ITEM 1. BUSINESS
(a) General Development of Business
Fedders Corporation (the "Company" or the "Registrant") is a leading global manufacturer of air treatment products, including air conditioners, air cleaners, dehumidifiers and humidifiers, and thermal technology products. The Company was established more than 100 years ago and has been in the air treatment business for more than 50 years. The Company has been expanding into a broad variety of air treatment businesses.
In 1994, the Company opened a research and development center in Singapore and in 1998 all international activities were headquartered in the Singapore facility.
In November 1995, the Company established a joint venture, Fedders Xinle Co., Ltd., in Ningbo, China to manufacture air conditioners for the domestic market and for export.
In June 1998, the Company established a joint venture in Spain to produce portable air conditioners.
In November 1999, the Company completed its acquisition of Trion, Inc. ("Trion") a manufacturer of air treatment equipment for cleanroom, residential, commercial and industrial environments.
In January 2000, the Company acquired the capital stock of ABB Koppel, Inc. (now named Fedders Koppel, Inc. ("Fedders Koppel")), a leading manufacturer of air conditioners in the Philippines.
In February 2000, the Company acquired Sun Manufacturing, Inc. (now named Sun Air Conditioning, Inc. ("Sun")). Sun is a leading manufacturer of specialized air conditioning equipment used in telecommunications equipment enclosures.
In May 2000, the Company entered into a ten-year licensing agreement with Maytag Corporation, which gives the Company exclusive rights to market room air conditioners under the Maytag brand in North America.
Unless otherwise indicated, all references herein to the "Company" or the "Registrant" include Fedders Corporation and its principal operating subsidiaries.
(b) Financial Information About Industry Segments
The Company operates in one industry segment. See Note 8 of the Notes to Consolidated Financial Statements at page herein.
(c) Narrative Description of Business
The Company manufactures and sells, worldwide, a wide variety of air treatment products, including air conditioners, humidifiers, dehumidifiers, air cleaners and thermal technology products.
The Company manufactures and sells a complete line of air conditioners including window, split, multi-split, through-the-wall, portable, vertical, and floor/ceiling and packaged units. The Company's air conditioners are manufactured in capacities ranging from 5,000 BTUs to 200,000 BTUs. The Company manufactures and sells household humidifiers, dehumidifiers, media filters and air cleaners that improve air quality.
Trion manufactures and sells products for 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.
Envirco manufactures 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.
Through Sun, the Company manufactures and sells specialized air conditioning equipment for the telecommunications industry.
The Company's Melcor subsidiary manufactures solid-state heat pump modules, liquid industrial chillers and solid-state thermoelectric air conditioners that are typically used by original equipment manufacturers and end users in microelectronics, semiconductor, laboratory, medical device,biotechnology, cleanroom and telecommunication applications with limited space and precision temperature control requirements.
The Company's air conditioners, dehumidifiers, humidifiers and air cleaners are marketed globally, primarily by the Company's salaried salesforce, under the Fedders, Emerson Quiet Kool, Sun, Airtemp, Trion, Koppel, Envirco and Herrmidifier brands, as well as under private label. In 2001, air conditioners will also be marketed under the Maytag brand.
Solid-state heat pump modules, liquid industrial chillers and solid-state thermoelectric air conditioner products are currently sold by salaried salespeople and a network of sales representative firms located around the world. Cleanroom products are marketed to microelectronics, semiconductor and medical products manufacturers and hospitals through sales representatives, distributors and directly to end users.
The Company currently manufactures air conditioners in China, Georgia, Illinois, Philippines, Spain and Tennessee. The Company's Rotorex subsidiary manufactures compressors for use in the Company's air conditioners in Maryland.
The Company manufactures its appliance, residential and commercial/industrial air cleaning products in New Mexico, North Carolina, and Maryland.
Melcor manufactures its solid-state heat pump modules, thermoelectric air conditioners and industrial chillers in New Jersey.
QUALITY ASSURANCE
One of the key elements of the Company's strategy is a commitment to a single worldwide standard of quality. The Company's U.S. air conditioning manufacturing facilities (except the newly-acquired Sun facility), its Melcor, Rotorex and Singapore facilities and the joint ventures in China and Spain have earned the highest level of certification, ISO 9001, for their quality management systems under the International Standards Organization.
