-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vr9aLhOxEoIF0HBVMRFKgK+UsFJktNXT2LpSI2zjh/MXWBFuv7+WmycG17RAQqMr NIl/7CFMulikh8s2mrqUdw== 0000744106-95-000012.txt : 19951214 0000744106-95-000012.hdr.sgml : 19951214 ACCESSION NUMBER: 0000744106-95-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDDERS CORP /DE CENTRAL INDEX KEY: 0000744106 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 222572390 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08831 FILM NUMBER: 95601327 BUSINESS ADDRESS: STREET 1: 158 HWY 206 STREET 2: PO BOX 265 CITY: PEAPACK STATE: NJ ZIP: 07977 BUSINESS PHONE: 9082342100 MAIL ADDRESS: STREET 1: 158 HWY 206 STREET 2: P O BOX 265 CITY: PEAPACK STATE: NJ ZIP: 07977 10-K 1 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8831 FEDDERS CORPORATION (Exact name of Registrant as specified in its charter) Delaware 22-2572390 (State of Incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938-0813 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (908) 604-8686 Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $1 par value New York Stock Exchange, Inc. Class A Stock, $1 par value New York Stock Exchange, Inc.
Securities registered pursuant to section 12 (g) of the Act: Title of Each Class None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. As of the close of business on November 30, 1995, there were outstanding 18,988,898 shares of the Registrant's Common Stock, 18,937,508 shares of Class A Stock and 2,267,606 shares of its Class B Stock. The approximate aggregate market value (based upon the closing price on the New York Stock Exchange) of these shares held by non-affiliates of the Registrant as of November 30, 1995 was $182,050,793. (The value of a share of Common Stock is used as the value for a share of Class B Stock as there is no established market for Class B Stock and it is convertible into Common Stock on a share-for-share basis.) FEDDERS CORPORATION FORM 10-K ANNUAL REPORT SEPTEMBER 1, 1994 TO AUGUST 31, 1995 TABLE OF CONTENTS
PAGE PART I Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20 1 PART I ITEM 1. Business (a) General Development of Business Fedders Corporation (the "Company" or the "Registrant") is a holding company which, through its wholly owned operating subsidiaries, is engaged in the manufacture and sale of a complete line of room air conditioners and dehumidifiers, principally for the residential market. Based upon industry statistics compiled by a trade association, the Company believes it is the largest manufacturer of room air conditioners in North America. Unless otherwise indicated, all references herein to the "Company" or the "Registrant" include Fedders Corporation and its principal operating subsidiaries, Fedders North America, Inc. ("Fedders NA"), Emerson Quiet Kool Corporation ("EQK"), Columbia Specialties, Inc. ("CSI"), Fedders, Inc. and Fedders International, Inc. ("FI"). EQK, CSI and Fedders, Inc. are wholly owned subsidiaries of Fedders NA. In 1994, Fedders NA also established a Mexican sales subsidiary, Fedders de Mexico S.A. de C.V. and FI established a Singapore subsidiary, Fedders Asia Pte. Ltd. ("Fedders Asia"). In July 1995, the Company signed a contract with the Ningbo General Air Conditioner Factory of Ningbo, China to form a joint venture, Fedders Xinle Co. Ltd.("Fedders Xinle"), to manufacture and market ductless split room air conditioners as well as window type air conditioners. The joint venture was capitalized on November 7, 1995. The Company owns 60% of the joint venture which and through Fedders International, will export approximately 50% of its product to markets outside of China. See note 12 of the Notes to Consolidated Financial statements on page F19 herein for a description of the terms of the transaction. On November 30, 1995, the Company announced that it had reached a definitive agreement to merge with NYCOR, Inc. ("NYCOR"). See note 13 of the Notes to the Consolidated Financial Statements on page F19 for description of the merger. The Company has purchased compressors since 1992 from NYCOR, under a ten year supply agreement, and continues to rely upon NYCOR for a significant portion of its requirements for rotary compressors, one of the most important components of the air conditioners manufactured by the Company. The merger will provide the Company with a guaranteed supply of compressors to support international growth of room air conditioners. (b) Financial Information About Industry Segments The Company operates in one industry segment. See Note 8 of the Notes to Consolidated Financial Statements at page F18 herein. 2 (c) Narrative Description of Business Products and Markets The Company manufactures and sells a complete line of window and through-the-wall room air conditioners, principally for the residential market in models ranging in capacity from 5,000 BTU (British Thermal Units) per hour to 32,000 BTU per hour. Fedders also manufactures through Fedders Xinle joint venture, split ductless room air conditioners for international markets from 7,000 to 40,000 BTU. These models comprise product lines marketed by the Company under the brands FEDDERS, EMERSON QUIET KOOL and AIRTEMP. The Company also manufactures products under various private labels. The Company manufactures and markets, under the EMERSON QUIET KOOL brand, a line of household dehumidifiers ranging in capacity from 30 to 50 pints per 24 hours. In North America, the Company markets its products to retail chains, retail buying groups and others representing over 10,000 retail outlets. The distribution of appliances and electronics in North America has changed significantly in the last several years. Most of the Company's sales are now made directly to retailers, in contrast to the early 1980s when distributors accounted for the majority of the Company's business. In addition, in recent years the Company's customers have changed their purchasing patterns to minimize inventories. In response, the Company has increased its manufacturing flexibility, thereby improving its capabilities, especially in the area of just-in-time delivery. All Fedders NA sales, marketing, and service management are located in a Whitehouse, New Jersey headquarters location. Fedders North America serves many of its customers through regional sales offices and distribution centers. To support and service its customers and the ultimate consumer, the Company has a network of third-party service centers throughout the United States and regional parts depots to expedite repairs by local service companies during peak demand periods. The Company promotes its EMERSON QUIET KOOL and FEDDERS brands of air conditioners through advertising, primarily in trade publications. The Company's future business development activities are focused primarily outside of North America. The Company believes that the market for room air conditioners outside of North America is approximately four times the size of the North American market. Demand for air conditioners outside of North America accelerated in the 1980s and continues to grow rapidly with the increase in disposable income of populous nations in hot weather climates. The Company has participated in international markets for more than 30 years and has licensees in several countries. 3 The Company expects to increase its participation overseas through the Fedders Xinle joint venture established in November 1995, and through additional strategic alliances primarily under production and joint venture agreements, with participation based in part on its expertise, technological capability and well established global sourcing program. The Company also has production agreements in Taiwan, India and the People's Republic of China and is accelerating development activities to further penetrate international markets. This activity should establish greater growth potential than is afforded by the mature U.S. market while reducing its dependence on summer weather in North America. In 1994, Fedders International created a new subsidiary, Fedders Asia, Pte. Ltd. in Singapore for research, development, testing and coordination of production of the Company's product at facilities where production agreements are in place. The Company also has consolidated its international headquarters with its executive offices in a single facility in Liberty Corner, New Jersey. Fedders International has sales offices in Singapore, Miami and the United Kingdom. The Company believes it can compete cost-effectively abroad based on its global sourcing network that currently delivers components from around the world to two U.S. plants and, in the future, to the Fedders Xinle joint venture. Sources and Availability of Raw Materials The most important materials purchased by the Company are steel, copper and aluminum, which are obtained from domestic and foreign suppliers. The Company also purchases from other domestic and foreign manufacturers certain components, including thermostats, compressors, motors and electrical controls, used in its products. The Company endeavors to obtain the lowest possible cost in its purchases of raw materials and components, which must meet specified quality standards, through an active global sourcing program. The Company is not dependent upon any one source for major components of its manufactured products, except that it purchases compressors primarily from NYCOR. The Company presently has a supply agreement with NYCOR through the year 2003 which provides the Company a dependable source of up to 800,000 rotary compressors annually. The Company's compressor requirements for fiscal 1996 are in excess of 1,400,000. The Company has additional suppliers of compressors. In the event that NYCOR were unable to deliver the Company's requirements, the Company might have difficulty obtaining substitute sources of supply. To guarantee its supply of compressors, the Company announced that it has reached an agreement to merge with NYCOR. See note 13 of the Notes to the Consolidated Financial Statements on page F19. 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, are well known and enhance the marketing of its products, the Company 4 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 entirely dependent on the manufacture and sale of room air conditioners and dehumidifiers, the demand for which is highly seasonal. Seasonally low volume sales are not sufficient to offset fixed costs, resulting in seasonal operating losses at certain times of the year. In addition, the Company's working capital needs are seasonal, with the Company's greatest utilization of its lines of credit occurring early in the calendar year. See "Management`s Discussion and Analysis of Results of Operations and Financial Condition," at pages F1 through F3 herein. See also the discussion under "Working Capital Practices." Working Capital Practices The Company regularly reviews working capital components with a view to maintaining the lowest level consistent with requirements of anticipated levels of operations. The Company's sales are predominantly made directly to retailers, who typically require just-in-time delivery, primarily in April through July. Production is weighted towards the retail selling season to minimize borrowing earlier in the fiscal year, although room air conditioners may be produced throughout much of the rest of the year at a lower rate of production. Information with respect to the Company's warranty and return policy is provided in Note 1 of the Notes to Consolidated Financial Statements at page F11 herein. See also the information entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" at pages F1 through F3 herein. Backlog The Company's fiscal year end (August 31) coincides with the end of the seasonal room air conditioner sales cycle. Accordingly, backlog at this time of the year is insignificant. Competition The Company's competitors include a number of domestic and foreign manufacturers of air conditioners and appliances, including Frigidaire Company, Whirlpool Corporation, Matsushita Electric Industrial Company, Ltd. and Sharp Electronics Corporation. Many of the Company's competitors are substantially 5 larger and have greater resources than the Company. The Company competes principally on the basis of price, quality and its ability to deliver product and service to its customers on a just-in-time basis. Competitive factors could require price reductions or increased spending on product development, marketing and sales that could adversely affect the Company's profit margins. Research and Development Information with respect to amounts spent on research and development is provided in Note 1 of the Notes to Consolidated Financial Statements at page F13 herein. Environmental Protection It is the Company's policy to take all practical measures to minimize air and water pollution resulting from its operations. The Company did not make capital expenditures on environmental protection-related items during the year ended August 31, 1995 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, 1996. Employees The Company has approximately 2,000 employees, not including 500 joint venture employees. The current contracts with two unions representing employees of the Effingham, Illinois plant are scheduled to expire in October 1998. The Company considers its relations with its employees to be generally satisfactory. International Sales For information with respect to international sales of the Company's products, see Note 8 of the Notes to Consolidated Financial Statements at page F17 herein. Future sales are subject to the risks inherent in such activities, such as foreign regulations, unsettled political conditions and exchange rate fluctuations. 6 Item 2. Properties The Company owns or leases the following primary facilities: Approximate Square Location Principal Function Feet of Floor Area Liberty Corner, Corporate and 25,000 New Jersey International (Leased) Headquarters Effingham, Illinois Manufacturing 650,000 (Owned) Columbia, Tennessee Manufacturing 232,000 (Owned) Dover, New Jersey (1) 50,000 (Owned) Orangeville, (1) 106,000 Ontario (Owned) Whitehouse, Fedders NA 17,000 New Jersey (Leased) Headquarters Singapore Research and Design 14,600 (Leased) Center (1) Facility available for sale or lease The Effingham, Illinois facility is subject to a mortgage securing a $4.5 million, 1% promissory note payable over the next 13 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. 7 Item 3. Legal Proceedings Not applicable. 8 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 9 Executive Officers of the Registrant First Became an Name and Age Position Held Executive Officer Salvatore Giordano, 85 Chairman of the Board 1945 Sal Giordano, Jr., Vice Chairman, President 1965 57 (1) and Chief Executive Officer Robert L. Laurent, Jr., Executive Vice President, 1989 40 Finance and Administration and Chief Financial Officer S. A. Muscarnera, Senior Vice President and 1988 55 (2) Secretary Gordon Newman, 50 Senior Vice President, 1995 Supply Chain Gary J. Nahai, 44 Vice President and 1993 President, Fedders International, Inc. Thomas Kroll, 40 Controller 1995 ________________________ (1) Son of Salvatore Giordano (2) Nephew of Salvatore Giordano Business Experience During Last Five Years Messrs. Salvatore Giordano, Sal Giordano, Jr., Robert L. Laurent, Jr. and Mr. Muscarnera have been associated in executive capacities with the Company for more than five years. Mr. Newman was elected to his position in April 1995. He joined Fedders Corporation in 1991 as Vice President, Corporate Quality. Prior thereto Mr. Newman was Corporate Director of Quality for Welbilt Corporation. Mr. Nahai was elected to his position in March 1993. Previously he was Vice President of Sales - New York Metro Region and, prior thereto, was Manager of International Sales and Licenses. Mr. Nahai has been with the Company for more than five years. Mr. Kroll was elected to his position in April 1995. Previously he was Controller of Fedders North America since 1992. Prior thereto he was Controller of Emerson Quiet Kool. 10 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 November 30, 1995, there were 4,956 holders of Common Stock, 5,065 holders of Class A Stock and 28 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 on pages F17 through F18, which Notes are incorporated herein by reference. Item 6. Selected Financial Data See the table entitled "Selected Financial Data" at page F4, herein. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations See the information entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" at pages F1 through F3, herein. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements of the Company at August 31, 1995 and 1994, and for the years ended August 31, 1995, 1994 and 1993, the notes thereto and the report of the Company's independent auditors thereon are included at pages F7 through F20, herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure In May 1995, the Company dismissed Ernst & Young LLP ("E & Y") as its independent accountants. The Company has engaged BDO Seidman, LLP as its new independent accountants. The reports of E & Y on the Company's financial statements for the years ended August 31, 1994 and 1993 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. During the last two fiscal years, the Company has not had any disagreements with E & Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. 