
straight-line method. Goodwill and other intangible assets are net of
accumulated amortization of $23,618 and $20,392 at August 31, 2002 and 2001,
respectively. The Company, using estimates based on reasonable assumptions and
projections, reviews for impairment long-lived assets and certain identifiable
intangibles to be held and used whenever events or changes in circumstances
indicate the carrying amount of its assets might not be recoverable and
appropriately records any necessary adjustments.
F-6
OTHER ASSETS
Other assets consist of the following at August 31:
2002 2001
------- -------
Note due from an executive officer (note 11) ............. $ 6,000 $ 4,000
Unamortized deferred finance costs,
amortized over the life of the debt .................. 3,112 3,696
Cash surrender value of life insurance ................... 7,227 6,226
Supplemental retirement assets ........................... 8,858 8,362
Investment in unconsolidated joint ventures (note 12) .... 9,784 2,530
Other .................................................... 2,431 1,640
------- -------
$37,412 $26,454
======= =======
ACCRUED EXPENSES
Accrued expenses consist of the following at August 31:
2002 2001
------- -------
Warranty ................................................. $ 6,173 $ 6,303
Marketing programs ....................................... 8,867 7,498
Salaries and benefits .................................... 8,901 11,141
Insurance and taxes ...................................... 3,944 4,085
Other .................................................... 9,214 11,996
------- -------
$37,099 $41,023
======= =======
INCOME TAXES
Deferred income taxes are provided to reflect the tax effects of temporary
differences between assets and liabilities for financial reporting purposes and
income tax purposes. Provisions are also made for U.S. income taxes on
undistributed earnings of foreign subsidiaries not considered to be indefinitely
reinvested (note 7).
SHIPPING AND HANDLING FEES AND COSTS
Costs associated with the handling and warehousing of finished goods are
charged to selling, general and administrative expense and amounted to $4,817,
$3,819 and $3,502 in 2002, 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to selling, general and
administrative expense as incurred and amounted to $8,896, $9,086 and $9,521 in
2002, 2001 and 2000, 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 8% of the Company's employees are covered by a collective
bargaining agreement which expired in October 2002. The union members continue
to work while the parties negotiate. Another 3% of the Company's employees are
covered by a separate collective bargaining agreement which expires in March
2005.
F-7
Through certain subsidiary companies, the Company has operations in a
number of countries, including China, India, Germany, Spain, the United Kingdom
and the Philippines. Of our fourteen manufacturing facilities, five are in
China.
The Company's foreign operations, at times, may be adversely affected by
changes in government policies such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of additional measures to control
inflation, changes in the rate or method of taxation, the imposition of
additional restrictions on currency conversion and remittances abroad and the
expropriation of private enterprise. In addition, policy concerns particular to
the United States with respect to a country in which the Company has operations
could adversely affect the Company's operations in that country.
The Company monitors its operations with a view to minimizing the impact
on its foreign investments and overall business that could arise as a result of
the risks inherent in maintaining operations in foreign countries as described
above.
EARNINGS PER SHARE
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted
earnings (loss) per share are computed by adjusting outstanding shares assuming
conversion of all potentially dilutive stock options. In 2001, stock options
were not included in the computation of diluted (loss) per share due to their
anti-dilutive effect given the net loss for the year. The number of
anti-dilutive stock options excluded from the computation of diluted loss per
share was 289,274 for 2001. The computation of basic earnings (loss) per share
and diluted earnings (loss) per share is as follows:
2002 2001 2000
-------- -------- --------
Net income (loss) ............................................... $ 8,009 $(22,453) $ 20,401
-------- -------- --------
Weighted average shares outstanding
(amounts in thousands) ...................................... 31,492 31,808 35,325
Assumed conversion of stock options ............................. 2 -- 165
-------- -------- --------
Dilutive average shares outstanding
(amounts in thousands) ...................................... 31,494 31,808 35,490
======== ======== ========
Earnings (loss) per share:
Basic ....................................................... $ 0.25 $ (0.71) $ 0.58
Diluted ..................................................... 0.25 (0.71) 0.57
======== ======== ========
F-8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the short
maturity of these instruments. At August 31, 2002 and 2001, the fair value of
long-term debt (including current portion), is estimated to be $146,776 and
$152,467, respectively, based on current market rates that could be obtained by
the Company for similar debt.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The nature of the Company's business activities necessarily involves
the management of various financial and market risks, including those related to
changes in foreign currency exchange rates. The Company's use of derivative
financial instruments is limited primarily to the use of forward foreign
currency exchange contracts to mitigate certain foreign currency exchange rate
risks relative to Canadian dollar receivables, Euro dollar payables, and
Philippine peso payables. Such contracts are not designated as hedges and any
changes in fair value are recognized in Other income (expense) in the current
period. The Company does not have any such contracts outstanding as of August
31, 2002 and 2001.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires the use of a non-amortization
approach to account for purchased goodwill and certain intangibles. Under the
non-amortization approach, goodwill and certain intangibles will not be
amortized but instead would be reviewed for impairment and written down with a
resulting charge to operations only in the period in which the recorded value of
goodwill and certain intangibles is more than their fair value. SFAS 142
requires the Company to perform an evaluation of whether goodwill is impaired as
of September 1, 2002, the effective date of the statement for the Company.
Additionally, SFAS 142 requires the Company to reassess the useful lives and
residual values of all intangible assets and make any necessary amortization
adjustments. Any transitional impairment loss resulting from the adoption of
SFAS 142 will be recognized as a cumulative effect of a change in accounting
principle in the Company's statement of operations. The Company is in the
process of evaluating the effect that adopting this statement will have on its
financial position, results of operations, and its cash flow.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company is required to adopt the provisions of SFAS
143 at the beginning of its fiscal year 2003. The Company has determined the
adoption of this statement will not have a material effect on its financial
position, results of operations, and its cash flow.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions of
this statement are required to be adopted by the Company at the beginning of its
fiscal year 2003. The Company is in the process of evaluating the effect that
adopting this statement will have on its financial position, results of
operations, and its cash flow.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). The adoption of this
statement did not have a material effect on the Company's financial position,
results of operations, and its cash flow.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146
will be effective for the Company for disposal activities initiated
F-9
after December 31, 2002, and therefore, the effect of adopting this statement on
the Company's financial position, results of operations, and its cash flows is
prospective.
RECLASSIFICATIONS
Amounts recorded for patent and trademark costs have been reclassified
from Other assets to Goodwill and other intangible assets to conform to the
current year presentation.
2. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES
In the fourth quarter of 2001, the Company announced a plan to restructure
its existing operations, which included the transfer of a majority of the
Company's room air conditioner production, as well as all production of
dehumidifiers and compressors, from its Illinois, Tennessee and Maryland
facilities to facilities in China in order to lower costs and improve
profitability. The Company's plan resulted in charges for fixed asset
impairments, employee severance costs, inventory write-downs, and other
restructuring charges directly related to the restructuring plan, including
facility closing costs and lease termination costs.
The Company determined that as a result of the movement of certain
production within its Heating, Ventilation, Air Conditioning and Refrigeration
("HVACR") segment, certain machinery and equipment used at its Illinois,
Tennessee and Maryland facilities would be idled and disposed of. Given the
nature of these fixed assets, the Company has written-off the full carrying
amount of these assets of $6,206.