As part of its acquisition integration program, the Company has implemented plans 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 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, AIRTEMP, SUN, KOPPEL, ROTOREX, MELCOR, TRION and MAC-10 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 sales volumes 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 7 through 9 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 peak in April through July. Production is weighted towards the selling season, accordingly the greatest use of credit lines occurs early in the calendar year. Cash levels are at their highest in August.
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 herein.
See also the information entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" at pages 7 through 9 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
All of the markets in which the Company does business are very competitive. Many of the Company's competitors are larger and have greater resources than the Company. The Company competes principally on the basis of technology, quality, price and its ability to deliver product and service to its customers on a just-in-time basis based upon its accurate-response manufacturing program.
RESEARCH AND DEVELOPMENT
The Company's product development activities include ongoing research and development programs to redesign existing products, reduce manufacturing cost, increase product efficiencies and create new products. In fiscal 2000, the Company spent approximately $9.5 million on research and development.
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 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 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, 2000 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, 2001.
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 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 3,250 employees worldwide. The contract with the union representing substantially all of the production employees of the Effingham, Illinois plant is scheduled to expire in October 2001. Union contracts covering Fedders Koppel and Rotorex employees expire in March and August 2005, respectively. The Company considers its relations with its employees to be generally satisfactory.
INTERNATIONAL SALES
Future international sales are subject to the risks inherent in such activities, such as foreign regulations, unsettled political conditions and exchange rate fluctuations. See Note 8 of the Notes to Consolidated Financial Statements at page herein.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns or leases the following primary facilities:
The Effingham, Illinois facility is subject to a mortgage securing a note payable to the State of Illinois. The Sanford, North Carolina and 22,400 square foot Lawrence, Township facility are each subject to a mortgage securing repayment of economic development bonds. The Company believes that productive capacity at its major manufacturing facilities is adequate to meet production needs in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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, 2000, there were 2,637 holders of Common Stock, 2,540 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 and Class B Stock, see Notes 9 and 10 of the Notes to Consolidated Financial Statements on pages and.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA(1)
- --------------- (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.
(5) During fiscal 2000, the Company repurchased 2,768 shares of Common and Class A Stock at an average price of $4.87 per share for a total of $13,484. During fiscal 1999, the Company repurchased 2,601 shares of 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) In fiscal 1999, the amount shown excludes a one-time charge for the restructuring ($3,100). For fiscal 1998, the amount shown excludes a one-time charge for the 1998 restructuring ($16,750) and early retirement program ($2,891).
(7) 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 a better indicator of liquidity than 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 its 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 of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund cash needs.
ITEM 7.
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 recognized record net sales in fiscal 2000 as a result of international sales of air treatment products as well as sales to the domestic telecommunications and semiconductor markets.
Presently, the Company's business is still largely the manufacture and sale of room air conditioners. In fiscal 2000, domestic U.S. room air conditioner sales declined as a result of unusually cool weather in northern domestic regions. The decline was more than offset by increases in room air conditioner sales to major international markets, sales of specialized air conditioning equipment used in telecommunication equipment enclosures and sales of cleanroom fan filter units used in the production of semiconductors.
In November 1999, the acquisition of Trion, Inc. was completed, expanding Fedders' market share in indoor air treatment with Trion electronic air cleaners, Herrmidifier commercial, industrial and residential humidification systems and Envirco HEPA filtration systems for cleanroom manufacturing.
In January 2000, the Company acquired ABB Koppel, Inc., now renamed Fedders Koppel, Inc.("Fedders Koppel"), a leading air conditioner manufacturer in the Philippines. The acquisition strengthens the Company's international operations, which are headquartered in Singapore and which have their primary manufacturing base in China.
In February 2000, the Company acquired the net assets of Sun Manufacturing, Inc.("Sun"), a leading manufacturer of specialized air conditioning equipment used in telecommunication equipment enclosures.
In May 2000, the Company entered into a ten-year licensing agreement with Maytag Corporation, which gives the Company exclusive rights to market room air conditioners under the Maytag brand in North America.