11 PART III Item 10. Directors and Executive Officers of the Registrant Set forth opposite the name of each director is his age, principal occupation for the past five years, the name and principal business of any corporation or other organization in which such employment is carried on and other business directorships held by the nominee or director. The Company is not presently aware of any circumstance which would prevent any nominee from fulfilling his duties as a director of the Company. For additional information with respect to the Company's executive officers, see Page 9 herein. Director Name Principal Occupation and Age Since NOMINEES - THREE YEAR TERM Salvatore Giordano Chairman of the Board of the Company 1945 (1)(2); 85 Howard S. Modlin Partner, Weisman, Celler, Spett & Modlin 1977 (3); 64 William J. Brennan Financial Consultant(1)(4); 67 1980 DIRECTORS - TWO YEARS REMAINING TERM Joseph Giordano President, NYCOR, Inc. (1)(5); 62 1961 Clarence Russel Moll President Emeritus, Widener University 1967 (6); 82 Anthony E. Puleo President, Puleo Tree Co. (7); 60 1994 DIRECTORS - ONE YEAR REMAINING TERM Sal Giordano, Jr. Vice Chairman, President and Chief 1965 Executive Officer of the Company (1)(2); 57 S. A. Muscarnera Senior Vice President and Secretary of 1982 the Company (1)(2); 55 (1) Messrs. Sal Giordano, Jr. and Joseph Giordano are sons, and Mr. Muscarnera is the nephew, of Mr. Salvatore Giordano. Messrs. Salvatore Giordano, and Sal Giordano, Jr., are also executive officers and (along with Joseph Giordano, William J. Brennan and S. A. Muscarnera) directors of NYCOR, Inc. 12 (2) Messrs. Salvatore Giordano, Sal Giordano, Jr. and S.A. Muscarnera, have been associated in executive capacities with the Company for more than five years. (3) Principal occupation during the past five years. The law firm of Weisman, Celler Spett & Modlin renders legal services to the Company. Mr. Modlin is also a director of General DataComm Industries, Inc. and Trans-Lux Corporation. (4) Principal occupation during the past five years. Mr. Brennan served as a director of the Company from 1980 to 1987, and was again elected a director in 1989. He is also Chairman of the Board of CSM Environmental Systems, Inc. (5) Principal occupation during the past two years. NYCOR, Inc. is a holding company currently comprising two operating companies, one manufacturing rotary compressors and the other thermoelectric heating and cooling modules. Mr. Giordano was a Senior Vice President of the Company for more than five years prior to his retirement August 31, 1992. (6) Principal occupation during the past five years. Dr. Moll is also a director of Ironworkers Savings Bank. (7) Principal occupation during the past two and one half years. Puleo Tree Co. is an importer of Christmas items and garden furniture. Prior to that Mr. Puleo was President of Boulderwood Corporation. Item 11. Executive Compensation The following information is furnished as to all cash compensation paid by the Company and its subsidiaries during the Fiscal Year to each of the five highest paid executive officers of the Company whose aggregate direct compensation exceeded $100,000. 13 Long-Term Compensation Summary Compensation Table Annual Compensation Awards
(a) (b) (c) (d) (g) (i) All Other Name and Principal Fiscal Salary Bonus Options Compensation(1) Position Year $ # $ Salvatore Giordano 1993 237,133 - 120,000 7,114 Chairman of the Board 1994 252,150 282,045 150,000 15,753 of Directors 1995 245,354 520,365 77,314 3,097,691 (2) Sal Giordano, Jr. 1993 307,800 - 590,000 9,234 Vice Chairman, President 1994 335,375 282,045 180,000 17,548 and Chief Executive 1995 352,902 520,365 139,066 32,424 Officer Robert L. Laurent, Jr. 1993 186,101 - 85,000 5,583 Executive Vice President, 1994 209,725 141,023 95,000 8,425 Finance and 1995 226,489 260,183 50,590 15,281 Administration Chief Financial Officer S. A. Muscarnera 1993 173,633 - 120,000 5,209 Senior Vice President 1994 181,875 141,023 15,000 7,641 and Secretary 1995 191,144 260,183 18,750 16,726 Gordon Newman 1993 61,990 - 14,063 1,860 Senior Vice President, 1994 100,016 21,456 - 3,205 Supply Chain 1995 122,498 48,072 22,782 5,123
(1) Includes the Company contribution to savings and investment retirement plans up to the 3% offered to all employees of the Company in 1995, the dollar value of the benefit of premiums paid for split-dollar life insurance policies projected on an actuarial basis which cost is recovered by the Company from the proceeds of such policies (Mr. Sal Giordano, Jr. $6,226; Mr. Robert L. Laurent, Jr. $681; Mr. S. A. Muscarnera $3,186). (2) Includes a special award grated to Mr. Giordano in recognition of over fifty years of extraordinary and exemplary service to the Company as its President or Chairman, overseeing the growth of the Company from a $7,000,000 radiator manufacturer to the leading manufacturer of room air conditioners in North America. Options/SAR Grant Tables The following table sets forth information concerning the grant of stock options and/or stock appreciation rights (SAR's) during the Fiscal Year to the individual executive officers named in the Summary Compensation Table. The table shows the number of options granted to each named executive officer, the number of options granted as a percentage of options granted to all employees during the Fiscal Year, the exercise price of each option, the expiration date for each option, and a presentation of the potential realizable value for each option assuming annual rates of stock appreciation of 5% and 10% over each option term. 14 Options/SAR Grants Last Fiscal Year
% of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted # Fiscal Year ($/SH) Date 5% ($) 10% ($) Salvatore 37,500 $ 3.30 12/31/99 $ 34,190 $299,009 Giordano 39,814 4.50 8/31/00 49,499 109,381 77,314 19.2% Sal 37,500 3.30 12/31/99 34,190 75,551 Giordano, Jr. 101,566 4.50 8/31/00 126,274 279,032 139,066 34.5% Robert L. 25,000 3.30 12/31/99 22,793 50,367 Laurent, Jr. 25,590 4.50 8/31/00 31,815 70,303 50,590 12.6% S. A. 18,750 4.7% 3.30 12/31/99 17,095 37,945 Muscarnera Gordon Newman 22,782 5.7% 4.50 8/31/00 28,324 62,589
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table The following table sets forth the number of shares exercised during the Fiscal Year, the value realized upon exercise, the number of unexercised options at the end of the Fiscal Year, and the value of unexercised in- the-money options at the end of the Fiscal Year. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Value of Unexercised Shares Unexercised In-the-Money Acquired on Value Options at FY-end Options at FY-end Name Exercise Realized (#) Exercisable/ ($) (1) Exercisable/ (#) ($) Unexercisable Unexercisable Salvatore - - 450,000 E $ 440,257 E Giordano - - 77,314 U 54,278 U Sal - - 459,000 E 447,761 E Giordano, Jr. - - 1,076,066 U 1,892,024 U Robert L. - - 300,000 E 312,877 E Laurent, Jr. - - 50,590 U 36,071 U S. A. Muscarnera - - 225,000 E 233,246 E - - 18,750 U 24,750 U Gordon Newman - - 14,063 E 24,432 E - - 22,782 U 2,734 U
Compensation Committee Interlocks and Insider Participation The Compensation Committee is comprised of three directors who are not officers or employees of the Company (Howard S. Modlin, William J. Brennan and Anthony E. Puleo). The Committee submitted a plan to the Company's Board of Directors (the "Board") for the Fiscal Year 1996 which was approved by the Board on October 25, 1994. 15 Report of the Compensation Committee on Executive Compensation In determining the total compensation package for the chief executive officer and all other executive officers for the Fiscal Year, the Committee considered several factors including: the performance of the Company; the individual contribution of each executive officer; the need to attract and retain highly qualified executives in the air conditioning industry necessary to build long-term stockholder value; and the need to link a portion of each executive officer's long-term capital accumulation to the growth in the market value of the Company's Stock. Executive compensation was broken down into three major components (i) cash compensation, (ii) incentive bonuses, and (iii) stock options. Cash compensation for the Fiscal Year is shown on the Summary Compensation Table. For the Fiscal Year, the Committee recommended and the Board adopted the same incentive plan used for the Company's executive officers for the past three fiscal years. The awards under the plan are based heavily upon the performance of the Company (the "Executive Plan"). In accordance with the terms of the Executive Plan, the executive officers designated by the Board may receive incentive awards based upon a prescribed formula. The amount of the award ranges from 0.5% to 1.5% of an amount equal to consolidated pre-tax income of the Company minus $1,000,000 ("Adjusted Pre-Tax Income"). With respect to the individuals named in the Summary Compensation Table, the following percentages of fiscal 1995 Adjusted Pre-Tax Income have been designated: Mr. Salvatore Giordano 1.5%; Mr. Sal Giordano, Jr. 1.5%; Mr. Robert L. Laurent, Jr. .75%; and Mr. S. A. Muscarnera .75%. Under the Executive Plan, the following awards were made for Fiscal Year performance: Mr. Salvatore Giordano $520,365, Mr. Sal Giordano, Jr. $520,365, Mr. Robert L. Laurent, Jr. $260,183, Mr. S.A. Muscarnera $260,183. Mr. Gordon Newman, as Vice President, Supply Chain qualifies for incentive remuneration under a separate plan. Applying the formula, Mr. Newman earned an incentive award of $48,072. Respectfully submitted, Compensation Committee Howard S. Modlin - Chairman William J. Brennan Anthony E. Puleo 16 Employment Contract Mr. Salvatore Giordano has an Employment Agreement with the Company, which became effective on March 23, 1993. The material provisions of the Agreement include: (1) an annual base salary of at least $238,000, payable in equal semi-monthly installments; (2) annual participation in all compensatory plans and arrangements of the Company no less favorable than the current fiscal year plans including, but not limited to, a bonus not less than the amount of the latest fiscal year bonus (none was paid), and continuing eligibility to be awarded stock options; (3) reimbursement for all expenses incurred while on Company related business; and (4) annual consideration for base salary and plan participation increases, if deemed justified by the Company. the Agreement has a stated expiration date of March 23, 2003, but the term of the Agreement automatically extends and has a remaining term of ten years from any point in time, until the term is finally fixed at a period of ten years from an intervening event, as provided in the Agreement, such as permanent disability or death. During the Fiscal Year, the Company amortized the estimated present value of future non- salary benefits payable under the Agreement based upon certain assumptions, in the amount of $468,000. Item 12. Security Ownership of Certain Beneficial Owners and Management As of November 30, 1995, each director of the Company and all directors and executive officers of the Company owned beneficially the number of shares of the Company's equity securities set forth in the following table. Shares subject to acquisition within 60 days pursuant to stock options are shown separately. Unless otherwise indicated, the owners listed have sole voting and investment power. Class A Stock has no voting rights except as provided under Delaware Law. 17 Amount and Shares Subject Nature of to Acquisition Percent
Name of Individual Beneficial Within of Class Title of Class or Persons in Group Ownership 60 days (15) Owned (16) Common Stock Salvatore Giordano 1,100 (1) 0 Less than 1% Sal Giordano, Jr. 1,100 (1) 0 Less than 1% Joseph Giordano 13,910 (1) 0 Less than 1% Howard S. Modlin 256,800 (2) 0 1.35% Clarence Russel Moll 61,400 (3) 0 Less than 1% William J. Brennan 5,000 0 Less than 1% Anthony E. Puleo 2,000 (4) 0 Less than 1% Robert L. Laurent, Jr. 115,000 0 Less than 1% S. A. Muscarnera 55,000 0 Less than 1% All directors and executive officers as a group 514,610 0 2.71% Class A Stock Salvatore Giordano 2,378,740 (5)(6) 487,500 14.76% Sal Giordano, Jr. 1,521,509(5)(7)(8) 487,500 10.34% Joseph Giordano 1,710,170 (5)(8) 234,375 10.14% Howard S. Modlin 224,701 (9) 164,064 2.04% Clarence Russel Moll 34,725 (10) 96,563 Less than 1% William J. Brennan 4,375 121,876 Less than 1% Anthony E. Puleo 0 9,375 Less than 1% Robert L. Laurent, Jr. 100,625 325,000 2.21% S. A. Muscarnera 48,125 243,750 1.52% Gordon Newman 0 (11) 14,063 Less than 1% All directors and executive officers as a group 2,008,142 2,225,317 20.0% Class B Stock Salvatore Giordano 1,866,476 (12) 0 82.31% (15) Sal Giordano, Jr. 2,153,746(12)(13)(14) 0 94.98% Joseph Giordano 2,150,296 (12)(14) 0 94.83% All directors and executive officers as a group 2,262,566 0 99.78% Ownership of Common Stock, Class A Stock and Class B Stock combined, by all directors and executive officers as a group 4,785,318 2,225,317 16.53%
18 (1) The amount shown includes 1,100 shares as to which Messrs Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano share voting and investment power. (2) Includes 3,100 shares owned by members of Mr. Modlin's family as to which Mr. Modlin disclaims beneficial ownership. (3) Includes 15,000 shares owned by Dr. Moll's wife, as to which Dr. Moll disclaims beneficial ownership. (4) Through inadvertence, Mr. Puleo reported, in an untimely manner, one transaction on Form 4 covering the purchase of shares of the Common Stock of the Company during the Fiscal Year. The Company is not aware of any failure of Mr. Puleo to file any required Form. (5) Includes 825 shares as to which Messrs. Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano share voting and investment power; 502,025 shares as to which the same individuals also share voting and investment power; 102,150 are shares held by the Salvatore Giordano Foundation; and 35,817 are shares held by the Giordano Foundation, for both of which foundations these individuals are officers, directors and stockholders. (6) Includes 117,548 shares held of record by Mr. Giordano's wife, and 170,170 shares held of record by Mr. Giordano's wife in trust for their grandchildren, as to which Mr. Giordano disclaims beneficial ownership. (7) Includes 9,197 shares held of record by Mr. Giordano's wife, as to which Mr. Giordano disclaims beneficial ownership. (8) Includes 153,125 shares held in trust, as to which Messrs. Sal Giordano, Jr. and Joseph Giordano share voting and investment power. (9) Includes 2,713 shares owned by members of Mr. Modlin's family as to which Mr. Modlin disclaims beneficial ownership. (10) Includes 13,125 shares owned by Dr. Moll's wife as to which Dr. Moll disclaims beneficial ownership. (11) Through inadvertence, Mr. Newman reported, in an untimely manner, two transactions on Form 4 for the month of August, 1995 covering the sale of the Company's Common Stock and Class A Stock during the Fiscal Year. The Company is not aware of any failure of Mr. Newman to file any required Form. (12) The amount shown includes 1,810,186 shares as to which Messrs. Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano share voting and investment power; 52,500 are shares held by the Salvatore Giordano Foundation, and 3,790 are shares held by the Giordano Foundation, for both of which they are officers, directors and stockholders. 19 (13) The amount shown includes 1,150 shares held of record by Mr. Giordano's wife, as to which Mr. Giordano disclaims beneficial ownership. (14) The amount shown includes 175,000 shares held in trust, as to which Messrs. Sal Giordano, Jr. and Joseph Giordano share voting and investment power. (15) The amounts shown are the number of shares held under options exercisable within 60 days. (16) The Class B Stock is convertible into Common Stock at any time on a share-for-share basis. In the event that the individuals named as owning Class B Stock converted their shares into Common Stock, less than 5% of the class would remain outstanding, and pursuant to the terms of the Company's Certificate of Incorporation as amended, all remaining Class B Stock and all outstanding Class A Stock would automatically be converted into Common Stock. If such conversion took place, and the named individuals exercised all of the options indicated, such individuals and the group would beneficially own the following number of shares constituting the indicated percentage of Common Stock outstanding: Mr. Salvatore Giordano, 4,733,816 shares (of which 2,314,136 are shares as to which Mr. Giordano shares voting and investment power with Messrs. Joseph Giordano and Sal Giordano, Jr.; 154,650 are shares held by the Salvatore Giordano Foundation, and 39,607 are shares held by the Giordano Foundation, for both of which he is an officer, director and shareholder) constituting 11.64%; Mr. Sal Giordano, Jr., 4,163,855 shares (of which 2,314,136 are shares as to which Mr. Giordano shares voting and investment power with Messrs. Salvatore Giordano and Joseph Giordano; 154,650 are shares held by the Salvatore Giordano Foundation, and 39,607 are shares held by the Giordano Foundation, for both of which he is an officer, director and shareholder) constituting 10.24%; Mr. Joseph Giordano, 4,108,751 shares (of which 2,214,136 are shares as to which Mr. Giordano shares voting and investment power with Messrs. Salvatore Giordano and Sal Giordano, Jr.; 154,650 are shares held by the Salvatore Giordano Foundation, and 39,607 are shares held by the Giordano Foundation, for both of which he is an officer, director and shareholder) constituting 10.16%; and all directors and executive officers as a group 7,010,635 shares constituting 16.53%. 20 PRINCIPAL STOCKHOLDERS The following table sets forth information at November 1, 1995 with respect to the beneficial ownership of the Company's voting securities by all persons known by the Company to own more than 5% of the Company's outstanding voting securities. Unless otherwise indicated, the owners listed have sole voting and investment power.
