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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8831
FEDDERS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-2572390
(State of Incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938-0813
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(908) 604-8686
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange, Inc.
Class A Stock, $1 par value New York Stock Exchange, Inc.
Securities registered pursuant to section 12 (g) of the Act:
Title of Each Class
None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of the close of business on October 31, 1999, there were outstanding
16,135,159 shares of the Registrant's Common Stock, 17,595,877 shares of Class A
Stock and 2,266,406 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 23, 1999
was $183,739,635. (The value of a share of Common Stock is used as the value for
a share of Class B Stock as there is no established market for Class B Stock and
it is convertible into Common Stock on a share-for-share basis.)
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FEDDERS CORPORATION
FORM 10-K ANNUAL REPORT
SEPTEMBER 1, 1998 TO AUGUST 31, 1999
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity
and Related Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the
Registrant 22
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management 24
Item 13. Certain Relationships and Related
Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 25
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Fedders Corporation (the "Company" or the "Registrant") is a leading global
manufacturer of products for the treatment of indoor air, including air
conditioners, air cleaners, dehumidifiers and humidifiers, and thermal
technology products.
Unless otherwise indicated, all references herein to the "Company" or the
"Registrant" include Fedders Corporation and its principal operating
subsidiaries, Fedders North America, Inc. ("Fedders North America"), Emerson
Quiet Kool Corporation, Columbia Specialties, Inc., Fedders International, Inc.
("Fedders International"), Rotorex Company, Inc. ("Rotorex"), Melcor Corporation
("Melcor"), and Trion, Inc. ("Trion").
The Company, in a move to enhance its competitiveness, implemented a
restructuring plan (the "1998 Restructuring") during fiscal 1998. The 1998
Restructuring did not result in any factory closings. However, it did involve
shifting some additional production from North America to China and increasing
component outsourcing. In August 1999, the Company added to the 1998
Restructuring by arranging to outsource to Taiwan and China all of the pumps
used in the manufacture of its Rotorex compressors.
In December 1998, the Company announced its commitment to diversification of
revenues, income and profits through a dedicated domestic and international
acquisition effort.
On August 11, 1999, the Company acquired Trion, a manufacturer of equipment to
improve indoor air quality in cleanroom, residential, commercial, and industrial
environments. The Company subsequently announced the integration of the Trion
operations into its existing indoor air treatment and thermal technology
businesses. The global demand for air cleaners for the residential,
industrial/commercial and cleanroom markets is expected to experience long-term
growth due to concerns over the quality of indoor air and increasing
requirements for clean manufacturing environments.
The Company manufactures and sells a full line of room air conditioners and
dehumidifiers for use in U.S. residential markets. The Company believes that it
is the largest manufacturer of room air conditioners in North America, based on
units sold. The Company's products are marketed under the FEDDERS, EMERSON QUIET
KOOL and AIRTEMP brand names primarily to national and regional retail chains,
home improvement centers, and buying groups, as well as to distributors and,
under private label, to retailers and other original equipment manufacturers
("OEMs"), including other room air conditioner manufacturers.
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The Company believes its growth and profitability have been primarily
attributable to its: (i) low cost production achieved through continuous
manufacturing improvements and global sourcing; (ii) broad range of high quality
products with strong brand recognition; (iii) strong relationships with leading
retailers; and (iv) accurate-response manufacturing and just-in-time delivery
capabilities, supported by a dedicated supply of compressors assembled by its
Rotorex rotary compressor subsidiary.
The Company manufactures solid-state heat pump modules that utilize electricity
to perform the same cooling and heating functions as refrigerant-based
compressors and absorption refrigerators.
With the acquisition of Trion, the Company will manufacture and sell media
filters, electronic filters, humidifiers, and appliances that remove
contaminants and provide humidification for entire homes and specific rooms
within a house, and industrial and commercial air cleaning applications
including media filters, electronic filters, humidifiers, dust collectors, and
packaged solutions to remove contaminants and provide humidification for
industrial and commercial settings and HEPA/ULPA filters for filter units and
lab and medical equipment that provide ultra-clean air environments for
applications such as cleanroom manufacturing and medical and laboratory
processes.
The Company believes it is well positioned to continue building on its U.S.
market strength in air conditioning while simultaneously directing many of its
resources toward penetration of the much larger and rapidly expanding global
market for indoor air quality products. Industry sources estimate the worldwide
market for air conditioning to be nearly five times as large as the domestic
market, as measured in the number of units shipped annually. As indicated
previously, long-term growth is expected to be sustained in the demand for
indoor air quality products.
The Company opened a research and development center in Singapore in 1994 to
focus its efforts on developing air conditioning products for the international
market. In November 1995, the Company entered into the Fedders Xinle Co., Ltd.
("Fedders Xinle" or "FX") joint venture with the Ningbo General Air Conditioner
Factory of Ningbo, China. Fedders Xinle is 60% owned by the Company and intends
to market its products both within China and, through Fedders International, to
export markets around the world. During 1999, FX exported window air
conditioners to North America. FX manufactures split-type units, including
vertical split units for commercial applications, in which the condensing unit
is installed separately outdoors, as well as window air conditioners. In June
1998, the Company entered into a 50%/50% joint venture with Bosch-Siemens
Hausgerate GmbH("BSH") in Estella, Spain to manufacture room air conditioners in
Spain for the European market and for export. The Spanish joint venture
manufactures portable room air conditioners, which are the major
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room air conditioner product sold in Europe. Portable units were also exported
to North America in 1999.
The supply of compressors from Rotorex and from its Asian licensees, is also
strategically important for the Company's international growth, since the
Company's largest global competitors also dominate world compressor supplies.
As part of the 1998 Restructuring described above, all international activities
including executive management, were relocated to Singapore.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment. See Note 8 of the Notes to
Consolidated Financial Statements at page F16 herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company manufactures and sells a complete line of window and
through-the-wall room air conditioners domestically, principally for the
residential market. The Company's air conditioners are manufactured in
capacities ranging from 5,000 BTU (British Thermal Units) to 32,000 BTU. These
models comprise distinct product lines marketed by the Company primarily under
the brands FEDDERS, EMERSON QUIET KOOL and AIRTEMP.
The Company markets a line of household dehumidifiers ranging in capacity from
20 to 50 pints per 24 hours, and its Rotorex subsidiary assembles rotary
compressors, principally for use in the Company's room air conditioners.
The Company manufactures and sells appliance and residential air cleaner
products, including media filters, electronic filters, humidifiers, and
appliances that remove contaminants and provide humidification for entire homes
and specific rooms within a house.
Room air conditioners and dehumidifiers are marketed principally to national and
regional retail chains, home improvement centers and retail buying groups. These
retail chains and retail buying groups (comprising retailers which negotiate as
groups the prices at which they will purchase the Company's products) represent
approximately 10,000 retail outlets marketing room air conditioners throughout
the United States. The Company also markets its air conditioners under private
label to both retailers and OEMs. The Company has positioned its brands across
most price points, emphasizing quality and value for retailers and consumers.
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The Company's appliance and residential air cleaning products are marketed to
heating, ventilation and air conditioning OEM's, building contractors, and
retailers. They are currently sold through a network of manufacturers'
representative organizations, and distributors and directly to end users and
OEM's.
The Company's air conditioning sales, marketing, service, research and design
and administrative support functions were relocated to its factory in Effingham,
Illinois as part of the 1998 Restructuring. The sales force, in conjunction with
marketing employees, are proactive in working with customers to assist them in
maximizing their profitability and market share through responsive changes in
product mix and marketing. Utilizing regional distribution centers, the Company
provides next-day delivery of air conditioners to all major U.S. markets, which
is critical during heat waves that stimulate retail sales. Additionally, the
company has instituted computerized systems, including electronic data
interchange (EDI), to accommodate major high-volume retailers that require
suppliers to replenish inventories frequently and on short notice.
To support and service its air conditioning customers and the ultimate consumer,
the Company has established a network of independent servicers throughout the
United States. These independent servicers are local tradespeople who are
screened and monitored by the Company.
The Company promotes its FEDDERS and EMERSON QUIET KOOL brands of air
conditioners through advertising, primarily in trade publications. Many of the
Company's customers advertise and promote its air conditioning products at their
own expense.
The Company currently manufactures its air conditioners in two owned facilities
in the United States -- a 650,000 square foot facility in Effingham, Illinois
and a 232,000 square foot facility in Columbia, Tennessee - - with a combined
annual capacity of approximately 2,000,000 units. The Company has sufficient
production capacity for domestic needs for the foreseeable future.
Rotorex assembles all of its compressors in its 200,000 square foot facility in
Walkersville, Maryland. As part of the 1998 Restructuring, many of the
components previously manufactured by Rotorex were outsourced. In August 1999,
the 1998 Restructuring was complemented by a further restructuring related to
outsourcing all of the pumps used in its compressors to Taiwan and China.
Rotorex can now produce the same number of compressors with 75 percent fewer
production employees. The current capacity of approximately 1,500,000 units is
sufficient to meet compressor requirements of Fedders North America.
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The Company is well positioned to penetrate the much larger and rapidly growing
international market for indoor air treatment products. The Company believes
that the market, in units, for room air conditioners outside of North America is
approximately five times the size of the U.S. market. The global market for air
cleaners is expected to experience long-term growth due to concerns over the
quality of indoor air and increasing requirements for clean manufacturing
environments. The Company has participated in international markets for nearly
40 years and has licensees in several countries. The Company currently has a
joint venture in China, Fedders Xinle, and a joint venture in Spain ("BSH/FI")
and intends to continue to expand its presence internationally.
Fedders Xinle manufactures split-type room air conditioners in which the
condensing unit is installed separately outdoors, as well as window air
conditioners in capacities from 7,000 to 40,000 BTU, for both residential and
commercial use in international markets. Fedders Xinle owns a facility in
Ningbo, People's Republic of China. Capacity of the facility is currently
approximately 500,000 air conditioners. BSH/FI manufactures portable and
portable-split room air conditioners at a factory in Estella, Spain for the
European market and export.
Management believes that international sales afford greater growth potential
than the U.S. market, while reducing the Company's dependence on summer weather
in North America. As part of the 1998 Restructuring, all international
activities, including executive management located at the Company's headquarters
in New Jersey, were relocated to Singapore. The Company also has offices in the
United Kingdom and Miami, and representative offices in Japan, China and India.
The Company exhibits its products globally at industry trade shows. The Company
believes it can compete cost-effectively abroad based on its global sourcing
network that currently delivers components from around the world to its U.S.
plants and its joint ventures.
The Company expects to increase its participation overseas through strategic
alliances, including long-term agreements to secure high technology finished
products, as well as under production and joint venture agreements, based in
part on its expertise, technological capability and well-established global
sourcing program. With the establishment of Fedders Xinle, the Company is
strategically positioned to sell Fedders branded products, provide private label
products for OEMs with established sales and service organizations worldwide,
and establish assembly operations within each major trading block that has
protective duties in order to import subassemblies or semi-finished goods from
the China facility. In 1999, Fedders Xinle manufactured room air conditioners
for the U.S. market. The Spanish joint venture manufactures portable type units
for sale in Europe and elsewhere, including to the United States.