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 restructuring enabled the Company to further reduce operating costs at its automated compressor assembly operation in Maryland. Amounts covered by the charge were paid out in fiscal 2000.
RESULTS OF OPERATIONS
Net sales in fiscal 2000 totaled $409.8 million, an increase of 15.1% from sales of $356.0 million in fiscal 1999 and an increase of 27.2% from sales of $322.1 million in fiscal 1998. The sales increase in fiscal 2000 reflects increased sales of air treatment products internationally and at acquired companies.
OPERATING RESULTS AS A PERCENT OF NET SALES
The gross profit in fiscal 2000 increased $20.4 million, or 24.1% from fiscal 1999. The gross profit as a percent of net sales increased in fiscal 2000 due primarily to sales of higher margin products at acquired companies and to cost reduction efforts. In fiscal 1999, gross profit as a percent of net sales increased from fiscal 1998 due primarily to cost reduction efforts.
Selling, general and administrative expenses ("SG&A") increased as a percent of net sales in fiscal 2000 primarily due to higher selling and marketing costs as a percent of sales of the acquired companies. In fiscal 1999, SG&A decreased as a percent of net sales primarily due to a $2.9 million provision for the implementation of an early retirement program in fiscal 1998.
The restructuring charge in fiscal 1999 of $3.1 million consisted 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 a write-down of fixed assets ($5.6 million), lease terminations ($4.9 million), personnel-related costs ($3.8 million) and administrative facility closing costs ($2.5 million).
Net interest expense in fiscal 2000 increased $5.9 million from fiscal 1999 due primarily to the interest on the additional $50 million principal amount of 9 3/8% Senior Subordinated Notes due in 2007 (the "Notes") issued in August 1999. Net interest expense in fiscal 1999 as a percent of net sales equaled the fiscal 1998 percentage.
Net income decreased to $20.4 million in fiscal 2000 from $20.7 million in fiscal 1999. Full-year earnings were affected by cool summer weather in the northern U.S. markets and higher interest expense associated with the Notes, the proceeds of which were used to replenish cash used for acquisitions. Fiscal 1999 results included the restructuring charge of $3.1 million. Net income, excluding the after-tax effect of the restructuring charge, would have been approximately $22.8 million in fiscal 1999. Net income in fiscal 1998 was $3.0 million. Net income, 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. Net income in fiscal 2000 reflects an effective tax rate of 33%, the same as in fiscal 1999 and less than the 35% in fiscal 1998, principally due to the valuation allowance reflected in current income and 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 2000 with cash and cash equivalents of $87.2 million compared to $117.5 million at August 31 a year earlier.
Net cash provided by operations in fiscal 2000 amounted to $4.6 million. Accounts receivable increased by $1.1 million due to increased sales of air treatment products and increased international sales. Inventories increased by $9.5 million due to acquired inventory at companies, as well as reduced sales of room air
conditioners in the fourth quarter in the U.S. Other current assets increased by $3.8 million in part due to a licensing agreement. Accrued expenses decreased by $12.9 million primarily due to a decrease in accruals related to acquisition costs and restructuring.
Net cash used in investing activities by the Company consisted primarily of net capital expenditures and acquisition costs of $15.0 million.
Net cash used in financing activities in fiscal 2000 amounted to $19.9 million. The Company used $13.5 million to repurchase 2.8 million shares of its Common and Class A Stock under a program authorized in August 1998 for the repurchase of up to $30 million of its outstanding stock. In October 2000, the Company announced an increase in the stock repurchase program from $30 million to $40 million. Dividend payments amounted to $4.2 million in fiscal 2000.
In fiscal 2000, the Company's $100 million, prime rate, revolving credit facility was utilized during the five-month period from January through early May, with a maximum amount outstanding during the year of $44.9 million. 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.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement has been adopted effective September 1, 2000 and will not have a material impact on the Company's financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company at August 31, 2000 and 1999, and for the years ended August 31, 2000, 1999 and 1998, the notes thereto and the reports of the Company's independent auditors thereon are included at pages through, herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 20, 2000, the Company retained Deloitte & Touche LLP, as its independent accountants replacing BDO Seidman, LLP. The former accountants report for each of the past two years did not contain any adverse opinion or disclaimer of opinion and was not qualified as to uncertainty, audit scope or accounting principles. The change was approved by the Board of Directors of the Company, upon recommendation of its Audit Committee.