Name and Address Amount Beneficially Percent Title of Class of Beneficial Owner (1) Owned of Class Class B Stock Salvatore Giordano 2,262,566 99.78% Joseph Giordano and Sal Giordano, Jr. c/o Fedders Corporation Liberty Corner, NJ 07938
(1) In the event that the named individuals converted their shares of Class B Stock into Common Stock, less than 5% of the class would remain outstanding, and pursuant to the terms of the Company's Certificate of Incorporation as amended, all remaining Class B Stock and all outstanding Class A Stock would automatically be converted into Common Stock. If such conversion took place, and the named individuals exercised all of their currently exercisable stock options, they would own 5,076,629 shares of Common Stock constituting 12.26% of Common Stock outstanding. See the previous table and the notes thereto for more detailed information with respect to the security ownership of the named individuals. Item 13. Certain Relationships and Related Transactions See the information included under Part III. Item 10 herein. 21 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 # Report of Independent Certified Public Accountants F5 Report of Independent Auditors F6 Consolidated Statements of Operations F7 Consolidated Balance Sheets at August 31, 1995 and 1994 F8 Consolidated Statements of Cash Flows for the years ended August 31, 1995, 1994 and 1993 F9 Stockholders' Equity for the years ended August 31, 1995, 1994 and 1993 F10 Notes to Consolidated Financial Statements F11-F20 (a) 2. Financial Statement Schedule Consolidated Schedule as of and for the years ended August 31, 1995, 1994 and 1993 Report of Independent Certified Public Accountants S-1 II. Valuation and Qualifying Accounts S-2
All other schedules have been omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the Notes thereto. 22 (a) 3. Exhibits (Note: With respect to incorporation by reference to exhibits filed by RTXX Corporation (formerly Rotorex Corporation), reference is hereby made to Commission File No. 1-2150) (3) (i) Restated Certificate of Incorporation, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for 1984 and incorporated herein by reference. (ii) Amendment to Restated Certificate of Incorporation, filed as Exhibit 4a to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985 and incorporated herein by reference. (iii) Correction of Restated Certificate of Incorporation, filed as Exhibit 4b to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985 and incorporated herein by reference. (iv) Amendment of Certificate of Incorporation, filed as Exhibit (3) (i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 and incorporated herein by reference. (v) Amendment of Certificate of Incorporation, filed as Exhibit (3) (ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 and incorporated herein by reference. (vi) Amendment to Certificate of Incorporation, filed as Exhibit (3) (vi) to the Company's Annual Report on Form 10-K for the year ended August 31, 1992 and incorporated herein by reference. (vii) By-Laws, amended through January 16, 1988, filed as Exhibit (3) (vii) to the Company's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (10) (i) Stock Option Plan II, filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for 1984 and incorporated herein by reference. (ii) Stock Option Plan III, filed as Exhibit 10 (iv) to the Company's Annual Report on Form 10-K for 1985 and incorporated herein by reference. (iii) Stock Option Plan IV, filed as Exhibit 10 (iv) to the Company's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (iv) Stock Option Plan V, filed as Exhibit 10 (v) to the Company's Annual Report on Form 10-K for 1988 and incorporated herein by reference. 23 (v) Stock Option Plan VI, filed as Exhibit 10 (vi) to the Company's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (vi) Stock Option Plan VII, filed as Exhibit 10 (vi) to the Company's Annual Report on Form 10-K for 1990 and incorporated herein by reference. (vii) Employment Contract between The Corporation and Salvatore Giordano dated March 23, 1993 filed as Exhibit 10 (viii) to the Company's Annual Report on Form 10-K 1993 and incorporated herein by reference. (viii) 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. (11) Statement re computation of per share earnings. (16) Letter reference change in certifying accountants. (21) Subsidiaries. (23) Consents of BDO Seidman, LLP. (27) Financial data schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended August 31, 1995. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. FEDDERS CORPORATION By/s/Robert L. Laurent, Jr. Robert L. Laurent, Jr. Executive Vice President, Finance and Administration and Chief Financial Officer December 13, 1995 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 December 13, 1995 /s/Salvatore Giordano, Jr. Salvatore Giordano, Jr. Vice Chairman, President December 13, 1995 and Chief Executive Officer and a Director (Principal Executive Officer) /s/Joseph Giordano Joseph Giordano Director December 13, 1995 /s/Howard S. Modlin Howard S. Modlin Director December 13, 1995 /s/Clarence Russel Moll Clarence Russel Moll Director December 13, 1995 /s/William J. Brennan William J. Brennan Director December 13, 1995 /s/Anthony Puleo Anthony Puleo Director December 13, 1995 /s/S.A. Muscarnera S.A. Muscarnera Director December 13, 1995 /s/Robert L. Laurent, Jr. Robert L. Laurent, Jr. Executive Vice President, December 13, 1995 Finance and Administration (Principal Financial and Accounting Officer) F1 Fedders Corporation Management's Discussion and Analysis of Results of Operations and Financial Condition The past three years for Fedders Corporation, have shown significant growth in revenues and profits. The growth in sales reflects the Company's concentration on flexible manufacturing to accommodate customers' increasingly seasonal delivery requirements while holding fixed costs at a lower level than in the early 1990s. The Company has also reallocated certain of its resources to the international marketplace which is four times larger than the U.S. market and still growing. The Company's business is affected by summer weather in major markets, with product shipped primarily in the second half of the fiscal year. Just-in-time delivery is a requirement of new retail leaders in the room air conditioner industry. Favorable weather for the third consecutive year has depleted industry inventories at manufacturers and retailers entering fiscal 1996. This follows a period of abnormally cool summer weather in 1992 and 1990 - compounded by retailers' credit constraints and industry consolidation that reduced room air conditioner manufacturer sales and created significant excess inventories industrywide from 1990 into the 1993 season. Manufacturers' shipments of room air conditioners in the U.S., during Fedders' fiscal periods totaled 4.1 million units in 1995, 3.8 million units in 1994 and 3.0 million units in 1993. The room air conditioner market outside of the U.S. is over 12.0 million units. Results of Operations With Fedders and U.S. industry inventories at minimal levels entering both of the last two fiscal years, Fedders increased its sales by 37% and 46% in 1995 and 1994, respectively. Reported industry unit shipments during 1995 in the U.S., excluding Fedders, increased only 12% while Fedders' U.S. unit shipments increased by 30% as a result of its flexible manufacturing and proven ability to meet customers' just-in-time requirements. The Company also increased international sales in fiscal 1995 by 56.3% over fiscal 1994 to $12.9 million. Fiscal 1994 sales increased due to increased orders from new accounts, including heat-generated orders that were produced and shipped during the retailers' selling season. Excess industry inventories from earlier cold weather negatively affected 1993 sales. The gross profit margin changed little in 1995. However, there was a favorable $3.5 million reduction in warranty provisions, an outgrowth of continuing improvements in quality offset, in part, by a $2.8 million write down of idle equipment and inflationary pressure, primarily related to copper. The gross profit margin increased in fiscal 1994 due to efficiencies in plant utilization F2 due to higher sales and continuous cost reduction. The 1993 gross profit margin, though lower than 1995 and 1994, reflects a significant improvement over prior years as a result of a 1992 restructuring that lowered costs. Selling, general and administrative expense decreased to 9.3% as a percent of net sales in fiscal 1995 from 11.0% in fiscal 1994 due to higher sales volume, that was offset, in part, by a $2.0 million provision for the implementation of an early retirement program. Selling, general and administrative expense decreased to 11.0% as a percent of net sales in fiscal 1994 from 16.3% in fiscal 1993 due to higher sales volume and consolidation of the Fedders North America sales and marketing function near the end of fiscal 1993. In fiscal 1993, selling, general and administrative expense decreased as a percent of sales, despite lower sales, as a result of expense reduction associated with a 1992 restructuring. Interest expense decreased, as a percent of sales, by 1.2% from fiscal 1994 and 2.1% from fiscal 1993 as long-term debt was prepaid, and accurate-response manufacturing minimized borrowing under the revolving credit facility. In 1995, the Company's income before taxes was only partially offset by net operating loss carryforwards from 1994, and as a result, the effective income tax rate increased to 17.3%. In fiscal 1994, the tax rate was 3% with a provision of $594,000 and in fiscal 1993 the Company had a net tax benefit of $565,000. During fiscal 1994, the Company adopted Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" which resulted in a one-time cumulative effect of an accounting change amounting to $1.8 million. The tax rate will increase to the full taxable rate in fiscal 1996. Prior-year earnings per share information was restated to reflect a 25% Class A Stock dividend distributed to holders of Common, Class A and Class B Stock in June 1995. Liquidity and Capital Resources Working capital requirements of the Company historically have been seasonal with cash balances peaking in August and the greatest utilization of its lines of credit occurring early in the calendar year. The Company's cash flow in 1995 continued strong with cash increasing to $57.7 million at August 31 from $34.9 million a year earlier even after prepaying debt. Accounts receivable decreased by $4.0 million as a result of lower fourth quarter sales in fiscal 1995. Ending inventories increased by $11.0 million, primarily as a result of raw materials purchases in August 1995 to support earlier production for fiscal 1996, and additional finished goods inventories to support international F3 sales. Accrued expenses increased in fiscal 1995 as a result of higher sales and marketing accruals related to higher sales offset, in part, by lower warranty accruals due to continued improvements in quality resulting in lower claims experience. Investing activities during 1995 were limited primarily to capital expenditures of $9.0 million. On July 31, 1995, the Company signed a contract to enter into a joint venture to manufacture room air conditioners in Ningbo, China with the Ningbo General Air Conditioner Factory at an existing manufacturing facility. Fedders has a 60% interest in Fedders Xinle Co., Ltd. which was initially capitalized on November 7, 1996. Fedders' cash contribution to the venture was approximately $8.4 million. The factory's present capacity is 200,000 units and is planned to be increased to 500,000 units in fiscal 1999. The venture is expected to sell 50% of its product in China and export 50%. In November 1995, the Company announced that a definitive agreement has been reached to merge with NYCOR, Inc. ("NYCOR"), a manufacturer of rotary compressors for use in room air conditioners and thermoelectrical modules (note 13). NYCOR has five Asian compressor licensees. The Company has a supply agreement with NYCOR for the supply of up to 800,000 compressors annually, through the year 2003 (note 2). The Company anticipates rotary compressor requirements of 1.4 million in fiscal 1996. The merger will provide a guaranteed supply of compressors to support the international growth of room air conditioners. The Company's expansion in the international market mitigates the dependency on weather in the North American market. Fedders' cash flow during fiscal 1995 was strong. As a result, the Company fully redeemed at par $13.2 million of principal, plus accrued interest outstanding, of its 5% convertible subordinated debentures due in May 1996. The Company also used $3.0 million for the early buy-out of an equipment lease. Remaining debt of $5.1 million has an average rate of interest of 1.9%. The Company also declared a cash dividend of $797,000 in fiscal 1995, the first cash dividend since 1991. The Company's revolving credit facility of $40.0 million is renewable in December 1997. The credit facility is collateralized by substantially all of the Company's assets. Management believes that the Company's cash, earnings and borrowing capacity are adequate to meet the needs of its operations and long-term credit requirements, including capital expenditures and its debt maturities. F4 Fedders Corporation Selected Financial Data (a)
(Amounts in thousands, except share data) 1995 1994 1993 1992 1991(e) Net sales $316,494 $231,572 $158,602 $192,365 $191,423 Gross profit 67,125 49,263 27,744 25,607 27,750 Percent of net sales 21.2 21.3 17.5 13.3 14.5 Operating income (loss) 37,653 23,905 1,907 (9,392) (1,883) Percent of net sales 11.9 10.3 1.2 (4.9) (.01) Pre-tax income (loss) 35,691 19,803 (2,340) (24,965) (13,666) Percent of net sales 11.3 8.6 (1.5) (12.7) (7.1) Net income (loss) $ 29,504 $ 20,989(c) $ (1,775) $(24,931)(d)$(11,178)(f) Per share $ 0.72 $ 0.53(c) $ (0.05) $ (0.67) $ (0.32) Cash dividends declared per share: Common $ 0.020 - - - $ 0.360 Class A 0.020 - - - - Class B 0.018 - - - 0.324 Cash $ 57,707 $ 34,869 $ 8,553 $ 8,738 $ 2,908 Total assets 136,775 100,653 81,285 179,249 197,243 Total debt 5,106 17,943 25,590 89,588 94,973 Stockholders' equity 82,542 49,317 24,229 19,039 44,181 Capital expenditures 9,041(b) 2,634 2,379 3,599 3,607 Depreciation and amortization 7,519 9,374 5,646 14,876 10,580 Earnings before interest, taxes, depreciation and amortization 44,143 32,252 6,317 2,675 6,269
(a) The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition and the consolidated financial statements and the notes thereto. (b) Includes buyout of $1,750,000 of equipment under lease. (c) In 1994, the Company adopted SFAS 109, Accounting for Income Taxes, which resulted in income of $1,780,000 or $0.04 per share from the cumulative effect of an accounting change. (d) Includes a net restructuring charge of $3,300,000 for costs associated with the shutdown of the Company's New Jersey production facilities offset, in part, by the benefit from the sale of its compressor business. (e) Information presented is for the eight months ended August 31, 1991. (f) Includes a pre-tax provision of $5,000,000 for a product recall. F5 Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Fedders Corporation We have audited the accompanying consolidated balance sheet of Fedders Corporation as of August 31, 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for the year ended August 31, 1995. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fedders Corporation as of August 31, 1995, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/BDO Siedman, LLP Woodbridge, New Jersey October 2, 1995 except for Note 13, which is as of November 30, 1995 F6 Report of Independent Auditors To the Board of Directors and Stockholders of Fedders Corporation We have audited the accompanying consolidated balance sheet of Fedders Corporation as of August 31, 1994, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the two years in the period ended August 31, 1994. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 the 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, 1994 and the consolidated results of its operations and its cash flow for each of the two years in the period ended August 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. As discussed in notes 1 and 7 to the consolidated financial statements, in 1994 the Company changed its method of accounting for income taxes. /s/ Ernst and Young LLP MetroPark, New Jersey October 6, 1994 F7 Fedders Corporation Consolidated Statements of Operations
(Amounts in thousands, except per share data) Years Ended August 31, 1995 1994 1993 Net sales $316,494 $231,572 $158,602 Costs and expenses: Cost of sales 249,369 182,309 130,858 Selling, general and administrative 29,472 25,358 25,837 278,841 207,667 156,695 Operating income 37,653 23,905 1,907 Interest expense (net of interest income of $751, $223 and $161 in 1995, 1994 and 1993, respectively (1,962) (4,102) (4,247) Income (loss) before income taxes 35,691 19,803 (2,340) Federal, state and foreign income tax (benefit) (note 7) 6,187 594 (565) Income (loss) before cumulative effect of an accounting change 29,504 19,209 (1,775) Cumulative effect of an accounting change (note 7) - 1,780 - Net income (loss) $29,504 $20,989 $(1,775) Earnings per share: Income (loss) before cumulative effect of an accounting change $ 0.72 $ 0.49 $ (0.05) Cumulative effect of an accounting change - 0.04 - Net income (loss) per share $ 0.72 $ 0.53 $ (0.05)
See accompanying notes F8 Fedders Corporation Consolidated Balance Sheets
(Amounts in thousands, except share data) August 31, 1995 1994 Assets Current assets: Cash and cash equivalents $57,707 $34,869 Accounts receivable (less allowances of $872 in 1995 and $744 in 1994) 8,847 12,840 Inventories 29,020 18,048 Deferred income taxes (note 7) 2,954 - Other current assets 893 674 Total current assets 99,421 66,431 Net property, plant and equipment 29,803 27,372 Deferred income taxes (note 7) 1,277 - Other assets 6,274 6,850 $136,775 $100,653 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt (note 5) $ 590 $ 616 Accounts payable 5,591 5,315 Income taxes payable (note 7) 9,131 758 Accrued expenses 27,986 21,369 Total current liabilities 43,298 28,058 Long-term debt (note 5) 4,516 17,327 Deferred income taxes (note 7) - 1,175 Other long-term liabilities: Warranty 3,962 2,852 Other 2,457 1,924 Commitments and contingencies (notes 3, 4, 6, 11, 12 and 13) Stockholders' equity (notes 9 and 10): Common Stock, $1 par value, 60,000,000 shares authorized, 18,988,598 and 19,641,659 issued at August 31, 1995 and 1994, respectively 18,989 19,642 Class A Stock, $1 par value, 30,000,000 shares authorized, 18,831,376 and 10,625,029 shares issued at August 31, 1995 and September 9, 1994, respectively 18,831 10,625 Class B Stock, $1 par value, 7,500,000 shares authorized, 2,267,206 and 2,268,206 issued and outstanding at August 31, 1995 and 1994, respectively 2,267 2,268 Additional paid-in capital (note 7) 46,481 51,423 Accumulated deficit (4,041) (24,764) Cumulative translation adjustment 15 (169) Notes due on Common Stock purchases (note 10) - (742) 82,542 58,283 Less treasury stock, at cost, 654,410 shares of Common Stock at August 31, 1994 - (8,966) Total stockholders' equity 82,542 49,317
$136,775 $100,653 See accompanying notes F9 Fedders Corporation Consolidated Statements of Cash Flows
(Amounts in thousands) Years Ended August 31, 1995 1994 1993 Operating activities: Net income (loss) $29,504 $20,989 $(1,775) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 7,519 9,374 5,646 Tax benefit related to stock options exercised 2,900 - - Deferred income taxes (5,406) (962) 566 Changes in operating assets and liabilities: Accounts receivable, net 3,993 (3,939) 5,574 Inventories (10,972) 1,222 25,864 Other current assets (219) 243 (832) Other assets 175 (59) (1,156) Accounts payable (521) 141 (23,051) Accrued expenses 6,617 4,370 (15,439) Income taxes payable 8,373 573 - Other long-term liabilities 1,643 1,687 272 Other 184 (39) (778) Net cash provided by (used in) operations 43,790 33,600 (5,109) Investing activities: Additions to property, plant and equipment (9,041) (2,634) (2,379) Disposal of property, plant and equipment 521 441 89 Net cash used in investing activities (8,520) (2,193) (2,290) Financing activities: Repayments of long-term debt (13,866) (9,229) (529) Proceeds from stock options exercised 692 4,138 7,743 Proceeds from notes due on common stock purchases 742 - - Net cash (used in) provided by financing activities (12,432) (5,091) 7,214 Net increase (decrease) in cash and cash equivalents 22,838 26,316 (185) Cash and cash equivalents at beginning of year 34,869 8,553 8,738 Cash and cash equivalents at end of year $57,707 $34,869 $8,553 Supplemental disclosure: Interest paid $ 1,904 $ 3,766 $3,248 Net income taxes paid (refunded) 492 (1,196) (1,155)
See accompanying notes F10 Fedders Corporation Consolidated Statements of Stockholders' Equity (Amounts in thousands)
Cumula- tive Notes Addi- Trans- Due on tional Retained lation Common Common Class A Class B Paid-in Earnings Adjust- Stock Treasury Stock Stock Stock Capital (Deficit) ments Purchases Stock August 31, 1992 $16,838 - $2,268 $41,583 $(33,353) $648 - $(8,945) Net loss - - - - (1,775) - - - Stock options exercised 1,776 - - 5,988 - - - (21) Foreign currency translation - - - - - (778) - - August 31, 1993 $18,614 - $2,268 $47,571 $(35,128)$(130) - $(8,966) Net income - - - - 20,989 - - - Stock dividend - $10,625 - - (10,625) Stock options exercised 1,028 - - 3,852 - - $(742) - Foreign currency translation - - - - - (39) - - August 31, 1994 $19,642 $10,625 $2,268 $51,423 $(24,764)$(169) $(742) $(8,966) Net income - - - - 29,504 - - - Stock dividend - 7,984 - - (7,984) - - - Conversion of Class B to Common Stock 1 - (1) - - - - - Dividends declared - - - - (797) - - - Stock options exercised - 222 - 470 - - - - Tax benefit related to stock options exercised - - - 2,900 - - - - Repayment of common stock notes - - - - - - 742 - Retirement of treasury stock (654) - - (8,312) - - - 8,966 Foreign currency translation - - - - - 184 - - August 31, 1995 $18,989 $18,831 $2,267 $46,481 $(4,041) $ 15 $ - $ -