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The Company's appliance, residential and commercial industrial air cleaning
products, and cleanroom products are currently sold through sales
representatives and distributors, and also directly to end users and OEM's.
The Company produces these products at a 263,000 square foot facility in
Sanford, North Carolina, and a 63,000 square foot facility in Albuquerque, New
Mexico.
Industrial and commercial air cleaning products, include media filters,
electronic filters, humidifiers, dust collectors, and packaged solutions to
remove contaminants and provide humidification for industrial and commercial
environments and cleanroom products, including HEPA/ULPA filters, fan filter
units and lab and medical equipment that provide ultra-clean air environments
for applications such as cleanroom manufacturing and medical and laboratory
processes. Industrial and commercial products are marketed to manufacturers,
contractors and end users such as office and apartment buildings, restaurants,
sports arenas and the United States Navy. Cleanroom products are marketed to
microelectronics, semiconductor and medical products manufacturers and
hospitals. These products, which are manufactured in the North Carolina and New
Mexico facilities are sold through sales representatives, distributors, and
directly to end users.
The Company manufactures solid-state heat pump modules, liquid industrial
chillers and solid-state thermoelectric air conditioners that utilize
electricity to perform the same cooling and heating functions as
refrigerant-based compressors and absorption refrigerators. These products are
typically used by original equipment manufacturers and end users in
microelectronics, semiconductor, laboratory, medical device and
telecommunication applications with limited space and precision temperature
control requirements. The Company's products are sold under the trademarks
MELCOR and FRIGICHIPS.
Melcor's products are currently sold by salaried salespeople and a network of
sales representative firms located around the world.
The Company manufactures these products in facilities comprising 53,000 square
feet near Lawrence Township, New Jersey. The capacity available is sufficient
for its needs in the foreseeable future.
Quality Assurance
One of the key elements of the Company's strategy is a commitment to a single
worldwide standard of quality. Each of the Company's U.S. air conditioning
manufacturing facilities has earned the highest level of certification -- ISO
9001 -- for its quality management system under the International Standards
Organization.
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FX has earned the ISO 9002 certification. The Company expects to rapidly develop
and implement a plan to obtain ISO certification for its newly-acquired
facilities.
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.
Sources and Availability of Raw Materials
The principal raw materials used for production are steel, copper, aluminum and
filter paper, which the Company obtains from domestic and foreign suppliers. The
Company also purchases certain components used in its products from other
domestic and foreign manufacturers including thermostats, compressors, motors
and electrical controls. The Company endeavors to obtain the lowest possible
cost in its purchases of raw materials and components, which must meet specified
quality standards, through an active global sourcing program.
Patents, Trademarks, Licenses and Concessions Held
The Company owns a number of trademarks. While the Company believes that its
trademarks, such as, FEDDERS, EMERSON QUIET KOOL and AIRTEMP, ROTOREX, MELCOR,
FRIGICHIPS, MAC-10 and HOSPI-GARD are well known and enhance the marketing of
its products, the Company does not consider the successful conduct of its
business to be dependent upon such trademarks. The Company aggressively protects
its trademark and intellectual property rights worldwide.
Seasonality of Business
The Company's results of operations and financial condition are 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 16 through 20 herein.
See also the discussion under "Working Capital Practices."
Working Capital Practices
The Company regularly reviews working capital components with a view to
maintaining the lowest level consistent with requirements of anticipated levels
of operations. The Company's sales are predominantly made directly to retailers,
who typically require just-in-time delivery, primarily in April through July.
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Production is weighted towards the retail selling season to minimize borrowing
earlier in the fiscal year, although room air conditioners may be produced
throughout much of the rest of the year at a lower rate of production.
Information with respect to the Company's warranty and return policy is provided
in Note 1 of the Notes to Consolidated Financial Statements at page F7 herein.
See also the information entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" at pages 16 through 20 herein.
Backlog
The Company's fiscal year end (August 31) coincides with the end of the seasonal
room air conditioner sales cycle. Accordingly, backlog at this time of the year
is insignificant.
Competition
Domestically, the Company's competitors include a number of domestic and foreign
manufacturers of air conditioners and appliances, including Whirlpool
Corporation, Frigidaire Company, Matsushita Electric Industrial Co., Ltd., Sharp
Corporation and LG Corporation. Many of the Company's competitors are
substantially larger and have greater resources than the Company. The Company
competes principally on the basis of price, quality and its ability to deliver
product and service to its customers on a just-in-time basis. The Company
believes that it competes effectively with its multiple brand strategy of
providing competitively priced, high quality products on a just-in-time basis.
Internationally, competitors vary depending on the market. Some markets, such as
China, are served by many local manufacturers. Other markets are dominated by
foreign manufacturers of air conditioners and electronics products including
Matsushita Electric Industrial Co., Ltd., Toshiba Corporation, Hitachi, Ltd.,
Mitsubishi Electric Corporation and Sanyo Electric Trading Co., Ltd., all of
which also manufacture compressors. The Company believes that it can compete
effectively with its strategy of manufacturing low cost air conditioners
locally, controlling its supply of compressors and utilizing its global sourcing
network.
Key competitors for Trion's products vary in each of its markets. The principal
competitors for cleanroom products are all located outside of the United States.
The commercial/industrial product market is highly fragmented and no competitor
controls a major share of the market. The residential product market includes
several large, U.S. based companies as principal competitors. While each market
is different, the purchase criteria for the products are relatively consistent,
primarily technology,
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quality, customer service or price. The Company competes on the basis of
offering a broad range of high quality products that typically rate at the top
of their class in performance and durability.
Research and Development
Research and development of room air conditioner technology and design is
conducted at the Effingham, Illinois facility and compressor research and
development is based at the Frederick, Maryland facility. Residential air
cleaner and appliance development is conducted in Sanford, North Carolina.
Internationally, the research and design facility is located in Singapore. The
technology products organization conducts research and development at its
facilities in New Jersey, North Carolina, and New Mexico. In fiscal 1999, the
Company spent approximately $6.7 million on research and development., including
activities at its Singapore facility which focuses on products for the
international market.
Environmental Protection
The Company's operations are subject to various United States (federal and
state) and foreign environmental statutes and regulations, including laws and
regulations dealing with storage, treatment, discharge and disposal of hazardous
materials, substances and wastes and that affect the production of chemical
refrigerants used in the operation of some of the Company's products. The
refrigerant used in room air conditioners is an HCFC that is to be phased out of
use in new products on January 1, 2010 in the United States. Chemical producers
are currently developing environmentally acceptable alternative refrigerants for
use in room air conditioners that are expected to be available in advance of any
now-proposed phase-out deadlines for the current refrigerant. Modifications to
the design of the Company's products may be necessary in order to utilize
alternative refrigerants. The cost of the substitution of alternative
refrigerants is not currently expected to have a material adverse impact on the
Company.
The Company believes it is currently in material compliance with applicable
environmental laws and regulations. The Company did not make capital
expenditures on environmental matters during the year ended August 31, 1999 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, 2000.
The Company has been identified as a potentially responsible party ("PRP") by
the federal Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), at the PCB Treatment Inc. Site (the "Site") located in Kansas City,
Kansas and in Kansas City, Missouri, based on the delivery there of
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certain materials from its Effingham, Illinois facility. CERCLA imposes strict
and, in certain circumstances, joint and several liability on PRP's for response
costs and natural resource damages at waste sites. In view of the substantial
number of other PRP's at the Site and the relatively small volume of material
sent by the Company to the Site (approximately 0.182% of the total), the Company
does not believe it will incur any material liability for this matter.
The Company has identified a groundwater problem at its Walkersville, Maryland
facility. 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 3,100 employees, including approximately 500
employees at Fedders Xinle. The contract with the union representing
substantially all of the production employees of the Effingham, Illinois plant
is scheduled to expire in October 2001. Another union contract covering Rotorex
employees expires in August 2005. The Company considers its relations with its
employees to be generally satisfactory.
International Sales
International sales were $38,168 in 1999, $38,078 in 1998 and $45,012 in 1997.
With signs of economic conditions improving in many countries of Asia and
Europe, and with the addition of Trion's international business, we are
expecting substantial growth in international sales in fiscal 2000.
Future international sales are subject to the risks inherent in such activities,
such as foreign regulations, unsettled political conditions and exchange rate
fluctuations.
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ITEM 2. PROPERTIES
The Company owns or leases the following primary facilities:
Approximate Square
Location Principal Function Feet of Floor Area
Liberty Corner, Corporate 25,000
New Jersey Headquarters
(Leased)
Effingham, Illinois Manufacturing 650,000
(Owned)
Columbia, Tennessee Manufacturing 232,000
(Owned)
Frederick, Maryland Assembly of 200,000
(Owned) rotary compressors
Singapore International Headquarters 14,600
(Leased) and Research and Design
Center
Lawrence Township, Manufacture of Melcor 15,000
New Jersey (Owned) components
Lawrence Township, Assembly of Melcor modules 22,400
New Jersey (Leased)
Sanford, Manufacture of air cleaning 263,000
North Carolina products and humidifiers
(Owned)
Albuquerque, Manufacture of cleanroom 63,000
New Mexico (Leased) products
The Effingham, Illinois facility is subject to a mortgage securing a $3.5
million, 1% promissory note payable over the next nine years to the State of
Illinois. The Company believes that productive capacity at its major
manufacturing facilities is adequate to meet production needs in the foreseeable
future.
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ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
MATTERS
The Company's Common and Class A Stock are listed on the New York Stock
Exchange. There is no established public trading market for the Company's Class
B Stock, as there are restrictions on its transfer. As of October 31, 1999,
there were 2,864 holders of Common Stock, 2,745 holders of Class A Stock and 13
holders of Class B Stock. For information with respect to the Company's Common
Stock, Class A Stock, Convertible Preferred Stock and Class B Stock, see Notes 9
and 10 on pages F16 and F17, which Notes are incorporated herein by reference.