During the Company's two most recent fiscal years and any subsequent interim period, there were no disagreements between the Company and the former accountants on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures, nor were there any "Reportable Events" within the meaning of Item 304(a)(1)(iv) of Regulation S-K.
PART III
ITEM 10.
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 19, 2000, which section is incorporated herein by reference.
- --------------- (1) Son of Salvatore Giordano
(2) Grandson of Salvatore Giordano
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. Edwards was elected to his present position in June 2000. He has been General Counsel of the Company for more than five years.
Mr. Erbs 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 was elected President and Chief Operating Officer in June 2000. Previously, he was Senior Vice President of the Company and Chairman and Chief Executive Officer of Fedders Air Conditioning since May 1, 1999. He served as Vice President of Global Purchasing for the Company from December 1997 to May 1999 and, prior thereto, Vice President, Purchasing of Fedders North America.
Mr. Giordano was elected Executive Vice President, Finance and Administration and Chief Financial Officer in June 2000. Previously, he was Vice President, Finance and Chief Financial Officer of the Company since July 1, 1999. Mr. Giordano also served as Senior Vice President of Fedders International, Inc. from 1998
until being elected to his current position and, prior thereto, Managing Director of the Singapore office of Fedders International.
Mr. Sal Giordano III was elected to his present position in December 1999. He was a Vice President of the Company since August 1996 and President of Melcor from 1995.
Mr. Hansen was elected to his present position in June 2000. Previously he was Senior Vice President and Secretary from August 1996 and, prior thereto, Vice President, Finance and General Counsel of NYCOR, Inc.
Ms. Katz was elected Vice President, Strategic Planning in June 2000. Previously, she held the position of Vice President, Communications and Planning since August 1998 and, prior thereto, Director, Strategic Support since September 1995.
Mr. Noselli was elected Corporate Controller in June 2000. Previously, he was with Ingersoll-Rand Co. from 1980, most recently as Vice President and Controller of its production equipment group.
Mr. Salerno was elected to his present position in June 2000. Previously, he had been an appointed officer with responsibility for Information Systems since July 1999 and, prior thereto, Director of Information Technology for Calvin Klein Cosmetics Company.
Ms. Volpe was elected Vice President, Human Resources in June 2000. Previously, she was Vice President, Recruitment and Leadership Development for more than five years.
ITEM 11.
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 19, 2000, which section is incorporated herein by reference.
ITEM 12.
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 19, 2000, which sections are incorporated herein by reference.
ITEM 13.
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 19, 2000, which section is incorporated herein by reference.
PART IV
ITEM 14.
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:
The Company filed a Report on Form 8-K dated June 14, 2000 regarding a change in independent auditors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
FEDDERS CORPORATION
By /s/ MICHAEL GIORDANO ------------------------------------ Michael Giordano Executive Vice President, Finance and Administration and Chief Financial Officer November 29, 2000
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.
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
See accompanying notes
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
See accompanying notes
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 warranties.
Warranty and Return Policy
The Company's policy is to accrue the estimated cost of warranty coverage and returns at the time the sale is recorded.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated at the rate of exchange in effect at the end of the period. Net sales and expenses are translated at the average rate of exchange for the period. Translation adjustments are reflected in other comprehensive loss as a separate component of stockholders' equity.
Cash and Cash Equivalents
The Company considers all highly liquid investments 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:
Long-Lived Assets
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
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
accounts and any gain or loss is reflected in income. Property, plant and equipment at cost consist of the following at August 31:
Depreciation is provided on the straight-line basis over the estimated useful life of each asset as noted above. Accumulated depreciation includes $2,359 and $1,966 of depreciation related to equipment under capital leases in 2000 and 1999, respectively.
Goodwill is amortized over 40 years using the straight-line method. Other intangible assets primarily related to trademarks and patents are amortized over periods ranging from 2 to 10 years using the straight-line method. Goodwill and other intangible assets are net of accumulated amortization of $17,242 and $14,011 at August 31, 2000 and 1999, respectively.