See accompanying notes F11 Fedders Corporation Notes to Consolidated Financial Statements (Years ended August 31, 1995, 1994 and 1993; dollar amounts in tables, except per share, stock option and market data, are in thousands) 1. Summary of Significant Accounting Policies Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Net sales Sales are recorded, at time of shipment, net of provisions for sales allowances, warranty and similar items. Warranty and return policy The Company's warranty policy generally provides five-year coverage for sealed systems including compressors, two-year coverage on motors and one-year coverage on all other parts and labor related to air conditioners sold in North America. The Company's policy is to accrue the estimated cost of warranty coverage and returns at the time the sale is recorded. The policy with respect to sales returns generally provides that a customer may not return inventory except at the Company's option. Foreign currency translation Assets and liabilities of the Company's foreign subsidiaries are translated at the rate of exchange in effect at the end of the period. Net sales and expenses are translated at the average rate of exchange for the period. Translation adjustments are reflected as a separate component of stockholders' equity. Cash and cash equivalents The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of the first-in, first-out (FIFO) cost or market. The Company reviews inventory periodically for slow-moving and obsolete items. Write downs, which have historically been insignificant, are recorded in the period in which they are identified. Inventories consist of the following at August 31:
1995 1994 Finished goods $14,592 $9,596 Work in process 2,540 1,242 Raw materials and supplies 11,888 7,210 $29,020 $18,048
F12 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 1995 1994 Land and improvements $1,369 $1,363 Buildings 20 to 30 years 12,888 12,005 Machinery and equipment 5 to 12 years 53,302 47,146 Property, plant and equipment 67,559 60,514 Accumulated depreciation 37,756 33,142 $29,803 $27,372
Depreciation is provided on the straight-line basis over the estimated useful life of each asset as noted above. Depreciation expense includes a write down of certain idle fixed assets to estimated realizable value amounting to $2,860,000 and $3,902,000 in 1995 and 1994, respectively. Other assets Other assets consist primarily of intangible assets which, other than goodwill, are amortized over periods from one to eight years using the straight-line method. Goodwill is amortized over 40 years using the straight-line method and recoverability is evaluated periodically. In 1994, long-term receivables included receivables from employees, including an officer, that were repaid in 1995. Other assets are net of accumulated amortization of $8,473,000 and $8,072,000 at August 31, 1995 and 1994, respectively, and consist of the following at August 31:
1995 1994 Goodwill $5,517 $5,669 Other 757 754 Intangible assets 6,274 6,423 Long-term receivables - 427 $6,274 $6,850
The Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," establishes accounting standards for, among other things, the impairment of long-lived assets and certain identifiable intangibles. SFAS No.121 will be effective for financial statements for fiscal years beginning after December 15, 1995. It is not expected to have a material effect on the Company's consolidated financial statements. F13 Accrued expenses Accrued expenses consist of the following at August 31:
1995 1994 Warranty $3,442 $6,393 Marketing programs 10,685 4,368 Salaries and benefits 7,143 3,082 Other 6,716 7,526 $27,986 $21,369
Income taxes During the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes." The cumulative effect of adopting the new standard as of September 1, 1993 resulted in a tax benefit of $1,780,000. Prior years' financial statements were not restated to apply the provisions of SFAS No. 109. 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 $2,742,000, $2,233,000 and $2,164,000 in 1995, 1994 and 1993, respectively. Amounts per share Earnings per share are computed by dividing net income by the weighted average number of shares of Common, Class A and Class B Stock and other common stock equivalents outstanding during the year: 41,001,000, 39,386,000, and 37,297,000 in 1995, 1994, and 1993, respectively. Prior-period earnings per share have been restated to reflect the Class A Stock dividend distributed in June 1995 (notes 9 and 10). Reclassifications Certain items in the 1994 financial statements have been reclassified to conform to the 1995 presentation. 2. Transactions With NYCOR The Company has an agreement with NYCOR, Inc. ("NYCOR") for the supply of up to 800,000 compressors annually through 2003 with two renewable options. Purchases from NYCOR at negotiated market prices, amounted to $52,381,000, $52,108,000 and $28,801,000 in 1995, 1994 and 1993, respectively. Certain officers and directors of the Company are also officers and/or directors of NYCOR and have significant stockholdings in both companies. In November 1995, the Company announced that a definitive agreement was reached to merge with NYCOR (note 13). F14 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, 1995 and 1994, the Company had no short-term borrowing under its $40,000,000 revolving credit facility with a commercial finance company. Availability under the facility is based on accounts receivable and inventory and requires maintenance of certain financial covenants. The maximum amount outstanding under the credit facility was $21,512,000 and $28,404,000 during fiscal 1995 and fiscal 1994, respectively. The average amount outstanding and average rate of interest charged on outstanding borrowings under the credit facility were $4,602,000 at 11% in fiscal 1995 and $11,425,000 at 8.7% in fiscal 1994. The credit facility is collateralized by substantially all of the Company's assets and is in effect until December 1997. The rate of interest on the facility is at the prime rate plus 2.0%. 5. Long-term Debt Long-term debt consists of the following at August 31:
1995 1994 Promissory note payable to the State of Illinois, interest at 1% $4,527 $4,856 Capital lease obligations and other 579 712 5% convertible subordinated debentures due in 1996: $13,211 principal amount less unamortized discount of $1,029 at August 31, 1994 - 12,182 Promissory note payable to the State of Tennessee and Maury County, Tennessee, interest at 8% - 193 5,106 17,943 Less current maturities 590 616 $4,516 $17,327
Aggregate amounts of long-term debt, excluding capital leases and other of $579,000 maturing in each of the five years after August 31 are: 1996-$332,000, 1997-$335,000, 1998-$338,000, 1999-$342,000 and 2000-$346,000. The loan from the State of Illinois has an interest rate of 1%, is to be paid over the next 13 years, and is collateralized by a mortgage on the Illinois facility. The 5% convertible subordinated debentures due in May 1996 were fully redeemed by the Company in May 1995 at 100% of principal. The loan from the State of Tennessee and Maury County, Tennessee was prepaid by the Company in June 1995. F15 The Company has equipment which are under capital leases. The aggregate future minimum lease payments for the years ending August 31 are as follows: $251,000 in 1996, $253,000 in 1997 and $75,000 thereafter. The present value of minimum lease payments is $579,000, excluding $32,000 of interest. 6. Operating Leases The Company leases certain property and equipment under operating leases which expire over the next twelve years. Most of these operating leases contain one of the following options: (a) the Company may, at the end of the initial lease term, purchase the property at the then fair market value or (b) the Company may renew its lease at the then fair rental value for a period of one month to four years. Minimum payments for operating leases having initial or remaining non-cancelable terms are as follows: $1,526,000, $1,398,000, $959,000, $957,000 and $914,000 in 1996, 1997, 1998, 1999 and 2000, respectively. Minimum lease payments total $5,754,000. Total rent expense for all operating leases amounted to $2,083,000, $3,559,000 and $3,783,000 in 1995, 1994 and 1993, respectively. In 1995, an equipment lease expiring in February 1996 was bought out by the Company for $3,000,000, of which $1,250,000 related to the prepayment of rental and interest expense. 7. Income Taxes The provision for income tax (benefit) consists of the following components:
1995 1994 1993 Current: Federal $6,258 $396 - State 2,378 198 - Foreign 57 - $(870) 8,693 594 (870) Charge in lieu of income taxes 2,900 - - Deferred: Federal (4,392) - - State (1,014) - - Foreign - - 305 (5,406) - 305 $6,187 $594 $(565)
In 1995 and prior years, the exercise of stock options to acquire shares of the Company's Common and Class A Stock resulted in a compensation deduction for income tax purposes for which no corresponding expense was required for financial reporting purposes. The tax benefits related to these deductions, which were realized in 1995, are reflected as a charge in lieu of income taxes and a credit to additional paid-in capital. F16 Deferred income taxes result from "temporary differences" between assets and liabilities for financial reporting purposes and income tax purposes. These temporary differences are determined in accordance with SFAS No. 109 and are more inclusive in nature than "timing differences" as determined under previously applicable accounting principles. The principal temporary differences and carryforwards giving rise to deferred tax assets and liabilities at August 31 are as follows:
1995 1994 Warranty $2,822 $3,100 Depreciation (1,826) (4,400) Employee benefit programs 1,550 1,111 Inventory 854 1,196 Net operating loss carryforwards 1,500 9,826 Other 1,556 792 6,456 11,625 Valuation allowance (2,225) (12,800) $4,231 $(1,175)
The decrease in the deferred tax asset valuation allowance in 1995 resulted from the utilization of net operating loss carryforwards and a change in the Company's estimate of the utilization of temporary differences based primarily on improved operating results. The difference between the United States statutory income tax rate and the consolidated effective income tax rate is due to the following items:
1995 1994 1993 Expected tax (benefit) at statutory rate $12,492 $6,733 $(796) Effect of Canadian operations - - (123) Valuation allowance reflected in current income (7,851) (6,799) - Alternative minimum tax - 396 - State taxes, less federal income tax benefit 887 198 - Losses for which no benefits can be provided - - 295 Other 659 66 59 $6,187 $594 $(565)
At August 31, 1995, the Company has Canadian net operating loss carryforwards of approximately $3,500,000 that expire in the years 2002 through 2003. At August 31, 1994, the Company had U.S. net operating loss carryforwards of approximately $21,200,000, investment tax credit carryforwards of approximately $370,000 and alternative F17 minimum tax credit carryforwards of approximately $1,400,000. All U.S. net operating losses and credit carryforwards were utilized at August 31, 1995. 8. Industry Segment The Company operates in one industry segment and sells its room air conditioners primarily direct to retailers and also through private label arrangements and distributors. One customer accounted for 26% of net sales in 1995 and 28% in 1994 and 1993. Two other customers accounted for 10% and 11% of net sales in 1995 and 1994, respectively. International sales were approximately $12,892,000 in 1995, $8,250,000 in 1994, and $5,769,000 in 1993, and were made principally to Canada, Japan and Spain. 9. Capital Stock Common Stock: Shares of Common Stock are reserved for the conversion of Class A Stock and Class B Stock as indicated herein. At August 31, 1995, 1,050,000 shares of Common Stock are reserved under the Company's stock option plans. During fiscal year 1995, the Company canceled 654,410 shares of Common Stock held in treasury. Class A Stock: On June 14, 1995, 7,984,000 shares of Class A Stock were issued to stockholders through a stock dividend of one share of Class A Stock for each four shares of either Common, Class A or Class B Stock held. On September 9, 1994, 10,625,029 shares of Class A Stock were issued to stockholders through a stock dividend of one share of Class A Stock for each two shares of either Common or Class B Stock held. At August 31, 1995, 6,253,000 shares of Class A Stock are reserved under the Company's stock option plans. Class A Stock has rights, including dividend rights, substantially identical to the Common Stock, except that the Class A Stock will not be entitled to vote except to the extent provided under Delaware law. Class A Stock is immediately convertible into Common Stock on a share-for-share basis upon conversion of all of the Class B Stock and accordingly, at August 31, 1995, 25,084,000 shares of Common Stock are reserved for such conversion. Class B Stock: Class B Stock is immediately convertible into Common Stock on a share-for-share basis and accordingly, at August 31, 1995, 2,267,206 shares of Common Stock are reserved for such conversion. Class B Stock has greater voting power, in certain circumstances, ten-to-one, in the election of directors but receives a lower dividend, 90%, if declared, than Common Stock and has limited transferability. Class B Stock also votes separately, as a class, on certain significant issues. 10. Stock Option Plans All stock option plans, as approved by the stockholders, provide for the granting to employees and officers of incentive stock options (as defined under current tax laws) and non-qualified stock options. All of the plans provide for the granting of non-qualified stock options to directors who are not employees. Stock options are exercisable one year after the date of grant and, if not exercised, will expire five years from the date of grant. Certain options are only exercisable at the end of five years. F18 For options exercised during a six-week period in early 1994, optionees were given the opportunity to pay two-thirds of the exercise price upon exercise and to defer the remaining balance until the earlier of July 31, 1995 or upon the sale of such stock. Such optionees executed non-recourse interest bearing notes, which were repaid in 1995. The stock option plan summary is as follows:
(000's) 1995 1994 1993 Options outstanding beginning of year 3,903 2,987 3,200 Granted 403 752 2,299 Canceled (300) (109) (736) Exercised (218) (1,028) (1,776) Options outstanding prior to dividend-related adjustments 3,788 2,602 2,987 Dividend-related adjustments (a) 927 1,301 - Options outstanding at end of year 4,715 3,903 2,987 Options exercisable at end of year 3,336 1,862 688 Exercise price $2.33 $2.90 $4.36 per share to 4.70 to 5.66 to 7.63
(a) In connection with the stock dividend distributed on June 14, 1995 and September 9, 1994, all Class A options were adjusted to reflect a 25% and 50% increase, respectively, with a corresponding reduction in exercise price to 80% and 67%, respectively, of the previously existing price, in order to maintain the equivalent economic position of the optionee. 11. Pension Plans and Other Retirement Benefits The Company maintains a 401(k) defined contribution plan covering all U.S. employees. Company matching contributions under the plan are based on the level of individual participant contributions and amounted to $756,000 in 1995, $726,000 in 1994 and $754,000 in 1993.The Company has maintained defined benefit pension plans, which were curtailed in 1993, covering its union employees, which plans paid benefits to retirees based upon the length of continuous service. As of August 31, 1995, the Company has terminated its defined benefit pension plans with no material gain or loss resulting from such terminations. Net periodic pension expense (benefit) as of July 31 was $6,000, $(301,000), and $15,000 in 1995, 1994 and 1993, respectively. At July 31, 1994, the market value of plan assets of $11,354,000 exceeded the actuarial present value of the accumulated vested benefit obligation by $1,454,000. Of this excess, $215,000 was recorded as a prepaid pension benefit on the balance sheet and the remainder represented an unrecognized gain. The Company has an agreement with an officer that has a term of ten years from any point in time and provides for salary during the F19 employment period, a disability program, postretirement benefits and a death benefit in an amount equal to ten times the prior year's compensation, payable by the Company over ten years. The estimated present value of future non-salary benefits payable under the agreement has been determined based upon certain assumptions and is being amortized over the expected remaining years of service to the Company. The Company provides a portion of health care and life insurance benefits for retired employees who elect to participate in the Company's plan. During fiscal 1994, the Company adopted SFAS No. 106, which requires accrual accounting for all postretirement benefits other than pension. At August 31, 1995 and 1994 postretirement benefits were fully accrued. The effect of adoption in 1994 of SFAS No. 106 was not material. 12. Joint Venture On July 31, 1995, the Company announced that it signed a contract to enter into a joint venture with the Ningbo General Air Conditioner Factory ("Ningbo"), Ningbo City, Zheijang Province, People's Republic of China ("P.R.C.") to manufacture room air conditioners in China. The joint venture, Fedders Xinle Co., Ltd., was capitalized during the first fiscal quarter of 1996, at which time the Company contributed approximately $8,400,000 of cash plus know-how for a 60% interest in the joint venture. Ningbo contributed the factory, equipment and other assets valued at $5,600,000 for a 40% interest. The equivalent of approximately $10,400,000 in long-term financing was provided by a P.R.C. bank for the joint venture. 13. Subsequent Event In November 1995, the Company announced that a definitive agreement was reached to merge with NYCOR. Under the terms of the agreement, if Fedders Class A Stock is trading for less than $6.25 per share on the date preceding the merger, stockholders of NYCOR will receive shares of Fedders Preferred Stock, convertible into Fedders Class A Stock at $6.25, for each of the 7,565,000 shares of NYCOR Common, Class A and Class B Stock outstanding. If Fedders Class A Stock is trading for $6.25 or greater on the date preceding the merger, NYCOR stockholders will receive $6.25 worth of Fedders Class A Stock, with fractional shares being paid in cash. The agreement is subject to the approval of the stockholders and lenders of both companies in addition to any required governmental approvals. F20 14. Quarterly Financial Data (unaudited) (000's, except per share and market price data)
First Second Third Fourth Fiscal Year 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 $ $ $ $ $ $ $ $ $ $ Net sales 20,125 10,527 72,357 36,959 145,869 95,812 78,143 88,274 316,494 231,572 Gross profit 4,306 2,074 13,686 7,710 30,489 19,869 18,644 19,610 67,125 49,263 (c) Income (loss) before cumulative effect of accounting change (1,217)(3,891) 5,567 1,128 17,806 11,640 7,348 10,332 29,504 19,209 Cumulative effect of accounting change - 1,780 - - - - - - - 1,780 Net income (loss) (1,217)(2,111) 5,567 1,128 17,806 11,640 7,348 10,332 29,504 20,989 Net income (loss) per share (a, b) (0.03) (0.05) 0.13 0.03 0.44 0.29 0.18 0.26 0.72 0.53 Market price per share (a): Conmon Stock (FJC) High 6 1/4 3 5/16 6 1/8 4 1/8 6 1/8 4 3/4 7 7/8 4 3/8 7 7/8 4 3/4 Low 3 7/8 2 1/2 5 3 1/8 5 1/4 3 1/2 5 3/8 3 1/2 3 7/8 2 1/2 Class A Stock (FJA) High 4 3/8 - 4 3/4 - 4 3/4 - 6 5/8 - 6 5/8 - Low 3 1/4 - 3 5/8 - 4 - 4 1/8 - 4 -
(a) Restated to reflect a 25% stock dividend distributed on June 14, 1995. (b) Quarterly earnings per share may not add to earnings per share for the year due to rounding and changes in the number of weighted average shares outstanding. (c) Includes a $3.5 million reduction in warranty provisions and a $2.8 million write down of idle equipment. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Directors Fedders Corporation The audit referred to in our report dated October 2, 1995, except for Note 13, which is as of November 30, 1995, relating to the consolidated financial statements of Fedders Corporation, which is contained in item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audit. In our option, such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/BDO Seidman, LLP Woodbridge, New Jersey October 2, 1995, except for Note 13, which is as of November 30, 1995 S-1 FEDDERS CORPORATION VALUATION & QUALIFYING ACCOUNTS SCHEDULE II For The Years Ended August 31, 1995, 1994 and 1993 (Amounts in Thousands)
Balance at Additions Balance Allowance for beginning charged to at end Doubtful Accounts: of period expense Deductions of period Year ended: August 31, 1995 $ 744 $ 286 $ 158 $ 872 August 31, 1994 $ 1,078 $ 666 $ 1,000 $ 744 August 31, 1993 $ 3,356 $ 63 $ 2,341 (1) $ 1,078
(1) Deductions include $474 related to the sale of the compressor operations. S-2 EXHIBIT INDEX PAGE (3) (i) Restated Certificate of Incorporation, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for 1984 and incorporated herein by reference. (ii) Amendment to Restated Certificate of Incorporation, filed as Exhibit 4a to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985 and incorporated herein by reference. (iii) Correction of Restated Certificate of Incorporation, filed as Exhibit 4b to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985 and incorporated herein by reference. (iv) Amendment of Certificate of Incorporation, filed as Exhibit (3) (i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 and incorporated herein by reference. (v) Amendment of Certificate of Incorporation, filed as Exhibit (3) (ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987 and incorporated herein by reference. (vi) Amendment to Certificate of Incorporation, filed as Exhibit (3) (vi) to the Company's Annual Report on Form 10-K for the year ended August 31, 1992 and incorporated herein by reference. (vii) By-Laws, amended through January 16, 1988, filed as Exhibit (3) (vii) to the Company's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (10) (i) Stock Option Plan II, filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for 1984 and incorporated herein by reference. (ii) Stock Option Plan III, filed as Exhibit 10 (iv) to the Company's Annual Report on Form 10-K for 1985 and incorporated herein by reference. (iii) Stock Option Plan IV, filed as Exhibit 10 (iv) to the Company's Annual Report on Form 10-K for 1987 and incorporated herein by reference. (iv) Stock Option Plan V, filed as Exhibit 10 (v) to the Company's Annual Report on Form 10-K for 1988 and incorporated herein by reference. Page (v) Stock Option Plan VI, filed as Exhibit 10 (vi) to the Company's Annual Report on Form 10-K for 1989 and incorporated herein by reference. (vi) Stock Option Plan VII, filed as Exhibit 10 (vi) to the Company's Annual Report on Form 10-K for 1990 and incorporated herein by reference. (vii) Employment Contract between The Corporation and Salvatore Giordano dated March 23, 1993 filed as Exhibit 10 (viii) to the Company's Annual Report on Form 10-K 1993 and incorporated herein by reference. (viii) 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. (11) Statement re computation of per share earnings. (16) Letter reference change in certifying accountants. (21) Subsidiaries. (23) Consents of BDO Seidman, LLP. (27) Financial data schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended August 31, 1995. EX-11 2 FEDDERS CORPORATION COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 For The Years Ended August 31, 1995, 1994 and 1993 (Amounts in thousand except per share data)