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ITEM 6. SELECTED FINANCIAL DATA (1)
(Amounts in thousands, except per share data)
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Net sales $355,956 $322,121 $314,100 $371,772 $316,494
Gross profit 84,591 69,770 70,076 83,028 67,125
Percent of net sales 23.8 21.7 22.3 22.3 21.2
Operating income (2) 40,258 12,810 31,729 50,988 37,653
Percent of net sales 11.3 4.0 10.1 13.7 11.9
Pre-tax income 30,986 4,603 28,867 50,266 35,691
Percent of net sales 8.7 1.4 9.2 13.5 11.3
- -------------------------------------------------------------------------------------------------------------
Net income $ 20,724 $ 2,992 $ 18,764 $ 31,158 $ 29,504
Net income attributable
to common stockholders 20,724 2,992 16,344 31,007 29,504
Earnings per share:
Basic $ 0.56 $ 0.07 $ 0.42 $ 0.77 $ 0.74
Diluted 0.56 0.07 0.39 0.74 0.74
- -------------------------------------------------------------------------------------------------------------
Cash dividends declared per share:
Convertible Preferred (3) - - $ 0.318 $ 0.050 -
Common/Class A $ 0.105 $ 0.085 0.080 0.080 $ 0.020
Class B 0.095 0.077 0.072 0.072 0.018
Cash and cash equivalents $117,509 $ 90,986 $110,393 $ 90,295 $ 57,707
Total assets 382,342 304,629 329,014 290,220 136,775
Long-term debt (including
current portion) (4) 161,363 111,013 115,380 40,406 5,106
Stockholders' equity (5) 108,933 104,792 145,687 159,751 82,542
Capital expenditures(6) 9,378 8,497 9,236 7,043 9,041
Depreciation and
amortization 10,843 9,263 9,935 6,578 7,519
- -------------------------------------------------------------------------------------------------------------
Other data:
Earnings before interest,
taxes, depreciation and
amortization(7)(8) 54,613 41,757 42,232 57,796 44,143
=============================================================================================================
(1) The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the consolidated financial statements and the notes thereto.
(2) In 1999, operating income reflects a $3,100 restructuring charge. In 1998,
operating income reflects a $16,750 restructuring charge relating to actions
taken by the Company to enhance competitiveness in global markets and a $2,891
provision for the implementation of an early retirement program.
(3) In September 1997, the Company redeemed each share of its Convertible
Preferred Stock for 1.022 shares of Class A Stock.
(4) 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. In August 1997, the same subsidiary of the Company issued
$100,000 of 9 3/8% Senior Subordinated Notes, proceeds of which were utilized,
in part, to fully redeem $22,100 of 8.5% Convertible Subordinated Debentures,
including accrued interest.
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(5) During fiscal 1999, the Company repurchased 2,601 shares of 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, Common and Class
A Stock at an average price of $5.93 per share for a total of $45,750. During
fiscal 1997, the Company repurchased 4,335 shares of Class A Stock at an average
price of $5.78 per share for a total of $25,041 and 705 shares of Convertible
Preferred Stock at $6.25 per share for a total of $4,408.
(6) Fiscal 1995 amount includes $1,750 of equipment under capital lease.
(7) In fiscal 1999, the amount shown excludes a one-time charge for the
restructuring ($3,100). For fiscal 1998, the amount shown excludes one-time
charges for the 1998 Restructuring ($16,750) and early retirement programs
($2,891).
(8) EBITDA represents income before income taxes plus net interest expense and
depreciation and amortization (excluding amortization of debt discounts and
deferred financing costs). While EBITDA should not be construed as a substitute
for operating income or cash flow from operating activities, which are
determined in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the ability of
the Company to meet future debt service, capital expenditure and working capital
requirements. In addition, the Company believes that certain investors find
EBITDA to be a useful tool for measuring the ability the Company to service its
debt. EBITDA is not necessarily a measure of the Company's ability to fund cash
needs.
- 14 -
18
FEDDERS CORPORATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's, except per share and market price data)
1999 First Second Third Fourth Fiscal
Year
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 25,702 $ 58,887 $175,632 $ 95,735 $355,956
Gross profit 6,592 12,886 40,659 24,454 84,591
Income (loss) before
income taxes (4,504) 1,250 26,895 7,345 30,986
Net income (loss) $ (2,935) $ 815 $ 18,070 $ 4,774 $ 20,724
Basic earnings (loss) per share(a) $ (0.08) $ 0.02 $ 0.50 $ 0.13 $ 0.56
Diluted earnings (loss)per share $ (0.08) $ 0.02 $ 0.50 $ 0.13 $ 0.56
Market price per share:
Common Stock (FJC)
High 6 5 7/8 6 1/16 6 15/16 6 15/16
Low 3 15/16 4 13/16 5 5 3/16 3 15/16
Class A Stock (FJA)
High 5 5/8 5 3/4 5 13/16 6 3/4 6 3/4
Low 3 1/2 4 3/8 4 5/8 5 3/16 3 1/2
- ----------------------------------------------------------------------------------------------------------------
1998
Net sales $ 25,491 $ 33,580 $172,061 $ 90,989 $322,121
Gross profit 4,733 7,141 36,986 20,910 69,770
Income (loss) before
income taxes (6,043) (20,817) 24,392 7,071 4,603
Net income (loss) $ (3,931) $(13,528) $ 15,854 $ 4,597 $ 2,992
Basic earnings
(loss) per share(a) $ (0.09) $ (0.32) $ 0.38 $ 0.12 $ 0.07
Diluted earnings
(loss)per share $ (0.09) $ (0.32) $ 0.38 $ 0.11 $ 0.07
Market price per share:
Common Stock (FJC)
High 6 3/8 6 1/4 6 1/4 7 5/16 7 5/16
Low 5 3/4 5 11/16 5 3/16 5 1/8 5 1/8
Class A Stock (FJA)
High 6 1/4 6 1/8 6 1/16 7 1/16 7 1/16
Low 5 9/16 5 1/16 5 3/16 5 5
================================================================================================================
(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.
- 15 -
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Fedders Corporation (the "Company") is a leading global manufacturer of products
for the treatment of indoor air including air conditioners, air cleaners,
dehumidifiers and humidifiers, and thermal technology products.
The Company's business is currently largely domestic and is affected by summer
weather in major domestic markets. During fiscal 1999, the Company's domestic
sales of air conditioners continued to reflect an increasingly seasonal pattern,
with more shipments occurring in the second half of the fiscal year and fewer in
the off-season first half since leading retailers require just-in-time delivery.
The Company's ability to supply products to leading retailers with
accurate-response, in-season production capabilities enables it to maintain a
strong market leadership position. Favorable summer weather in fiscal 1999
increased in-season sales and depleted industry inventories at fiscal year-end
(August 31), which positions U.S. manufacturers for another strong year in
fiscal 2000, assuming normal weather.
In August 1999, the Company incurred a restructuring charge related to
transferring production of pumps for compressors from the U.S. to Taiwan and
China. The charge will enable the Company to reduce operating costs further at
its automated compressor assembly operation in Maryland. This is in addition to
expected savings from a new six-year labor agreement that enables the compressor
operation to hire new factory workers at 75% of present wage rates. This
complements a restructuring plan (the "1998 Restructuring") implemented during
fiscal 1998.
The 1998 Restructuring did not result in any factory closings. However, it did
involve shifting some additional production from North America to China and
increasing component outsourcing. As part of the 1998 Restructuring, all Fedders
International activities, including executive management located at the
Company's headquarters in New Jersey, were relocated to Singapore. The sales,
marketing, service, research and design and administrative support functions of
Fedders North America, Inc. were relocated to the Company's factory in Illinois.
During fiscal 1999, the Company's international product offerings were expanded
and for the first time, our joint ventures in China and Spain began producing
product for the North American market.
In August 1999, the Company acquired Trion, Inc. ("Trion"), a global
manufacturer of indoor air quality products for residential, commercial,
industrial, and cleanroom markets. Trion's net sales for the twelve-month period
ended June 30, 1999 were $57 million.
- 16 -
20
RESULTS OF OPERATIONS
Net sales in fiscal 1999 totaled $356.0 million, an increase of 10.5% from sales
of $322.1 million in fiscal 1998 and an increase of 13.3% from sales of $314.1
million in fiscal 1997. The sales increase in fiscal 1999 reflects lower
industry inventory levels entering fiscal 1999 compared to fiscal 1998 and
favorable summer weather in U.S. markets.
OPERATING RESULTS AS A PERCENT OF NET SALES
1999 1998 1997
- ---------------------------------------------------------------------
Gross profit 23.8% 21.7% 22.3%
Selling, general and
administrative expense 11.6 12.5 12.2
Restructuring 0.9 5.2 -
Operating income 11.3 4.0 10.1
Interest expense 2.7 2.7 1.1
Pre-tax income 8.7 1.4 9.2
=====================================================================
The gross profit in fiscal 1999 increased $14.8 million, or 21.2% from fiscal
1998. The gross profit as a percent of net sales increased in fiscal 1999 due to
reduced costs as a result of the 1998 Restructuring and to a change in customer
and product mix from fiscal 1998. In fiscal 1998, gross profit as a percent of
net sales declined from fiscal 1997 due primarily to a change in the customer
and product mix.
Selling, general and administrative expenses ("SG&A")increased by $1.0 million
from fiscal 1998 but decreased as a percent of net sales in fiscal 1999
primarily due to increased sales and a $2.9 million (0.9% of net sales)
provision for the implementation of an early retirement program in fiscal 1998.
In fiscal 1998, SG&A increased by $1.9 million from fiscal 1997.
The restructuring charge in fiscal 1999 of $3.1 million consists of costs
related to transferring production of pumps for compressors from the U.S. to
Taiwan and China. The 1998 Restructuring charge of $16.8 million consisted of
the write down of fixed assets ($5.6 million), an amount for lease terminations
($4.9 million), personnel-related costs ($3.8 million) and administrative
facility closing costs ($2.5 million).
Net interest expense as a percent of sales in fiscal 1999 equaled fiscal 1998.
Net interest expense increased in fiscal 1998 by $5.2 million from fiscal 1997.
The increase resulted from interest on the 9 3/8% Senior Subordinated Notes due
in 2007 (the "Notes") issued late in fiscal 1997. The increase was offset, in
part, by a redemption of 8.5% Convertible Subordinated Debentures due in 2012
and to lower interest on very limited short-term borrowing in fiscal 1998,
compared to fiscal 1997. Higher interest is also partially offset by the
- 17 -
21
absence of preferred stock dividends after the redemption in September 1997 of
the Company's Convertible Preferred Stock.
Including the restructuring charge of $3.1 million, the Company's net income
increased to $20.7 million in fiscal 1999 from $3.0 million in fiscal 1998 and
$18.8 million in fiscal 1997. Net income attributable to common stockholders,
excluding the after-tax effect of the restructuring charge, would have been
approximately $22.8 million in fiscal 1999. Net income attributable to common
stockholders, excluding the after-tax effect of charges for the 1998
Restructuring and early retirement program, would have been approximately $15.8
million in fiscal 1998 compared to $16.3 million in fiscal 1997. Net income
attributable to common stockholders in 1997 reflects the dividend requirement of
$2.4 million paid on the Company's Convertible Preferred Stock that was fully
redeemed in September 1997. Net income in fiscal 1999 reflects an effective tax
rate of 33% versus 35% in fiscal 1998 and 1997, principally due to the release
of prior-year tax provisions no longer required.
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements are seasonal. Cash balances peak in August, while
greatest use of credit lines occurs early in the calendar year. The Company
ended fiscal 1999 with cash of $117.5 million compared to $91.0 million at
August 31 a year earlier.