Long-lived assets of foreign entities, including joint venture operations, were $19,572, $7,193 and $7,962 at August 31, 2000, 1999 and 1998, respectively. Long-lived assets of domestic operations were $142,490, $141,885 and $106,298 at August 31, 2000, 1999 and 1998, respectively. The Company, using estimates based on reasonable assumptions and projections, reviews for impairment of long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate the carrying amount of its assets might not be recoverable and appropriately records any necessary adjustments.
Other assets
Other assets consist of the following at August 31:
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
Accrued expenses
Accrued expenses consist of the following at August 31:
Income taxes
Deferred income taxes are provided to reflect the tax effects of temporary differences between assets and liabilities for financial reporting purposes and income tax purposes. Provisions are also made for U.S. income taxes on undistributed earnings of foreign subsidiaries not considered to be indefinitely reinvested (note 7).
Research and development costs
All research and development costs are charged to expense as incurred and amount to $9,521, $6,742, and $6,557 in 2000, 1999 and 1998, 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 2% of the Company's employees are covered by a collective bargaining agreement which expires in August 2005. Another 20% 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 net income by the weighted average number of shares outstanding for the period. Diluted earnings per share are computed by adjusting outstanding shares assuming
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
conversion of all potentially dilutive stock options. The computation of basic earnings per share and diluted earnings per share is as follows:
Fair Value of Financial Instruments
The carrying amount for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments. At August 31, 2000, the fair value of long-term debt (including current portion), is estimated to be $161,867 based on the current market rates obtained by the Company.
Effect of New Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement has been adopted effective September 1, 2000 and will not have a material impact on the Company's financial statements.
Reclassification
Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation.
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 ended 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 severance 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.
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
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.
All amounts were paid out on the restructuring by the Company by the second fiscal quarter ended February 29, 2000.
3. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation, both as plaintiff and defendant, incidental to the conduct of its business. It is the opinion of management, after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on the accompanying consolidated financial statements.
4. SHORT-TERM BORROWING
At August 31, 2000, Fedders Xinle had short-term notes of $3,753 outstanding under a loan agreement with a People's Republic of China bank. The notes bear interest at approximately 6.50% and expire April 2001. At August 31, 2000 and 1999, the Company had no short-term borrowing under its U.S. revolving credit facility with a commercial finance company. Availability under the U.S. facility of $100,000 at August 31, 2000 and is based on accounts receivable and inventory and requires maintenance of certain financial covenants. The maximum amount outstanding under the credit facility was $44,944 and $33,899 during fiscal 2000 and 1999, respectively. The average amount outstanding and average rate of interest charged on outstanding borrowings under the credit facility were $8,652 and 8.51% in fiscal 2000 and $5,347 and 7.75% in fiscal 1999. 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 prime rate or LIBOR plus 2.25%.
5. LONG-TERM DEBT
Long-term debt consists of the following at August 31:
Aggregate amounts of long-term debt, excluding capital leases of $2,487, maturing in each of the years ending August 31 are: 2001 -- $2,222, 2002 -- $2,226, 2003 -- $2,329, 2004 -- $2,333, 2005 -- $1,598 and thereafter $153,239.
In August 1997, a subsidiary of the Company issued $100,000 principal amount of 9 3/8% Senior Subordinated Notes due 2007. In August 1999, the same subsidiary issued an additional $50,000 principal
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
amount of 9 3/8% Senior Subordinated Notes due 2007. The notes are guaranteed by the Company on a senior subordinated basis. The notes may be redeemed by the subsidiary after August 2002 at a redemption price of 104.688% of principal amount. The provisions of the notes limit, among other things, the payment of dividends by the subsidiary.
In 2000, Fedders Xinle refinanced a long-term promissory note payable to a People's Republic of China bank.
The loan from the State of Illinois has an interest rate of 1%, is to be paid over the next eight years, and is collateralized by a mortgage on the Company's Illinois facility.
The Trion Industrial Revenue Bond is due in November 2011, bears interest at 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.
The Fedders Koppel promissory note payable to a Philippines bank is to be paid over the next five years, bears interest at PHIBOR plus 3% and is guaranteed by the Company.