1995 1994 1993 Average number of common and common equivalent shares outstanding (1) 41,001 39,386 37,297 Net income (loss) to common stockholders $29,504 $20,989 ($1,775) Net income (loss) per common share $0.72 $0.53 ($0.05) Fully diluted: Average number of common and common equivalent shares outstanding 41,001 39,386 37,297 Additional average number of common shares assuming the conversion of the 5% convertible subordinated debentures due 1996 - 388 388 Average common and common equivalent shares outstanding 41,001 39,774 37,685 Net income (loss) $29,504 $20,989 ($1,775) Interest relating to the 5% convertible subordinated debentures due 1996 net of applicable taxes and tax credits - 661 661 Net income (loss) applicable to common stockholders assuming full dilution $29,504 $21,650 ($1,114) Net income (loss) per common share $0.72 $0.54 ($0.03) Fully diluted income (loss) per share excluding anti-dilutive effect of conversion of debentures $0.72 $0.54 ($0.05)
(1) Average number of common and common stock equivalents outstanding have been restated to reflect Class A Stock dividend distributed in September 1994 and June 1995. (2) The 5% convertible subordinated debentures due in May 1996 were fully redeemed by the company (see note 5 of the Notes to Consolidated financial Statements). EX-16 3 EXHIBIT 16 June 8, 1995 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Gentlemen: We have read Item 4 of Form 8-K/A dated June 8, 1995, of Fedders Corporation and are in agreement with the statements contained in the paragraphs a(i), a(ii), a(iv)(v) and a(vi) on page 2 therein. We have no basis to agree or disagree with other statements of the registrant contained therein. /s/Ernst & Young LLP EX-21 4 Exhibit 21 SUBSIDIARIES State or Other Jurisdiction Name of Incorporation Fedders North America, Inc. (1) Delaware Fedders International, Inc. (1) Delaware Fedders Exporting, Inc. (1) Barbados Fedders Investment Corporation (1) Delaware Fedders, Inc. (2) Ontario Emerson Quiet Kool Corporation (2) Delaware RTXX Corporation (2) Delaware Fedders Capital N.V. (3) Netherlands Antilles Columbia, Specialties, Inc. (3) Delaware Fedders Asia Pte. Ltd. (4) Singapore Fedders De Mexico S.A. de C.V. (2) Mexico (1) Wholly owned subsidiary of Fedders Corporation (2) Wholly owned subsidiary of Fedders North America, Inc. (3) Wholly owned subsidiary of RTXX Corporation (4) Wholly owned subsidiary of Fedders International EX-23 5 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No. 2-98475, No. 33-4628, No. 33- 26740, No. 33-31332 and No. 33-55054) pertaining to the Employee Stock Option Plans of Fedders Corporation of our report dated October 2, 1995, except for Note 13, which is as of November 30, 1995, with respect to the consolidated financial statements and schedule of Fedders Corporation appearing in the Company's Annual Report on Form 10-K for the year ended August 31, 1995. /s/BDO Seidman, LLP Woodbridge, New Jersey December 8, 1995 EX-27 6
5 0000744106 FEDDERS CORPORATION 1000 YEAR YEAR YEAR AUG-31-1995 AUG-31-1994 AUG-31-1993 AUG-31-1995 AUG-31-1994 AUG-31-1993 57,707 34,869 0 0 0 0 9,719 13,584 0 (872) (744) 0 29,020 18,048 0 99,421 66,431 0 67,559 60,514 0 (37,756) (33,142) 0 136,775 100,653 0 43,298 28,058 0 4,516 17,327 0 40,087 32,535 0 0 0 0 0 0 0 42,455 16,782 0 136,775 100,653 0 316,494 231,572 158,602 316,494 231,572 158,602 249,369 182,309 130,858 278,841 207,667 156,695 0 0 0 0 0 0 1,962 4,102 4,247 35,691 19,803 (2,340) 6,187 594 (565) 29,504 19,209 (1,775) 0 0 0 0 0 0 0 1,780 0 29,504 20,989 (1,775) 0.72 0.53 (0.05) 0 0 0
EX-10 7 EXHIBIT (10) (viii) EXECUTION COPY JOINT VENTURE CONTRACT BETWEEN NINGBO GENERAL AIR CONDITIONER FACTORY AND FEDDERS INVESTMENT CORPORATION FOR THE ESTABLISHMENT OF FEDDERS XINLE CO. LTD July 31, 1995 Ningbo, Zhejiang Province, China T A B L E O F C O N T E N T S
Articles Page ARTICLE 1. GENERAL PROVISIONS 1 ARTICLE 2. PARTIES TO THE CONTRACT 4 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PARTIES 4 ARTICLE 4. ESTABLISHMENT OF THE JOINT VENTURE COMPANY 6 ARTICLE 5. PURPOSE, SCOPE AND SCALE OF PRODUCTION AND BUSINESS OF THE COMPANY 7 ARTICLE 6. TOTAL AMOUNT OF INVESTMENT AND REGISTERED CAPITAL 8 ARTICLE 7. RESPONSIBILITIES OF THE PARTIES 13 ARTICLE 8. MATERIALS AND SUPPLIES 15 ARTICLE 9. RIGHT TO USE LAND, PLANT AND UTILITIES 15 ARTICLE 10. TECHNOLOGY LICENSE CONTRACT, SERVICES AND SECONDMENT CONTRACT AND TRADEMARK CONTRACTS 17 ARTICLE 11. SALE OF PRODUCTS 17 ARTICLE 12. BOARD OF DIRECTORS 18 ARTICLE 13. BUSINESS MANAGEMENT 20 ARTICLE 14. PERSONNEL AND LABOR MANAGEMENT 22 ARTICLE 15. PREPARATION OF THE COMPANY 25 ARTICLE 16. FINANCIAL AFFAIRS AND ACCOUNTING 25 ARTICLE 17. TAXATION AND INSURANCE 28 ARTICLE 18. FOREIGN EXCHANGE REQUIREMENTS OF THE COMPANY AND FOREIGN EXCHANGE BALANCING 28 ARTICLE 19. CONFIDENTIALITY AND NON-COMPETITION 29 ARTICLE 20. JOINT VENTURE TERM 31 ARTICLE 21. TERMINATION; DISPOSAL OF ASSETS ON DISSOLUTION 32 ARTICLE 22. LIABILITY FOR BREACH OF CONTRACT 34 ARTICLE 23. FORCE MAJEURE 35 ARTICLE 24. APPLICABLE LAW 36 ARTICLE 25. SETTLEMENT OF DISPUTES 36 ARTICLE 26. MISCELLANEOUS 37
Schedule 1 Contributions of Parties and Terms Thereof Schedule 2 Tax Preferences and Holidays Schedule 3 Utilities Schedule 4 Initial Management Organization Chart Annex A Asset Transfer Contract Annex B Labor Contract Annex C Party A Trademark Contract Annex D Party B Trademark Contract Annex E Services and Secondment Contract Annex F Technology License Contract Attachments Joint Feasibility Study Certificate of Approval Articles of Association JOINT VENTURE CONTRACT THIS JOINT VENTURE CONTRACT (the "Contract") is made this 31st day of July, 1995, in Ningbo Municipality, Zhejiang Province between Ningbo General Air Conditioner Factory ("Party A"), a collectively- owned enterprise established pursuant to the laws of the People's Republic of China ("China"), and Fedders Investment Corporation ("Party B"), a company organized and existing pursuant to the laws of the State of Delaware, United States of America ("USA"). Party A and Party B are collectively referred to herein as the "Parties" and individually as a "Party". This Contract is made in accordance with the Law of China on Joint Ventures Using Chinese and Foreign Investment (the "Joint Venture Law"), the implementing regulations issued thereunder (the "Joint Venture Regulations"), and other relevant laws and regulations of China and Zhejiang Province. ARTICLE 1. GENERAL PROVISIONS 1.1 Preliminary Statement Party A is a collectively-owned enterprise producing air conditioners, air cleaners, stabilizers and other appliances and related components in its factory within the Ningbo Economic and Technological Development Zone, Ningbo City, Zhejiang Province, China, and selling its products primarily in China. Party B is a corporation 100% owned by Fedders Corporation which is a corporation producing high quality, high efficiency room air conditioners and dehumidifiers produced in highly efficient factories within the United States of America and other countries. The Parties wish to establish a joint venture company for the production of the Products as hereafter defined. After friendly consultations conducted in accordance with the principles of equality and mutual benefit, the Parties have agreed to establish an equity joint venture enterprise, using advanced technology and modern management methods for the production and sale of the Products, in accordance with the Joint Venture Law, the Joint Venture Regulations, other relevant laws and regulations of China and Zhejiang Province, and the provisions of this Contract. The Parties therefore have entered into this Contract as of the date first set forth above. 1.2 Definitions The following terms as used in this Contract shall have the meanings set forth below: (a) An "Affiliate" of a Party means a corporation, partnership, trust or other entity directly or indirectly controlling or controlled by the Party or under direct or indirect common control with the Party. For the purposes of this definition, "control" means direct or indirect ownership of at least fifty percent (50%) of the voting rights of said entity. (b) "Approval Authority" means the Ningbo Economic and Technological Development Zone Administrative Committee. (c) "Articles of Association" means the articles of association of the Company signed by the Parties and attached to this Contract as an attachment. (d) "Asset Transfer Contract" means the asset transfer contract between the Company and Party A substantially in the form attached hereto as Annex A. (e) "Board" means the board of directors of the Company. (f) "Company" means the joint venture company to be established pursuant to the laws of China and the terms of this Contract. (g) "Establishment Date" means the date on which the business license of the Company is issued by the relevant administration for industry and commerce. (h) "Feasibility Study" means the jointly prepared feasibility study report dated May, 1995, which has been approved by the Approval Authority on June 9, 1995, the Certificate of Approval of which is attached to this Contract as an attachment. (i) "Initial Contribution Date" shall have the meaning ascribed to it in Article 6.4(c). (j) "JV Employee" means a Chinese staff member or worker of the Company, including, where applicable, ranking officers, other than such personnel provided pursuant to the Services and Secondment Contract or nominated by Party B in accordance with Article 14.6. (k) "Labor Contract" means the contract between the Company and each JV Employee substantially in the form attached hereto as Annex B. (l) "Land" means the sites occupying an area of approximately 14,420 square meters located within the Zone in Ningbo Municipality, Zhejiang Province, China, the boundaries of which are marked on the Land Map. (m) "Land Map" means the map attached as Exhibit A to the Land Lease Contract on which the boundaries of the Land are marked. (n) "Land Lease Contract" means the contract between the Company and Ningbo Economic Development Zone (or its affiliated company) leasing the factory complex to the Company for a thirty year period with an option to extend for a further 20 years on substantially the same terms and conditions as the lease to Party A, which should allow the Company to carry out its business operations in accordance with and as contemplated by this Contract, in accordance with applicable Chinese laws and regulations. (o) "Party A Trademark Contract" means the trademark license contract between the Company and Party A substantially in the form attached hereto as Annex C. (p) "Party B Trademark Contract" means the trademark license contract between the Company and Party B or its Affiliate substantially in the form attached hereto as Annex D. (q) "Plant" means the buildings and facilities of the Company to be located on the Land. (r) "Products" means high quality, high efficiency air conditioners, dehumidifiers, air cleaners, stabilizers and other appliances and other related components and service parts therefor, to be produced by the Company. (s) "RMB" means Renminbi, the lawful currency of China. (t) "Services and Secondment Contract" means the secondment and services contract between the Company and Party B or its Affiliate substantially in the form attached hereto as Annex E. (u) "Guarantee Letter" means the letter from Fedders Corporation confirming its guarantee for the performance of Party B's obligations under this Contract. (v) "Technology License Contract" means the technology license contract between the Company and Party B or its Affiliate substantially in the form attached hereto as Annex F. (w) "Term" shall have the meaning ascribed to it in Article 20.2. (x) "Three Funds" shall have the meaning ascribed to it in Article 16.5(a). (y) "Zone" means the Ningbo Economic and Technological Development Zone, Ningbo Municipality, Zhejiang Province, China. ARTICLE 2. PARTIES TO THE CONTRACT 2.1 Parties The parties to this Contract are as follows: (a) Ningbo General Air Conditioner Factory, a collectively-owned enterprise registered with the Ningbo Economic and Technological Development Zone Administrative Bureau for Industry and Commerce (Business License No. 14410030-X) and with its legal address at Factory Building 8502, Ningbo Economic and Technological Development Zone, Ningbo Municipality, Zhejiang Province, China. The Legal Representative of Party A is: Name: Cai Kangqian Position: Director Nationality: Chinese (b) Fedders Investment Corporation, a corporation organized and existing under the laws of the State of Delaware, USA, with its principal place of business at Westgate Corporate Center, 505 Martinsville Road, Liberty Corner, New Jersey 07938, USA. The Legal Representative of Party B is: Name: Robert L. Laurent, Jr. Position: Executive Vice President Finance and Administration and Chief Financial Officer Nationality: USA ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PARTIES 3.1 Representations and Warranties of Party A Party A hereby represents and warrants to Party B as follows: (a) Party A is a collective enterprise duly organized, validly existing and in good standing as a legal person under the laws of China. (b) Party A has full legal right, power and authority to execute and deliver this Contract and all of the contracts and documents referred to in this Contract to which it is a party and to observe and perform its obligations hereunder and thereunder. (c) Party A has taken all appropriate and necessary collective, corporate and administrative action to authorize the execution and delivery of this Contract and all of the contracts and documents referred to in this Contract to which it is a party and to authorize the performance and observance of the terms and conditions hereof and thereof. (d) Party A has obtained all consents, approvals and authorizations necessary for the valid execution and delivery of this Contract and all of the contracts and documents referred to in this Contract to which it is a party and to observe and perform its obligations hereunder and thereunder; provided, however, that this Contract is subject to the approval of the Approval Authority before the same may become effective. (e) Party A is not aware of any material litigation, arbitration or administrative proceeding which is currently taking place or pending or threatened against Party A or the assets of Party A which are the subject of this Contract. Furthermore, Party A is not in default under any law, regulation, government directive whether having force of law or not, judgment, order, authorization, agreement or obligation applicable to the business or assets of Party A which are the subject of this Contract. (f) All information supplied to Party B by Party A in relation to this Contract, including the information concerning the business and financial status of Party A and its assets, inventories and outstanding contractual arrangements with its suppliers and customers, is true and correct whether the same has been verified or audited by an independent third party or not. 3.2 Representations and Warranties of Party B Party B hereby represents and warrants to Party A as follows: (a) Party B is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, USA. (b) Party B has full legal right, power and authority to execute and deliver this Contract and all of the contracts and documents referred to in this Contract to which it is a party and to observe and perform its obligations hereunder and thereunder. (c) Party B has taken all appropriate and necessary corporate action to authorize the execution and delivery of this Contract and all of the contracts and documents referred to in this Contract to which it is a party and to authorize the performance and observance of the terms and conditions hereof and thereof. (d) Party B has obtained all consents, approvals and authorizations necessary for the valid execution and delivery of this Contract and all of the contracts and documents referred to in this Contract to which it is a party; provided, however, that this Contract is subject to the approval of the Approval Authority before the same may become effective. (e) Party B is not aware of any material litigation, arbitration or administrative proceeding which is currently taking place or pending or threatened against Party B or the assets of Party B which are the subject of this Contract. Furthermore, Party B is not in default under any law, regulation, government directive whether having force of law or not, judgment, order, authorization, agreement or obligation applicable to the business or assets of Party B which are the subject of this Contract. (f) All information supplied to Party A by Party B in relation to this Contract, including the information concerning the business and financial status of Party B and its assets, inventories and outstanding contractual arrangements with its suppliers and customers, is true and correct whether the same has been verified or audited by an independent third party or not. ARTICLE 4. ESTABLISHMENT OF THE JOINT VENTURE COMPANY 4.1 Establishment of the Joint Venture Company In accordance with the Joint Venture Law and the Joint Venture Regulations and relevant Chinese laws and regulations, the Parties hereby agree to establish the Company pursuant to the terms of this Contract. 4.2 Name and Address of the Company (a) The name of the Company shall be "Fedders Xinle Co. Ltd." in English and in Chinese. (b) The legal address of the Company shall be G3 Zone, Ningbo Economic and Technological Development Zone, Ningbo Municipality, Zhejiang Province, China. 4.3 Limited Liability Company The Company shall be a limited liability company. Except as expressly agreed in this Contract or other contracts executed between the Parties and the Company from time to time, the liability of each Party with respect to the Company shall be limited to the amount of its respective subscribed capital contributions required under this Contract. Neither Party shall have any liability jointly or severally to any third party in respect of the debts or obligations of the Company. 4.4 Legal Person The Company shall be a legal person under the laws of China. 4.5 Compliance with Chinese Law (a) All of the activities of the Company shall comply with the published laws, regulations and rules of China and shall be protected by such laws, regulations and rules. (b) The legal rights of the Company and its investors shall be protected by Chinese law. ARTICLE 5. PURPOSE, SCOPE AND SCALE OF PRODUCTION AND BUSINESS OF THE COMPANY 5.1 Purpose of the Company The purpose of the Company is: (a) to manufacture and sell high quality Products to meet the growing demands of customers inside and outside China; (b) to apply Party B's advanced technology, management techniques and market knowledge to improve capacity utilization, product quality, production efficiency and cost controls, and generally to upgrade and expand the existing production capacity, and to utilize Party A's experience in manufacturing and facilities; and (c) to utilize the well recognized technology and technical know- how of Party B to expand existing markets and increase sales of air conditioners in China and abroad; so as to enable the Parties to operate the Company profitably and receive satisfactory returns on their investments. 5.2 Scope of Business of the Company The scope of business of the Company is: (a) to manufacture the Products; (b) to sell the Products on the domestic and export markets; (c) to provide or arrange for the provision of after-sale services such as repair and maintenance for the Products; and (d) to carry out such other business and activities, subject to relevant government approvals, as are necessary to generate foreign exchange or implement actions approved by the Board in furtherance of the goals of the Company (including the production of related raw materials and packaging materials for the Company's own use, and sub-contracting production as required by the production needs of the Company and other business and activities related to and/or supportive to the above business purpose and scope). 5.3 Estimated Scale of Production The estimated scale of production of the Products is as set forth in the Feasibility Study. The total productive capacity of the Company is estimated to be approximately 500,000 units by the 1999 calendar year of production. The figures contained in this Article and the Feasibility Study relating to production and capacity are estimates and may be either increased or decreased by the Board or the President during actual production based on the market situation, improvements in productive capacity and other relevant factors. 5.4 Location of Production Activities The Company shall carry out its production and operation activities at the Plant which is to be located within the boundaries specified on the Land Map and at such other locations as the Board may determine from time to time. ARTICLE 6. TOTAL AMOUNT OF INVESTMENT AND REGISTERED CAPITAL 6.1 Total Investment The total amount of investment of the Company shall be RMB 203,500,000 (Two Hundred Three Million Five Hundred Thousand Chinese Yuan). 6.2 Registered Capital The total amount of the registered capital of the Company shall be RMB 117,373,000 (One Hundred Seventeen Million Three Hundred Seventy-three Thousand Chinese Yuan). The respective contributions of the Parties shall be as follows: (a) Party A's aggregate contribution to the registered capital of the Company shall be forty percent (40%) of the total registered capital of the Company, that is RMB 46,949,000 (Forty-six Million Nine Hundred Forty Nine Thousand Chinese Yuan)* to be contributed in the form of the assets less liabilities assumed by the Company as set forth on Schedule 1(a). (b) Party B's aggregate contribution to the registered capital of the Company shall be sixty percent (60%) of the total registered capital of the Company, that is the United States Dollar equivalent of RMB 70,424,000 (Seventy Million Four Hundred Twenty-four Thousand Chinese Yuan)* to be contributed in the form of cash and know-how as set forth in Schedule 1(b). 