Net cash provided by operations in fiscal 1999 amounted to $51.9 million,
principally as a result of net income of $20.7 million, non-cash depreciation
charges of $10.3 million, and the following changes in operating assets and
liabilities (excluding the affects of the Trion acquisition). Increases in
accounts payable and accrued liabilities totaling $8.6 million, along with
decreases in accounts receivable, inventories and other current assets totaling
$7.3 million and other long-term assets of $1.9 million, were offset by a
decrease in other long-term liabilities of $1.2 million, to produce the primary
sources of cash from changes in operating assets and liabilities.
Net cash used in investing activities by the Company consisted primarily of
capital expenditures of $9.4 million and the acquisition costs for Trion of
approximately $39.4 million.
Net cash provided by financing activities in fiscal 1999 amounted to $23.4
million. The Company repurchased $13.2 million or 2.6 million shares of its
Common and Class A Stock under a repurchase program authorized in August 1998
for the repurchase of up to $30 million of its outstanding stock. Dividend
payments amounted to $3.8 million in fiscal 1999. In August 1999, the Company
issued $50 million of 9 3/8% Senior Subordinated Notes due 2007. The net
proceeds were used primarily to replenish cash used in acquiring Trion.
- 18 -
22
During fiscal 1999, the Company's $50 million, prime rate, revolving credit
facility was utilized during the five-month period from January through May with
a maximum outstanding during the year of $33.9 million. In connection with the
acquisition of Trion, this credit facility was increased to $100 million with an
added interest rate option of LIBOR plus 2.25% in August of 1999. Management
believes that cash, earnings and borrowing capacity of the Company are adequate
to meet the needs of its operations and long-term credit requirements, including
capital expenditures and debt maturities.
YEAR 2000
This discussion is separated into two sections; one with respect to all of
Fedders Corporation, excluding Trion, and the second with respect to Trion
solely for purposes of clarity since the acquisition occurred in August 1999.
For Fedders Corporation, the inventory, assessment, resolution, and testing
phases of the Year 2000 plan are materially complete with respect to internal
information technology ("IT") and non-IT systems, such as embedded technology
and micro-controllers. The National Retail Federation has listed the Company as
being a compliant Year 2000 EDI vendor.
The principle Year 2000 uncertainty relates to third-party relationships with
customers and suppliers. Assessment of these relationships, in part through
on-site audits, is ongoing and contingency plans have been developed to minimize
the effect of any such issues. Contingency planning includes the use of
alternate suppliers, which the Company has in place for virtually all
significant components. In addition, the Company is developing plans to protect
its facilities from any damage that could occur if a utility supplying that
facility was unable to provide service. Because the Company's business is
seasonal, and most customers in the domestic market do not take product until
close to the summer season, the Company will have a period of time to react to
any adverse consequences caused by a vendor or service provider who is not Year
2000 compliant. The Company cannot estimate lost revenues, if any, at this time
that are reasonably likely to be a result of Year 2000 issues.
Immediately following the completion of its tender offer for Trion, the Company
incorporated Trion's Year 2000 program into its own Year 2000 plan. The
inventory and assessment phases of Trion's Year 2000 efforts are materially
complete. Trion has remediated a majority of its IT and non-IT systems, however,
a number of such systems are scheduled for completion and testing in November
1999.
The Company will be actively engaged in seeing that the planned completion of
all plan phases occurs on a timely basis. As to third-party relationships with
customers and suppliers, these will be monitored on an ongoing basis.
Alternate suppliers have been identified and are also being assessed. Trion
cannot estimate lost revenues, if any, at this time that are reasonably likely
to be a result of Year 2000 issues.
- 19 -
23
The Company has not delayed any IT projects that are material to its operations
due to Year 2000 efforts, nor does it believe that any delay in implementation
of these projects will have any material financial impact. Related costs are
being expensed as incurred, and in fiscal 1999 amounted to approximately
$500,000. The Company estimates incurring an additional $50,000 in remediation
of its and Trion's Year 2000 issues.
Forward-looking statements are covered under the "Safe Harbor" clause of the
Private Securities Litigation Reform Act of 1995. Such statements are based upon
current expectations and assumptions. Actual results could differ materially
from those currently anticipated as a result of known and unknown risks and
uncertainties including, but not limited to, weather and economic, political,
market and industry conditions. Such factors are described in Fedders' SEC
filings. The Company disclaims any obligation to update any forward-looking
statements to incorporate subsequent events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
- 20 -
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company at August 31, 1999 and
1998, and for the years ended August 31, 1999, 1998 and 1997, the notes thereto
and the report of the Company's independent auditors thereon are included at
pages F1 through F30, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 21 -
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the Company's directors, see the section
entitled "Election of Directors" in the Company's Proxy Statement filed in
connection with the Company's Annual Meeting of Stockholders to be held on
December 21, 1999, which section is incorporated herein by reference.
Name and Age Position Held Executive Officer
- ------------ ------------- -----------------
Salvatore Giordano, 89 Chairman of the Board 1945
Sal Giordano, Jr., 61 (1) Vice Chairman, President 1965
and Chief Executive Officer
Nancy DiGiovanni, 48 Treasurer 1998
Daryl G. Erbs, 42 Vice President, Technology 1999
Michael B. Etter, 44 Senior Vice President, 1997
Chairman and Chief Executive
Officer of Fedders Air
Conditioning
Michael Giordano, 35 (2) Vice President, Finance 1999
and Chief Financial
Officer
Sal Giordano III, 40 (2) Vice President and President 1996
Melcor Corporation
Kent Hansen, 52 Senior Vice President and 1996
Secretary
Thomas A. Kroll, 44 Controller 1995
Robert L. Laurent, Jr., 44 Executive Vice President, 1989
Acquisitions and Alliances
- -----------------------------------------------------------------
(1) Son of Salvatore Giordano
(2) Grandson of Salvatore Giordano
- 22 -
26
Name and Age Position Held Executive Officer
- ------------ ------------- -----------------
Gary J. Nahai, 48 Vice President and 1993
President, Fedders
International
Gordon Newman, 53 Vice President and 1995
President, Rotorex Co.
Gerald C. Senion, 53 Group Vice President and 1997
Chief Operating Officer,
Fedders North America
Business Experience During Last Five Years
Messrs. Salvatore Giordano, Sal Giordano, Jr., Robert L. Laurent, Jr. and Gary
J. Nahai have been associated in executive capacities with the Company for more
than five years.
Ms. DiGiovanni was elected to her position in October 1998. Previously she was
Assistant Treasurer of the Company since 1989.
Mr. Erbs has been 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 has been 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. Giordano has been 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 position in August 1996. He has been
President of Melcor since 1995.
Mr. Hansen was elected to his position in August 1996. Previously he was Vice
President, Finance and General Counsel of NYCOR, Inc.
- 23 -
27
Mr. Kroll was elected to his position in April 1995. Previously he was
Controller of Fedders North America since 1992.
Mr. Newman was elected to his position in April 1995. He joined Fedders
Corporation in 1991 as Vice President, Corporate Quality.
Mr. Senion became Group Vice President of the Company and Chief Operating
Officer of Fedders North America in July 1997. He was elected to the position of
President of Fedders North America in September 1998. Prior to joining the
Company, Mr. Senion was employed by Frigidaire Corporation for approximately 20
years.
ITEM 11. EXECUTIVE COMPENSATION
See the section entitled "Executive Compensation" in the Company's Proxy
Statement, filed in connection with the Company's Annual Meeting of Stockholders
to be held on December 21, 1999, which section is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
See the sections entitled "Security Ownership of Directors and Officers" and
"Principal Stockholders" in the Company's Proxy Statement, filed in connection
with the Company's Annual Meeting of Stockholders to be held on December 21,
1999, which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section entitled "Election of Directors" in the Company's Proxy
Statement, filed in connection with the Company's Annual Meeting of Stockholders
to be held on December 21, 1999, which section is incorporated herein by
reference.
- 24 -
28
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, 1999, 1998 and 1997 F1
Consolidated Balance Sheets at August 31, 1999 and 1998 F2
Consolidated Statements of Cash Flows for the years ended
August 31, 1999, 1998 and 1997 F3-F4
Stockholders' Equity for the years ended
August 31, 1999, 1998 and 1997 F5-F6
Notes to Consolidated Financial Statements F7-F29
Report of Independent Certified Public Accountants F30 & S1
(a) 2. Financial Statement Schedule
Consolidated Schedule as of and for the years ended
August 31, 1999, 1998 and 1997
II. Valuation and Qualifying Accounts S2
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
Exhibit 21 Subsidiaries S3
Consent of Independent Certified Public Accountants S4
- 25 -
29
(3)(i) Restated Certificate of Incorporation of the Company dated November 18,
1997 filed as Exhibit (3)(i) to the Company's Annual Report on Form 10-K for
1997 and incorporated herein by reference.
(ii) By-Laws, amended through January 16, 1988, filed as Exhibit (3) (vii) to
the Company's Annual Report on Form 10-K for 1987 and incorporated herein by
reference.
(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 October 7, 1999 and incorporated herein for reference.
(10)(i) Stock Option Plan VII, filed as Exhibit 10 (vi) to the Company's Annual
Report on Form 10-K for 1990 and incorporated herein by reference.
(ii) Stock Option Plan VIII, filed as Annex F to the Company's Proxy
Statement - Prospectus dated May 10, 1996 and incorporated herein by reference.
(iii) Employment Contract between The Company and Salvatore Giordano dated
March 23, 1993 filed as Exhibit 10 (viii) to the Company's Annual Report on Form
10-K 1993 and incorporated herein by reference.
(iv) Joint Venture Contract between Ningbo General Air Conditioner Factory
and Fedders Investment Corporation for the establishment of Fedders Xinle Co.
Ltd., dated July 31, 1995 filed as Exhibit 10 (viii) on the Form 10-K 1996 and
incorporated herein by reference.
(v) Employment Agreement between the Company and Sal Giordano, Jr. effective
October 1, 1997, filed as Exhibit 10 to the Company's Quarterly Report on From
10-Q for the quarter ended November 30, 1997 and incorporated herein by
reference.
(21) Subsidiaries.
(23) Consent of BDO Seidman, LLP.
(27) Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 1999.
- 26 -
30
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
Vice President, Finance
Chief Financial Officer
November 23, 1999
- 27 -
31
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Salvatore Giordano
- ---------------------
Salvatore Giordano Chairman of the Board November 29, 1999
/s/Salvatore Giordano, Jr.