Employee severance costs of $1,873 were recorded due to the elimination of
approximately 800 factory workers in the U.S., primarily within the HVACR
segment. As of August 31, 2001, the Company has terminated approximately 675 of
the workers and has terminated the remainder through the end of October 2001.
Inventory write-downs of $1,809 were recorded in connection with the
restructuring plan to reduce the carrying amount of certain component inventory
which will not be relocated as part of the relocation of production to China. In
addition, the Company was required to record a lower of cost or market
adjustment of $2,222 on certain room air conditioner and dehumidifier products
in the fourth quarter of fiscal 2001 due to a recent decline in selling prices.
The total charge for inventory write-downs was $4,031 and is recorded within
cost of sales. In addition, the Company recorded certain other write-downs for
unused purchase credits associated primarily with the discontinuation of certain
vendor relationships, which resulted in an additional charge to cost of sales of
$716.
Facility closing costs of $868 include charges for clean-up and waste
removal at the Company's Illinois, Tennessee and Maryland facilities.
The Company recorded the following amounts in the Consolidated Statement
of Operations in fiscal 2001 in connection with the restructuring plan:
COST OF RESTRUCTURING AND
SALES SPECIAL CHARGES TOTAL
------- ----------------- -------
Work force reductions ............................................ -- $ 1,873 $ 1,873
Fixed asset impairments .......................................... -- 6,206 6,206
Inventory write-downs ............................................ $ 4,031 -- 4,031
Facility closing costs and other ................................. 716 868 1,584
------- ------- -------
Total ........................................................ $ 4,747 $ 8,947 $13,694
======= ======= =======
Of the $13,694 in total charges recorded in fiscal 2001, $10,445
represents non-cash charges primarily related to fixed asset impairments and
inventory write-downs. The remaining charges of $3,249 as of August 31, 2001
represent future cash payments that will be required to be made in connection
with employee severance and facility closing costs. As of August 31, 2001, the
Company had an accrued balance of $3,077 in connection with the restructuring.
The total cash expended in fiscal 2001 was $172, of which $100 was related to
severance charges.
F-10
The following table displays the activity and balances of the
restructuring reserve account from September 1, 2000 to August 31, 2002.
SEPTEMBER AUGUST 31, AUGUST 31,
1, 2000 2001 2002
BALANCE ADDITIONS DEDUCTIONS BALANCE ADDITIONS DEDUCTIONS BALANCE
----------- --------- ---------- ---------- --------- ---------- ----------
Workforce reductions ......... $ -- $ 1,873 $ (100) $ 1,773 $ -- $(1,152) $ 621
Facility closing costs ....... -- 787 -- 787 -- (126) 661
Other costs .................. -- 589 (72) 517 -- (114) 403
------ ------- ------- ------- ------ ------- -------
Total ........................ $ -- $ 3,249 $ (172) $ 3,077 $ -- $(1,392) $ 1,685
====== ======= ======= ======= ====== ======= =======
In fiscal 2002, the Company continued with its previously announced plan
to restructure its existing operations. The remaining work force reductions were
completed in the first quarter of fiscal 2002. In connection with the
restructuring, the Company expended $995, primarily for severance and other
workforce reduction charges, and recorded a $397 reduction to the reserve due to
a change in estimate for accrued medical costs related to terminated employees.
The remaining balance of $1,685, which consists primarily of workforce reduction
and facility closing costs, are expected to be expended during fiscal 2003 and
2004. The final amounts will be settled upon the expiration period for workmans'
compensation claims and completion of facility clean up and waste removal.
3. CONTINGENCIES
The Company is involved in litigation, both as plaintiff and defendant,
incidental to the conduct of its business. It is the opinion of management,
after consultation, with counsel, that the outcome of such litigation will not
have a material adverse effect on its financial position, results of operations,
and cash flow.
4. SHORT-TERM BORROWING
At August 31, 2002 and 2001, two foreign subsidiaries had short-term
notes of $9,829 and $7,470, respectively, outstanding under loan agreements with
various banks. The current notes bear interest ranging from 3.40% to 6.43% and
expire no later than May 2003.
At August 31, 2002 and 2001, the Company had no short-term borrowing
outstanding under its $100,000 U.S. revolving credit facility with a commercial
finance company. Availability under the revolving credit facility is based on
accounts receivable and inventory and requires maintenance of certain financial
covenants. The Company is currently in compliance with the terms of these
covenants.
The maximum amount outstanding under the credit facility was $62,726 and
$68,075 during fiscal 2002 and 2001, respectively. The average amount
outstanding and average rate of interest charged on outstanding borrowings under
the credit facility were $16,228 and 4.52% in fiscal 2002 and $17,533 and 8.21%
in fiscal 2001. The credit
F-11
facility is collateralized by substantially all of the Company's assets and is
in effect until February 2004. The rate of interest on the facility is prime
rate or LIBOR plus 2.25%.
5. LONG-TERM DEBT
Long-term debt consists of the following at August 31:
2002 2001
-------- --------
9 3/8% Senior Subordinated Notes due in 2007:
$100,000 principal amount less unamortized discount of $237 and $285 ....................... $ 99,763 $ 99,715
$50,000 principal amount less unamortized discount of $1,468 and $1,761 .................... 48,532 48,239
Fedders Koppel promissory note ................................................................. 3,574 4,934
Promissory note payable to the State of Illinois ............................................... 2,129 2,482
Trion Industrial Revenue Bond .................................................................. 3,200 3,200
Sun Air Conditioning Industrial Revenue Bond ................................................... 1,809 --
Sun Air Conditioning promissory note ........................................................... 890 1,597
Melcor, State of New Jersey Economic Development Bond .......................................... 1,037 1,168
Eubank Manufacturing Enterprises, Inc. mortgage ................................................ 1,019 1,266
Capital lease obligations ...................................................................... 5,178 5,854
-------- --------
167,131 168,455
Less current maturities ........................................................................ 3,362 3,055
-------- --------
$163,769 $165,400
======== ========
Aggregate amounts of long-term debt, excluding capital leases of $5,178,
maturing in each of the years ending August 31 are as follows:
Years Amount
---------- --------
2003 $ 2,633
2004 2,660
2005 2,363
2006 942
2007 149,083
Thereafter 4,272
--------
Total $161,953
========
In August 1997, a subsidiary of the Company issued $100,000 principal
amount of 9 3/8% Senior Subordinated Notes due 2007. In August 1999, the same
subsidiary issued an additional $50,000 principal amount of 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 the subsidiary after August
2002 at a redemption price of 104.688% of principal amount. The provisions of
the notes limit, among other things, the payment of dividends by the subsidiary.
The loan from the State of Illinois has an interest rate of 1%, is to be
paid over the next six years, and is collateralized by a mortgage on the
Company's Illinois facility.
The Trion Industrial Revenue Bond is due in November 2011, bears interest
at a variable rate which fluctuates in accordance with the Bond Market
Association Index, and requires no principal payments until maturity. This bond
is collateralized by Trion's Sanford, North Carolina facility, including real
property and equipment.
The Fedders Koppel promissory note payable to a Philippines bank is to be
paid over the next three years, bears interest at PHIBOR plus 3% and is
guaranteed by the Company.
The Sun Air Conditioning Industrial Revenue Bond is to be paid over seven
years, with the first payment in January 2002. The bond is collateralized by
certain real property and equipment, is guaranteed by the Company, and bears
interest at a variable rate calculated as 75% of the sum of LIBOR plus 1.75.