6.3 Rate of Exchange To the extent any installment of either Party's contribution is denominated in or has been valued in United States Dollars, the Chinese Yuan equivalent shall be determined at the middle rate announced daily by the People's Bank of China for the exchange of United States Dollars to RMB based on the average prevailing rate of the previous day on the inter-bank foreign exchange market or, if such rate is no longer announced by the People's Bank of China, such other rate as the Parties may agree in writing. *Subject to adjustment based upon the pre-closing audit of Party A's net assets to be completed as of July 31, 1995, and further adjustments, if necessary, in the post-closing audit. 6.4 Timing of Capital Contributions (a) Subject to the conditions of this Article 6.4, the registered capital of the Company shall be paid by the Parties in installments according to Schedule 1(c). (b) Notwithstanding Article 6.4(a), the Parties shall have no obligation to contribute their respective shares of the registered capital of the Company until: (1) the Asset Transfer Contract, Land Lease Contract, Services and Secondment Contract, Party A Trademark Contract, Party B Trademark Contract, Services Contract, Technology License Contract and Guarantee Letter have been executed by the parties thereto and have received the approval of the relevant Chinese authorities, if required; (2) the Labor Contract has been approved by competent labor authorities in a form satisfactory to the Parties, if such approval is at any time required; (3) valid use certificates in respect of the Land have been issued in the name of the Company in a form consistent with applicable government regulations and acceptable to Party B and an environmental assessment and remediation (if deemed necessary by either Party) has been completed to the reasonable satisfaction of both Parties; (4) the form and substance of the approvals received in connection with or in accordance with this Contract and the documents referred to in Article 6.4(b)(1)-(3) are acceptable to each Party; (5) financing for the operation of the Company in accordance with Article 6.5 of this Contract has been arranged in amounts and on terms acceptable to the Parties and the Company has entered into contractually binding loan agreements or definitive commitment letters with the relevant banks or financial institutions; (6) arrangements satisfactory to the Parties in relation to availability of foreign exchange have been secured; (7) the Parties have received evidence to their respective satisfaction that all tax preferences, holidays and concessions referred to in Article 17.1(c) and Schedule 2 have been obtained; (8) The Environmental Protection Agency of the Zone shall have issued a certificate to the Company confirming that the Land and Plant which Party A is to arrange to lease to the Company as of the Initial Contribution Date: (i) are free from any environmental liabilities to and claims from both government and non-government parties and (ii) there are no environmental conditions on the Land and Plant, nor have there been any releases of contaminants into the soils, surface waters, or groundwater of the Land, which would adversely impact public health or the environment. (c) As soon as the conditions set forth in Article 6.4(b) have been fulfilled, the Parties shall immediately notify each other in accordance with Article 26.6 and agree upon a mutually convenient date which shall be within one month of such notification (the "Initial Contribution Date") on which the Parties shall simultaneously make full contribution of their respective initial subscriptions of the registered capital as provided for in this Article 6 and Schedule 1. 6.5 Additional Financing (a) The Company may borrow any necessary funds from domestic or international banks or other financial institutions on terms and conditions approved by the Board. None of the Parties shall be obligated to lend funds to the Company or to guarantee loans from third parties or financial institutions. However, if, at the request of the Board, a Party does agree to lend funds to the Company, or to guarantee a loan to the Company from a third party or financial institution, such Party shall be entitled to be paid interest on the loan or guarantee fees as if such Party were not a party to the joint venture and as if the transaction were a negotiated, arm's length financing from a third party. (b) Prior to the contribution of capital referred to in Article 6.4, the Company shall have received a firm commitment from a Chinese financial institution expressing its willingness to lend to the Company the principal sum of RMB 86,000,000 (Eighty-six Million Chinese Yuan) for a term of at least twelve (12) years at a fixed rate of interest and on other terms and conditions acceptable to the Company and its Board of Directors. The said loan may be secured by a mortgage over the Company's assets, but in no event shall Party B be required to guarantee such loan. Notwithstanding the above, the fixed rate of interest is subject to adjustment during the term of the loan if required by the relevant laws of China. The proceeds from this loan will be used, in part, to satisfy Party A's short term debt under the assumed liabilities set forth on Schedule 1(a). (c) The Company shall also seek to obtain a short-term working capital loan or line of credit in the amount of RMB 55,000,000 (Fifty-five Million Chinese Yuan) at an acceptable rate of interest to be used during the Company's first calendar year of operation. In the event that such loan or line of credit has not been arranged prior to September 30, 1995, the Parties may delay their capital contribution until such time as the said loan or line of credit is arranged. 6.6 Decrease or Increase of Registered Capital During the term of the Company, the Company shall not reduce the amount of its registered capital. Any increase in the registered capital of the Company shall require the unanimous approval of the Board and the approval of the Approval Authority. 6.7 Transfer of Registered Capital (a) Subject to the provisions of Article 6.7(b) and (c) below, a Party may assign, sell or otherwise dispose of all or part of its registered capital contribution to the Company to any third party, provided that it first obtains the unanimous approval of the Board and the approval of the Approval Authority. (b) When a Party (the "Disposing Party") wishes to assign, sell or otherwise dispose of all or part of its registered capital contribution to a third party (a "Transfer"), it shall provide written notice (the "Notice") to the other Party (the "Non- Disposing Party") specifying its wish to make the Transfer; the interest it wishes to transfer; the terms and conditions of the Transfer; and the identity of the proposed transferee. (c) The Non-Disposing Party shall have a preemptive right to purchase the whole of such interest on terms and conditions no less favorable than those specified in the Notice. If the Non-Disposing Party elects to exercise its preemptive right, it shall notify the Disposing Party in writing within thirty (30) days of the giving of the Notice to the Non-Disposing Party of its intention to purchase the whole of the interest to be transferred; the Non-Disposing Party shall then, subject to obtaining the approval of the Approval Authority, purchase such interest on the terms and conditions specified in the Notice, unless both Parties agree otherwise in writing. If the Non-Disposing Party consents to the Transfer, the Disposing Party may assign, sell or otherwise dispose of such interest to such proposed transferee, on the terms and conditions set forth in the Notice, provided that such sale or disposal takes place within six (6) months after the giving of the Notice. The Disposing Party shall provide the Non-Disposing Party with a duplicate of the executed written agreement with the transferee within fourteen (14) days after the agreement is executed. (d) Notwithstanding the provisions of this Article 6.7, Party B may assign its registered capital contribution to an Affiliate of Party B and Party A hereby consents to such assignment, provided that Party B guarantees the affiliate's performance under this Contract and the Articles of Association, and to amend this Contract if appropriate to indicate such obligation, and Party B shall also notify the Board and Party A in writing of the assignment and specify the name and the legal address of the Affiliate, as well as the name, position, nationality and address of the legal representative of the Affiliate. The assignment shall be reported to the Approval Authority for approval. 6.8 Encumbrance of Registered Capital A Party shall not mortgage or otherwise encumber all or any part of its contribution to the registered capital of the Company without the prior written consent of the other Party. 6.9 Investment Certificates After the Parties have made their initial capital contributions, the Company shall engage an internationally recognized firm of auditors registered in China to verify the contributions. Upon the issuance of a verification report by such accountant, the Company shall issue an investment certificate to each of the Parties in accordance with the Joint Venture Law. The Company may issue investment certificates from time to time as the Parties make further capital contributions and the same are verified by the registered auditors. ARTICLE 7. RESPONSIBILITIES OF THE PARTIES 7.1 Responsibilities of Party A In addition to its other responsibilities under this Contract, Party A and/or its Affiliates shall: (a) assist in handling all matters relating to the establishment of the Company, including submission of the applications to the Approval Authority and any other relevant governmental authority whose approval is required for approval of this Contract, the registration of the Company and the issuance of the Company's business license, and the opening of RMB and foreign exchange bank accounts; (b) assist the Company and Party B, and use its best efforts, to handle procedures in connection with the submission of applications for, and the grant of, all necessary approvals, permits, certificates and licenses required in connection with all matters regulated by Chinese governmental authorities, including without limitation safety and environmental matters, foreign exchange matters and approvals, and Chinese tax preferences, holidays and concessions and any other investment incentives available to or for the Company and Party B; (c) assist the Company, if requested, to handle procedures and obtain all relevant import and export licenses and approvals for any import supply agreements and arrangements, and the Company's imported equipment, machinery, vehicles, raw materials and exported products of the Company; (d) arrange for the Company to obtain a thirty year lease the Land with an option to extend for twenty years as set forth in Article 9.1, handle the registration of the Company's lease of the Land with the relevant government department, and handle all other necessary procedures in relation thereto to ensure that the Company has the right to use the Land in conformity with the scope of its operations for the term of the Company, as extended from time to time, and that the Company is issued a certificate from the relevant government department evidencing such right; (e) assist the Company in contracting for and obtaining electricity, water and other necessary utilities required by the Company, as set forth in Article 9; (f) assist directors and foreign personnel of Party B and the Company to obtain all necessary entry visas, travel documents and work permits; (g) assist the Company with the smooth transfer of employees from Party A who are recruited by the Company and with the recruitment of other qualified Chinese management personnel, technical personnel, workers and other needed personnel, and with other employment related matters; (h) generally assist the Company in its relations with local government authorities and Chinese domestic companies, including the customers and suppliers of the Company; (i) assist the Company to obtain adequate allocations and supplies of raw materials, local equipment, means of transportation, articles for office use and communication facilities in accordance with Article 8 hereof; (j) assist the Company in obtaining RMB and foreign exchange loans from financial institutions in China; (k) assist the Company to qualify for the status of "Technologically Advanced Enterprise"; (l) enter into those contracts attached to this Contract as Annexes to which it is a party; and (m) handle other matters entrusted to it by the Company and as agreed from time to time by Party A. 7.2 Responsibilities of Party B In addition to its other responsibilities under this Contract, Party B shall: (a) assist the Company, if requested, to procure domestically and from abroad equipment, supplies and raw materials in accordance with Article 8 hereof; (b) assist the Company as requested to recruit appropriate management and senior technical personnel; (c) enter into, or cause its Affiliates to enter into, those contracts and agreements with the Company to which it or any of its Affiliates is a party; (d) assist the Company, if requested, to gather information regarding and develop export markets for the Products; (e) handle other matters entrusted to it by the Company and agreed from time to time by Party B; and (f) export fifty (50) per cent of the Products manufactured, based upon a rolling three calendar year average, provided that the Products are competitive in price and meet international standards of quality. ARTICLE 8. MATERIALS AND SUPPLIES 8.1 Asset Transfer Contract The Parties agree that within thirty (30) days after the Establishment Date, the Company and Party A shall enter into the Asset Transfer Contract in order to provide for the transfer to the Company of all of the assets listed in the Asset Transfer Contract and in Exhibit 1 to Schedule 1 currently used in the business of Party A at the Plant, together with existing inventory so as to permit the Company to carry-on the business previously conducted by Party A. 8.2 General Principles The Company shall have the right to purchase materials and supplies at its own discretion on the domestic and foreign markets. 8.3 Supply of Components To the extent that the Company's specifications for construction and raw materials with respect to quality, quantity, price, and delivery terms and dates cannot be met from sources within China, the Company may procure such materials and supplies from abroad provided that such materials and supplies are competitive in price and meet international standards of quality and the requirements of all relevant authorities or agencies are complied with. ARTICLE 9. RIGHT TO USE LAND, PLANT AND UTILITIES 9.1 Right to Use the Land and Plant (a) Within thirty (30) days after the Establishment Date, Party A shall arrange for the signing of the Land Lease Contract by the Zone (or its affiliate) and the Company. Party A shall undertake all actions required in order to implement the Land Lease Contract so that the Zone (or its affiliate) leases the land use rights to the Company for a period of thirty years with an option to extend for a further period of twenty years in accordance with China's laws and regulations, the terms hereof and the Land Lease Contract, including obtaining all approvals and completing all registrations and/or filings required by applicable laws and regulations from any land use authority or real estate bureau in connection with the transfer of the use of the Land and the Plant to the Company as contemplated hereby. (b) Party A shall assist the Company to obtain from the relevant department in charge of land a valid certificate evidencing the registration of the Land Lease Contract in the name of the Company (including all necessary means of access to the nearest public roads to enable the Company to access the Land and to conduct thereon the activities contemplated by this Contract). (c) The Land shall be leased to the Company free and clear of any structure other than those facilities to be contributed by Party A to the Company, together with other facilities ancillary thereto, as specified in this Contract. (d) Party A warrants that the Land and Plant to be provided to the Company by Party A shall be as set forth in the Land Map; that the Land and Plant shall be connected to the water, electricity, sewer, steam, and waste water treatment and telecommunications systems. Party A also agrees to exercise every reasonable effort to cause the supply of water, steam and electricity to the production facilities of the Company to be continuous and uninterrupted in accordance with the specifications and conditions set forth in the Feasibility Study. Party A warrants that the Land and Plant to be leased to the Company as of the Initial Contribution Date: (i) are free from any environmental liabilities to and claims from both government and non-government parties and (ii) there are no environmental conditions on the Land and Plant, nor have there been any releases of contaminants into the soils, surface waters, or groundwater of the Land, which would adversely impact public health or the environment. Party A agrees to defend and indemnify the Company against any claims or rulings at any time asserted against the Company attributable to the pre-existing environmental condition of the Land and Plant at the time the Land and Plant is leased to the Company. Party A's obligations under this Article 9.1(d) shall survive the termination of this Contract and the liquidation of the Company. (e) The actual boundaries of the Land will be verified by the Ningbo Municipal Land Administration Bureau or the Zone after consultation with Party A and Party B. 9.2 Utilities Party A shall ensure that on the Initial Contribution Date all utilities required by the Company, including water, electricity, sewerage services, steam, and waste water treatment shall be supplied to the Company by the same suppliers currently utilized by Party A for the Company, at the same (or lower) price and on the same (or more favorable) terms and conditions now enjoyed by Party A. Payment for any such services shall be made in RMB. Attached to this Contract as Schedule 3 is a list of the utility services now supplied to Party A and their current prices in RMB. 9.3 Services The Parties agree that within thirty (30) days after the Establishment Date, the Company and Party A shall enter into the Services Contract for the provision to the Company of the services stipulated therein. ARTICLE 10. TECHNOLOGY LICENSE CONTRACT, SERVICES AND SECONDMENT CONTRACT AND TRADEMARK CONTRACTS 10.1 Technology License Contract The Parties agree that within thirty (30) days after the Establishment Date the Company and Party B or its Affiliate shall enter into the Technology License Contract providing for the licensing of certain of Party B's advanced technology to the Company. 10.2 Services and Secondment Contract The Parties agree that within thirty (30) days after the Establishment Date the Company and Party B or its Affiliate shall enter into the Services and Secondment Contract. 10.3 Trademark Contracts The Parties agree that within thirty (30) days after the Establishment Date the Company and Party A shall enter into the Party A Trademark Contract, and the Company and Party B or its Affiliate shall enter into the Party B Trademark Contract, so as to obtain the right to use the trademarks needed for marketing and sale of the Products. ARTICLE 11. SALE OF PRODUCTS 11.1 General Principles Subject to Article 7.2 (f) of this Contract and this Article 11, the Products of the Company shall be sold on the domestic and export markets for both RMB and foreign exchange. Subject to the approval of the Board and a separate agreement with Party B and/or its Affiliates, the Company may enter into arrangements pursuant to which Party B and/or its Affiliates, whether as an agent of the Company or in its or their own right or otherwise, provide some or all marketing and sales and engineering services required by the Company for the Products. 11.2 Domestic Sales Products sold by the Company on the Chinese domestic market shall be sold by the Company either by the Company itself or through its branches. The prices charged to domestic purchasers of the Products may be denominated in RMB. The principles for determining the currency and sales prices of Products sold on the domestic market shall be established by the Board. 11.3 Export Sales Export price policies and guidelines shall be made by the Board after considering reports from the President assisted by the Senior Vice President, Finance; provided, however that prices should not be lower than cost plus a small profit margin for the Company. Products sold by the Company in the export market shall be handled exclusively by Party B as provided in Article 7.2 (f) of this Contract. The President shall make day-to-day decisions within these guidelines. In addition, such sales shall be made by Party B only if the Products continue to meet international requirements in terms of price, quality, delivery, performance and packaging. ARTICLE 12. BOARD OF DIRECTORS 12.1 Establishment The Board shall be established on the Establishment Date. The first meeting of the Board shall be held within sixty days (60) days after the Establishment Date. 12.2 Composition and Term The Board shall consist of five (5) directors, as follows: (a) two (2) directors to be appointed by Party A, one of whom shall be appointed by Party A to be the Vice Chairman of the Board; and (b) three (3) to be appointed by Party B, one of whom shall be appointed by Party B to be the Chairman of the Board. The term of office of the Board shall be three (3) years, and directors may serve consecutive terms if reappointed by the appointing Party. 12.3 Authority The Board shall be the highest authority of the Company and shall decide all major issues of the Company. The following matters shall require the unanimous approval of the Board: (a) amendment of the Articles of Association; (b) termination or dissolution of the Company, subject to Article 21.1 of this Contract; (c) increase or assignment of the registered capital of the Company, unless otherwise expressly stipulated herein; (d) merger of the Company with any other economic organization; (e) the appointment, dismissal and compensation of the President; and (f) modification of the rights and responsibilities of the Company's Chairman and President. 