- --------------------------
Salvatore Giordano, Jr. Vice Chairman, November 29, 1999
President and Chief Executive
Officer and a Director
(Principal Executive Officer)
/s/William J. Brennan
- ---------------------
William J. Brennan Director November 29, 1999
/s/David C. Chang
- -----------------
David C. Chang Director November 29, 1999
/s/Joseph Giordano
- ------------------
Joseph Giordano Director November 29, 1999
/s/C.A. Keen
- ------------
C.A. Keen Director November 29, 1999
/s/Howard S. Modlin
- -------------------
Howard S. Modlin Director November 29, 1999
/s/Clarence Russel Moll
- -----------------------
Clarence Russel Moll Director November 29, 1999
/s/S.A. Muscarnera
- ------------------
S.A. Muscarnera Director November 29, 1999
/s/Anthony Puleo
- ----------------
Anthony Puleo Director November 29, 1999
/s/Michael Giordano
- -------------------
Michael Giordano Vice President, Finance November 29, 1999
(Principal Financial
Officer)
- 28 -
32
FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (Amounts in thousands, except per share data)
Year Ended August 31,
1999 1998 1997
----------------------------------------------
Net sales $ 355,956 $ 322,121 $ 314,100
Costs and expenses:
Cost of sales 271,365 252,351 244,024
Selling, general and administrative
expense 41,233 40,210 38,347
Restructuring 3,100 16,750 -
----------------------------------------------
315,698 309,311 282,371
Operating income 40,258 12,810 31,729
Partner's net interest in joint venture results 412 403 568
Interest expense (net of interest
income of $1,524, $2,599 and $920 in
1999, 1998 and 1997, respectively) (9,684) (8,610) (3,430)
----------------------------------------------
Income before income taxes 30,986 4,603 28,867
Federal, state and foreign income taxes 10,262 1,611 10,103
Net income 20,724 2,992 18,764
Convertible Preferred stock dividend requirement - - 2,420
----------------------------------------------
Net income attributable to
common stockholders $ 20,724 $ 2,992 $ 16,344
Other comprehensive income(loss):
Foreign currency translation, net of tax (97) (190) 13
----------------------------------------------
Comprehensive income $ 20,627 $ 2,802 $ 16,357
----------------------------------------------
Earnings per share:
Basic $ 0.56 $ 0.07 $ 0.42
Diluted 0.56 0.07 0.39
----------------------------------------------
Dividends per share declared:
Convertible Preferred - - $ 0.318
Common/Class A $ 0.105 $ 0.085 0.080
Class B 0.095 0.077 0.072
==============================================
See accompanying notes
F1
33
FEDDERS CORPORATION CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value data)
August 31,
1999 1998
-----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 117,509 $ 90,986
Accounts receivable (less allowances of
$1,373 and $2,032 in 1999 and 1998) 21,028 14,520
Inventories 61,614 52,261
Deferred income taxes 10,161 5,902
Other current assets 1,496 4,308
-----------------------------
Total current assets 211,808 167,977
Net property, plant and equipment 70,771 56,318
Deferred income taxes 7,676 8,838
Goodwill 73,999 55,159
Other assets 18,088 16,337
-----------------------------
$ 382,342 $ 304,629
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,598 $ 2,065
Accounts payable 35,432 25,769
Income taxes payable 13,049 14,406
Accrued expenses 46,463 32,101
-----------------------------
Total current liabilities 99,542 74,341
Long-term debt 156,765 108,948
OTHER LONG-TERM LIABILITIES:
Warranty 4,843 2,556
Other 8,397 9,355
Partner's interest in joint venture 3,862 4,637
Commitments and contingencies
STOCKHOLDERS' EQUITY (ALL CLASSES $1 PAR VALUE):
Common Stock, 16,135 and 16,972 issued 16,135 16,972
Class A Stock, 19,400 and 19,381 issued 19,400 19,381
Class B Stock, 2,267 issued 2,267 2,267
Additional paid-in capital 28,069 31,619
Retained earnings 53,379 36,496
Accumulated other comprehensive loss (288) (430)
-----------------------------
118,962 106,305
Deferred compensation (1,227) (1,513)
Treasury stock, at cost, 1,764 shares
of Class A Stock (8,802) -
-----------------------------
Total stockholders' equity 108,933 104,792
-----------------------------
$ 382,342 $ 304,629
=============================
See accompanying notes
F2
34
FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended August 31,
1999 1998 1997
--------------------------------------------
OPERATING ACTIVITIES:
Net income $ 20,724 $ 2,992 $ 18,764
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 10,279 9,263 9,935
Deferred income taxes 5,803 (4,296) 504
Restructuring charge -
fixed asset write-down - 5,590 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 2,811 (5,460) (1,085)
Inventories 1,115 10,626 (9,441)
Other current assets 3,399 6,263 (5,551)
Other assets 1,860 (7,281) (335)
Income taxes payable (1,357) 4,379 (5,364)
Accounts payable 8,085 15,178 (5,923)
Accrued expenses 503 1,269 (6,973)
Other long-term liabilities (1,175) 704 (3,288)
Other - net (105) (403) (548)
--------------------------------------------
Net cash provided by
(used in) operations 51,942 38,824 (9,305)
--------------------------------------------
INVESTING ACTIVITIES:
Purchase of Trion, Inc. (39,400) - -
Additions to property, plant
and equipment (9,378) (8,497) (9,236)
Disposal of property, plant
and equipment - 1,847 428
Investment in joint venture - (3,347) -
--------------------------------------------
Net cash used in investing
activities (48,778) (9,997) (8,808)
--------------------------------------------
FINANCING ACTIVITIES:
Net proceeds from issuance of 9 3/8%
Senior Subordinated Notes 47,652 - 96,025
Repayment and redemption of 8 1/2%
Convertible Subordinated Debentures - (22,806)
Repayments of long-term debt (2,685) (1,903) (1,992)
Proceeds from stock options exercised 254 5,289 1,727
Tax benefit related to stock
options exercised 47 3,825 479
Net proceeds from (repayment of)
Fedders Xinle financing 1,447 (2,517) (168)
Repayment of Trion, Inc. debt (6,300) - -
Cash dividends (3,841) (3,520) (5,605)
Repurchases of capital stock (13,215) (49,408) (29,449)
F3
35
FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
Year Ended August 31,
1999 1998 1997
------------------------------------------------
Net cash provided by (used in)
financing activities 23,359 (48,234) 38,211
------------------------------------------------
Net increase(decrease)in cash and
cash equivalents 26,523 (19,407) 20,098
Cash and cash equivalents at
beginning of year 90,986 110,393 90,295
------------------------------------------------
Cash and cash equivalents at
end of year $ 117,509 $ 90,986 $ 110,393
------------------------------------------------
SUPPLEMENTAL DISCLOSURE:
Net interest paid $ 12,283 $ 10,654 $ 3,406
Net income taxes (refunded) paid 6,218 (2,788) 14,090
------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITY:
Exchange of 6,754,000 shares of
Convertible Preferred Stock for Class A
Stock on a 1 for 1.022 basis - $ 6,904 -
================================================
See accompanying notes
F4
36
FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Year Ended August 31,
1999 1998 1997
-------------------------------------------
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year - $ 6,809 $ 7,643
Redemption for Class A Stock - (6,754) -
Conversion to Class A Stock - - (129)
Repurchase and retirement of stock - (55) (705)
-------------------------------------------
Balance at end of year - - $ 6,809
-------------------------------------------
COMMON STOCK
Balance at beginning of year $ 16,972 $ 18,990 $ 18,990
Shares relinquished or purchased - (100) -
Repurchase and retirement of stock (837) (1,918) -
-------------------------------------------
Balance at end of year $ 16,135 $ 16,972 $ 18,990
-------------------------------------------
CLASS A STOCK
Balance at beginning of year $ 19,381 $ 20,074 $ 19,416
Redemption of Convertible Preferred
Stock - 6,904 -
Conversion of Convertible Preferred
Stock - - 129
Stock options exercised 19 4,251 529
Issuance of restricted stock - 300 -
Retirement of Class A treasury shares - (12,148) -
-------------------------------------------
Balance at end of year $ 19,400 $ 19,381 $ 20,074
-------------------------------------------
CLASS B STOCK
Balance at beginning of year $ 2,267 $ 2,267 $ 2,267
Balance at end of year 2,267 2,267 2,267
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 31,619 85,702 87,728
Stock options exercised 235 10,287 1,198
Tax benefit related to stock
options exercised 47 3,825 479
Repurchase of stock (3,832) (9,917) (3,703)
Retirement of treasury shares - (59,591) -
Issuance of restricted stock - 1,463 -
Redemption of Convertible Preferred
Stock - (150) -
-------------------------------------------
Balance at end of year $ 28,069 $ 31,619 $ 85,702
===========================================
F5
37
FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(Amounts in thousands)
Year Ended August 31,
1999 1998 1997
--------------------------------------------
RETAINED EARNINGS
Balance at beginning of year $ 36,496 $ 37,024 $ 23,865
Net income 20,724 2,992 18,764
Dividends (3,841) (3,520) (5,605)
--------------------------------------------
Balance at end of year $ 53,379 $ 36,496 $ 37,024
--------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year $ (430) $ (138) $ (158)
Foreign currency translation
adjustment 142 (292) 20
--------------------------------------------
Balance at end of year $ (288) $ (430) $ (138)
--------------------------------------------
DEFERRED COMPENSATION
Balance at beginning of year $(1,513) - -
Issuance of restricted stock - $(1,763) -
Amortization of deferred compensation 286 250 -
--------------------------------------------
Balance at end of year $(1,227) $(1,513) -
TREASURY STOCK
Balance at beginning of year - (25,041) -
Repurchase of stock (8,546) (37,504) $(25,041)
Shares relinquished or purchased (256) (9,194) -
Retirement of treasury shares 71,739 -
--------------------------------------------
Balance at end of year $(8,802) - $(25,041)
============================================
See accompanying notes
F6
38
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Years ended August 31, 1999, 1998 and 1997; amounts in thousands, except per
share, share and market data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Fedders Corporation (the "Company") and all of its wholly-owned and
majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
NET SALES
Sales are recorded, at time of shipment, net of provisions for sales allowances,
and warranty.
WARRANTY AND RETURN POLICY
The Company's warranty policy generally provides five-year coverage for sealed
systems including compressors, two-year coverage on motors and one-year coverage
on all other parts and labor related to air conditioners sold in North America.
The Company's policy is to accrue the estimated cost of warranty coverage and
returns at the time the sale is recorded. The policy with respect to sales
returns generally provides that a customer may not return inventory except at
the Company's option.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated at
the rate of exchange in effect at the end of the period. Net sales and expenses
are translated at the average rate of exchange for the period. Translation
adjustments are reflected in accumulated 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, which have historically been insignificant, are recorded in
the period in which they are identified. Inventories consist of the following at
August 31:
F7
39
1999 1998
------------------------
Finished goods $29,328 $25,553
Work-in-process 3,298 4,132
Raw materials and supplies 28,988 22,576
------------------------
$61,614 $52,261
========================
PROPERTY, PLANT AND EQUIPMENT
Replacements, betterments and additions to property, plant and equipment are
capitalized at cost. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon sale or retirement of property, plant and equipment,
the cost and related accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in income. Property, plant and
equipment at cost consist of the following at August 31:
Estimated Useful
Life 1999 1998
------------------------------------------------------------------------
Land and improvements $ 4,042 $ 2,994
Buildings 20 to 30 years 31,257 22,326
Machinery and equipment 5 to 12 years 102,380 79,454
Machinery and equipment
under capital leases 12 years 6,657 8,647
------------------------------------------------------------------------
Property, plant and
equipment 144,336 113,421
------------------------------------------------------------------------
Accumulated depreciation (73,565) (57,103)
------------------------------------------------------------------------
$ 70,771 $ 56,318
========================================================================
Depreciation is provided on the straight-line basis over the estimated useful
life of each asset as noted above. Accumulated depreciation includes $1,966 and
$1,287 of depreciation related to equipment under capital leases in 1999 and
1998, respectively.