F-12
The Sun Air Conditioning promissory note due to Flag Bank is to be paid
over the next five years and has a variable rate of interest, payable at the
prime rate. The promissory note is collateralized by certain real property and
equipment.
The loan from the New Jersey Economic Development Corporation to Melcor
Corporation has an interest rate of 6.6%, is to be paid over the next eight
years, and is collateralized by Melcor's facility and certain equipment.
The Eubank Manufacturing Enterprises Inc. mortgage is payable to Bank of
America Leasing and Capital. The loan has an interest rate of 8.54%, is to be
paid over the next four years, and is collateralized by a mortgage on Eubank's
facility.
6. COMMITMENTS
The Company leases certain property and equipment under operating leases.
Most of these operating leases contain one of the following options: (a) the
Company may, at the end of the initial lease term, purchase the property at the
then fair market value or (b) the Company may renew its lease at the then fair
rental value for a period of one month to five years. The Company also has
guaranteed payments under license agreements. Minimum payments for operating
leases having non-cancelable terms and guaranteed payments under the license
agreements are as follows:
Years Amount
---------- --------
2003 $ 3,109
2004 2,902
2005 2,353
2006 2,859
2007 2,776
Thereafter 8,138
--------
Total $ 22,137
========
Total rent and licensing expense amounted to $5,715, $2,958 and $1,647 in
2002, 2001 and 2000, respectively.
Aggregate future minimum rental payments under capital leases are as
follows:
Years Amount
---------- ------
2003 $1,123
2004 884
2005 842
2006 840
2007 838
Thereafter 2,408
------
Total minimum lease payments 6,935
Less amount representing interest 1,757
------
Total obligation under capital leases $5,178
======
F-13
7. INCOME TAXES
The (benefit) provision for income taxes consists of the following
components:
2002 2001 2000
-------- -------- --------
Current: Federal ..................... $(12,101) $ (5,472) $ 1,076
State ....................... (181) (53) 69
Foreign ..................... 493 531 275
-------- -------- --------
(11,789) (4,994) 1,420
-------- -------- --------
Charge in lieu of income taxes ........ -- 134 109
-------- -------- --------
Deferred: Federal ..................... 6,497 (5,783) 8,436
State ....................... 259 (167) 108
-------- -------- --------
6,756 (5,950) 8,544
-------- -------- --------
$ (5,033) $(10,810) $ 10,073
======== ======== ========
The exercise of stock options to acquire shares of the Company's stock
creates a compensation deduction for income tax purposes for which there is no
corresponding expense required for financial reporting purposes. The tax
benefits related to these deductions are reflected as a charge in lieu of income
taxes and a credit to additional paid-in capital. The Company elected to carry
back its 2001 U. S. net operating loss and received $8,257 in tax refunds during
fiscal 2002.
Deferred tax assets result from temporary differences between assets and
liabilities for financial reporting and income tax purposes, and include the
components related to acquired companies. The components are as follows at
August 31:
2002 2001
-------- --------
Warranty ............................................. $ 2,710 $ 1,727
Depreciation ......................................... (7,114) (3,649)
Employee benefit programs ............................ 7,256 8,391
Inventory ............................................ 2,202 4,868
Net operating loss and tax credit carry-forwards ..... 2,294 1,130
Restructuring ........................................ 509 2,002
Other ................................................ 1,405 1,451
-------- --------
9,262 15,920
Valuation allowance .................................. (775) (677)
-------- --------
$ 8,487 $ 15,243
======== ========
The difference between the United States statutory income tax rate and the
consolidated effective income tax rate is due to the following items:
2002 2001 2000
-------- -------- --------
Expected tax at statutory rate .......... $ 1,042 $(11,642) $ 10,666
Tax difference on foreign earnings ...... (568) 75 319
Valuation allowance reflected
in current income ................... 98 (356) (1,054)
State taxes, less federal
income tax benefit .................. 50 (143) 115
Prior year provisions no longer
required ............................ (6,048) -- (435)
Other ................................... 393 1,256 462
-------- -------- --------
$ (5,033) $(10,810) $ 10,073
======== ======== ========
At August 31, 2002, the Company has Federal net operating loss
carry-forwards of approximately $4,000 and foreign net operating loss
carry-forwards of approximately $1,300. The valuation allowance reflects the
uncertainty
F-14
associated with the realization of deferred tax assets. The increase in the
valuation reserve was due primarily to foreign net operating losses. During the
fourth quarter of 2002, the Company recorded a tax benefit of $6,048 to reflect
favorable tax audit resolutions and the reduction in world-wide tax exposures.
8. REPORTABLE SEGMENTS
The Company has two reportable segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. The Company's
reportable segments were determined based upon several factors including the
nature of the products provided and markets served. Each reportable segment is
managed separately and includes various operating segments which have been
aggregated due to similar economic characteristics.
The HVACR segment designs, manufactures and distributes window, split,
multi-split, through-the-wall, portable and vertical packaged unit air
conditioners and dehumidifiers. HVACR products are distributed through a variety
of sales channels including national retailers, regional retailers, wholesale
distributors, catalog supply houses, private label/OEM, government direct and
the Internet.
The Engineered Products segment designs, manufactures and distributes
media filters, electronic filters, humidifiers, dust collectors, fan filter
units, and solid-state thermoelectric heat pump modules. These products are sold
through manufacturers' representatives, distributors and direct sales to
end-users.
SUMMARY OF BUSINESS BY SEGMENT:
2002 2001 2000
--------- --------- ---------
Net sales
HVACR .................................... $ 332,748 $ 359,964 $ 369,014
Engineered Products ...................... 40,954 45,733 47,167
--------- --------- ---------
Consolidated net sales ................... $ 373,702 $ 405,697 $ 416,181
========= ========= =========
Earnings before interest and taxes
HVACR .................................... $ 25,908 $ 7,387 $ 45,958
Engineered Products ...................... (1,663) 15 2,747
--------- --------- ---------
Segment earnings before interest and taxes 24,245 7,402 48,705
--------- --------- ---------
Asset impairment, employee severance and
other restructuring (credits) charges . (397) 8,947 --
Non-allocated expenses ................... 3,049 13,873 2,647
Interest expense ......................... 18,617 17,845 15,584
(Benefit) provision for income tax expense (5,033) (10,810) 10,073
--------- --------- ---------
Consolidated net income (loss) ........... $ 8,009 $ (22,453) $ 20,401
========= ========= =========
Adjusted EBITDA (1) (2)
HVACR .................................... $ 36,313 $ 25,986 $ 54,572
Engineered Products ...................... 1,576 3,111 5,866
Non-allocated ............................ (2,745) (4,351) (1,652)
--------- --------- ---------
Consolidated Adjusted EBITDA ............. $ 35,144 $ 24,746 $ 58,786
========= ========= =========
(1) In fiscal year 2002, Adjusted EBITDA excludes a $397 asset impairment,
employee severance and other restructuring credit, $350 of operating
losses incurred at the Tennessee and Maryland facilities subsequent to the
announcement that production at these facilities would cease and $339 of
non-cash income to reduce the compensation accrual due to the re-pricing
of a majority of unexercised stock options in fiscal 2001. In fiscal 2001,
Adjusted EBITDA results exclude $8,947 of asset impairment, employee
severance and other restructuring charges, $4,031 of one-time inventory
charges, a $7,583 deferred compensation charge relating to the retirement
of an officer of the Company, an additional $2,283 of other non-recurring
inventory write-offs, $1,364 of operating losses incurred at the Tennessee
and Maryland facilities subsequent to the announcement that production at
these facilities would cease, a $726 non-cash charge for the re-pricing of
a majority of unexercised stock options and $716 of other one-time
charges.