The Sun Air Conditioning, Inc. promissory note due to Citizens National is to be paid over the next seven years and bears interest at the prime rate.
The loan from the New Jersey Economic Development Corporation to Melcor Corporation has an interest rate of 6.6%, is to be paid over the next 10 years and is collateralized by Melcor's facility and certain equipment.
6. LEASES
Operating Leases
The Company leases certain property and equipment under operating leases which expire over the next five years. Most of these operating leases contain one of the following options: (a) the Company may, at the end of the initial lease term, purchase the property at the then fair market value or (b) the Company may renew its lease at the then fair rental value for a period of one month to four years. Minimum payments for operating leases having non-cancelable terms are as follows: $1,165, $929, $682, $572 and $8 in 2001, 2002, 2003, 2004 and 2005, respectively. Minimum lease payments total $3,356. Total rent expense for all operating leases amounted to $1,647, $1,513 and $3,940 in 2000, 1999 and 1998, respectively.
Capital Leases
Aggregate future minimum rental payments under capital leases for the years ending August 31 are as follows: $255, $276, $262, $118 and $108 in 2001, 2002, 2003, 2004 and 2005, respectively. The present value of minimum lease payments is $2,487. In 2000, a capital lease was bought out by the Company at maturity for $1,018.
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
7. INCOME TAXES
The provision for income taxes consists of the following components:
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 acquired companies. The components are as follows at August 31:
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
The difference between the United States statutory income tax rate and the consolidated effective income tax rate is due to the following items:
At August 31, 2000, the Company has foreign net operating loss carryforwards of approximately $900 and U.S. net operating loss and tax credit carryforwards of approximately $3,500 and $200, respectively, which are restricted as to use and expire in the years 2001 through 2010. The valuation allowance reflects the uncertainty associated with the realization of deferred tax assets.
8. INDUSTRY SEGMENT
The Company operates in one industry segment, air treatment products, and sells primarily direct to retailers and also through manufacturers' representatives, private label arrangements and distributors. In 2000, one customer accounted for 25% of net sales and a second customer accounted for 24% of net sales. 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.
International sales were approximately $54,404 in 2000, $38,168 in 1999 and $38,078 in 1998 and were made principally to Asia, Europe, Canada and Mexico.
9. CAPITAL STOCK
On October 11, 2000, the Company announced an increase in the stock repurchase plan (the "$30 Million Plan") from $30,000 to $40,000 for the Company's Common and Class A Stock, authorized in August 1998. The $50,000 stock repurchase plan authorized in 1997 (the "$50 Million Plan") for the Company's Common and Class A Stock has been completed.
Common Stock (80,000,000 shares authorized): During fiscal 2000, 567,900 shares were repurchased for $3,580 under the $30 Million Plan. In 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): In fiscal 2000, 2,200,100 shares were repurchased for $9,904 under the $30 Million Plan. An additional 154,071 shares were received from employees in connection with the exercise of stock options. In fiscal 1999, 1,763,600 shares were repurchased for $8,546 under the $30 Million Plan. In 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 option plans and amounted to $12,772. All Class A shares that were repurchased during fiscal 1998 have been retired as of August 31, 1998. Shares of Class A Stock reserved under the Company's stock option plans amounted to 5,573,000 and 5,819,933 at August 31, 2000 and 1999, respectively. Class A Stock has rights, including dividend rights, substantially identical to the Common Stock,
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
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, 25,337,663 and 22,792,082 shares of Common Stock are reserved for such conversion at August 31, 2000 and 1999, 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, 2000 and 1999, 2,266,406 and 2,266,706 shares of Common Stock, respectively, 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 unless a sales target is achieved prior thereto.