GOODWILL
Goodwill is generally amortized over 40 years using the straight-line method and
recoverability is evaluated periodically based on the expected undiscounted net
cash flows of the related businesses. Goodwill and other assets are net of
accumulated amortization of $14,011 and $12,171 at August 31, 1999 and 1998,
respectively.
F8
40
OTHER ASSETS
On June 3, 1998, the Company entered into a joint venture with Bosch-Siemens
Hausgerate GmbH ("BSH") in Estella, Spain to manufacture room air conditioners
in that country. The Company contributed $3,347 of cash for its 50% interest in
the BSH and Fedders International Air Conditioning,
S.A. joint venture. The Company's investment in the joint venture is accounted
for under the equity method.
Other assets consist of the following at August 31:
1999 1998
----------------------
Note due from an executive officer $ 4,000 $ 4,000
(note 11)
Unamortized deferred finance costs 3,281 3,284
Cash surrender value of life insurance 4,136 3,192
Investment in joint venture 2,363 3,078
Other 4,308 2,783
----------------------
$18,088 $16,337
========================
ACCRUED EXPENSES
Accrued expenses consist of the following at August 31:
1999 1998
----------------------
Warranty $ 4,269 $ 3,271
Marketing programs 9,812 9,508
Salaries and benefits 12,389 8,465
Restructuring, principally lease
terminations 2,310 4,768
Insurance and taxes 3,115 1,952
Acquisition Costs 4,999 -
Other 9,569 4,137
----------------------
$46,463 $32,101
======================
INCOME TAXES
Deferred income taxes 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).
F9
41
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred and amount
to $6,742, $6,557 and $6,268 in 1999, 1998 and 1997, 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 1% of the Company's employees are covered by a collective
bargaining agreement which expires in August 2005. Another 18% of the Company's
employees are covered by a separate collective bargaining agreement which
expires in October 2001.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing income attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share are computed similarly to fully diluted
earnings per share.
Earnings per share amounts for 1997 have been restated to conform to the
requirements of SFAS 128. The computation of basic earnings per share and
diluted earnings per share is as follows:
F10
42
1999 1998 1997
-----------------------------------------
Net income $ 20,724 $ 2,992 $ 18,764
Preferred Stock dividends - - (2,420)
-----------------------------------------
Income attributable to common
stockholders for basic earnings
per share $ 20,724 $ 2,992 $ 16,344
Convertible Preferred Stock
Dividends - - 2,420
-----------------------------------------
Income attributable to common
stockholders after assumed
conversion $ 20,724 $ 2,992 $ 18,764
-----------------------------------------
Basic weighted average shares
Outstanding 36,870 41,355 38,931
Dilutive effect of potential
Common Stock:
Stock option plans 228 1,202 1,957
Convertible Preferred Stock - - 6,959
-----------------------------------------
Dilutive potential shares
Outstanding 37,098 42,557 47,847
-----------------------------------------
Earnings per share:
Basic $ 0.56 $ 0.07 $ 0.42
Diluted 0.56 0.07 0.39
=========================================
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments. The fair value of long-term debt (including current portion)
estimated to be $156,000 is based on the rates obtained by the Company during
the issuance of debt in August 1999.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. Currently SFAS 133 will
not have a material effect on the consolidated financial statements.
F11
43
2. RESTRUCTURING
In August 1999, the Company added to the 1998 restructuring of its operations to
include a one-time net charge of $3,100. The charge consisted of a machinery and
equipment write-down to estimated recoverable value ($44), an amount for
production equipment leases ($629), other contractual obligations ($2,218), and
personnel-related costs ($209). The restructuring related to transferring
production of pumps for compressors from the U.S. to Taiwan and China.
In January 1998, the Company announced a plan to restructure its operations,
which resulted in the Company recording a one-time expense totaling $16,750 in
the second fiscal quarter ending February 28, 1998. The charge consisted of
production machinery and equipment write-downs to estimated recoverable
value($5,590), an amount for production machinery and equipment lease
terminations ($4,030) primarily related to outsourcing, other administrative
facility lease terminations ($826), personnel-related outsourcing costs
including a contract settlement ($2,505) and severence payments ($1,298), and
administrative facility closing costs ($2,501). The restructuring did not result
in factory closings. However, it did involve shifting some additional production
from North America to China and increasing component outsourcing. As part of the
restructuring, all of Fedders International, Inc.'s activities, including
executive management located at the Company's headquarters in New Jersey, were
relocated to the Company's Asian headquarters in Singapore. The sales,
marketing, research and design, service and administrative support functions of
Fedders North America, Inc. were relocated to the Company's facility in
Illinois.
3. LITIGATION
The Company is involved in litigation, both as plaintiff and defendant,
incidental to the conduct of its business. It is the opinion of management,
after consultation with counsel, that the outcome of such litigation will not
have a material adverse effect on the accompanying financial statements.
4. SHORT-TERM BORROWING
At August 31, 1999 and 1998, the Company had no short-term borrowing under its
revolving credit facility with a commercial finance company. Availability under
the facility of $100,000 at August 31, 1999 and $50,000 at August 31, 1998 is
based on accounts receivable and inventory and requires maintenance of certain
financial covenants. The maximum amount outstanding under the credit facility
was $33,899 and $8,593 during fiscal 1999 and 1998, respectively. The average
amount outstanding and average rate of interest charged on outstanding
borrowings under the credit facility were $5,347 and 7.75% in fiscal 1999 and
$460 and 8.5 % in fiscal 1998. The credit facility is collateralized by
substantially all of the Company's assets and is in effect until February 2003.
The rate of interest on the facility is the lesser of the prime rate or LIBOR
plus 2.25%.
F12
44
5. LONG-TERM DEBT
Long-term debt consists of the following at August 31:
1999 1998
--------------------------
9 3/8% Senior Subordinated Notes due
in 2007:
$100,000 principal amount less
unamortized discount of $381 and $429, $ 99,619 $ 99,571
$50,000 principal amount less
unamortized discount of $2,348 47,652 -
Fedders Xinle 8% promissory note 5,061 3,614
Promissory note payable to the State of
Illinois, interest at 1% 3,389 3,521
Trion Industrial Revenue Bond, interest at 5% 3,200 -
Capital lease obligations 2,442 4,307
--------------------------
161,363 111,013
--------------------------
Less current maturities 4,598 2,065
--------------------------
$156,765 $108,948
==========================
Aggregate amounts of long-term debt, excluding capital leases of $2,442,
maturing in each of the years ending August 31 are: 2000 - $346, 2001-$349, 2002
- - $352, 2003 - $356, 2004 - $360, and thereafter $158,921.
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, a subsidiary of the
Company 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 Fedders North America after
August 2002 at a redemption price of 104.688% of principal amount. The
provisions of the notes limit, among other things, the payment of dividends by
the subsidiary.
The long-term promissory note of Fedders Xinle Co. Ltd. is payable to a People's
Republic of China bank and matures in 2008. The loan is secured by certain joint
venture assets and is not guaranteed by the Company or its other subsidiaries.
Fedders Xinle made payments of $964 during fiscal 1999.
The loan from the State of Illinois has an interest rate of 1%, is to be paid
over the next nine years, and is collateralized by a mortgage on the Company's
Illinois facility.
F13
45
The Trion Industrial Revenue Bond is due in November 2011, bears interest at
approximately 5.0% and requires no principal payments until maturity. This bond
is collateralized by Trion's Sanford, North Carolina facility, including real
property and equipment.
6. LEASES
OPERATING LEASES
The Company leases certain property and equipment under operating leases, which
expire over the next four years. Most of these operating leases contain one of
the following options: (a) the Company may, at the end of the initial lease
term, purchase the property at the then fair market value or (b) the Company may
renew its lease at the then fair rental value for a period of one month to four
years. Minimum payments for operating leases having non-cancelable terms are as
follows: $1,894, $1,246, $979, $622 and $444 in 2000, 2001, 2002, 2003 and 2004,
respectively. Minimum lease payments total $5,185. Total rent expense for all
operating leases amounted to $1,513, $3,940 and $3,749 in 1999, 1998 and 1997,
respectively.
CAPITAL LEASES
Aggregate future minimum rental payments under capital leases for the years
ended August 31 are as follows: $1,899, $186, $186, $155, and $16 in 2000, 2001,
2002, 2003, and 2004, respectively. The present value of minimum lease payments
is $2,442.
7. INCOME TAXES
The provision for income tax consists of the following components:
1999 1998 1997
-------------------------------------------
Current:
Federal $ 3,816 $ 1,854 $ 8,005
State 281 170 714
Foreign 315 58 401
-------------------------------------------
4,412 2,082 9,120
-------------------------------------------
Charge in lieu of income taxes: 47 3,825 479
-------------------------------------------
Deferred:
Federal 5,741 (3,970) 380
State 62 (326) 124
-------------------------------------------
5,803 (4,296) 504
$ 10,262 $ 1,611 $ 10,103
===========================================
F14
46
The exercise of stock options to acquire shares of the Company's Class A Stock
creates a compensation deduction for income tax purposes for which there is no
corresponding expense required for financial reporting purposes. The tax
benefits related to these deductions are reflected as a charge in lieu of income
taxes and a credit to additional paid-in capital.
Deferred tax assets result from temporary differences between assets and
liabilities for financial reporting and income tax purposes, and include the
components related to the acquisition of Trion, Inc. as of August 31, 1999. The
components are as follows at August 31:
1999 1998
---------------------------
Warranty $ 3,838 $ 2,011
Depreciation (2,666) 2,190
Employee benefit programs 6,024 4,697
Inventory 3,875 2,553
Net operating loss and tax credit
carryforwards 3,846 5,575
Restructuring 1,990 1,907
Other 3,017 2,543
---------------------------
19,924 21,476
Valuation allowance (2,087) (6,736)
---------------------------
$ 17,837 $ 14,740
===========================
The difference between the United States statutory income tax rate and the
consolidated effective income tax rate is due to the following items:
1999 1998 1997
--------------------------------------------
Expected tax at statutory rate $ 10,845 $ 1,611 $ 10,103
Valuation allowance reflected
in current income - - (289)
State taxes, less federal
income tax benefit 151 95 545
Prior year provisions no longer
required (1,029) (297) (675)
Other 295 202 419
--------------------------------------------
$ 10,262 $ 1,611 $ 10,103
============================================
F15
47
At August 31, 1999, the Company has U.S. net operating loss and tax credit
carryforwards of approximately $5,000 and $1,200, respectively, which are
restricted as to use and expire in the years 2001 through 2010. Due to a
revision in the estimated recoverability of these amounts, the Company reduced
the valuation allowance and the corresponding goodwill associated with the 1996
acquisition of NYCOR, Inc. each by $5,000. The remaining valuation allowance
reflects the uncertainty associated with the future realization of these and
other deferred tax assets.