(2) Adjusted EBITDA represents income before income taxes plus net interest
expense, depreciation and amortization (excluding amortization of debt
discounts and deferred financing costs), certain one-time charges and a
certain non-cash charge. Adjusted EBITDA is presented because we believe
it is an indicator of our
F-15
ability to incur and service debt and is used by our lenders in
determining compliance with financial covenants. However, Adjusted EBITDA
should not be considered as an alternative to cash flow from operating
activities, as a measure of liquidity or as an alternative to net income
as a measure of operating results in accordance with generally accepted
accounting principles. Our definition of Adjusted EBITDA may differ from
definitions of Adjusted EBITDA used by other companies.
Depreciation and amortization
HVACR .......................................... $ 10,409 $ 10,532 $ 8,450
Engineered Products ............................ 3,779 3,686 3,684
Corporate ...................................... 642 1,213 942
-------- -------- --------
Consolidated depreciation and amortization $ 14,830 $ 15,431 $ 13,076
======== ======== ========
Property, plant and equipment additions
HVACR .......................................... $ 5,955 $ 8,979 $ 5,268
Engineered Products ............................ 1,796 1,662 3,842
Corporate ...................................... 95 132 748
-------- -------- --------
Consolidated property, plant and equipment
additions ................................ $ 7,846 $ 10,773 $ 9,858
======== ======== ========
Total assets
HVACR .......................................... $212,931 $224,914 $222,393
Engineered Products ............................ 66,173 57,712 56,960
Non -allocated assets .......................... 87,024 79,706 108,822
-------- -------- --------
Consolidated assets ........................ $366,128 $362,332 $388,175
======== ======== ========
Summary of Net Sales by Geographic Area (1)
U.S. OTHER CONSOLIDATED
-------- ------- ------------
2002 $321,666 $52,036 $373,702
2001 336,530 69,167 405,697
2000 361,518 54,663 416,181
- ----------
(1) Other includes the Company's net sales principally to Asia, Europe, Canada
and Mexico.
Summary of Long-Lived Assets by Geographic Area (2)
U.S. OTHER CONSOLIDATED
-------- ------- ------------
2002 $128,575 $41,238 $169,813
2001 142,434 26,564 168,998
2000 142,490 19,572 162,062
- ----------
(2) Other includes long-lived assets located principally in Asia.
In 2002, one customer accounted for 29% of net sales and a second customer
20% of net sales. In 2001, one customer accounted for 26% of net sales and a
second customer 23% of net sales. In 2000, one customer accounted for 25% of net
sales and a second customer 24% of net sales.
It is not practical for the Company to report revenues for each product or
group of similar products. A majority of the internal reports provide detailed
information by legal entity, but there is no one uniform customer or product
information management system.
F-16
9. CAPITAL STOCK
On March 26, 2002, the Company's stockholders approved a recapitalization
plan (the "Plan") which became effective the same day. Under the Plan, the
holder of each share of Common Stock received 1.1 shares of new Common Stock,
the holder of each share of Class A Stock received 1 share of new Common Stock
and the holder of each share of Class B Stock received 1.1 shares of new Class B
Stock. The par value of the new Common Stock and the new Class B Stock is $0.01,
while the par value of the old Common Stock and old Class B Stock was $1.00. The
new Common Stock and the new Class B Stock have alternating preferences with
respect to payments or distributions in the event of any dissolution,
liquidation, or winding up of the Company. No such liquidation preference
existed previously. Each share of new Class B Stock shares equally with each
share of new Common Stock in payments of dividends while each share of old Class
B Stock received 90% of the dividends paid to each share of old Common Stock.
The new Class B Stock will automatically be converted into shares of new Common
Stock if the number of outstanding shares of new Class B Stock falls below 2.5%
of the aggregate number of issued and outstanding shares of new Common Stock and
new Class B Stock. The old Class B Stock automatically converted into shares of
old Common Stock if the number of outstanding shares of old Class B Stock fell
below 5.0% of the aggregate number of issued and outstanding shares of old
Common Stock and old Class B Stock.
New Common Stock (70,000,000 shares authorized): 3,746,757 shares of new
Common Stock were reserved for the exercise of stock options and 2,394,046 of
shares of new Common Stock were reserved for the conversion of shares of new
Class B stock as of August 31, 2002.
Old Common Stock (80,000,000 shares authorized): During fiscal 2001,
1,932,800 shares were repurchased for $8,985. During fiscal 2000, 567,900 shares
were repurchased for $3,580. 3,747,157 shares of old Common Stock were reserved
for the exercise of stock options, 24,044,773 shares of old Common Stock were
reserved for the conversion of Class A Stock and 2,266,406 shares of old Common
Stock were reserved for the conversion of shares of old Class B Stock as of
August 31, 2001.
Class A Stock (60,000,000 shares authorized): During fiscal 2001,
1,065,600 shares were repurchased for $4,252. An additional 224,259 shares were
received by employees in connection with the exercise of stock options. During
fiscal 2000, 2,200,100 shares were repurchased for $9,904. An additional 154,071
shares were received from employees in connection with the exercise of stock
options. Class A Stock had rights, including dividend rights, substantially
identical to the old Common Stock, except that the Class A Stock was not
entitled to vote except to the extent provided under Delaware law. Class A Stock
was immediately convertible into old Common Stock on a share-for-share basis
upon conversion of all of the Class B Stock.
New Class B Stock (5,000,000 shares authorized): New Class B Stock is
immediately convertible into Common Stock on a share-for-share basis if the
number of outstanding shares of new Class B Stock falls below 2.5% of the
aggregate number of issued and outstanding shares of new Common Stock and new
Class B Stock. New Class B Stock has greater voting power, in certain
circumstances (ten-to-one in the election of directors), and has limited
transferability. New Class B Stock also votes separately, as a class, on certain
significant issues.
Old Class B Stock (7,500,000 shares authorized): Old Class B Stock was
immediately convertible into old Common Stock on a share-for-share basis if the
number of outstanding shares of old Class B Stock fell below 5.0% of the
aggregate number of issued and outstanding shares of old Common Stock and old
Class B Stock. Old Class B Stock had greater voting power, in certain
circumstances (ten-to-one in the election of directors), but received a lower
dividend, if declared, equal to 90% of the dividend on old Common Stock and had
limited transferability. Old Class B Stock also voted separately, as a class, on
certain significant issues.