12.4 Other Important Decisions of the Board Unless otherwise specified in the Articles of Association, decisions with respect to all matters other than those set forth in Article 12.3(a) - (f) shall be adopted if they receive the affirmative votes of a majority of the directors present in person or by proxy, or in the case of a resolution by writing, by a majority of the directors. Without limiting the generality of the foregoing, the following matters shall require the majority approval of the Board: (a) change the scope of business of the Company. (b) subject to Article 13.2(b), the appointment of the Senior Vice President, Finance, Vice President, Vice President, Quality and department managers; (c) the determination of annual contributions to the Three Funds in excess of the minimum amounts required therefor in Article 9.1 of the Articles of Association, and any modifications to the Company's policy regarding the distribution of net profits as set forth in Article 9.2 of the Articles of Association; and (d) approval of the Company's five (5) year business plan, which will include all significant plans for (i) the introduction of new products and (ii) new investments by the Company. (e) the dismissal and compensation of the Senior Vice President, Finance, Vice President, Vice President, Quality and department managers; (f) modification of the Company's management level organizational structure; (g) modification of the rights and responsibilities of the Company's Vice President and other management level officers; (h) approval of the Company's annual budget, including the Company's production, personnel and welfare plans; and (i) approval of the Company's sales policy, including pricing and export sales policies. 12.5 Legal Representative The Chairman of the Board shall be the legal representative of the Company within the scope expressly authorized by the Board. If the Chairman is unable to perform such duties for any reason, the Vice Chairman shall perform such duties. If the Vice Chairman is unable to perform such duties, the Board shall authorize another director to perform such duties. 12.6 Compensation and Expenses Directors shall serve the Company without compensation. Expenses incurred by any director in connection with attending meetings of the Board shall be borne by the Company. 12.7 Meetings The quorum for all meetings of the Board shall be four (4) of the directors present in person or by proxy. Meetings of the Board shall generally be held at least two (2) times a year. Board meetings shall be convened and presided over by the Chairman of the Board or as otherwise provided in the Articles of Association. 12.8 Further Powers and Procedures The detailed powers and procedures of the Board shall be as set forth in the Articles of Association. ARTICLE 13. BUSINESS MANAGEMENT 13.1 Business Management The day-to-day management of the overall operations of the Company shall be under the direction of the President, who shall be assisted by a Senior Vice President, Finance, other Vice Presidents, Vice President, Quality and such other officers as the Board may consider necessary. 13.2 Appointment of the Managers (a) The Board shall determine the management structure and additional management level officers of the Company from time to time and according to the Articles of Association. Initially, the Company shall be organized in accordance with the structure set forth on the organizational chart attached hereto as Schedule 4 with the following divisions: Sales; Quality; Manufacturing and Technology; Purchasing; Finance; and Personnel and Administration. (b) The President, Senior Vice President, Finance and Vice President, Quality shall be nominated by Party B. The Vice President, Manufacturing and Technology Manager, Purchasing Manager, Sales Manager, and Personnel and Administration Manager shall be nominated by Party A. The responsibilities of the President, Senior Vice President, Finance, Vice President and the Vice President, Quality shall be as set forth in Articles 5.7 to 5.9 of the Company's Articles of Association, and the reporting relationships shall be as set forth in Schedule 4 hereto, as initially approved and modified by the Board from time to time. (c) Notwithstanding the foregoing, each management level officer (other than the President, Senior Vice President, Finance, Vice President, Quality, and other Vice Presidents) shall be subject to a probation period of six (6) months following such manager's confirmation by the Board. If, during the relevant probation period, any manager proves to be incapable of performing the duties required of such manager, the President shall have the right to remove him and request the original nominating Party to nominate a new candidate for the post for appointment by the Board. 13.3 Term of Office The President, Senior Vice President, Finance, Vice President, Quality and the other Vice Presidents shall, unless they become incapacitated, resign, retire or are removed from office earlier by the Board, hold office for a term of three (3) years each and are eligible for reappointment for further terms, and the Senior Vice President, Finance shall serve, on a temporary basis, as the acting President when the President becomes incapacitated, resigns, retires, or is removed by the Board prior to the expiration of his term or any subsequent term, until the President is replaced by the Board. 13.4 Responsibilities of the Managers The powers and duties of the managers shall be as set forth in the Articles of Association. 13.5 Approval of Officers to Hold Other Positions The President, Senior Vice President, Finance, Vice President, Quality and other Vice Presidents of the Company shall not, except with the express approval of the Board, concurrently occupy any operational position in any other economic organization. 13.6 Power of Board to Dismiss Officers Subject to the terms of the Labor Contract, the Board may remove any of the managers or any other officer or employee of the Company at any time. ARTICLE 14. PERSONNEL AND LABOR MANAGEMENT 14.1 Recruitment The Company shall have the right to recruit its own employees in accordance with applicable laws and the Labor Contract. The President shall make all decisions in relation to the recruitment of employees. 14.2 Party A's Employees Party A shall ensure that all wages, bonuses and accrued retirement or other benefits of all employees of Party A who are offered positions with the Company, which relate to the period prior to the transfer of such employees to the Company, have been fully paid to such employees, into the relevant statutory fund, or properly set aside as required by applicable laws. The Company shall not be liable for any payments to JV Employees or any individual previously employed by Party A accrued during any period prior to their employment by the Company. 14.3 Labor Contract The Company shall enter into a Labor Contract with each individual JV Employee, substantially in the form attached hereto as Annex B as modified based on Chinese Labor Law from time to time by the Board. 14.4 Wages and Salaries The levels of salaries and all welfare benefits and subsidies for all employees shall be as approved by the Board. The wage levels of Chinese employees to be employed upon the formation of the Company shall be competitive with wages received by employees in Party A's plant as at the date of this Contract. Thereafter, the wage levels of the JV Employees shall be determined in accordance with Article 14.5(b) and (g) of this Contract. 14.5 Labor Policies Labor and personnel policies of the Company shall be determined by the Board. These policies shall be in accordance with applicable Chinese laws and regulations and shall include the following principles: (a) All JV Employees shall be selected on the basis of examination and the best qualifications. In this regard, the Company shall be free to hire qualified personnel from any location in China. However, priority will be given to current well qualified employees of Party A who successfully pass the applicable examination and other selection criteria. (b) Responsibility for approval of all merit salary increases for specific JV Employees shall be based upon the individual employee's performance and shall be determined by the President, subject to the approval of the Board. (c) All bonuses of whatever type shall be established as an incentive, and shall be awarded on the basis of performance. All such bonuses shall be awarded at the discretion of the President. (d) The Company shall have the power to dismiss JV Employees in accordance with the Labor Contract and the applicable labor laws in force at the relevant time. Such power shall be vested in the President on behalf of the Board. (e) JV Employees who are high ranking officers of the Company shall be paid a salary approved by the Board. (f) All personnel of Party B or its Affiliates (other than Chinese personnel recruited and nominated by Party B to be employed by the Company as management level officers) employed by or provided to the Company shall be provided pursuant to the Services and Secondment Contract. (g) Any general increases or decreases in wages, salaries, any benefits or any subsidies of JV Employees shall be determined by the Board in accordance with the principles set forth herein and shall take into consideration the economic condition of the Company, and the salary and wage situation in the Ningbo area. (h) The Parties recognize that the Company will incur significant expense in the training of JV Employees with critical skills, as determined by the President of the Company, and that the Company will be seriously damaged if these JV Employees are transferred to other Chinese enterprises within a short period of time after such training. The Parties also recognize that such training will provide benefits to Chinese industry. Accordingly, Party A agrees that JV Employees will not be transferred to Party A or other Chinese enterprises without the approval of the Board and the President. 14.6 Chinese Nationals Recruited and Nominated by Party B as President and Senior Vice President, Finance of the Company Party B will nominate the President, Senior Vice President, Finance and Vice President, Quality of the Company in accordance with the terms of this Contract and the Articles of Association. Such personnel may be resident expatriates seconded to the Company in accordance with the Services and Secondment Contract, or Party B may recruit and nominate Chinese nationals resident in China to serve in such positions. To the extent that Party B so recruits and nominates such Chinese nationals (who are not employed by Party A at the time of nomination): (a) upon approval by the Board, such personnel shall be employed by the Company; (b) such personnel shall be subject to the same rules and regulations and policies and procedures as set forth in Articles 14.3 through 14.5 of this Contract as though such personnel were JV Employees, except that: (1) the wage and compensation packages for such personnel shall be as negotiated between the relevant personnel and Party B, using guidelines established by the Board taking into consideration rank, experience, and other related considerations, and after full discussion by the Board in accordance with Article 12.4 of this Contract; (2) to the extent that such wage and compensation package includes additional benefits for such personnel, including but not limited to special housing arrangements, leave and vacation entitlements, insurance policies or other benefits, the Company shall provide such benefits to the relevant personnel. To the extent that the Parties agree that such benefits may not be provided directly by the Company, Party B may provide such benefits to the personnel, and the Company shall reimburse Party B for all such costs; and (3) The Labor Contract for such personnel shall be revised as necessary to take into account the terms of such personnel's employment in accordance with this Article. 14.7 Trade Union Fund The Company shall reserve for the Company's trade union fund for such trade union's use as is required in accordance with the applicable laws of China on the management of trade union funds. ARTICLE 15. PREPARATION OF THE COMPANY 15.1 Preparation Committee Within twenty one (21) days of the execution of this Contract by both Parties, each Party shall appoint representatives to form a preparation committee (the "Preparation Committee") to formulate and implement plans for the establishment of the Company. The Preparation Committee shall be comprised of two (2) members, with each Party appointing one member. The tasks of the Preparation Committee shall include but not be limited to implementing the plan for the separation of the Company from Party A's existing business located within Ningbo Municipality and establishing an accounting system for the Company. The Preparation Committee shall report to the Board. 15.2 Office The office of the Preparation Committee will be located at such place as the Parties shall agree. 15.3 Dissolution The Preparation Committee shall be dissolved by the Board at its discretion and in no event later than one month after the completion of the tasks referred to in this Article 15, but no earlier than the Initial Contribution Date. 15.4 Expenses Each Party shall bear its own travel and personnel costs and expenses for its representatives on the Preparation Committee. All other costs incurred in the operation of the Preparation Committee shall be borne by the Parties pro rata based on their respective equity interests in the Company set forth in Article 6.2. ARTICLE 16. FINANCIAL AFFAIRS AND ACCOUNTING 16.1 Accounting System (a) The Company shall maintain its accounts in accordance with the Foreign Investment Enterprise Accounting System of China, United States generally accepted accounting principles ("US GAAP") and the provisions of the Articles of Association and in a manner sufficient to satisfy the financial reporting requirements of the Parties. (b) The fiscal year of the Company shall be the calendar year. The Company may also prepare financial and accounting statements and reports for the period from September 1 of one year to August 31 in the following year for internal purposes. All accounting records, vouchers, books and statements of the Company shall be made and kept in the Chinese and English languages and shall be retained for such period of time as may be required to permit the Company, Party A and Party B to fulfill their respective obligations to applicable taxation authorities. To permit the Parties to comply with such obligations, the Company shall provide to the Parties copies of all such documents as requested by the Parties and access to such materials. All important financial and accounting records and statements shall require the approval and the signature of the President and the Senior Vice President, Finance. (c) Each Party shall take all appropriate action to cause the Board of the Company to adopt such internal control policies and procedures as are necessary to assure that the business of the Company and the conduct of its officers, directors, employees, and agents, are consistent with the following operating principles: (1) no money or any other thing of value shall be offered, promised, or given to any government official, any political party or official thereof, any candidate for political office, or any other person while knowing or having reason to know that all or a portion of such money or thing of value will be offered, promised, or given directly to any of the those listed above for the purpose of influencing any action, omission, or decision by the recipient in order to obtain or retain business for the Company or to direct business to another; and (2) all operations are in full compliance with all applicable laws and regulations, including but not limited to, such laws and regulations which may be applicable as a result of the ownership or control of the Company by Party B, which is not a domestic Chinese company and is subject to the laws of its country of incorporation. 16.2 Audit (a) An internationally recognized firm of auditors, registered in China, shall be appointed as the Company's auditors (the "Registered Auditor") and shall be engaged by the Company to examine and verify the annual accounts, and submit its report to the Board and the President. The Company shall submit to the Parties and to each director the audited annual accounts within ninety (90) days after the end of the fiscal year, together with the audit report of the Registered Auditor. (b) If it so chooses, each Party may appoint on its behalf and at its expense an accountant, registered either in China or abroad (including a certified accountant from a Party or a foreign firm of publicly certified accountants), to audit the Company's accounts. If the results of any such audit are significantly different from that conducted by the Registered Auditor and are accepted by the Board, the expense of the audit shall be borne by the Company. The Company will permit such accountant to have access to the Company's books and records and will provide such accountant with office space and all other reasonable facilities to enable the accountant to carry out the audit. The Party appointing the accountant shall ensure that the accountant keeps confidential all documents audited by such person. 16.3 Bank Accounts The Company shall separately open foreign exchange accounts and RMB accounts at one or more banks located in China, in accordance with applicable laws and regulations. The Company may open accounts at banks located abroad with the approval, if required by relevant Chinese laws or regulations, of the State Administration of Exchange Control. 16.4 Settlement of Expenses In principle, except where payment in foreign exchange is required pursuant to this Contract or other contracts entered into by the Company, all payments to be made by the Company in China (including but not limited to expenses and compensation for labor other than expatriate personnel) shall be settled and paid by the Company in RMB. 16.5 Profits Distribution (a) After providing for income tax to be paid by the Company, the Board will determine the respective amounts to be transferred to the Company's reserve fund, bonus and welfare fund and the enterprise expansion fund (the "Three Funds"), and such amounts will be deducted from the Company's after-tax net profits. (b) After providing for income tax to be paid by the Company and deduction of amounts to be transferred to the Three Funds, the Board shall, except as otherwise decided by the Board, declare that all the net profits of the Company shall be distributed to the Parties in proportion to each of their respective shares of registered capital. The profit distribution plan shall be on an annual basis, with a final profit distribution to be determined by the Board and paid to the Parties within sixty days after the receipt of the audited annual accounts referred to in Article 16.2(a) above. ARTICLE 17. TAXATION AND INSURANCE 17.1 Income Tax, Customs Duties and Other Taxes (a) The Company shall pay tax in accordance with the relevant laws and regulations of China and applicable local regulations. Chinese and foreign employees shall pay individual income tax in accordance with applicable Chinese laws and regulations. (b) The Parties shall, prior to the establishment of the Company and at such times as the same become obtainable, apply to obtain for the Company and the Parties the benefits of all applicable tax exemptions, reductions, privileges and preferences which are now or in the future become obtainable under Chinese law or any treaties or international agreements to which China is or may become a party. (c) In order to confirm the tax treatment applicable to the Company and the Parties, the Parties shall, immediately after the establishment of the Company, procure that the Company submit an application to the appropriate tax authorities of China requesting confirmation of the tax exemptions, reductions and other preferences to be accorded to the Company as set forth in Schedule 2 hereto. 17.2 Insurance The Company will take out and maintain insurance in accordance with the Articles of Association and applicable law. ARTICLE 18. FOREIGN EXCHANGE REQUIREMENTS OF THE COMPANY AND FOREIGN EXCHANGE BALANCING 18.1 Foreign Exchange Requirements of the Company All payments to be made by the Company to Party B and to any expatriate employees of the Company shall be made in United States Dollars, unless some other freely convertible currency shall be mutually agreed upon. Party B shall have the right to remit outside China of all payments made to it by the Company, including amounts paid to it upon dissolution of the Company, in accordance with applicable Chinese laws and regulations. Unless otherwise specified in this Contract or in contracts entered into by the Company pursuant to a valid decision of the Board, all expenses, loan repayments, labor compensation and other charges of the Company paid to Chinese enterprises or nationals shall be paid in RMB. 18.2 Foreign Exchange Balancing The Company shall strive to achieve a balance of foreign exchange receipts and expenditures. In order to do so, the Parties and the Company shall be permitted to adopt all methods permitted by applicable laws from time to time as determined by the Board, and shall apply for all governmental approvals appropriate therefor. The Parties intend that such methods may include, among others, the following: (a) subject to Article 8, the Parties intend that the Company will purchase in RMB productive materials for manufacturing Products from local sources in China at competitive prices; (b) subject to Articles 13 and 14 and the Articles of Association, the Parties intend that the majority of the Company's managers will be Chinese nationals, and that the compensation for such managers will be paid in RMB; and (c) subject to Article 16.5 hereof and the Articles of Association, the Parties may agree to permit the Company to withhold distribution of profits to the Parties. 18.3 Appropriation of Foreign Exchange Available Funds in any foreign exchange account of the Company shall be used by the President in accordance with sound business practices in the following order of priority: (a) Payment for imported raw materials, spare parts, equipment, items used by and services rendered to the Company; (b) Payments required under the Services and Secondment Contract; (c) Interest and principal on loans payable in foreign exchange, if any; (d) Dividends payable to Party B; (e) Payments of salaries, allowances, and related expenses of the Company's expatriate employees, including costs and expenses in foreign exchange incurred in China; (f) Repatriation of Party B's capital on such capital becoming payable to Party B; and (g) Other payments which the Board decides should be made in foreign exchange. ARTICLE 19. CONFIDENTIALITY AND NON-COMPETITION 19.1 Confidentiality (a) During the term of this Contract (including any extensions thereof) or for so long as the Company continues to exist, and for a period of five (5) years thereafter, or unless and until the information properly comes into the public domain, each Party shall maintain the secrecy and confidentiality of any proprietary or secret information ("Confidential Information") related to the Company, and shall not disclose to any third party or person any Confidential Information disclosed to it by the other Party at any time during or for the purpose of negotiation of this Contract or for the establishment or operation of the Company, provided that Party B shall be permitted to disclose information received by it under this Contract to its Affiliates when such disclosure is necessary for Party B to carry out its obligations under this Contract. (b) The Parties shall cause their directors, staff, and other employees, and those of their subsidiaries or affiliated companies, also to comply with the confidentiality obligation set forth in Article 19.1(a). 