8. INDUSTRY SEGMENT
The Company operates in one industry segment and sells its indoor air treatment
products primarily direct to retailers and also through manufacturers
representatives, private label arrangements and distributors. In 1999, two
customers each accounted for 29% of net sales. In 1998, one customer accounted
for 30% of net sales and a second customer accounted for 27% of net sales. In
1997, one customer accounted for 27% of net sales and a second customer
accounted for 19% of net sales.
9. CAPITAL STOCK
In August 1998, the Company's Board of Directors authorized a $30,000 stock
repurchase plan (the "$30 Million Plan")for the Company's Common and Class A
Stock. In 1997, the Company's Board of Directors authorized a $50,000 stock
repurchase plan (the "$50 Million Plan")for the Company's Common and Class A
Stock.
Common Stock (80,000,000 shares authorized): During fiscal 1999, 837,000 shares
were repurchased and retired for $4,669 under the $30 Million Plan. During
fiscal 1998, 1,917,500 shares were repurchased for $11,487 and retired under the
$50 Million Plan. Shares of Common Stock are reserved for the conversion of
Class A and Class B Stock as indicated herein.
Class A Stock (60,000,000 shares authorized): During fiscal 1999, 1,763,600
shares were repurchased for $8,546 under the $30 Million Plan. During fiscal
1998, 5,750,132 shares were repurchased for $33,937 under the $50 Million Plan.
An additional 2,063,173 shares were received from employees and retired in
connection with the exercise of stock options under the Company's stock options
plans and amounted to $12,772. During fiscal 1997, 4,334,800 shares were
repurchased under an earlier $25 million stock repurchase plan and were held in
treasury as of August 31, 1997. All Class A shares that were repurchased during
fiscal 1998 and 1997 were retired as of August 31, 1998. Shares of Class A Stock
reserved under the Company's stock option plans amounted to 5,819,933 and
10,138,000 at August 31, 1999 and 1998, respectively. Class A Stock has rights,
including dividend rights, substantially identical to the Common Stock, except
that the Class A Stock will not be entitled to vote except to the extent
provided under Delaware law. Class A Stock is immediately convertible into
Common Stock on a share-for-share basis upon conversion of all of the Class B
Stock and accordingly, 22,792,082 and 37,171,281 shares of
F16
48
Common Stock are reserved for such conversion at August 31, 1999 and 1998,
respectively. In 1998, the Company granted 300,000 shares of restricted stock to
an executive officer, the value of which was $1,763 (note 11).
Class B Stock (7,500,000 shares authorized): Class B Stock is immediately
convertible into Common Stock on a share-for-share basis and accordingly, at
August 31, 1999 and 1998, 2,266,606 shares of Common Stock are reserved for such
conversion. Class B Stock has greater voting power, in certain circumstances
(ten-to-one in the election of directors), but receives a lower dividend, if
declared, equal to 90% of the dividend on Common Stock, and has limited
transferability. Class B Stock also votes separately, as a class, on certain
significant issues.
10. STOCK OPTION PLANS
All stock option plans, as approved by the stockholders, provide for the
granting to employees and officers of incentive stock options (as defined under
current tax laws) and non-qualified stock options. All of the plans provide for
the granting of non-qualified stock options to directors who are not employees.
Stock options are exercisable one year after the date of grant and, if not
exercised, will expire five years from the date of grant. Certain options are
only exercisable at the end of five years.
On September 1, 1996, the Company adopted SFAS 123 "Accounting for Stock Based
Compensation" and chose to continue the application of APB Opinion 25 and
related interpretations in accounting for its stock options issued to employees.
Accordingly, the adoption of SFAS 123 did not have a material effect on the
Company's consolidated financial statements. Had compensation cost for the
Company's stock option plans been determined consistent with SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
1999 1998
------------------------------------------
Net income attributable to
common stockholders:
As reported $20,724 $ 2,992
Pro forma 20,676 2,553
Basic earnings per share:
As reported $ 0.56 $ 0.07
Pro forma 0.56 0.06
Diluted earnings per share:
As reported $ 0.56 $ 0.07
Pro forma 0.56 0.06
==========================================
F17
49
The stock option plan summary and changes during each year are presented below:
1999 1998 1997
---------------------------------------------
Options outstanding at beginning of
year 1,675 5,992 4,852
Granted 54 21 1,761
Canceled - (91) (92)
Exercised (85) (4,247) (529)
---------------------------------------------
Options outstanding at end of year 1,644 1,675 5,992
Options exercisable at end of year 1,588 1,655 3,385
---------------------------------------------
$ 2.67 $ 2.67 $ 1.87
Exercise price per share to 5.75 to 5.75 to 5.50
=============================================
Options exercisable at August 31, 1999 have an average exercise price of $4.62.
The fair value of the stock options granted during 1999, 1998 and 1997 was
$1,33, $1.71 and $1.41, respectively. The fair value of each option granted is
estimated on the date of granting using the Black-Scholes option pricing model
with the following weighted-average assumptions:
1999 1998 1997
----------------------------------------------
Expected dividend yield $ 0.105 $ 0.085 $ 0.080
Risk-free rate 6.1% 6.1% 6.1%
Expected life in years 4 4 4
Volatility 32% 32% 32%
==============================================
The following table summarizes information on stock options outstanding at
August 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (1) Price (1) Exercisable Price (1)
$2.67-4.00 60 2.44 $3.46 60 3.59
$4.75-5.75 542 2.36 4.79 542 4.75
$4.75-5.50 441 2.61 4.87 385 4.79
$4.50-5.13 473 1.40 4.68 473 4.68
$3.30-4.20 128 0.16 3.37 128 3.37
- ---------------------------------------------------------------------------------------------------------------
1,644 1.89 4.62 1,588 4.62
================================================================================================================
F18
50
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 $1,096, $1,328 and $1,340 in 1999, 1998 and 1997,
respectively.
The Company has an agreement with an officer that has a term of ten years from
any point in time and provides for annual base and incentive compensation during
the employment period, a disability program, post-retirement benefits and a
death benefit in an amount equal to ten times the prior year's compensation,
payable by the Company over ten years. The estimated present value of future
non-salary benefits payable under the agreement has been determined based upon
certain assumptions and is being amortized over the expected remaining years of
service to the Company.
The Company has an agreement with another officer that has a term that extends
through September 2003. The agreement provides for annual base and incentive
compensation, a non-interest bearing, uncollateralized loan maturing in
September 2004 (note 1), a retirement contribution that vests over the life of
the agreement and restricted stock that vests in January 2004 (note 9). The
Company is amortizing the retirement contribution and the restricted stock over
the life of the agreement.
The Company provides a portion of health care and life insurance benefits for
retired employees who elect to participate in the Company's plan. SFAS 106
requires accrual accounting for all post-retirement benefits other than pension.
At August 31, 1999 and 1998, post-retirement benefits, although immaterial, were
fully accrued with no significant change between these dates.
12. ACQUISITION
In August 1999, a subsidiary of the Company acquired substantially all
outstanding shares of common stock of Trion, Inc., a manufacturer of indoor air
quality products, by way of a cash tender offer totaling $39.4 million. The
acquisition was accounted for using the purchase method, with the purchase price
allocated to assets acquired based on their estimated fair values as of the
acquisition date. The excess of purchase price over the fair value of the
acquired net assets $25,620 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
Trion, Inc. Since August, 1999. The following table presents the unaudited pro
forma results of operations as if this transaction occurred on September 1,
1997. The pro forma results have been prepared for comparitive purposes only and
do not purport to be indicative of what would have actually occurred had the
merger been consummated at the beginning of fiscal 1998 or of results which may
occur in the future.
F19
51
(Unaudited) 1999 1998
--------------------------
Net sales $410,444 $386,533
Operating income 42,053 16,517
Net income 20,646 3,070
--------------------------
Income per share:
Primary $ 0.56 $ 0.07
Fully diluted $ 0.56 $ 0.07
==========================
13. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Fedders North America, Inc. ("FNA") is a wholly owned subsidiary of the Company.
FNA and the Company are the Issuer and the Guarantor, respectively, of the
senior subordinated notes due 2007, of which $100,000 were issued in August
1997, and $50,000 were issued in August, 1999 (the "Offering") (note 5). The
Company's guarantee is full and unconditional. The following condensed
consolidating financial statements present separate information for FNA and for
the Company and its subsidiaries other than FNA, and should be read in
connection with the consolidated financial statements of the Company.
The amounts shown for FNA (presented under the caption "Fedders North America")
in the following historical condensed consolidating financial statements include
the accounts of Trion, Inc., which was acquired by FNA by way of a cash tender
offer totaling $39.4 million. (note 12). The amounts presented under the caption
"Other Fedders" include the parent and its subsidiaries.
Certain prior year amounts have been reclassified to conform to current year
presentation.