F-17
The following table summarizes the number of shares outstanding by class of
stock:
NEW COMMON OLD COMMON NEW CLASS B OLD CLASS B
STOCK STOCK CLASS A STOCK STOCK STOCK
---------- ----------- ------------- ----------- -----------
Balance at August 31, 1999 -- 16,135,459 17,635,741 -- 2,266,706
Purchase of treasury stock -- (567,900) (2,200,100) -- --
Stock options exercised -- -- 385,322 -- --
Other -- -- (114,071) -- (300)
---------- ----------- ----------- ----------- -----------
Balance at August 31, 2000 -- 15,567,559 15,706,892 -- 2,266,406
Purchase of treasury stock -- (1,932,800) (1,065,600) -- --
Stock options exercised -- -- 425,055 -- --
Other -- -- (176,361) -- --
---------- ----------- ----------- ----------- -----------
Balance at August 31, 2001 -- 13,634,759 14,889,986 -- 2,266,406
Stock options exercised -- -- 400 -- --
Recapitalization 29,888,621 (13,634,759) (14,890,386) 2,493,046 (2,266,406)
Other 202,444 -- -- -- --
---------- ----------- ----------- ----------- -----------
Balance at August 31, 2002 30,091,065 -- -- 2,493,046 --
========== =========== =========== =========== ===========
On October 11, 2000, the Company announced an increase in a stock
repurchase plan, authorized in August 1998, from $30,000 to $40,000 for the
Company's old Common and Class A Stock. Total repurchases under this plan,
including commissions, amounted to approximately 8.4 million shares of old
Common Stock and Class A Stock for $40.0 million or $4.74 per share. The stock
repurchase plan has now been completed.
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 granted prior to June 1, 2002 are exercisable one year after the
date of grant. Stock options granted subsequent to June 1, 2002 vest over a four
year period. Options, if not exercised, will expire five years from the date of
grant. Certain options are only exercisable at the end of five years unless a
sales target is achieved prior thereto.
In October 2000, the Company's Board of Directors approved the repricing
of a majority of unexercised stock options, reducing the exercise price to
$3.625 per share, which was the fair market value of the Class A Stock on the
date of repricing. The Company recorded a non-cash charge of $726 due to the
repricing in fiscal 2001. In fiscal 2002, the Company recorded a $339 reduction
to compensation expense to reflect changes in the market price of the Company's
stock.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock options issued to employees. The Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below had compensation cost for the Company's stock option
plans been determined consistent with SFAS 123.
2002 2001 2000
---------- ---------- ----------
Net income (loss):
As reported ................ $ 8,009 $ (22,453) $ 20,401
Pro forma .................. 7,230 (22,949) 19,257
Basic earnings (loss) per share:
As reported ................ $ 0.25 $ (0.71) $ 0.58
Pro forma .................. 0.23 (0.72) 0.55
Diluted earnings (loss) per share:
As reported ................ $ 0.25 $ (0.71) $ 0.57
Pro forma .................. 0.23 (0.72) 0.54
F-18
The stock option plan summary and changes during each year are presented
below:
2002 2001 2000
---------- ---------- ----------
Options outstanding at beginning of year ............................... 1,630,000 2,483,000 1,644,000
Granted ................................................................ 1,423,000 79,000 1,295,000
Canceled/Expired ....................................................... (539,000) (507,000) (71,000)
Exercised .............................................................. -- (425,000) (385,000)
---------- ---------- ----------
Options outstanding at end of year ..................................... 2,514,000 1,630,000 2,483,000
Options exercisable at end of year ..................................... 78,000 551,000 1,411,000
========== ========== ==========
Exercise price per share ............................................... $ 2.65 $ 2.84 $ 2.84
to 5.00 to 4.63 to 5.94
========== ========== ==========
Options exercisable at August 31, 2002 have an average exercise price of
$3.61. The fair value of the stock options granted during 2002, 2001 and 2000
was $1.47, $1.46 and $1.31, respectively.
The fair value of each option granted is estimated on the date of grant
using the Binomial option pricing model with the following weighted-average
assumptions:
2002 2001 2000
---- ---- ----
Expected dividend yield ........ 3.98% 2.84% 2.43%
Risk-free rate ................. 2.9% 5.7% 6.1%
Expected life in years ......... 4 4 4
Volatility ..................... 68% 45% 30%
The following table summarizes information on stock options outstanding at
August 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE(1) PRICE(1) EXERCISABLE PRICE(1)
-------- ----------- ----------- --------- ----------- ---------
$2.65 - 2.84 .................. 71,000 4.41 $2.74 1,000 $2.84
$3.02 - 3.02 .................. 1,307,000 4.88 3.02 -- --
$3.63 - 3.63 .................. 1,077,000 2.22 3.63 77,000 3.63
$4.50 - 5.00 .................. 59,000 3.63 4.53 -- --
--------- ----- ----- --------- -----
2,514,000 3.70 $3.31 78,000 $3.61
========= ===== ===== ========= =====
- ----------
(1) weighted average
11. PENSION PLANS AND OTHER COMPENSATION ARRANGEMENTS
The Company maintains a 401(k) defined contribution plan covering all U.S.
employees, except union employees at one subsidiary. Company matching
contributions under the plan are based on the level of individual participant
contributions and amounted to $1,064, $1,496,and $1,287, in 2002, 2001 and 2000,
respectively.
In fiscal 2002, the Company extended the employment agreement with an
officer that now has a term that extends through September 2006. The agreement
provides for annual base and incentive compensation, a non-interest bearing,
uncollateralized loan which the Company expects to collect in six yearly
installments over the six year period following the officer's termination of
employment. (see note 1), a retirement contribution that vests over the life of
the agreement and restricted stock, of which a portion vests in January 2004 and
a portion vests in January 2007. The Company is amortizing the retirement
contribution over the vesting period and the restricted stock, commencing on the
date of grant, over the remaining life of the agreement.
Due to the retirement of another officer in fiscal 2001, the Company
recorded additional compensation of $7,583 to selling, general and
administrative expense as a result of changes in the underlying estimate. This
change in estimate was due primarily to the timing of the executive's decision
to retire, since the compensation formula includes factors based upon prior
year's base salary and bonus. Therefore, the effects of this change in estimate
are not attributable to future periods. This officer is required to be paid a
monthly retirement benefit for 10 years, commencing upon his retirement in
fiscal 2001. The retirement benefit is based upon his compensation in the year
prior to retirement, pursuant to an employment agreement entered into in 1993.
F-19
The Company provides a portion of health care and life insurance benefits
for certain retired employees who elect to participate in the Company's plan.
SFAS 106 requires accrual accounting for all post-retirement benefits other than
pensions. At August 31, 2002 and 2001, post-retirement benefits, although
immaterial, were fully accrued with no significant change between these dates.
12. ACQUISITIONS AND JOINT VENTURES
The Company completed the acquisition, in the first quarter of fiscal
2002, of a wholly-owned air conditioning manufacturing operation in Shanghai,
China, now called Fedders Shanghai Co., Ltd. This subsidiary is included within
the HVACR reportable segment. This plant has fully replaced the production of
room air conditioners previously produced at the Company's Tennessee plant,
which ceased production as part of the 2001 restructuring plan. The purchase
price of $4.6 million was allocated based on the fair market value of the assets
acquired, which consisted primarily of inventory and fixed assets. The excess of
purchase price over the fair market value of the assets acquired was allocated
to goodwill ($0.6 million).
In November 2001, Melcor Corporation ("Melcor"), a subsidiary of the
Company, and Quanzhou Hua Yu Electrical Component Factory formed a joint
venture, Quanzhou Melcor Hua Yu Thermoelectric Company Ltd., to manufacture
thermoelectric modules in China. This joint venture is included within the
Engineered Products reportable segment. Melcor has a 65% interest in the joint
venture. The Company's investment in the joint venture amounted to $1.8 million.