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:
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
The stock option plan summary and changes during each year are presented below:
Options exercisable at August 31, 2000 have an average exercise price of $4.85. The weighted average fair value of the stock options granted during 2000, 1999 and 1998 was $1.31, $1.33 and $1.71, respectively. The fair value of each option granted is estimated on the date of grant using the Binomial option pricing model in 2000 and the Black-Scholes option pricing model in 1999 and 1998 with the following weighted-average assumptions:
The following table summarizes information on stock options outstanding at August 31, 2000:
- --------------- (1) weighted average
11. PENSION PLANS AND OTHER COMPENSATION ARRANGEMENTS
The Company maintains a 401(k) defined contribution plan covering all U.S. employees except union employees at one subsidiary. Company matching contributions under the plan are based on the level of individual participant contributions and amounted to $1,287, $1,096 and $1,328 in 2000, 1999 and 1998, 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
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
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. 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 pensions. At August 31, 2000 and 1999, post-retirement benefits, although immaterial, were fully accrued with no significant change between these dates.
12. ACQUISITIONS
In fiscal 2000, a subsidiary of the Company acquired the capital stock of ABB Koppel, Inc. (now called Fedders Koppel), a manufacturer of room and packaged air conditioners in the Philippines, for total consideration of $11.6 million in cash and notes. Also during fiscal 2000, another subsidiary of the Company acquired the net assets of Sun Manufacturing, Inc. for $1.0 million of cash plus the assumption of $2.2 million of debt. Sun is a manufacturer of air conditioners that cool telecommunications equipment in cellular towers. Both acquisitions were accounted for using the purchase method with the purchase price allocated to net assets acquired based on their estimated fair values as of the acquisition date. The excess of purchase price over the fair value of the net assets acquired ($9,586) was allocated to goodwill which is being amortized on a straight-line basis over 40 years. The Company's consolidated financial statements including the operating results of the acquired businesses from the date of 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 completed in November 1999. The acquisition was accounted for using the purchase method, with the purchase price allocated to net assets acquired based on their estimated fair values as of the acquisition date. The excess of purchase price over the fair value of the acquired net assets ($25,620) was allocated to goodwill ($19,768), 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 the Trion acquisition occurred on September 1, 1998. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have actually occurred had the acquisition been consummated at the beginning of fiscal 1999 or of results which may occur in the future.
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
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.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING BALANCE SHEETS
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING BALANCE SHEETS
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
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 $13,468, $14,090 and $9,383 for the years ended August 31, 2000, 1999 and 1998, respectively.
b) FNA's interest expense reflects actual interest charges on the 9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory Note and capital lease obligations.
c) FNA's depreciation and amortization for the years ended August 31, 2000, 1999 and 1998 amounted to $7,410, $6,990 and $7,500, respectively. Capital expenditures of FNA for the same periods amounted to $9,361, $5,713 and $8,083, respectively.
d) The Company guarantees FNA's obligations under FNA's revolving credit facility.
e) The Company's stock option plans include FNA's employees.
f) On August 31, 2000 and 1999, FNA declared a dividend of $9,708 and $25,714 to the Company.
REPORTS OF INDEPENDENT AUDITORS
To The Shareholders and Board of Directors of Fedders Corporation:
We have audited the accompanying consolidated balance sheet of Fedders Corporation and its subsidiaries as of August 31, 2000 and the related consolidated statement of operations and comprehensive income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fedders Corporation and its subsidiaries at August 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Parsippany, New Jersey October 13, 2000
To The Shareholders and Board of Directors of Fedders Corporation:
We have audited the accompanying consolidated balance sheet of Fedders Corporation as of August 31, 1999, and the related consolidated statements of operations and comprehensive income, cash flows and stockholders' equity for each of the two 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 the consolidated results of its operations and its cash flows for each of the two years in the period ended August 31, 1999, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP Woodbridge, New Jersey October 12, 1999
QUARTERLY FINANCIAL DATA (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND MARKET PRICE DATA)
- --------------- (a) Quarterly earnings per share may not add to earnings per share for the year due to rounding and changes in the number of weighted average shares outstanding
FEDDERS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
REPORTS OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors Fedders Corporation Westgate Corporate Center 505 Martinsville Road Liberty Corner, New Jersey
We have audited the financial statements of Fedders Corporation as of August 31, 2000, and for the year in the period ended August 31, 2000, and have issued our report thereon dated October 13, 2000; such report is included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Fedders Corporation, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Parsippany, New Jersey October 13, 2000
REPORTS OF INDEPENDENT AUDITORS
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 14 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.
/s/ BDO Seidman, LLP Woodbridge, New Jersey October 12, 1999