F20
52
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Fiscal Year Ended August 31, 1999
---------------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
---------------------------------------------------------------
Net sales $ 326,793 $ 29,163 - $ 355,956
Cost of sales 247,158 24,207 - 271,365
Selling, general and
administrative
expense (a) 31,282 9,951 - 41,233
Restructuring charge 3,100 - - 3,100
---------------------------------------------------------------
Operating income (loss) 45,253 (4,995) - 40,258
Partners net interest in
joint venture - 412 - 412
Net interest income
(expense) (b) (10,121) 437 - (9,684)
Dividend income (g) - 25,714 (25,714) -
---------------------------------------------------------------
Profit (loss) before
income taxes 35,132 21,568 (25,714) 30,986
Income taxes (benefit) 11,512 (1,250) - 10,262
---------------------------------------------------------------
Net income (loss)
attributable to common
stockholders 23,620 (2,896) - 20,724
Other comprehensive income
(loss):
Foreign currency
translation, net of tax (42) (55) - (97)
---------------------------------------------------------------
Comprehensive income $ 23,578 $ 22,763 $ 25,714 $ 20,627
==============================================================
F21
53
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Fiscal Year Ended August 31, 1998
----------------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
----------------------------------------------------------------
Net sales $ 289,412 $ 32,709 - $ 322,121
Cost of sales 226,805 25,546 - 252,351
Selling, general and
administrative
expense (a) 25,768 14,442 - 40,210
Restructuring charge 15,360 1,390 16,750
----------------------------------------------------------------
Operating income (loss) 21,479 (8,669) - 12,810
Partners net interest in
joint venture - 403 - 403
Net interest income
(expense) (b) (10,354) 1,744 - (8,610)
----------------------------------------------------------------
Profit (loss) before
income taxes 11,125 (6,522) - 4,603
Income taxes (benefit) 3,894 (2,283) - 1,611
----------------------------------------------------------------
Net income (loss)
attributable to common
stockholders 7,231 (4,239) - 2,992
Other comprehensive income
(loss):
Foreign currency
translation, net of tax - (190) - (190)
----------------------------------------------------------------
Comprehensive income: $ 7,231 $ (4,429) - $ 2,802
================================================================
F22
54
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Fiscal Year Ended August 31, 1997
-------------------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
-------------------------------------------------------------------
Net sales $ 271,874 $ 42,226 - $ 314,100
Cost of sales 206,870 37,154 - 244,024
Selling, general and
administrative
expense (a) 26,130 12,217 - 38,347
-------------------------------------------------------------------
Operating income (loss) 38,874 (7,145) 31,729
Partners net interest in
joint venture - 568 - 568
Net interest income
(expense) (b) (4,341) 911 - (3,430)
-------------------------------------------------------------------
Profit (loss) before 34,533 (5,666) - 28,867
income taxes
Income taxes (benefit) 12,087 (1,984) - 10,103
-------------------------------------------------------------------
Net income (loss) 22,446 (3,682) - 18,764
Dividend income (f) - 72,300 (72,300) -
Preferred stock dividend
requirement - 2,420 - 2,420
-------------------------------------------------------------------
Net income (loss)
attributable to common
stockholders 22,446 66,198 (72,300) 16,344
Other comprehensive income
(loss):
Foreign currency
translation, net of tax - 13 - 13
-------------------------------------------------------------------
Comprehensive income: $ 22,446 $ 66,211 $(72,300) $ 16,357
===================================================================
F23
55
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
Fiscal Year Ended August 31, 1999
---------------------------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
---------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $76,092 $ 41,417 - $117,509
Net Accounts Receivable 13,655 7,373 - 21,028
Inventories 46,991 14,623 - 61,614
Other current assets 5,714 5,943 - 11,657
---------------------------------------------------------------------------
Total current assets $142,452 $ 69,356 - $211,808
Investments in
subsidiaries - 104,306 $(104,306) -
Property, plant and
equipment, net 60,226 10,545 - 70,771
Goodwill 67,228 6,771 - 73,999
Other long-term assets 9,835 15,929 - 25,764
---------------------------------------------------------------------------
$279,741 $206,907 $(104,306) $382,342
---------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion long-term
debt $ 2,188 $2,410 - $ 4,598
Accounts and income taxes
payable 52,436 (3,955) - 48,481
Accrued expenses 40,960 5,503 - 46,463
---------------------------------------------------------------------------
Total current liabilities $95,584 $3,958 - $ 99,542
Long-term debt 154,114 2,651 - 156,765
Other long-term
liabilities 2,301 14,801 - 17,102
Stockholders' equity:
Common, Class A, and
Class B Stock 5 37,802 (5) 37,802
Paid-in capital 21,292 179,996 (173,219) 28,069
Retained earnings
(deficit) (g) 6,761 (22,300) 68,918 53,379
Deferred compensation
and Treasury Stock - (10,029) - (10,029)
Accumulated other
comprehensive profit
(loss) (316) 28 - (288)
---------------------------------------------------------------------------
Total stockholders' equity 27,742 185,497 (104,306) 108,933
---------------------------------------------------------------------------
$279,741 $206,907 $(104,306) $382,342
===========================================================================
F24
56
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
Fiscal Year Ended August 31, 1998
---------------------------------------------------------------------------
Fedders Other Elimination Fedders
North America Fedders Entries Corporation
---------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 6,014 $ 84,972 - $ 90,986
Net Accounts Receivable 11,328 3,192 - 14,520
Inventories 39,335 12,926 - 52,261
Other current assets 6,952 3,258 - 10,210
---------------------------------------------------------------------------
Total current assets $ 63,629 $104,348 - $167,977
Investments in
subsidiaries - 104,306 $(104,306) -
Property, plant and
equipment, net 45,446 10,872 - 56,318
Goodwill 48,873 6,286 - 55,159
Other long-term assets 7,460 17,715 - 25,175
---------------------------------------------------------------------------
$165,408 $243,527 $(104,306) $304,629
---------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion long-term
debt $ 2,060 $ 5 - $ 2,065
Accounts and income taxes
payable 38,773 1,402 - 40,175
Accrued expenses 28,571 3,530 - 32,101
---------------------------------------------------------------------------
Total current liabilities $ 69,404 $ 4,937 - $ 74,341
Net due to (from)
affiliates (40,891) 40,891 - -
Long-term debt 105,334 3,614 - 108,948
Other long-term
liabilities 3,391 13,157 - 16,548
Stockholders' equity:
Common, Class A, and
Class B Stock 5 38,620 (5) 38,620
Paid-in capital 21,292 183,546 (173,219) 31,619
Retained earnings
(deficit) (f) 7,231 (39,653) 68,918 36,496
Deferred compensation - (1,513) - (1,513)
Accumulated other
comprehensive profit
(loss) (358) (72) - (430)
---------------------------------------------------------------------------
Total stockholders' equity 28,170 180,928 (104,306) 104,792
$165,408 $243,527 $(104,306) $304,629
===========================================================================
F25
57
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Fiscal Year Ended August 31, 1999
-----------------------------------------------------------------
Fedders Other Fedders
North America Fedders Corporation
Net cash provided by operations $ 56,243 $(4,301) $ 51,942
-----------------------------------------------------------------
Net additions to property, plant and
equipment (5,713) (3,665) (9,378)
Purchase of Trion, Inc. (39,400) - (39,400)
-----------------------------------------------------------------
Net cash used in investing activities (45,113) (3,665) (48,778)
-----------------------------------------------------------------
Net repayments of short and long-term
borrowings (6,300) (2,685) (8,985)
Net proceeds from Senior Subordinated
Notes 47,652 - 47,652
Net proceeds from Xinle financing - 1,447 1,447
Cash dividends (25,714) (21,873) (3,841)
Proceeds from stock options exercised - 254 254
Tax benefit of stock options
excercised - 47 47
Repurchase of capital stock - (13,215) (13,215)
Change in net due to (from) affiliate 43,310 (43,310) -
-----------------------------------------------------------------
Net cash used in financing activities 58,948 (35,589) 23,359
-----------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 70,078 (43,555) 26,523
Cash and cash equivalents at
beginning of year 6,014 84,972 90,986
-----------------------------------------------------------------
Cash and cash equivalents at end of
year $76,092 $41,417 $117,509
=================================================================
F26
58
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Fiscal Year Ended August 31, 1998
-------------------------------------------------------------------
Fedders Other Fedders
North America Fedders Corporation
-------------------------------------------------------------------
Net cash provided by operations $ 43,320 ( 4,496) $ 38,824
-------------------------------------------------------------------
Net additions to property, plant and (5,351) (4,646) (9,997)
equipment, being cash used in
investing activities
-------------------------------------------------------------------
Net repayments from short and (1,822) (2,598) (4,420)
long-term borrowings
Cash dividends - (3,520) (3,520)
Tax benefit related to stock options
exercised - 3,825 3,825
Proceeds from stock options exercised - 5,289 5,289
Repurchase of capital stock - (49,408) (49,408)
Change in net due to (from) affiliate (30,133) 30,133 -
-------------------------------------------------------------------
Net cash used in financing activities (31,955) (16,279) (48,234)
-------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 6,014 (25,421) (19,407)
Cash and cash equivalents at
beginning of year - 110,393 110,393
-------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 6,014 $ 84,972 $ 90,986
===================================================================
F27
59
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Fiscal Year Ended August 31, 1997
-------------------------------------------------------------------
Fedders Other Fedders
North America Fedders Corporation
-------------------------------------------------------------------
Net cash provided by operations $ 12,694 $(21,999) $ (9,305)
-------------------------------------------------------------------
Net additions to property, plant and (6,750) (2,058) (8,808)
equipment, being cash used in
investing activities
-------------------------------------------------------------------
Net repayments from short and long- $(1,716) $ (276) $ (1,992)
term borrowings
Cash dividends - (5,605) (5,605)
Proceeds from stock options exercised - 1,727 1,727
Tax benefit related to stock options
exercised - 479 479
Proceeds from bond offering 96,025 - 96,025
Redemption of 8 1/2% convertible
subordinated debentures - (22,806) (22,806)
Purchase of Class A Stock - (25,041) (25,041)
Purchase of Preferred Stock - (4,408) (4,048)
Other - (168) (168)
Intercompany dividend (72,300) 72,300 -
Change in net due to (from) affiliate (27,953) 27,953 -
-------------------------------------------------------------------
Net cash used in financing activities $(5,944) 44,155 $ 38,211
-------------------------------------------------------------------
Net increase (decrease) in cash and - 20,098 20,098
cash equivalents
Cash and cash equivalents at - 90,295 90,295
beginning of year
-------------------------------------------------------------------
Cash and cash equivalents at end of - $110,393 $110,393
year
===================================================================
F28
60
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
INTERCOMPANY TRANSACTIONS
The historical condensed consolidating financial statements presented above
include the following transactions between FNA and the Company;
a) The Company charges corporate overhead to FNA essentially on a cost basis
allocated in proportion to sales. Such charges to FNA amounted to $14,090,
$9,383 and $9,747 for the years ended August 31, 1999, 1998 and 1997,
respectively.
b) In 1999 and 1998, FNA's interest expense reflects actual interest charges
on the 9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory
Note and capital lease obligations. In 1997, the Company allocated interest
expense to FNA based upon the level of FNA's working capital at the prime rate
of interest in the prior year. Such interest charge amounted to $3,953 for the
year ended at August 31, 1997.
c) FNA's depreciation and amortization for the years ended August 31, 1999,
1998 and 1997 amounted to $6,990, $7,500 and $7,847, respectively. Capital
expenditures of FNA for the same periods amounted to $5,713, $8,083 and $7,131,
respectively.
d) The Company guarantees FNA's obligations under FNA's revolving credit
facility.
e) The Company's stock option plans include FNA's employees.
f) In connection with the completion of the offering on August 13, 1997, FNA
declared a dividend of $72,300 to the Company. In addition, the intercompany
receivable from Fedders Corporation on August 13, 1997 of $152,097 was forgiven
and has been reflected as an adjustment to stockholders equity of both companies
in the accompanying condensed consolidated balance sheets.
g) On August 31, 1999, FNA declared a dividend of $25,714 to the Company.
F29
61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FEDDERS CORPORATION
We have audited the accompanying consolidated balance sheets of Fedders
Corporation as of August 31, 1999 and 1998, and the related consolidated
statements of operations and comprehensive income, cash flows and
stockholders' equity for each of the three years in the period ended
August 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fedders
Corporation as of August 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended August 31, 1999, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
October 12, 1999
F30
62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
FEDDERS CORPORATION
The audits referred to in our report dated October 12, 1999 relating to
the consolidated financial statements of Fedders Corporation, which is
contained in Item 8 of this Form 10-K, included the audit of the financial
statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
October 12, 1999
S1
63
FEDDERS CORPORATION
VALUATION & QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
For The Years Ended August 31, 1999, 1998 and 1997
(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, 1999 $2,032 $ 14 $ (592) $(81) $1,373
August 31, 1998 $1,834 $1,812 $(1,614) - $ 2,032
August 31, 1997 $1,952 - $ (118) - $ 1,834
=========================================================================================================
S2