This joint venture is consolidated into the Company's financial statements with
Quanzhou Hua Yu's 35% interest accounted for as a minority interest. This
transaction was accounted for as a business combination, which resulted in an
intangible asset of $1.2 million. This intangible asset is being amortized over
20 years, which represents the term of the joint venture agreement.
In October 2001, the Company entered into a joint venture with Voltas
Limited ("Voltas") to produce room air conditioners in India. Fedders and Voltas
each have a 50% interest in the joint venture, Universal Comfort Products Pvt.
Ltd, which produces room and ductless split system air conditioners. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $2.2 million. The Company reports
the results of the joint venture by the equity method of accounting.
In January 2002, Rotorex Company, Inc. ("Rotorex"), a subsidiary of the
Company, and Dong Fang Electromechanical, a subsidiary of China North Industries
Group Corporation, entered into an agreement to form a joint venture to
manufacture rotary compressors for air conditioners, in Xi'an, China. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $4.4 million in fiscal 2002. Rotorex
has a 50% interest in Xi'an Fedders Dong Fang Air Conditioner Compressor Co.
Ltd. The Company reports the results of the joint venture by the equity method
of accounting.
The Company's consolidated financial statements include the operating
results of the acquired businesses and joint ventures from the date of
acquisition or the commencement of the joint venture. On a pro forma basis, as
if the businesses had been acquired or the joint ventures entered into at the
beginning of fiscal 2002, revenue, net income and earnings per share would not
differ materially from the amounts reported in the consolidated financial
statements for fiscal 2002.
In November 2000, a subsidiary of the Company acquired Eubank
Manufacturing Enterprises, Inc. ("Eubank") a manufacturer of cooling systems
used to control the environment in cellular tower transmission equipment rooms
and residential and commercial applications. Eubank's sales for the twelve-month
period ended October 31, 2000 were approximately $21.0 million. In March 2001,
the Company acquired Polenz GmbH ("Polenz"), a premier air treatment products
distributor in Germany. Polenz's sales for calendar year 2000 were approximately
$25.6 million. Total cash paid for the two acquisitions was $19.7 million, net
of cash acquired. Both subsidiaries are included within the HVACR reportable
segment.
Both acquisitions were accounted for using the purchase methods, with the
purchase price allocated to net assets acquired based on their estimated fair
values as of the acquisition date. The excess of purchase price over the fair
value of the net assets acquired ($11,600) 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 the acquired
businesses from the date of acquisition. On a pro forma basis, as if the
businesses had been acquired at the beginning of fiscal
F-20
2001, revenue, net income and earnings per share would not differ materially
from the amounts reported in the consolidated financial statements for fiscal
2001.
In fiscal 2000, a subsidiary of the Company acquired the capital stock of
ABB Koppel, Inc. (now called Fedders Koppel, Inc.), a manufacturer of packaged
air conditioners in the Philippines. In March 2000, another subsidiary of the
Company acquired the net assets of Sun Manufacturing, Inc. ("Sun"). Total
consideration for the two acquisitions was $12.6 million in cash and notes plus
the assumption of $2.2 million of debt. Sun is a manufacturer of air
conditioners that cool telecommunications equipment in cellular towers. Both
subsidiaries are included within the HVACR segment.
Both acquisitions were accounted for using the purchase method, with the
purchase price allocated to net assets acquired based on their estimated fair
values as of the acquisition date. The excess of purchase price over the fair
value of the net assets acquired ($9,586) 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 the acquired
businesses from the date of acquisition. On a pro forma basis, as if the
businesses had been acquired at the beginning of fiscal 2001, revenue, net
income and earnings per share would not differ materially from the amounts
reported in the consolidated financial statements for fiscal 2000.
13. SUBSEQUENT EVENTS
In October 2002, the Company announced that its Board of Directors had
approved a plan pursuant to which a new class of Cumulative Preferred Stock will
be offered to stockholders in exchange for up to 15 million shares of the
Company's new Common Stock, with .14 shares of Preferred Stock being offered in
exchange for every share of new Common Stock. The offer will be conditioned upon
at least 5 million shares of the Company's new Common Stock being tendered. The
new Preferred Stock will have an annual dividend of $2.15 per share and a
liquidation value of $25 per share.
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, of which $100,000 were issued in August
1997, and $50,000 were issued in August 1999 (note 5). The Company's guarantee
is full and unconditional. The following condensed consolidating financial
statements present separate information for FNA, the Company, and its
subsidiaries other than FNA, and should be read in conjunction with the
consolidated financial statements of the Company.
F-21
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED AUGUST 31, 2002
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales ..................................... $ 287,079 $ 98,364 -- $ (11,741) $ 373,702
Cost of sales ................................. 226,550 75,843 -- (11,741) 290,652
Selling, general and administrative
expense (a) ................................ 35,442 26,849 $ 817 -- 63,108
Asset impairment, employee severance
and other restructuring (credits) ......... (397) -- -- -- (397)
--------- --------- --------- --------- ---------
Operating income (loss) ....................... 25,484 (4,328) (817) -- 20,339
Partners' net interest in
joint venture results ...................... -- 713 -- -- 713
Equity income in investment ................... -- -- 2,348 (2,348) --
Net interest (expense) income (b) ............. (16,603) (2,326) 312 -- (18,617)
Other income .................................. 154 387 -- -- 541
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............. 9,035 (5,554) 1,843 (2,348) 2,976
Provision (benefit) for income taxes .......... 2,938 (1,805) (6,166) -- (5,033)
--------- --------- --------- --------- ---------
Net income (loss) ............................. 6,097 (3,749) 8,009 (2,348) 8,009
Foreign currency translation, net
of tax ..................................... 223 630 853 (853) 853
--------- --------- --------- --------- ---------
Comprehensive income (loss) ................... $ 6,320 $ (3,119) $ 8,862 $ (3,201) $ 8,862
========= ========= ========= ========= =========
F-22
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED AUGUST 31, 2001
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales .......................................... $ 312,408 $ 97,085 -- $ (3,796) $ 405,697
Cost of sales ...................................... 267,294 73,499 -- (3,796) 336,997
Selling, general and administrative
expense (a) ..................................... 38,775 24,524 $ 11,499 -- 74,798
Asset impairment, employee severance
and other restructuring charges ................. 8,947 -- -- -- 8,947
--------- --------- --------- --------- ---------
Operating (loss) ................................... (2,608) (938) (11,499) -- (15,045)
Partners' net interest in joint venture
results ......................................... -- (160) -- -- (160)
Equity (loss) in investment ........................ -- -- (16,192) 16,192 --
Net interest income (expense) (b) .................. (17,163) (2,905) 2,223 -- (17,845)