19.2 Non-competition (a) On and after the Initial Contribution Date and for the term of the Company, neither Party shall conduct any business activities, including but not limited to the establishment of another joint venture in China, which will directly or indirectly compete with the business of the Company. If the Company is terminated due to a material breach of this Contract, the Articles of Association, or any annex to this Contract, this covenant of non-competition shall remain in force as to the breaching Party for a period of two full years after the termination of the Company. If, however, the termination is due to the normal expiration of this Contract or is otherwise mutually agreed to by the Parties, this covenant shall not survive the termination of the Company. (b) Subject to the consent of the Company, Party A may transfer to the Company promptly after the Establishment Date pursuant to the terms of the Asset Transfer Contract all of its outstanding contracts with third party purchasers for the sale of any products which directly or indirectly compete with the Company's Products. Any such contractual arrangements which the Company does not elect to take over from Party A shall be fulfilled by Party A, but Party A shall not enter into any further contracts for the production or sale of such competitive products. 19.3 Survival The provisions and obligations set forth in Articles 19.1(a) and (b) and 19.2(a) shall, subject to such term limitations as described therein, survive the termination of this Contract and the liquidation of the Company. ARTICLE 20. JOINT VENTURE TERM 20.1 Effective Date (a) This Contract and its Annexes shall be submitted to the Approval Authority for approval and shall come into force on the day on which the Approval Authority issues its certificate of approval. (b) In the event that (i) the Establishment Date does not occur within four (4) months of the date set forth on the first page of this Contract or (ii) the Approval Authority requires the Parties to amend this Contract in a manner or imposes conditions that are unacceptable to either of the Parties, then either Party may terminate this Contract by written notice to the other Party, and upon the effectiveness of such notice in accordance with Article 26.6 hereof this Contract shall be void and of no force and effect. 20.2 Joint Venture Term The term of the Company (the "Term") shall be thirty (30) years from the Establishment Date with an option to renew for an additional twenty (20) year period upon the mutual consent of the Parties. 20.3 Extension of Joint Venture Term At least two (2) calendar years prior to the expiration of the Term, the Parties shall hold consultations to discuss the extension of the Term. If both Parties agree to extend the Term, an application for extension shall be submitted to the Approval Authority for approval not less than six (6) months prior to the expiration of the Term. 20.4 Sale of Company as a Going Concern If, after discussion and consultation pursuant to Article 20.3, either Party fails to agree to extend the Term of the Company, then the other Party may elect to continue the business of the Company, provided such election shall be approved by the Approval Authority in accordance with applicable law. The Party making such an election (the "Purchasing Party") shall be obligated to purchase the interest of the other Party (the "Selling Party") in the Company at a price calculated and paid as follows: (a) the Selling Party and the Purchasing Party shall discuss and agree upon a purchase price which shall in all cases reflect the going concern value (including reputation and goodwill) and the projected future profitability of the Company. The method of calculating such price in respect of the interest of the Selling Party shall be as follows: (1) the net worth of the Company, to be determined by a balance sheet effective on the date of termination, multiplied by the percentage of the Company's registered capital contributed by the Selling Party, plus (2) an additional payment to be negotiated in good faith to reflect the going concern value of the Company based on the actual circumstances of the Company and taking into account the market value of companies in similar manufacturing industries and internationally accepted principles relevant to the determination of going concern value. (b) If the Selling Party and Purchasing Party cannot agree on a price, they shall appoint a valuation committee to value the interest of the Selling Party by reference to the principles set forth above. The valuation committee shall consist of three (3) members. The Selling Party shall select one member, the Purchasing Party shall select one member and the third member shall be selected by the first two members. If the valuation committee cannot agree on the value of the interest of the Selling Party within sixty (60) days after its appointment, the matter shall be settled in accordance with Article 25. (c) After the purchase price has been determined in accordance with this Article 20.4, the Parties shall use their best efforts to secure all necessary governmental approvals and comply with all administrative procedures required in connection with the purchase. Payment shall be made within forty-five (45) days following the completion of the purchase procedures, provided that the Selling Party shall not be required to complete any sale pursuant to this Article 20.4 unless the entire purchase price is paid in the lawful currency of, or a currency which may be freely converted and remitted to, the jurisdiction of organization of the Selling Party. ARTICLE 21. TERMINATION; DISPOSAL OF ASSETS ON DISSOLUTION 21.1 Termination And Dissolution Subject to Article 20.4, the Company shall be dissolved and this Contract terminated in accordance with the Joint Venture Law, the Joint Venture Regulations and the Articles of Association (i) upon expiration of the Term (if not extended) or any extension thereof; or (ii) if any of the conditions or events set forth below shall occur and be continuing. The following are events that may trigger dissolution: (a) The Company sustains significant losses in three (3) consecutive calendar years and, after consultations, the Parties are unable to agree on a method to improve the economic situation of the Company to the extent satisfactory to both Parties; (b) The Company is unable to carry out operations for six (6) consecutive months or more because of an Event of Force Majeure (as defined in Article 23.1); (c) The Company is unable to carry out operations because any of the Land Lease Contract, the Technology License Contract, the Party A Trademark Contract, the Party B Trademark Contract, the Asset Transfer Contract, the Services and Secondment Contract, the Services Contract, and the Lease Contract are not entered into within three (3) months after the Establishment Date or are terminated early, or the Company is not issued with a valid land use certificate in a form reasonably satisfactory to Party B within a period of three (3) months after the Establishment Date; (d) Any Party fails to perform any of its material obligations under this Contract or the other contracts referred to in 21.1(c) above if, in the reasonable opinion of the non-breaching Party, such non-performance creates a material risk of loss to such non-breaching Party or the Company or materially and adversely affects the value of the non-breaching Party's interest in the Company; (e) Either Party fails to make its contributions to the registered capital of the Company in accordance with the provisions of Article 6 of this Contract, where such failure continues for a period of more than three months and is not waived by the other Party; (f) All or a material portion of the assets or property of the Company or the interest of either Party in the Company is expropriated or requisitioned, or any JV Employees are reassigned or withdrawn with the effect that the operations of the Company are adversely affected; (g) Any new law or regulation, or any new interpretation of existing law or regulation, is imposed (i) which controls the export or sale for foreign exchange of the products of the Company, the effect of which will render the Company unable to carry out its normal operations, or (ii) which materially withdraws or reduces any tax exemptions, reductions, privileges, preferences and/or incentives granted to or enjoyed by the Company; and (h) The Parties agree to dissolve the Company. (g) An early termination (other than a termination for the reasons specified in Article 21.1(d) or (e)) shall require a resolution unanimously adopted at a meeting of the Board which shall be submitted to the Approval Authority for approval. The Parties agree that a non-breaching Party may terminate this Contract by notice in writing to the other Party and apply directly to the Approval Authority for dissolution of the Company without the necessity of obtaining such a Board resolution upon the occurrence of any of the events specified in Article 21.1(d) and (e). After the Board resolves to dissolve the Company, it shall apply to the Approval Authority for approval of such dissolution. 21.2 Liquidation Committee If, upon the expiration of the Term of the Company's business license or upon early dissolution of the Company pursuant to Article 21.1, neither Party purchases the interest of the other Party in the Company, the Parties shall cause the directors appointed by them to adopt a resolution to liquidate the Company, formulate liquidation procedures, establish a liquidation committee (the "Liquidation Committee"), and submit its proposals to the department in charge for verification. The composition, powers and functions of the Liquidation Committee shall be as set forth in the Articles of Association. 21.3 Effect of Termination, Dissolution or Sale The termination of this Contract for any reason, the dissolution of the Company or the sale of a Party's interest to a third party shall not release a Party from its liability to pay any sums of money accrued, due and payable to the other Party, or to discharge its then-accrued and unfulfilled obligations including any liability to the Company or the other Party in respect of any breach of this Contract. ARTICLE 22. LIABILITY FOR BREACH OF CONTRACT 22.1 Breach of Contract If a Party fails to perform any of its material obligations under this Contract, or if a representation or warranty made by a Party under this Contract is untrue or materially inaccurate, the Party shall be deemed to have breached this Contract. 22.2 Failure to Pay Capital Contributions Should one of the Parties fail to pay any portion of its contribution to the registered capital of the Company at the time and in the amounts stipulated in Article 6 of this Contract, the breaching Party shall pay to the Company a monthly amount equal to two percent (2%) of such contribution, starting from the first month the contribution is overdue. In the event that a Party's payment is overdue for a period in excess of three (3) months, a non-breaching Party may terminate this Contract by notice in writing to the breaching Party in accordance with Article 21.1; provided that the non-breaching Party may, within one month after expiry of the time limit stated in its notice, apply to the original Approval Authority for approval to seek another Party to undertake the breaching Party's rights and obligations under this Contract. 22.3 Indemnity (a) If the Company suffers any cost, expense, liability or loss, as a result of a breach of this Contract by either Party, then the breaching Party shall indemnify and hold the Company harmless in relation to any such cost, expense, liability or loss. (b) If the non-breaching Party suffers any cost, expense, liability or loss, as a result of a breach of this Contract by the breaching Party, the breaching Party shall indemnify and hold the non-breaching Party harmless in relation to any such cost, expense, liability or loss incurred by the non-breaching Party. ARTICLE 23. FORCE MAJEURE 23.1 Force Majeure "Event of Force Majeure" means an event beyond the control of a Party, as a result of which the Party is unable to perform its obligations under this Contract. An Event of Force Majeure includes, but is not limited to: prohibition or acts by government or public agency, riot, war, hostility, public disturbance, epidemic, fire, flood, earthquake, storm, tidal wave or other acts of nature. 23.2 Notification of Occurrence If one Party has been prevented from performing its responsibilities stipulated in this Contract because of an Event of Force Majeure, it shall notify the other Party in writing within fourteen (14) days after the occurrence of such Event of Force Majeure, and both Parties shall use reasonable endeavors to mitigate damages, to the extent possible. If an Event of Force Majeure occurs, no Party shall be responsible for any damage, increased costs or loss which the other Parties may sustain by reason of such a failure or delay of performance, and such failure or delay shall not be deemed a breach of this Contract. A Party claiming inability to perform due to an Event of Force Majeure shall take appropriate means to minimize or remove the effects of the Event of Force Majeure and, within the shortest possible time, attempt to resume performance of the obligation affected by the Event of Force Majeure. ARTICLE 24. APPLICABLE LAW 24.1 Applicable Law The formation, validity, interpretation, execution, amendment and termination of this Contract shall be governed by the published laws of China. When the published laws of China do not govern a certain matter, international legal principles and practices shall apply. 24.2 Prior and Subsequent Laws This Contract and its Schedules and Annexes constitute the valid and binding obligations of the Parties. If there is (i) any conflict between this Contract and any laws, decrees, rules and regulations, or any ruling having the force of law, promulgated by any Chinese authority after the effective date of this Contract; or (ii) any amendment to previously promulgated laws, decrees, rules and regulations which take effect after the effective date of this Contract, this Contract shall be amended in accordance with Article 24.3 so as to preserve the original economic interests of the respective Parties. 24.3 Economic Adjustment If a Party's economic benefits are adversely and materially affected by the promulgation of any new laws, rules or regulations of China, or the amendment or interpretation of any existing laws, rules or regulations of China after the date on which this Contract comes into force, the Parties shall promptly consult with each other and use their best efforts to implement any adjustments necessary to maintain each Party's economic benefits derived from this Contract on a basis that is no less favorable than the economic benefits each would have derived if such laws, rules or regulations had not been promulgated or amended or so interpreted. ARTICLE 25. SETTLEMENT OF DISPUTES 25.1 Arbitration (a) Any dispute arising from, out of or in connection with this Contract shall be settled through friendly consultations between the Parties. Such consultations shall begin immediately after one Party has delivered to the other Party a written request for such consultation. If within ninety (90) days following the date on which such notice is given, the dispute cannot be settled through consultations, the dispute shall, upon the request of any Party with notice to the other Party, be submitted to arbitration in Stockholm, Sweden under the auspices of the Arbitration Institute of the Stockholm Chamber of Commerce (the "Institute"). (b) There shall be three (3) arbitrators. Party A shall select one arbitrator and Party B shall select one arbitrator, and both arbitrators shall be selected within thirty (30) days after giving or receiving the demand for arbitration. Such arbitrators shall be freely selected, and the Parties shall not be limited in their selection to any prescribed list. The President of the Institute shall select the third arbitrator. If a Party does not appoint an arbitrator who has consented to participate within thirty (30) days after the selection of the first arbitrator, the relevant appointment shall be made by the President of the Institute. (c) The arbitration tribunal shall apply the arbitration rules of the Institute in effect on the date of the signing of this Contract. However, if such rules are in conflict with the provisions of this Article 25.1, including the provisions concerning the appointment of arbitrators, the provisions of this Article 25.1 shall prevail. (d) Each Party shall cooperate with the other Party in making full disclosure of and providing complete access to all information and documents requested by the other Party in connection with such proceedings, subject only to any confidentiality obligations binding on such Party. (e) The arbitral award shall be final and binding upon all Parties, not subject to any appeal, and shall deal with the question of costs of arbitration and all matters related thereto. (f) Judgment upon the award rendered by the arbitration may be entered into any court having jurisdiction, or application may be made to such court for a judicial recognition of the award or any order of enforcement thereof. 25.2 Continued Implementation of Contract During the period when a dispute is being resolved, the Parties shall in all other respects continue their implementation of this Contract. ARTICLE 26. MISCELLANEOUS 26.1 Amendment and Modification of Contract Amendments to this Contract or its Schedules or Annexes may be made only by a written agreement in English and Chinese signed by duly authorized representatives of each of the Parties and, unless prior approval from the Approval Authority is statutorily required, will become effective as soon as the amendments are filed with the Approval Authority for record. 26.2 Severability The invalidity of any provision of this Contract shall not affect the validity of any other provision of this Contract. 26.3 Language This Contract is executed in English and Chinese. Both language versions shall be equally authentic. Each Party acknowledges that it has reviewed both language texts and that they are substantially the same in all material respects. 26.4 Entire Contract This Contract and the Schedules and Annexes attached hereto constitute the entire contract between the Parties with respect to the subject matter of this joint venture and supersede all previous oral and written agreements, contracts, understandings and communications of the Parties in respect of the subject matter of this Contract. The headings to Articles are for ease of reference only and shall have no legal effect. 26.5 Waiver Unless otherwise provided for, failure or delay on the part of any Party hereto to exercise any right, power or privilege under this Contract shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude exercise of any other right, power or privilege. 26.6 Notices Notices or other communications required to be given by any Party or the Company pursuant to this Contract shall be written in English and in Chinese (with a translation attached) and may be delivered personally or sent by registered airmail (postage prepaid), by a recognized courier service or by facsimile transmission to the addresses of the other Parties set forth below. The dates on which notices shall be deemed to have been effectively given shall be determined as follows: (a) Notices given by personal delivery shall be deemed effectively given on the date of personal delivery. (b) Notices given by registered airmail (postage prepaid) shall be deemed effectively given on the seventh day after the date on which they were mailed (as indicated by the postmark). (c) Notices given by courier shall be deemed effectively given on the third day after they were sent by recognized courier service. (d) Notices given by facsimile transmission shall be deemed effectively given on the first business day following the date of transmission. For the purpose of notices, the addresses of the Parties are as follows: Party A: Ningbo General Air Conditioner Factory Factory Building 8502, Ningbo Economic and Technological Development Zone Ningbo Municipality, Zhejiang Province People's Republic of China Attention: Director Telephone No: (86-574) 737-1696 Facsimile No.: (86-574) 733-2275 Party B: Fedders Investment Corporation Westgate Corporate Center 505 Martinsville Road P.O. Box 813 Liberty Corner, New Jersey 07938 United States of America Attention: Legal Department Telephone No: (1-908) 604-8686 Facsimile No: (1-908) 604-0715 Any Party may at any time change its address for service by notice in writing delivered to the other Party in accordance with the terms hereof. 26.7 Schedules and Annexes The Schedules and Annexes attached hereto are hereby made an integral part of this Contract and will when executed be equally binding upon the parties thereto as provided therein. The Schedules and Annexes are as follows: Schedule 1 Contributions of Parties and Terms Thereof Schedule 2 Tax Preferences and Holidays Schedule 3 Utilities Schedule 4 Initial Management Organization Chart Annex A Asset Transfer Contract Annex B Labor Contract Annex C Party A Trademark Contract Annex D Party B Trademark Contract Annex E Services and Secondment Contract Annex F Technology License Contract Attachments Articles of Association Joint Feasibility Study Certificate of Approval IN WITNESS WHEREOF, each of the Parties hereto have caused this Contract to be executed by its duly authorized representative on the date first set forth above. NINGBO GENERAL AIR FEDDERS INVESTMENT CORPORATION AIR CONDTIONER FACTORY By:_______________________ By:______________________ Cai Kang Qian Robert L. Laurent, Jr. Title: Director Title: Executive Vice Nationality: Chinese President, Finance and Administration and Chief Financial Officer Nationality: USA -----END PRIVACY-ENHANCED MESSAGE-----