Other expense ...................................... (213) -- -- -- (213)
--------- --------- --------- --------- ---------
(Loss) before income taxes ......................... (19,984) (4,003) (25,468) 16,192 (33,263)
(Benefit) for income taxes ......................... (6,495) (1,300) (3,015) -- (10,810)
--------- --------- --------- --------- ---------
Net (loss) ......................................... (13,489) (2,703) (22,453) 16,192 (22,453)
Foreign currency translation, net of tax ........... 12 (1,049) -- -- (1,037)
--------- --------- --------- --------- ---------
Comprehensive (loss) ............................... $ (13,477) $ (3,752) $ (22,453) $ 16,192 $ (23,490)
========= ========= ========= ========= =========
F-23
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED AUGUST 31, 2000
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales .......................................... $ 360,869 $ 60,197 -- $ (4,885) $ 416,181
Cost of sales ...................................... 275,456 40,782 -- (4,885) 311,353
Selling, general and administrative
expense (a) ..................................... 40,313 14,934 $ 2,727 -- 57,974
--------- --------- --------- --------- ---------
Operating income (loss) ............................ 45,100 4,481 (2,727) -- 46,854
Partners' net interest in joint venture
results ......................................... -- (796) -- -- (796)
Equity income in investment ........................ -- -- 20,801 (20,801) --
Net interest (expense) income (b) .................. (16,513) (1,142) 2,071 -- (15,584)
--------- --------- --------- --------- ---------
Income before income taxes ......................... 28,587 2,543 20,145 (20,801) 30,474
Provision (benefit) for income taxes ............... 9,170 1,159 (256) -- 10,073
--------- --------- --------- --------- ---------
Net income ......................................... 19,417 1,384 20,401 (20,801) 20,401
Foreign currency translation,
net of tax ...................................... 62 (624) -- -- (562)
--------- --------- --------- --------- ---------
Comprehensive income ............................... $ 19,479 $ 760 $ 20,401 $ (20,801) $ 19,839
========= ========= ========= ========= =========
F-24
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF AUGUST 31, 2002
---------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- ------- --------- ------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ....... $ 64,166 $ 3,213 -- -- $ 67,379
Net accounts receivable ......... 16,610 15,158 -- -- 31,768
Net inventories ................. 27,633 20,947 -- -- 48,580
Other current assets ............ 5,924 7,806 $ 12,477 $ (7,023) 19,184
--------- --------- --------- --------- ---------
Total current assets ................. 114,333 47,124 12,477 (7,023) 166,911
Investments in subsidiaries .......... -- -- 20,583 (20,583) --
Net property, plant and equipment .... 44,916 21,090 840 -- 66,846
Goodwill and other intangible assets.. 65,107 26,985 -- -- 92,092
Other long-term assets ............... 7,943 6,349 25,987 -- 40,279
--------- --------- --------- --------- ---------
Total assets ......................... $ 232,299 $ 101,548 $ 59,887 $ (27,606) $ 366,128
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ................ $ 2,432 $ 7,397 -- -- $ 9,829
Current portion of long-term debt 593 2,662 $ 107 -- 3,362
Accounts and income taxes payable 22,562 16,260 9,021 -- 47,843
Accrued expenses ................ 20,879 10,295 5,925 -- 37,099
--------- --------- --------- --------- ---------
Total current liabilities ............ 46,466 36,614 15,053 -- 98,133
Long-term debt ....................... 153,624 10,129 16 -- 163,769
Other long-term liabilities .......... 1,822 11,466 20,143 $ (7,023) 26,408
Net due to (from) affiliates ......... -- 53,143 (53,143) -- --
Stockholders' equity:
New Common, and
New Class B Stock ........... 5 -- 407 (5) 407
Additional paid-in capital ...... 21,292 24,642 68,870 (45,934) 68,870
Retained earnings (deficit) (f) . 9,078 (33,122) 47,551 24,044 47,551
Deferred compensation
and treasury stock .......... -- -- (37,698) -- (37,698)
Accumulated other
comprehensive income (loss) . 12 (1,324) (1,312) 1,312 (1,312)
--------- --------- --------- --------- ---------
Total stockholders' equity ........... 30,387 (9,804) 77,818 (20,583) 77,818
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity ............ $ 232,299 $ 101,548 $ 59,887 $ (27,606) $ 366,128
========= ========= ========= ========= =========
F-25
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF AUGUST 31, 2001
---------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- ------- --------- ------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ....... $ 44,331 $ 4,211 $ 2,650 -- $ 51,192
Net accounts receivable ......... 8,095 16,608 -- -- 24,703
Net inventories ................. 50,537 22,209 -- -- 72,746
Other current assets ............ 1,721 5,326 8,519 -- 15,566
--------- --------- --------- --------- ---------
Total current assets ................. 104,684 48,354 11,169 -- 164,207
Investments in subsidiaries .......... -- -- 17,382 $ (17,382) --
Net property, plant and equipment .... 50,805 19,841 1,105 -- 71,751
Goodwill and other intangible assets.. 66,734 26,762 -- -- 93,496
Other long-term assets ............... 4,111 2,684 33,106 (7,023) 32,878
--------- --------- --------- --------- ---------
Total assets ......................... $ 226,334 $ 97,641 $ 62,762 $ (24,405) $ 362,332
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ................ -- $ 7,470 -- -- $ 7,470
Current portion of long-term debt $ 586 2,369 $ 100 -- 3,055
Accounts and income taxes payable 24,423 17,994 4,599 -- 47,016
Accrued expenses ................ 21,438 11,727 7,858 -- 41,023
--------- --------- --------- --------- ---------
Total current liabilities ............ 46,447 39,560 12,557 -- 98,564
Long-term debt ....................... 153,896 11,379 125 -- 165,400
Other long-term liabilities .......... 1,924 10,264 20,189 $ (7,023) 25,354
Net due to (from) affiliates ......... -- 43,123 (43,123) -- --
Stockholders' equity:
Old Common, Class A and
Old Class B Stock ........... 5 -- 38,700 (5) 38,700
Additional paid-in capital ...... 21,292 24,642 31,146 (45,934) 31,146
Retained earnings (deficit) (f) . 2,981 (29,373) 43,313 26,392 43,313
Deferred compensation
and treasury stock .......... -- -- (37,980) -- (37,980)
Accumulated other
comprehensive (loss) ........ (211) (1,954) (2,165) 2,165 (2,165)
--------- --------- --------- --------- ---------
Total stockholders' equity ........... 24,067 (6,685) 73,014 (17,382) 73,014
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity ............ $ 226,334 $ 97,641 $ 62,762 $ (24,405) $ 362,332
========= ========= ========= ========= =========
F-26
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2002
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- ------- --------- ------- -----------
Net cash provided by (used in)
operating activities ............. $ 25,764 $ (3,152) $ 11,522 $ -- $ 34,134
-------- -------- -------- ---- --------
Net additions to property, plant and
equipment ........................ (3,184) (3,277) (95) -- (6,556)
Acquisition of businesses ............. (4,571) (3,437) -- -- (8,008)
-------- -------- -------- ---- --------
Net cash (used in) investing activities (7,755) (6,714) (95) -- (14,564)
-------- -------- -------- ---- --------
Net repayments of short and long-term
borrowings ........................ 1,826 (1,152) (102) -- 572
Cash dividends ........................ -- -- (3,725) -- (3,725)
Proceeds from stock options exercised . -- -- 1 -- 1
Other ................................. -- -- (231) -- (231)
Change in net due to (from) affiliate . -- 10,020 (10,020) -- --
-------- -------- -------- ---- --------
Net cash provided by (used in)
financing activities ............. 1,826 8,868 (14,077) -- (3,383)
-------- -------- -------- ---- --------
Net increase (decrease) in cash
and cash equivalents ............. 19,835 (998) (2,650) -- 16,187
Cash and cash equivalents at
beginning of year ................ 44,331 4,211 2,650 -- 51,192
-------- -------- -------- ---- --------
Cash and cash equivalents at
end of year ...................... $ 64,166 $ 3,213 $ -- $ -- $ 67,379
======== ======== ======== ==== ========
F-27
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2001
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- ------- --------- ------- -----------
Net cash (used in)
provided by operating activities . $ (7,319) $ 16,065 $ (2,827) $ -- $ 5,919
-------- -------- -------- ---- --------
Net additions to property, plant and
equipment ........................ (7,487) (3,014) (132) -- (10,633)
Acquisition of businesses ............. -- (19,694) -- -- (19,694)
-------- -------- -------- ---- --------
Net cash (used in) investing activities (7,487) (22,708) (132) -- (30,327)
-------- -------- -------- ---- --------
Proceeds from short-term notes ........ -- 3,717 -- -- 3,717
Net (repayments of) proceeds from
long-term debt ................... (579) 2,047 225 -- 1,693
Cash dividends ........................ -- -- (3,914) -- (3,914)
Proceeds from stock options exercised . -- -- 526 -- 526
Repurchase of capital stock ........... -- -- (13,237) -- (13,237)
Other ................................. -- -- (378) -- (378)
Change in net (from) due to affiliate . -- (1,229) 1,229 -- --
-------- -------- -------- ---- --------
Net cash (used in) provided by
financing activities ............. (579) 4,535 (15,549) -- (11,593)
-------- -------- -------- ---- --------
Net decrease in cash
and cash equivalents ............. (15,385) (2,108) (18,508) -- (36,001)
Cash and cash equivalents at
beginning of year ................ 59,716 6,319 21,158 -- 87,193
-------- -------- -------- ---- --------
Cash and cash equivalents at
end of year ...................... $ 44,331 $ 4,211 $ 2,650 $ -- $ 51,192
======== ======== ======== ==== ========
F-28
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2000
---------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
------- ------- --------- ------- -----------
Net cash (used in) provided by
operating activities .............. $ (699) $ 3,475 $ 1,843 -- $ 4,619
--------- --------- --------- --------- ---------
Net additions to property, plant and
equipment ......................... (3,870) (3,140) (611) -- (7,621)
Acquisition of businesses .............. -- (7,416) -- -- (7,416)
Dividend received from affiliate ....... -- -- 9,708 $ (9,708) --
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities .............. (3,870) (10,556) 9,097 (9,708) (15,037)
--------- --------- --------- --------- ---------
Net repayments of short and
long-term borrowings .............. (2,099) (1,169) -- -- (3,268)
Cash dividends ......................... (9,708) -- (4,205) 9,708 (4,205)
Proceeds from stock options exercised .. -- -- 1,059 -- 1,059
Repurchase of capital stock ............ -- -- (13,484) -- (13,484)
Change in net due to (from) affiliate .. -- 8,104 (8,104) -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities .............. (11,807) 6,935 (24,734) $ 9,708 (19,898)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ....................... (16,376) (146) (13,794) -- (30,316)
Cash and cash equivalents at
beginning of year ................. 76,092 6,465 34,952 -- 117,509
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of year ....................... $ 59,716 $ 6,319 $ 21,158 -- $ 87,193
========= ========= ========= ========= =========
F-29
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$11,483, $12,409 and $13,468 for the years ended August 31, 2002, 2001 and 2000,
respectively.
b) FNA's interest expense reflects actual interest charges on the
9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory Note,
capital lease obligations, and a revolving line of credit.
c) FNA's depreciation and amortization for the years ended August
31, 2002, 2001, and 2000, amounted to $10,584, $11,003 and $7,410, respectively.
Capital expenditures for the years ended August 31, 2002, 2001 and 2000,
amounted to $4,369, $7,487, and $9,361, 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) On August 31, 2000, FNA declared a dividend of $9,708 to the
Company. In Fiscal 2002 and 2001, FNA did not declare a dividend.
F-30
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Fedders Corporation::
We have audited the accompanying consolidated balance sheets of
Fedders Corporation and subsidiaries as of August 31, 2002 and 2001, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2002. 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 auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Fedders Corporation
and subsidiaries as of August 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 2002, in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Parsippany, New Jersey
October 29, 2002
F-31
FEDDERS CORPORATION QUARTERLY FINANCIAL DATA (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND MARKET PRICE DATA)
2002 FIRST SECOND THIRD FOURTH FISCAL YEAR
- ---- ----- ------ ----- ------ -----------
Net sales ................................ $ 38,097 $73,081 $170,688 $91,836 $373,702
Gross profit ............................. 8,938 17,340 39,859 16,913 83,050
(Loss) income before income taxes ........ (10,852) (2,856) 19,153 (2,469) 2,976
Net (loss) income ........................ $ (7,325) $(1,928) $ 12,928 $ 4,334 $ 8,009
Basic (loss) earnings per share(a) ....... $ (0.24) $ (0.06) $ 0.40 $ 0.13 $ 0.25
Diluted (loss) earnings per share ........ $ (0.24) $ (0.06) $ 0.40 $ 0.13 $ 0.25
Market price per share:
Common Stock (FJC)
High .............................. 4.80 3.94 4.07 3.20 4.80
Low ............................... 2.30 2.45 2.61 1.90 1.90
Class A Stock (FJA)
High .............................. 4.05 3.45 3.00 N/A 4.05
Low ............................... 1.55 1.97 2.55 N/A 1.55
2001 FIRST SECOND THIRD FOURTH FISCAL YEAR
- ---- ----- ------ ----- ------ -----------
Net sales ............................... $ 40,979 $84,654 $189,357 $ 90,707 $405,697
Gross profit ............................ 8,616 20,377 31,951 7,756 68,700
(Loss) income before income taxes ....... (11,122) (312) 10,158 (31,987) (33,263)
Net (loss) income ....................... $ (7,512) $ (220) $ 6,870 $(21,591) $(22,453)
Basic (loss) earnings per share(a) ...... $ (0.23) $ (0.01) $ 0.22 $ (0.70) $ (0.71)
Diluted (loss) earnings per share ....... $ (0.23) $ (0.01) $ 0.22 $ (0.70) $ (0.71)
Market price per share:
Common Stock (FJC)
High ............................. 5.19 5.51 5.60 5.24 5.60
Low .............................. 3.38 4.50 4.06 4.45 3.38
Class A Stock (FJA)
High ............................. 4.88 4.63 5.02 4.80 5.02
Low .............................. 3.25 4.13 4.07 3.90 3.25
(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.
F-32
FEDDERS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
BALANCE ADDITIONS BALANCE
AT CHARGED AT END
ALLOWANCE FOR DOUBTFUL BEGINNING TO OF
ACCOUNTS: OF PERIOD EXPENSE DEDUCTIONS OTHER PERIOD
- --------- --------- ------- ---------- ----- ------
Year ended:
August 31, 2002 ......... $ 2,494 $ 698 $ (579) $ -- $ 2,613
August 31, 2001 ......... $ 2,138 $ 1,413 $(1,130) $ 73 $ 2,494
August 31, 2000 ......... $ 1,373 $ 922 $ (290) $ 133 $ 2,138
F-33
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Fedders Corporation:
We have audited the financial statements of Fedders Corporation and
subsidiaries, as of August 31, 2002 and 2001, and for each of the three years in
the period ended August 31, 2002, and have issued our report thereon dated
October 29, 2002; such report is included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Fedders Corporation and
subsidiaries for each of the three years in the period ended August 31, 2002,
listed in Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information as set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Parsippany, New Jersey
October 29, 2002
F-34